Retirement Expenses

 I'm trying to give you some perspective of what you might face in retirement expenses versus income.

Never expected that in retirement that my largest expense would be insurance. About $13,600 a year for house, car, umbrella (in case you get sued for millions of dollars such as in a car accident), Medicare, Medicare Supplemental, Medicare prescriptions, and Dental. Despite all that insurance, out of pocket medical expenses still totaled over $7,000 despite all that insurance coverage (over $4,200 for prescriptions and non-prescription medications, $1,600 for doctors, and over $1,100 for dental). Fortunately, our house is paid off so we don't have a mortgage expense though property tax adds over $6,400 a year (would be more, but frozen for 10 years due to our age in our residence county - may not be frozen where you live or if you buy another house after you've been retired a while). The other two large expenses were Utilities (electricity, heat, air conditioning, and water) and Groceries - both over $9,000 a year. Leaving out over $11,000 for restaurants as that is more of a controllable than the others. We are fortunate enough to have enough savings to afford our expenses, but so many retired people have little or no savings. Shows the importance of saving for retirement starting at a young age.

Those out of pocket expenses total $45,000 (over $56,000 when restaurant meals are included) and there are many day to day expenses not included in those numbers that total over $20,000 (some optional such as lawn and maid service; others less optional such as phone, TV, internet, repairs, major purchases, clothes, etc.). We did no vacations due to Covid the last 3 years, but normally that has been the most expensive optional expense as we used to do 3 to 4 vacations a year. Our expenses in retirement have been more than when we were working due to the optional, frequent vacations we took in retirement.

This is why I preach about the importance of saving for retirement, plus give you an idea of what you will likely face in expenses relative to income when retired (though both would be higher then due to normal inflation, but the relationship between them likely will be similar). Now we do receive over $50,000 a year combined in Social Security income ((2/3rds me; 1/3rd my wife in SS income) because most of my career I paid out the maximum in Social Security taxes . Most married couples don't pay out in SS taxes and therefore don't receive that much in SS benefits. Singles receive SS income (and pay out SS taxes) much less. 

Also keep in mind, that when one spouse dies in retirement, the surviving spouse loses the lower monthly Social Security check. That can reduce SS retirement income by 33 to 50% (50% when both spouses paid the maximum SS taxes when working and thus each received the maximum SS benefit in retirement), but your monthly expenses won't go down anywhere near that amount (will mostly remain the same).

Social Security Taxes Value If Invested

 

To arrive at the calculation of what would Social Security be worth for a 23 year old by the time he reaches age 65 (42 years later), several facts are vital to analyze:

1. Each individual pays 6.2% of his income in Social Security taxes up to $142,800 annual limit.

2. The employer of that individual matches the 6.2% in taxes paid bringing the total to 12.4% taxes paid for each individual.

3. In addition to social security pensions, SS pays out welfare benefits for disabled workers and dependents, and widowed survivors with children.

4. 76.1% of total Social Security taxes paid goes to SS retirees. Therefore 76.1% of 12.4%, or 9.36% of the 12.4% paid are devoted to retirement. The rest goes to welfare programs.

5. So if it were possible to invest 9.36% of your income in actual investments for age 23 to 65 (42 years), what would your retirement benefits be? Note in the past some government institutions were allowed to do this (no longer) and the results were much better than regular Social Security benefits.

6. The long term average growth of the stock market is 10 to 11% or a doubling every 7 years. Some 7 year periods do better; some do worse, but string 4 to 5 of those 7 year periods together consecutively, that's your average. Therefore in 42 years, your investment would double 6 times. Every $1,000 invested annually would amount to $64,000 each year for 42 years in a row. $2,000 invested would amount to $128,000.

7. Relative to point 6, for both safety, minimum cost, and performance, only invest in large stock market index ETF funds such as the S&P 500 largest stocks - SPY , the S&P 400 Mid-Size stocks – MDY, and the S&P 600 Small Size stocks – SLY, plus the Nasdaq Top 100 stocks – QQQ (kind of a technology investment). Hold forever; don't sell and buy repeatedly (those who do that average only 4% growth annually). There are also growth (add G to the end of the symbol) and Value (add V to the end of the symbol) versions of the 3 S&P index funds mentioned.

8. For a person making $30,000 a year, that works out to $2,808 invested a year. By age 65, a 23 year old would be looking at receiving $179,712 for each of 42 years of retirement, and that assumes that person never got a raise in 42 years!! Otherwise, the total would be dramatically higher.

9. A 23 year old person making $45,000 a year, would be investing $4,212 a year and therefore looking at collecting $269,568 a year for 42 years at age 65 without any raises during his working career. Likely many raises and therefore much more invested and collected. Plus, very importantly, his estate will own all that money not yet collected when he/she dies and be distributed to his beneficiaries!!

10. A 23 year old person making $60,000 a year, would be looking at collecting $269,568 a year for 42 years at age 65 without any raises. Likely many raises and therefore much more collected. Plus, very importantly, his estate will own all that money not yet collected when he/she dies and be distributed to his beneficiaries!!

11. A 23 year old person making $75,000 a year would be investing $7,020 for his retirement and therefore looking at collecting $449,280 a year for 42 years at age 65 without any raises. Likely many raises will come and therefore much more collected in retirement. Plus, very importantly, his estate will own all that money not yet collected when he/she dies and be distributed to his beneficiaries!!

Final Note:

None of your Social Security taxes collected have ever been “invested”. That's because when Social Security was started in 1937, the taxes collected were used to pay benefits for retirees who were 65 or older who had never contributed to Social Security (as it did not exist when they were working). There was never any chance to invest the SS taxes collected. It was always, effectively, a “pay as you go” system. Even in years when a surplus of SS taxes are collected, relative to SS benefits paid out that year, the excess money is transferred out of the Social Security Budget to the Treasury Department, which then transfers the money to the General Budget where it is immediately spent and an “IOU” generated allowing the government to “pay back” SS in the future when taxes collected are less than benefits owed, by “borrowing” the money by selling Treasury bonds.