So at a time when the national savings rate has fallen below zero ... my family has gone the other way. ... We like to think of it as being frugal, but another adjective — cheap — would not be unfair.Yup, I'm cheap, no doubt about it!
I've been doing some surfing around the whole social security issue lately, following some back and forth on the subject with Piaw Na.
Here are some quotes from an article in last year's USA Today about retirees who live entirely off social security:
...today, 10.6 million people, or 22% of the 48 million who will receive Social Security benefits this year, live on that [social security] check alone, the Social Security Administration says.And here's the most recent summary on the status of Social Security and Medicare Programs (from May 1, 2006). [ Edit: Here's the full Trustees report for 2006, and here's another good summary of the report from the Center on Budget and Policy Priorities ]
...
Currently, 53% of people in the workforce have no pension, and 32% have no savings set aside for retirement.
...
The [current] average Social Security payout is ... $11,460 annually.
I've got no pension, but I do have retirement savings. Almost all of those savings are out of my own pocket; only one of my previous employers did the matching contribution thing, and I didn't stay with them long enough for it to make a big difference.
Hard to say just how much money I'll be getting in retirement. Things could definitely go sour. But then there's always the ex-pat option - hello, Panama! (log in required).
11 comments:
To give you an idea of how little trouble social security is in (compared to the medicare and general budget deficits), here's Calculated Risk's graphs of the various deficits. While it is prudent to not consider social security part of your retirement budget, I think too many people are wrongly focused on Social Security when it's the general budget and current account deficit that will potentially cause them problems in retirement.
As for retirement budgeting, I highly recommend the Early Retirement Home Page studies. They're designed by a retired petroleum industry cost analysis engineer (not an MBA, not a financial advisor) who's living off his own advise, and are appropriately prudent. He's got spreadsheets and Javascript calculators to let you do your own computation.
After our discussion, I've been reading through Krugman's articles again. I have a nagging recollection that there was some question or questions that I had which he never answered on the SS issue, which is why I've never quite felt comfortable with his arguments that SS is doing fine. (Of course hearing "SS is fine, it's medicare which is an upcoming disaster" is not really comforting.)
You should understand that Social Security is not a personal worry, for me. Since I'm not counting on it, it will be a bonus if it's there (I realize that things don't always go as planned). I am more concerned for the people who desperately need it. They are already in bad enough shape. For them, the current state of Social Security is not helping enough.
When you say "it's the general budget and current account deficit that will potentially cause them problems in retirement", do you mean the fact that money in the trust fund is being used to pay for other things, so the money may not actually be there when it's needed? If so, that sounds like Social Security is in trouble. Please expand on this.
I've been all through the Retire Early Home Page a few years ago, and I've seen John Greaney's material on the safe withdrawal rate. It's a good site. I've been a member of Motley Fool for several years. Greaney posts there under the alias intercst. Motley Fool overall has some pretty good info, mainly from some of the old-timers on the discussion boards.
What the general fund deficit means that tax planning is essentially a crap shoot. You can't count on tax rates staying as low as they are today, and you can't count on the dollar staying a high as it has been. (Though there are plenty of arguments on both sides of the matter: see Brad De Long's commentary for a sampling of the debate)
What this means for me is that I have to look far wider for diversification than I otherwise would have to. What it means for non-savers is that as the housing ATM shuts down, they're going to be forced to tighten consumption by a combination of high oil prices and higher import prices.
A repeat of the 1970s "stagflation" is not out of the question, and that's the real threat.
I doubt if the general fund deficit will cause social security to go away. The U.S. certainly can't default on those bonds any more than it can default on the bonds that China buys without destroying the bond market (and the economy). The people depending on social security also tend to be older than the general population, and they vote. It's the young people (who tend not to vote) paying payroll taxes that have to worry. The resulting higher interest rates, however, are going to cause the economy problems at exactly the same time.
In other words, what this does is it gives even prudent savers a lot of headaches as to how to plan for the future.
Tax planning: "tax planning is essentially a crap shoot"
Yes, I have had that problem (and more generally I've had that problem with retirement planning). Many uncontrolled variables.
Trivial example: I never quite felt confident about opening a Roth IRA. It's tax-advantaged later, in theory. I keep reading that Congress can change the law in 10 years or so that it does get taxed. Since Social Security was changed in this way, it's plausible. Also, the fact that it's tax advantaged later doesn't help me a whole lot, since I think I'll probably be in a pretty low tax bracket in retirement. I did eventually open a Roth; it's not a huge piece of my retirement plan so I figured it couldn't hurt.
I will take a look at Brad DeLong's site.
I am curious to hear your thoughts on George Price's series on Social Security, have you read any of this?:
Getting a grip on Social Security: The flaw in the system
Social Security: Bush's Lies vs. Reality
The Truth About Social Security
I came across his stuff via a link from Wikipedia.
In doing that investigation, I think I recall what it was that made me think Social Security is doomed (maybe doomed is too strong - when I say doomed I mean "not there for me in particular, since I think it will only be there for really really poor people and I hope not to be in that state").
So what made me think that, was the statement that we've gone from many workers (16 or whatever) to 3 workers supporting every Social Security recipient. I then leapt to the conclusion that eventually we'd get to one-to-one, at which point everyone should just be saving for themselves rather than paying out for someone else. (If I'm paying to support an entire person in their retirement it might as well be me). And heaven forbid it should invert. Anyway I assumed at some point people would rebel over the increasing tax burden, and make radical changes so that only the very poor might be covered. This is probably alarmist thinking.
However, I, personally, do not feel "invested" in Social Security, so it is easy for me to discard it as a plan for my future.
My feeling about Social Security is that it is a welfare program for the poor. I firmly believe that we need such programs. I don't want the elderly living in the streets or eating cat food, but I also don't want to be paying for their cable bill. I feel that as I am a person who is capable of long-range planning and has a good income, it is my responsibility to provide for my entire future. The idea that my nieces will be paying something to me (via SS) when I get old is disheartening.
If something goes wrong, some financial disaster that I had no way of avoiding, I do hope that Social Security will be there as a cushion.
Anyway, in my current reading I can see that there is no reason to assume the ratio of workers to retirees will decrease, at least. So one of my doubts is removed.
Specifically about the Roth IRA, there's a great article on Vanguard's web-site on how to approach it. They basically suggest treating it as a tax diversification move.
I can easily see that if the Republicans keep winning, they'll try to push through the consumption tax, which would make you feel pretty silly for paying your income tax in advance, but it's worth having a bit of money in there anyway for the reasons you state.
To the extent that people with high incomes already get taxed on their social security receipts, I think that poor people already get a break when they start collecting social security. In any case, social security receipts are so meagre that it's hard to imagine being able to live on them in many desirable parts of the country, so if you want to live on the coastal states for instance, you're going to have to save anyway or face a lifetime of not retiring (something that some people I know are resigned to).
I think George Price has it mostly right. Also, according to Krugman and De Long, it doesn't take much in productivity growth for social security to take care of itself. Dealing with a problem that'll happen in 2040 is crazy anyway, especially when we have much bigger problems (general fund deficit, medicare) facing us RIGHT NOW!
That is a good article. My employer doesn't offer the Roth 401(k) as part of their plan, so it's a moot point for me. I contribute to a Roth outside of my employer's regular 401(k) plan, getting the best of both worlds. My 401(k) is kind of a sucky plan with ugly fees; the tax deduction more than makes up for that though.
I think it would be nuts for me to contribute more to a Roth in lieu of the current tax deduction, because I am pretty sure I'll be in a lower tax bracket in retirement. You never know but I guess I wouldn't mind having that problem if it should happen.
"social security receipts are so meagre that it's hard to imagine being able to live on them in many desirable parts of the country"
That's absolutely true. It astounds me that some elderly people continue to live in these expensive areas at a subsistence level when they could live much more comfortably in some less expensive region.
But for some people, it's really tough to move away from friends, family, their doctors, etc. So they're sort of stuck, I guess.
Well, there are a lot of things to life other than living in luxury. A couple of my friends went to retire in New Zealand. After a couple of years, they realized that it wasn't as desirable a place for them as they'd thought (the shortage of roads make road cycling kind of boring after you've ridden the same road about 300 times).
They moved back to New England and went back to working for a living, while they could have stayed retired in New Zealand.
On the other hand, I know a number of people who moved to Washington to escape Cailfornia's 9.3% state income tax. When I think about their networth, I think: "If I had that much money, I wouldn't put up with crappy Seattle weather." For such people, the extra $3 million dollars on top of a $30 million portfolio is more important than the quality of life. I guess it does take all sorts.
As for the Roth, I've socked away so much money in the regular IRA, and the company match is in the regular 401(k) anyway, that it makes sense to diversify across tax regimes.
the shortage of roads make road cycling kind of boring after you've ridden the same road about 300 times
I can see that. This is sort of the problem I face in CT now. At some point hiking the same trail again gets old.
Still, moving back to New England, you'd think they'd run into the same problem. No matter where you are, at some point you've been all up and over the place; time to move again!
the extra $3 million dollars on top of a $30 million portfolio is more important than the quality of life.
Or maybe they don't care about crappy weather as much as you do. Still, I'd think one could live satisfactorily (and indefinitely) in CA off of $30M!
I believe there are lots of other fine places to live that are cheaper, though. I wish I could try them all; I think if I had $30M I would! That's something I look forward to in retirement, moving around a lot. I've already moved around quite a bit, but it's always where my job takes me - there are so many more places to see. I look forward to having more choice in where I can go. Even with limited funds, I think I'll have a wider selection than I do now, which basically involves going to wherever my next job takes me.
Apparently, Massachussetts and the surrounding areas have plenty of lovely roads that grant plenty of variety. I've lived in the Silicon Valley area for a good 13 years, and I'm still not bored by the terrain and beautiful roads (or the lovely weather), so I think once you get past a certain critical mass of roads in your network, the route selection becomes effectively infinite and you no longer worry about boredom. Similarly, after 13 years here, I still haven't run out of hiking trails within an hour's driving distance, and there are a few I'd happily do every day if I could.
Being able to live anywhere in the world would definitely be one of the big appeals of being wealthy. Then again, if you're not tied to a job, there's no reason you'd have to live in an expensive place --- most places that are desirable places to live that are expensive are expensive because of the jobs there, not just because they are desirable places to live. When I cycled through Southern France, there were lovely lovely towns with few people in them because all the jobs were gone, and all the young people had moved to the big cities. Their road networks were perfectly adequate, and I could easily imagine spending 6 months to a year in places like that --- it wouldn't necessarily be expensive, either.
after 13 years here, I still haven't run out of hiking trails within an hour's driving distance
Yeah, it's the driving that gets me - I've begun to run out of trails within a 45-minute drive. I do not like driving. If it's a 1-hour drive, then I want to be out all day, and I can't always do that what with work. Sounds like you've got a very nice spot in which to live.
I could easily imagine spending 6 months to a year in places like that
Mmm, I love France! Gotta stop watching so much TV and get back into studying French :-)
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