Don’t Count on Social Security: Why It’s Crucial to Take Control of Your Retirement NOW

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Last week, the Social Security Administration announced that Social Security benefits would not be increased for 2016. The indicators that were used to determine if an increase would be approved were flat, meaning there hadn’t been a significant increase in the cost of enough products to warrant a Cost of Living Adjustment. This is the third time in six years that benefits have not increased. That’s pretty disturbing if you’re counting on Social Security to take care of you after you retire. 

What really stinks is that those indicators don’t include things that actually make a difference to seniors. Some of the indicators they DO look at include the cost of gasoline and the cost of commuting. Not a really big factor in the budget of retired people. Some indicators that AREN’T included are the cost of healthcare, housing, and prescription drugs, which ARE something seniors need to consider.

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Cost of Living Increases

According to the Social Security Administration, The Bureau of Labor Statistics determined there was no increase in the Consumer Price Index for Urban Workers (CPI-W). The Senior Citizens League would like to see the Consumer Price Index for Elderly (CPI-E) used to determine cost of living increases instead. If CPI-E was used, seniors would receive a 0.6 increase next year.

I’m in my 40s. I don’t believe that Social Security has the funding to be around in its current capacity when I am retirement age. I don’t believe it will suddenly get better for those of you who are younger than me.

It used to be, multiple-generation families lived on farms, and the younger members took care of and provided for the older members as they got too weak/old/infirm to contribute. The Industrial Revolution lured younger people away from the farms as the older generations stayed behind. 

The Social Security Act came out of the Great Depression to provide for seniors who couldn’t provide for themselves. The plan was for contributions to be made during the times you were working, and benefits paid out after you retired at the age of 65, based on your past wages.

But even in the very beginning of the program, it was acknowledged that:

“It is impossible under any social insurance system to provide ideal security for every individual. The practical objective is to pay benefits that provide a minimum degree of social security—as a basis upon which the worker, through his own efforts, will have a better chance to provide adequately for his individual security.” — From the Report of the Social Security Board recommending the changes which were embodied in the 1939 Amendments.

They knew before the first Social Security Benefits were ever paid out that it wouldn’t be able to provide for everyone. They INTENDED for this to be a supplemental program, rather than an absolute.

tenant-owe-money

Related: How Much Do I Need to Retire?

Making Ends Meet

Have you ever walked into a large chain store and been greeted by an older person? They aren’t making $100,000 a year doing that. The majority of them also aren’t doing it just because they’re bored.

How about those samples you tasted at the membership warehouse you went to last week? Did you happen to notice the age of the person passing them out? While some of them are young, the majority of them in my area are past the traditional retirement age. Do you think they are doing it just for fun?

Nope. They do it because they need the money to pay their bills. I have yet to meet someone who started saving for retirement early, gathered up a big nest egg, retired, and now works at a low-paying job for kicks.

Did you know that small tweaks now can have a HUGE impact on your bottom line down the road?

The Incredible Advantage of Starting Early

Preparing for retirement isn’t something you can do in one day. The later you start, the more catching up you have to do. If you put “X” into retirement every year from age 22 to age 30, and then stop contributing, your nest egg will be larger at age 65 than if you start contributing at age 30 and put away DOUBLE until age 65. Eight years of savings at an early age will yield more than 35 years of savings if you start later. 

Compound interest is a powerful thing. I’ve written about it before. But when I was talking about it previously, I meant in the context of retiring early. What about being able to retire at all?

Beginning as early as you possibly can, make a savings plan. It doesn’t have to be huge dollar amounts, although that would certainly kick start your retirement fund. Aim for $50 a week. Or $20. Or $10. It doesn’t matter the amount, it matters more the habit. Of course, that bit is for those of you who are still in your teens. As you get older and it becomes more clear that you have not saved in the past, the contribution amount is far more important.

Starting early doesn’t mean you have to give everything up or make giant sacrifices. There is this huge misconception of frugality that you have to sacrifice everything fun. You don’t. You can still go out to dinner once in a while; just budget for it. You can still buy new clothes, just don’t go crazy at Nordstrom’s. Do you really need 12 pairs of jeans, anyway?

In fact, the later you wait to start saving, the more you are going to have to put away — and the more you’ll feel it.

Get Yourself a Budget

Do you know how much money you are spending every month? Do you know where it goes? Have you ever sat down and made a budget?

I thought I knew what I was doing, where my money went, how much I spent on everything. “Hey, I make my coffee at home rather than going to a coffee shop, I’m doing great!”

My husband suggested that we start writing down every penny to see how much we actually spent every month. “Knowing” what you spend every month and then seeing it written down in black and white is quite eye-opening. I didn’t realize I went to the grocery store six days a week. I wasn’t getting a lot, but every time I went, I picked up 2-5 more items than I had planned. Those 2-5 items weren’t free.

Write down your purchases for a month. See where everything goes. Make sure to include EVERYTHING, like the electric bill, the newspaper subscription, the mortgage payment. Note oddball expenses, like a new bicycle or car insurance, that aren’t typically due every month.

Getting a picture of what you are spending can give you an idea of what you will NEED for retirement. It can also show you which expenses you can cut without feeling too much of a pinch.

cashflow

Creating Passive Income Streams

How would you like to collect a steady paycheck with increases every year or so for the rest of your life? Kind of sounds like Social Security, right? Well it isn’t Social Security; it’s financial security. Wouldn’t it be great to know that YOU control your financial security, rather than relying on a government agency to decide how much you get, when you get it, IF you get a raise, etc.?

There are many ways to create streams of passive income. Investing in the stock market can be a great way to grow your bank balance, but the whims of Wall Street are just that, whims. You have no control over what a company may or may not do, how their CEO will act, etc. You have no control over how Wall Street will react to those behaviors, either.

I watch the stock market. The way Wall Street reacts to some things seems almost counter-intuitive. A company reports earnings better than expected, and the stock drops. Or the company earnings are worse than expected, and the stock soars. New CEO? Twenty-five point drop. CEO gets fired? Stock rises. It really doesn’t make any sense.

Dividend stocks — stocks that pay you nominal amounts for each share you own — can be a way to create passive income, but there is no guarantee that the stock will continue to pay dividends forever; they can cancel at any time.

Related: Most Americans Won’t Retire Comfortably: Here’s What They’re Doing Wrong

So let’s talk about real estate. Owning rental property is a great, at least sort of passive way to create an income stream. The longer you own the property, the more income you generate, simply because the amount you collect grows each year. In theory. Yes, there are areas where rent is going down, prices are dropping, etc. But you won’t have to worry about that because you’re doing your research and buying smart!

People are ALWAYS going to need a place to live. Millennials are pushing back the purchase of their first house, many preferring to rent for the flexibility it gives them.

Here is where the passive part comes in. Property managers. You can hire someone to take care of everything for you. THEY find the tenants, THEY take care of the repairs, THEY collect the rent. Then they send you a check.

The work you do comes in the form of vetting the property managers. (I said sort of passive — you do have to do a little work!) Spend the time up front, making sure the property management company has the same criteria you do. You don’t want to put just anyone into your unit; you want to make sure they are screened and that they check out. So tell your property management company exactly what you expect. Or better yet, ask them opened-ended questions about their practices to see what they typically do. The guy (or gal, no sexism here) who says, “I’ll have it rented in one day!” is probably not the one you want to hire.

Overcoming Fear

Everybody’s favorite BiggerPockets Podcast co-host Brandon Turner hosted a webinar this week called “10 Mistakes Real Estate Investors Make.” (If you have a Pro membership, you can watch the replay at biggerpockets.com/proreplay and see past webinars.)

The first mistake real estate investors make is letting fear stop them:

  • Fear of loss
  • Fear of the unknown
  • Fear of what other people may think

So how do you overcome these fears?

  • Start moving
  • Remember: You are the average of the five people you associate with most
  • Gain a solid education

“A year from now, you’ll wish you started today.”

Don’t wait for the government to take care of you. Don’t wait to start tomorrow — tomorrow can always be pushed back one more day. And another and another until you discover that you have waited too long, and you cannot catch up.

Small tweaks now make a huge difference down the road. Make plans now, so your future is crystal clear.

How early did you start planning for retirement? See below for a link to the FREE October 28th webinar, “Using Duplexes, Triplexes and Fourplexes to Find Financial Freedom.” You can BET Brandon Turner is planning HIS own retirement!

What are YOU doing (in real estate or otherwise) to plan for retirement?

Let’s share our strategies in the comments section below!

About Author

Mindy Jensen

Mindy has flipped numerous homes in the past 10 years, one at a time and doing much of the work with her husband. She lives in Longmont, CO, and is always looking for an ugly duckling to turn into a swan.

37 Comments

  1. Jay C.

    Mindy is 100 percent correct you should be not considering SS as your end all retirement pension. Rather a suppliment to a larger nest egg you built elsewhere. Although this is a REI site and not total wealth building site one can hone in on the positive takeaways one can derive from REI investing but make no mistake like SS if you drop all your eggs in one basket you have again set yourself up for failure.

    I would also caution Mindy about fear mongering what SS will do in the future is a great disservice to elderly who do in fact count on it for survival. As someone in your 40`s you haven’t a clue if it will or wont be around other than the propaganda that’s let out by political groups agendas to grind. I would remind those who post on this site to remain within its intended boundaries. We get enough fill elsewhere of opinion of this type of subject that portrays only one side of the story.

    • Mindy Jensen

      You are absolutely right, Jay. My opinion is mine, I am not involved with the SSA, and don’t have access to their books to be able to say for certain.

      I am not trying to fear monger. But I see far too many people making zero plans for their retirement, and think they can live off SS benefits. I think preparing for your retirement, making your own plan and ensuring your financial security is the best plan. Any SS benefits you receive will be bonus.

      Thanks for reading.

    • Bryan Otteson

      Are numbers now to be considered opinions? It is not a disservice to anyone to say that Social Security will become insolvent unless the government changes something in a big way. Facts are not fear mongering, they are educational. Insolvency is a numerical truth. If nothing changes, that system dies.

      • Ben Leybovich

        Why are we even talking about this? nobody in congress will ever let that system collapse – first of all. And secondly – who is on BiggerPockets for the purpose of positioning themselves in a way that makes SS income even necessary? We are all here to learn how not to care what happens with that system.

        So – why is the subject even worthy of discussion? Focus on what’s important – making more money and paying less into the system 🙂

        • Russell Brazil

          Im with Ben on this. Congress will eventually make a fix to the system. Theyve done so several times through history, and will again at some point. The general public will not stand for them allowing the system to collapse.

  2. karen rittenhouse

    Mindy:
    There are 2 easy ways to save:
    1. earn more
    2. spend less
    There’s no time like the present to start saving for the future.

    I totally agree about Social Security. When it was implemented, retirement age was still 65 however life expectancy was 58 for men and 62 for women. There were 42 workers per retiree and there are now about 2.5. Anyone considering this a retirement plan is setting themselves up for disappointment.

    Thanks for your information, education and encouragement to others to begin planning for the future today.

  3. Ndy Onyido

    Mindy,
    This is a great piece and you are entirely correct. I plan my own retirement and pension through real estat investment. I am a buy and hold investor and I love the constant flow of paycheck even while on vacation….the beauty of REI.

    • Mindy Jensen

      Unfortunately, I can’t read this article without subscribing, however the subhead is still readable, and it says in 1967 the projected cost for 1990 was $12 Billion, but actual costs were $110 Billion. That sort of deficit cannot continue.
      Thanks for sharing, Andrew.

  4. Phillip Davis

    I REALLY dislike articles like this that try to scare people that Social Security won’t exist in 20 years. The Social Security program, without any tweaks, is solvent at least until 2033. (The big problem is not with Social Security itselft, but with the ballooning Disability Insurance program). I agree that one shouldn’t depend SOLELY on Social Security–that’s why I’m investing in Real Estate!–and that benefit increases are likely to be non-existant, but SS is not going anywhere soon.

    • Mindy Jensen

      I appreciate your point, Phillip. I’m not trying to scare people into thinking Social Security isn’t going to exist. But time and again, when conversation turns to finance, the people I am speaking to have zero plans for retirement.
      Social Security was never designed to take care of you completely, but I’m seeing a lot of people with no other plans.
      You say the program, without any tweaks, is solvent until at least 2033. That’s only 18 years away.

    • Minh Le

      Phillip,

      Great point. With some tweaking, SS can last much longer. Unfortunately, the politicians don’t want to make the tough choice. All they care about is getting re-elected. Reality is a b!tch sometimes. :0)

    • Bryan Otteson

      Have you ever seen the government accurately predict anything? It’s already a very real possibility that it will be insolvent much sooner than 2033. I don’t think this report counts on “borrowing” from SS to pay the disability payments:

      http://www.heritage.org/research/reports/2014/08/social-security-trustees-report-unfunded-liability-increased-11-trillion-and-projected-insolvency-in-2033

      How Accurate Is the 2033 Prediction?
      According to the 2014 trustees’ report, the combined Social Security and Disability Insurance Trust Fund will remain solvent through 2033, but if history is any indicator, insolvency could come much sooner. As recently as 1983, the Social Security trustees projected, “On the basis of all but the most pessimistic of the four sets of assumptions used, the program is now estimated to be financially sound over the next 75 years.”[5] That would have been 2058 or later. Three decades later, the projected insolvency date is now 25 years sooner. As a Heritage Foundation report shows, if that trend continues, the Social Security Trust Fund would be insolvent nine years sooner than currently projected—in 2024 rather than 2033.

  5. Tim Puffer

    I see it becoming the norm that there isn’t any type of increase to SS. I’m 26 and I definitely do not plan for it to be there when I retire. Which by the time I get around to it the SSA will probably have a requirement that you have to be 75 years old before you can collect. No Thank You! Build your own retirement now so you don’t have to greet people at Walmart when you should be on the beach. 🙂

    • Mindy Jensen

      Exactly my point. I do believe SS will be around in the future – just not in its current capacity. Retirement age will have to increase, or benefits will have to be reduced. It just can’t continue on this current pace.
      Rather than be surprised at age 65, plan ahead to make sure you have enough to live on.

    • I always feel so sad for the greeters at Walmart. I’d hate to have to get that job when I’m older. Have never even given SS any thought…as in, I never thought I’d have it. Never even entered my mind to just expect to be covered when I’m older.

  6. Jeff S.

    There is a rich guy in my town that said he could not do today what he has done. He is very rich owning lots of commercial property and a thriving business.

    I feel the same way. The properties I bought 20+ years ago cash flowed from day 1 and have appreciated 6 to 10 times my purchase price. You could not afford them today. I also put my nose to the grindstone for 20 years and left with cash and a pension. That is not possible now with this job. Social security is there for me too. Today’s people need to be smarter and have different angles than what worked in the past.

    If you have a huge high tech job like Mr Mustache and save 50% of your income you can pull it off if you are smart and don’t make investing mistakes. RE is not a sure bet but it seems to be a great way to escape for most.

    • Mindy Jensen

      I don’t know about not being able to afford them today vs 20 years ago. Certainly prices were lower back then, but so were wages. There are a lot of people making a lot of money in Real Estate right now who haven’t been in it forever. Of course, buying property at 1995 prices would make even more money…

  7. Susan Maneck

    For all the negativity about Social Security, show me an annuity that pays any better? That’s the way we need to look at it. It’s insurance not an investment. There is an easy solution to preventing it from running out of funds. Just remove the cap! I intend to put off collecting my Social Security until I’m 70 although I’m hoping to retire at 62. The amount I get at that time, along with RMD will give me a comfortable income even without the houses. I hope to have enough passive income from my properties so I need only take a little out of my mutual funds.

  8. Joshua Diaz

    I enjoyed this article. It’s further cementing my belief that I should not just rely on one stream of income for retirement and hope for the best.
    I definitely don’t want to be working on the floor of some supermarket when I’m 70!

    • Ben Leybovich

      No worries, Minh. The cap will be removed sooner or later. Cap gains tax will go up, specifically short-term. Brackets will go up…

      Nobody will let SS go down – you’ll pay for it 🙂

      And Mindy, don’t get too successful, like Minh, or you might pay for it too 🙂

  9. Jerome Kaidor

    I have a related decision to make. Hitting the age where I can start drawing. If I take it now, I get $1200/month. If OTOH I wait 5 years, I would get $2400/month.

    I don’t really need it either way – I have spent the past 15 years building a rental business, and now have 93 units. But one always tries to optimize one’s situation..

    Factors to think of:
    * A dollar today is worth more than a dollar 5 years from now.
    * If I wait the 5 years, who knows what shape the SS system will be in?
    * If I wait… who knows how long I will survive after that?
    * 1200/month for 5 years – that’s over $70K.

    On the other side:
    * There’s an “insurance” aspect to getting $2400/month. If the business goes to poop,
    I could live reasonably well on that sum. On $1200/month, no way.

    • Mindy Jensen

      I don’t think in 5 years, there will be much difference in SS for people who are already at the age to start taking their benefits. I don’t think your only two choices are now or 5 years from now. Can’t you decide, in two years, to start taking payments if you want? Don’t benefits alter the longer you wait to take them?
      I think the big changes are going to affect people who have a while before they can start receiving them. 93 units?!? Nice. Should be able to live off that… 🙂

  10. Dmitriy Fomichenko

    Nice post and some really valid points about saving early. When it comes to rental properties, you receive income in different forms, starting with cash flow, property appreciation, loan paydown, and tax benefits. It is more about when you decide to start with RE investments. Thanks for sharing!

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