Trust Math, Not Magic
The best financial strategy is one that makes just as much sense as it does money. The closer you get to your goals, the more you should feel confident and secure. You don’t need to understand every piece of financial minutia, but you do need to understand the big picture. Math, not blind trust, is what puts you on the path to success.
Unfortunately, some people think that doing what everyone else does—or doing what the government tells them to do—will keep their retirement safe. As they get closer to retirement, however, they will start to realize that blind confidence has put them in dire financial straits.
Why do so many Americans trust Social Security unconditionally? Perhaps it is because they have seen their parents and grandparents retire with dignity on a Social Security income. Unfortunately, most American fail to realize that the math behind Social Security has changed since then.
Social Security: Past and Present
The first thing to understand is that the money deducted from your paycheck isn’t invested. Instead, it goes to Social Security payments for current retirees. Right now there are about three working-age people for every Social Security recipient. In 1945 the ratio was 42 to 1! It was easy to give seniors a dignified retirement when there were 42 tax paying adults for each senior citizen. Since then, however, birth rates have fallen and life expectancy has gone up by more than two decades. These trends will only continue and by 2040 the ratio will fall to almost 2:1.
Make no mistake about what this means: Social Security as you know it is doomed. Perhaps some benefits will continue, but any decent income for seniors will require massive tax hikes. Ironically, the hardest hit people will be those who put their money in tax deferred accounts like 401(k)s and IRAs. Those plans are only a good deal if Uncle Sam decides not to raise taxes, but he will have to raise taxes.
All this is sobering to consider, but please don’t despair! Just because the “government plan” for retirement is not something you can rely on does not mean there is nothing to be done. You will need to make a new plan based on clear goals and start working on it immediately. If you need help, then take my 10-minute quiz to get started.