Justify Social Security ... Don't Save for Retirement

It is a common question when investors review their retirement plan—should we include social security benefits into our retirement income projections?

It seems the closer an investor is to retirement, the more likely he/she will include social security benefits into the analysis. Younger investors, however, may feel compelled to omit such benefits. They must then become mavericks on the retirement front. The choice is yours, but before you decide the influence of social security on your future, remember the following points:

When Franklin D. Roosevelt signed the social security act in 1935, he stated that social security gives some protection to American families. One reoccurring theme of his statement focused on assistance, not 100% protection. In the President’s words, “the law will flatten out the peaks and valleys of deflation and of inflation (source: http://www.ssa.gov).”

For many, the Social Security Administration has raised the age of full retirement from 65 to adopt a more stringent schedule. This may be an addition of a couple of months or a couple of years. The administration justifies the increases due to longer life expectancies and general healthier life styles.

For example, those born after 1960, your full retirement age is 67. Going forward, we should ask ourselves “what other changes will be made to social security?” If you would like a complete schedule of retirement ages for full benefits, I recommend you visit Social Security's website at http://www.ssa.gov.

An opinion adopted by many is to consider social security in part the closer you are to retirement. For example, if you are sixty years of age and plan on full retirement in five years, you should consider an analysis based on your current projected benefits. Even with the proposed reform plans, preservation of benefits is a priority for eligible citizens age 50-55 and older.

If however you are thirty, it may be better for you to omit such projections. The result will be overfunded personal savings. Thus social security will be an added benefit and not the benefit.

Consider the troubling issues of the 2004 OASDI Trustees Report: future scheduled benefits for today's young workers could be reduced by 27% or more if amendments to the current plan are not adopted.

Young workers should take note of this report. Do not rely on social security and concentrate on personal savings.

In conclusion, you have a risky option—there is only one way to justify social security, don't save for retirement. If this is your chosen route, be prepared for difficult times ahead.

First Published in the Balanced Report Fall 1991
This is the central question of retirement planning. When people come to see us, that is what they are asking us to answer for them. The question is usually phrased as. "Can I afford to retire? When can I afford to retire? How much income will I have at retirement? Will inflation cause me to have to work longer or reduce my standard of living?" Very simply you want to know, will you have enough. This is no different than planning a trip. You need to try to figure how much money you need. How much cash / travelers cheques, will you need for the journey? When you have figured that out you will probably still take along some credit cards just in case you miscalculated. We feel more comfortable with a safety cushion in case we run out of money. At retirement most people want to know that their pensions and investment portfolio will provide an adequate income. Their capital is their safety cushion and they usually prefer to leave it intact.

The difference between retirement and a vacation is that you don't have to worry about the price of your purchases increasing between the beginning of your vacation and the end of it. But, you sure do in retirement. If you spend too much on your vacation you can always earn more to pay for it. In retirement you are unable to earn more income, in most cases. A person retiring today at 65 years of age can expect to live an average of 22 years, or age 87 based on current mortality tables. This is one third of your life and the figure is improving all the time. With that length of time in retirement, perhaps longer if you retire earlier, inflation becomes a serious matter to consider. At 5% inflation it will take three times as much monthly income in twenty two years to provide the same purchasing power it did the year you retired.

In order to answer the question how long will my money last it now becomes a little more complicated as we need to factor in an assumed rate of inflation. Most Financial Planners that I talk to like to use a figure of 5% in their forecasts. Any assumption under 4% is in my opinion irresponsible. Over a long period of time such as retirement, you can expect that some periods will be higher than others but it will level out over time. It is my experience that many people will experience a fair amount of inflation in their expenditures in the early years of retirement. This is because they are now traveling more or making a major purchase such as recreational vehicle or equipment to enjoy their retirement. But as they get over 80 years of age they start to spend less. So inflation of expenses is greater in the first ten yours of retirement and less after.

You then need to factor in the various pensions that you and your spouse may be eligible to receive. Many people now retire prior to age 65 and elect to receive a reduced Canada Pension in order to start collecting earlier. Old Age Security does not start until age 65 so you will have to factor in that extra cash flow requirement for a few years. If the spouse is a few years younger and you both want to retire at the same time you may have to plan for this additional income by drawing extra from your investments until the spouse's pensions begins. The point being that there will be about five or six different income streams to factor into the calculation because of the different starting times.

After many years of paying taxes some pensioners are now loosing their Old Age Security benefits. If you have net income greater than $50,850.00 you will lose some of your benefits. Sad as this is, it needs to be factored into your retirement plans. There are a few interesting financial planning activities that help to deal with this problem. Sometimes this claw back can be avoided for awhile by letting your RRSP's accumulate a little longer.

Fortunately we have developed a computer program to accurately calculate all of the various income streams, inflation, growth, etc. This programme will tell when you can retire, how much you will have each month in today's dollars and if it will run out. Using this key information has enabled many of our clients to make their retirement decisions easier. It has also helped some of our older clients who came through the depression and are afraid to spend. Knowing that your money will last gives you the freedom to enjoy yourself in retirement. But, you need to plan, calculate and save if you want to get there in comfort.

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