Hello everybody, it's Sam from Financial Samurai and in this episode I want to talk about Social Security, our national pension fund that I didn't really believe in when I was in my 20s or my 30s, but now that I'm going to be 45 next year, I'm thinking, hey, maybe Social Security is going to be there for us in full actually, and maybe all this time worrying about saving and investing our pennies and dollars was for naught, or at the very least, we shouldn't have been worrying so much.

And the reason why I believe this is because the cost of living adjustment in 2022 is going up a whopping 5.9 percent. 5.9 percent folks, that's an impressive increase and that'll translate to an additional $92 a month on average for the average retiree. Now that turns out to be $1,657 a month, or $19,884 a year from Social Security until death.

The average person would need about $500,000 in capital returning 4% to generate the average Social Security benefit of $19,884 a year. In other words, the average American retiring is a half a millionaire. And I also believe, because the average is a half a millionaire, the vast majority of Financial Samurai listeners and readers will retire as millionaires or multi-millionaires by their mid to late 60s.

All this time, I thought that Social Security would not pay out its fully promised amount. The pension fund is currently underfunded by about 22 percent. So I was thinking, well, we should all at least lop off 22 percent from our expectations. But for it to now pay such a huge, high cost of living adjustment is pretty baffling, since it's underfunded.

A larger payment reduces the plan's financial health. The Social Security Board of Trustees recently admitted the trust fund will be depleted by 2034, a year earlier than estimated in 2020. So if you jack up the COLA by 5.9 percent the following year, it's probably going to get depleted by two, three, four more months.

It just depends on what inflation will do next year and also how much the maximum income will be taxable under Social Security. Well, I got the answer. So the maximum income to be subject to the tax will increase from $142,800 in 2021 to $147,000 in 2022. So is that 5.9 percent?

Does that match the COLA increase? No, it does not. Quick math dictates that that income increase is only 2.94 percent. So again, another mismatch. Amazing. Great for retirees, the boomers, who are also the wealthiest, wealthiest generation in our history. And not so great for the millennials, the Gen Xers, the Gen Zers, and so forth.

Think about it, folks. If the government wanted to improve the financial health of Social Security, it would at least raise the maximum taxable income limit by 5.9 percent as well. And if they really, really wanted to improve the health of Social Security, they would raise the income tax limit further, let's say 10 to 20 percent to $157,000 to $171,000 while capping maximum benefits.

And that probably would pass the mustard. Those critical folks who are just saying it's all a big Ponzi scheme, can you really tell too much if your income limit goes to $157,000, $171,000? I mean, you can tell a little bit from each paycheck, but it's not that drastic of a difference.

We've got to do something if we want to make the system whole. And I think that would have been an easy, easy way to help the system instead of hurt it. Now, just to recap what the Social Security tax is just for our own education, because these numbers, you know, it's not like you can know them off the top of your head.

Well, Social Security tax rate is really 12.4 percent, half of which 6.2 percent is withheld from the employer, and 6.2 percent of which is withheld from the employee. Yay, go team, right? Then there is the Medicare tax rate, which is 2.9 percent, and half of it, or 1.45 percent, is withheld from the employer, and half of it, 1.45 percent, is withheld from the employee.

Therefore, for regular employees, you will pay 7.45 percent of your income up to the maximum limit of $147,000 in 2022 in FICA taxes. And FICA stands for Federal Insurance Contributions Act, and it consists of the Social Security tax and the Medicare tax that automatically gets deducted from your paycheck.

Now, good thing about the Social Security tax is that it's capped at $147,000. So, the maximum you'd pay in Social Security tax per year, well, in 2022, that is, is $9,114, right? $147,000 times 6.2 percent. Unfortunately, or fortunately, there's no maximum income limit on Medicare tax. You'll just have to keep on paying the 1.45 percent Medicare tax for as high as your income will go.

And then there's an additional Medicare tax of 0.9 percent for high income taxpayers with earned income of more than $200,000 and $250,000 for married couples filing jointly. So, these figures are interesting, and I think it coincides with what I think is the ideal income for maximum happiness, or where happiness doesn't increase any further.

And that's about $200,000 to $250,000 per individual and $250,000 to $300,000 per couple up to a family of four, so two children. Those are the income ranges where you get the most bang for your buck, and your tax rates aren't really going up at all. Now, President Biden has announced that he's going to raise taxes for individuals making over $400,000 and $450,000 for couples.

Therefore, if you're in the $200,000 to $250,000 range per person or $250,000 to $300,000 range as a married couple, you should be good to go. Now, I never thought the government would steal from the poor to give to the rich, you know, with all this rhetoric saying, "We must help the impoverished, the less fortunate," and so forth.

I would think that the government would always be taking from the rich and redistributing to the less rich or to the poor. But if you click over to my post, you can see the percentage of US household wealth by age of generations median cohort. And you'll see that baby boomers own about 55 to 58% of all the wealth in America.

Then there's the Gen Xers that own about 17 to 19% of all the wealth. And then there are the millennials who own about 5% of all the wealth. And it makes sense. It makes sense that baby boomers own more of the percentage of wealth because they're older and they've had more time to save and invest.

Think about how wealthy you'd be if you consistently saved and invested 20 plus percent of your income for 40 plus years in the biggest bull market ever. You'd be very wealthy. At least the cohort would be very wealthy. So in other words, by raising the COLA by 5.9% to the already wealthiest generation who get to accept Social Security, we are taking money away from the less wealthy generations and giving it to the wealthiest generation.

Therefore, with this logic, you want to one, retire wealthy yourself because then you can take care of yourself. And maybe the government is going to hook you up as well because the government, if you think about it, is run by some of the wealthiest people in the country. Giving a 5.9% COLA increase to baby boomers is like elite private universities with tens of billions of dollars in endowment funds giving full ride scholarships to Barack Obama's and Donald Trump's kids.

They're already very, very wealthy. Instead, wouldn't it be better for universities to give scholarships to poor families struggling to get out of the poverty cycle? I think we'd all say yes and the rich would say yes. But what the rich do is very different from what they say. Really pay attention to what they do with their money versus what they say.

We saw in the latest college rankings by Forbes, Harvard's share of Pell students is just 12% versus 25% on average for students enrolled in Forbes's top 600 colleges. And the same ratios are very consistent with a lot of these elite and wealthy institutions. And so, given the government is run by the rich, taking from the poor to give to the richest generation is pretty par for the course.

Therefore, you've got to look out for yourself. Put on your own oxygen mask first before you can potentially help others. We need to rely on the new three-legged stool for retirement. And those three legs are your taxed advantage retirement accounts. So your 401ks, IRAs, Roth IRAs and so forth.

Then your taxable investment accounts, those investments that generate passive income that you can live off of. And then finally, your side hustles, those odds and ends jobs that you do in retirement or while you're working. And maybe you start something entrepreneurial. There are so many ways to make extra money, more money, different types of money nowadays.

And to contrast, the old three-legged stool for retirement, they consisted of pension, social security, and your tax advantage retirement accounts. So if you also have a pension and you have social security as well, those three-legged stools turn into five-legged stools if you're depending on yourself. And you should be very stable, very sturdy in retirement.

Alright, folks, this wraps up another episode on Financial Samurai. I want to leave you with the maximum amount of social security benefits you can potentially receive starting in 2022. And that number is $3,345 a month, up from $3,148 a month. $3,345 a month, folks, that's a lot of money.

If you've paid off your house, you drive your normal car, you don't need a new car, you eat normally, you don't need to go on fancy vacations. I think most people in retirement can live off more than $38,000 a year. Couldn't you? I definitely think I could. So even if we have to lop off 20% from $3,345, you're still going to get about $2,700 a month from social security.

But just mentally don't count on it being there for you while you're in your 60s and 70s and beyond. If you don't count on something, then if you get that something, you're just going to feel that great upside surprise. So if you're feeling a little bit stressed, or a little bit fatigued about saving and investing, well, I think we should all feel a little bit better that social security, if the government doesn't blow it up, should do what it's supposed to do and take care of us in inflationary environments.

I'm curious to know how the government is going to make the system whole. We're just gonna have to wait and find out. Thanks so much, everyone. And if you enjoyed this podcast, I'd love a five star review and some positive comments. It's what keeps me going. Transcribed by https://otter.ai