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.
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