Social Security should not amount to your entire retirement plan. In part one of this article, I put a spotlight on how the SSA calculates your retirement and disability compensation in the event you retired as soon as you were eligible or if you unfortunately became disabled unexpectedly. Based solely on those numbers, survival would prove a challenge, even more so than it already is. To further bring this point home, let me illustrate a real life scenario using subject A and subject B.
Subject A is the career worker, may or may not have a college degree but definitely has a high school diploma. They have worked their entire lives starting early doing odd jobs until they finally landed the perfect job at age 25. They have worked in various positions, mostly with the same company and started earning a modest salary of $60k a year or about $5,000 a month. Since the age of 25, they have invested 4% of their annual salary or about $2,400 a year into their 401(k). Their company has always matched 50% of their contribution up to a total of 6% of their annual salary. The 401(k) has been producing an annual rate of return of 7%.
Subject B on the other hand does not have a college degree nor a high school diploma. They only have a G.E.D. More importantly, over the entire course of their working life they have never invested into their company sponsored 401(k) investment vehicle. Their attitude has always been, why should I put money aside for later when I really need it now? Even worse, they never bothered to save any real amount of money but instead lived most of their life check to check. You know, surviving solely on the income they could bring in every two weeks from whatever job they were working? Things really got bad during periods of unemployment.
So let’s fast forward 35 years. Both persons A and B are now 60 years old but their lives have taken different turns through the years. Subject A is happily married and has enjoyed relatively positive career promotions and a steady increase in pay. Their changes in career positions over time has lead to a more fulfilling and diverse outlook on life. Although they don’t actively workout, they eat relatively healthy and don’t smoke. Neither does their spouse. They own a nice home in a planned community with manicured lawns and two car garages. They own the home outright and are only required to pay the property taxes every year.
Subject B is now divorced and has not had as great of success professionally as subject A. However, they have worked most of their life and even enjoyed the pains and thrills of raising a family but times have changed and they are now single in old age living in a rented two bed room apartment. In addition, severe back problems has forced them out of the workforce and they now receive a monthly disability check for $850 a month. They are heavy smokers and have developed a chronic cough. They are also on government assistance for housing so the government pays their rent in full every month. They don’t have any money saved other than the $250 they’ve managed to set aside in a savings account. Over the years they didn’t invest in many assets so all of their belongings fit into the one apartment. They live in a less than desired neighborhood with few attractions and no sit down restaurants. Because of their financial position, they have little chance of upward mobility. This is the life they will probably live until they die.
So for the sake of comparison, let’s pretend subject A is forced into retirement today. Their company is downsizing due to the economy and rather than take a pay cut and a demotion, subject A chooses to retire and spend time with the grandchildren. Because they invested in a 401(k) since the age of 25, their mutual fund account now has a staggering balance of $536,000 with an expected yearly payout of $47,500. Because the house they bought has appreciated in value, the house is worth $400k more than what they bought it for 25 years ago. That gives them a retirement nest egg of approximately $936,000. This doesn’t include any other investments or cash savings they may have.
As you can see, there is a distinct difference the retirement lifestyles of subject A and B. These are very realistic examples and are not too far off the norm. I haven’t even gone as far as listing possible monthly expenses but imagine living on $850 a month and you still need to pay for food, medication, clothes, grandchildren and other every day life expenses. It is definitely not impossible, but it isn’t the most comfortable situation to be in. I think given the two scenarios, any person with common sense would choose scenario A over scenario B. The only difference in the two scenarios is how each individual chose to approach their retirement planning. Again, I ask you what retirement approach will you take?