Social_Security_Is_Great
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai and in this episode I want to talk about Social
00:00:04.400 | Security, our national pension fund that I didn't really believe in when I was in my 20s or my 30s,
00:00:12.480 | but now that I'm going to be 45 next year, I'm thinking, hey, maybe Social Security is going
00:00:19.040 | to be there for us in full actually, and maybe all this time worrying about saving and investing our
00:00:26.240 | pennies and dollars was for naught, or at the very least, we shouldn't have been worrying so much.
00:00:32.640 | And the reason why I believe this is because the cost of living adjustment in 2022 is going up a
00:00:41.440 | whopping 5.9 percent. 5.9 percent folks, that's an impressive increase and that'll translate to an
00:00:50.800 | additional $92 a month on average for the average retiree. Now that turns out to be $1,657 a month,
00:01:00.480 | or $19,884 a year from Social Security until death. The average person would need about
00:01:08.800 | $500,000 in capital returning 4% to generate the average Social Security benefit of $19,884 a year.
00:01:18.320 | In other words, the average American retiring is a half a millionaire. And I also believe,
00:01:23.920 | because the average is a half a millionaire, the vast majority of Financial Samurai listeners and
00:01:29.440 | readers will retire as millionaires or multi-millionaires by their mid to late 60s.
00:01:34.880 | All this time, I thought that Social Security would not pay out its fully promised amount.
00:01:40.160 | The pension fund is currently underfunded by about 22 percent. So I was thinking, well, we should all
00:01:47.440 | at least lop off 22 percent from our expectations. But for it to now pay such a huge,
00:01:53.920 | high cost of living adjustment is pretty baffling, since it's underfunded. A larger payment reduces
00:02:01.040 | the plan's financial health. The Social Security Board of Trustees recently admitted the trust fund
00:02:06.960 | will be depleted by 2034, a year earlier than estimated in 2020. So if you jack up the COLA
00:02:15.040 | by 5.9 percent the following year, it's probably going to get depleted by two, three, four more
00:02:21.120 | months. It just depends on what inflation will do next year and also how much the maximum income
00:02:27.040 | will be taxable under Social Security. Well, I got the answer. So the maximum income to be subject
00:02:35.280 | to the tax will increase from $142,800 in 2021 to $147,000 in 2022. So is that 5.9 percent? Does
00:02:45.120 | that match the COLA increase? No, it does not. Quick math dictates that that income increase is
00:02:51.120 | only 2.94 percent. So again, another mismatch. Amazing. Great for retirees, the boomers, who are
00:03:00.240 | also the wealthiest, wealthiest generation in our history. And not so great for the millennials,
00:03:05.920 | the Gen Xers, the Gen Zers, and so forth. Think about it, folks. If the government wanted to
00:03:11.200 | improve the financial health of Social Security, it would at least raise the maximum taxable income
00:03:17.120 | limit by 5.9 percent as well. And if they really, really wanted to improve the health of Social
00:03:22.720 | Security, they would raise the income tax limit further, let's say 10 to 20 percent to $157,000
00:03:29.360 | to $171,000 while capping maximum benefits. And that probably would pass the mustard. Those
00:03:37.440 | critical folks who are just saying it's all a big Ponzi scheme, can you really tell too much
00:03:43.680 | if your income limit goes to $157,000, $171,000? I mean, you can tell a little bit from each
00:03:49.920 | paycheck, but it's not that drastic of a difference. We've got to do something if we
00:03:54.640 | want to make the system whole. And I think that would have been an easy, easy way to help the
00:04:00.400 | system instead of hurt it. Now, just to recap what the Social Security tax is just for our own
00:04:05.760 | education, because these numbers, you know, it's not like you can know them off the top of your
00:04:10.320 | head. Well, Social Security tax rate is really 12.4 percent, half of which 6.2 percent is withheld
00:04:18.800 | from the employer, and 6.2 percent of which is withheld from the employee. Yay, go team, right?
00:04:25.440 | Then there is the Medicare tax rate, which is 2.9 percent, and half of it, or 1.45 percent,
00:04:32.160 | is withheld from the employer, and half of it, 1.45 percent, is withheld from the employee.
00:04:37.840 | Therefore, for regular employees, you will pay 7.45 percent of your income up to the maximum limit
00:04:44.640 | of $147,000 in 2022 in FICA taxes. And FICA stands for Federal Insurance Contributions Act,
00:04:54.160 | and it consists of the Social Security tax and the Medicare tax that automatically gets deducted
00:04:59.760 | from your paycheck. Now, good thing about the Social Security tax is that it's capped at $147,000.
00:05:06.960 | So, the maximum you'd pay in Social Security tax per year, well, in 2022, that is, is $9,114,
00:05:15.760 | right? $147,000 times 6.2 percent. Unfortunately, or fortunately, there's no maximum income limit
00:05:24.720 | on Medicare tax. You'll just have to keep on paying the 1.45 percent Medicare tax for as high
00:05:31.200 | as your income will go. And then there's an additional Medicare tax of 0.9 percent for high
00:05:36.880 | income taxpayers with earned income of more than $200,000 and $250,000 for married couples filing
00:05:43.760 | jointly. So, these figures are interesting, and I think it coincides with what I think is the ideal
00:05:50.240 | income for maximum happiness, or where happiness doesn't increase any further. And that's about
00:05:57.360 | $200,000 to $250,000 per individual and $250,000 to $300,000 per couple up to a family of four,
00:06:05.200 | so two children. Those are the income ranges where you get the most bang for your buck,
00:06:10.400 | and your tax rates aren't really going up at all. Now, President Biden has announced that he's going
00:06:16.720 | to raise taxes for individuals making over $400,000 and $450,000 for couples. Therefore,
00:06:23.360 | if you're in the $200,000 to $250,000 range per person or $250,000 to $300,000 range as a married
00:06:30.160 | couple, you should be good to go. Now, I never thought the government would steal from the poor
00:06:37.120 | to give to the rich, you know, with all this rhetoric saying, "We must help the impoverished,
00:06:43.040 | the less fortunate," and so forth. I would think that the government would always be taking from
00:06:48.240 | the rich and redistributing to the less rich or to the poor. But if you click over to my post,
00:06:53.680 | you can see the percentage of US household wealth by age of generations median cohort.
00:06:59.040 | And you'll see that baby boomers own about 55 to 58% of all the wealth in America. Then there's
00:07:08.400 | the Gen Xers that own about 17 to 19% of all the wealth. And then there are the millennials who
00:07:16.080 | own about 5% of all the wealth. And it makes sense. It makes sense that baby boomers own more
00:07:22.240 | of the percentage of wealth because they're older and they've had more time to save and invest.
00:07:27.760 | Think about how wealthy you'd be if you consistently saved and invested 20 plus percent
00:07:33.360 | of your income for 40 plus years in the biggest bull market ever. You'd be very wealthy. At least
00:07:40.720 | the cohort would be very wealthy. So in other words, by raising the COLA by 5.9% to the already
00:07:48.160 | wealthiest generation who get to accept Social Security, we are taking money away from the less
00:07:55.280 | wealthy generations and giving it to the wealthiest generation. Therefore, with this logic,
00:08:01.360 | you want to one, retire wealthy yourself because then you can take care of yourself. And maybe the
00:08:07.680 | government is going to hook you up as well because the government, if you think about it, is run by
00:08:12.320 | some of the wealthiest people in the country. Giving a 5.9% COLA increase to baby boomers
00:08:18.480 | is like elite private universities with tens of billions of dollars in endowment funds giving
00:08:24.480 | full ride scholarships to Barack Obama's and Donald Trump's kids. They're already very,
00:08:31.040 | very wealthy. Instead, wouldn't it be better for universities to give scholarships to poor families
00:08:36.640 | struggling to get out of the poverty cycle? I think we'd all say yes and the rich would say yes.
00:08:42.160 | But what the rich do is very different from what they say. Really pay attention to what they do
00:08:49.520 | with their money versus what they say. We saw in the latest college rankings by Forbes, Harvard's
00:08:54.960 | share of Pell students is just 12% versus 25% on average for students enrolled in Forbes's top 600
00:09:01.840 | colleges. And the same ratios are very consistent with a lot of these elite and wealthy institutions.
00:09:09.280 | And so, given the government is run by the rich, taking from the poor to give to the richest
00:09:15.440 | generation is pretty par for the course. Therefore, you've got to look out for yourself.
00:09:21.280 | Put on your own oxygen mask first before you can potentially help others. We need to rely on the
00:09:27.840 | new three-legged stool for retirement. And those three legs are your taxed advantage retirement
00:09:35.440 | accounts. So your 401ks, IRAs, Roth IRAs and so forth. Then your taxable investment accounts,
00:09:43.200 | those investments that generate passive income that you can live off of. And then finally,
00:09:48.720 | your side hustles, those odds and ends jobs that you do in retirement or while you're working.
00:09:55.440 | And maybe you start something entrepreneurial. There are so many ways to make
00:09:59.200 | extra money, more money, different types of money nowadays. And to contrast, the old three-legged
00:10:06.640 | stool for retirement, they consisted of pension, social security, and your tax advantage retirement
00:10:15.280 | accounts. So if you also have a pension and you have social security as well, those three-legged
00:10:22.560 | stools turn into five-legged stools if you're depending on yourself. And you should be very
00:10:27.760 | stable, very sturdy in retirement. Alright, folks, this wraps up another episode on Financial Samurai.
00:10:34.160 | I want to leave you with the maximum amount of social security benefits you can potentially
00:10:39.280 | receive starting in 2022. And that number is $3,345 a month, up from $3,148 a month. $3,345
00:10:51.280 | a month, folks, that's a lot of money. If you've paid off your house, you drive your normal car,
00:10:56.800 | you don't need a new car, you eat normally, you don't need to go on fancy vacations. I think most
00:11:03.200 | people in retirement can live off more than $38,000 a year. Couldn't you? I definitely think
00:11:10.000 | I could. So even if we have to lop off 20% from $3,345, you're still going to get about $2,700
00:11:18.800 | a month from social security. But just mentally don't count on it being there for you while you're
00:11:24.720 | in your 60s and 70s and beyond. If you don't count on something, then if you get that something,
00:11:30.560 | you're just going to feel that great upside surprise. So if you're feeling a little bit
00:11:34.880 | stressed, or a little bit fatigued about saving and investing, well, I think we should all feel
00:11:40.800 | a little bit better that social security, if the government doesn't blow it up, should do
00:11:47.360 | what it's supposed to do and take care of us in inflationary environments. I'm curious to know
00:11:52.640 | how the government is going to make the system whole. We're just gonna have to wait and find out.
00:11:57.200 | Thanks so much, everyone. And if you enjoyed this podcast, I'd love a five star review and
00:12:01.040 | some positive comments. It's what keeps me going. Transcribed by https://otter.ai