This an early bulletin from the huge volume of email I received after asking readers to write me about “small solutions.” By small solutions, I mean the things regular people do to solve the problems most of us face. This excludes those with generous stock options, CEOs, major muckety-mucks, top bananas and big dogs. What it does include are people who work for a living, or worked for a living until they retired.
Reading those emails, I saw one fascinating, overriding measure. It is the relationship between the amount of income earned and Social Security. If I had to name it, I’d call it “The 94 Percent Factor.”
Note I did not say “The 99 Percent Factor” or “The 1 Percent Factor.” Those numbers are political artifacts designed to incite class warfare and to inspire the 99 percent to get our beneficent government to take money from the 1 percent to give to the 99 percent.
No, the real (and practical) dividing line is what’s called the “Social Security wage base maximum.” That’s the maximum income a person can earn and still pay the retirement portion of the employment tax. Earn more than that figure and you don’t pay the tax — but you don’t earn any further benefits, either.
Last year, the wage base maximum was $113,700. This year it is $117,000. The figure rises every year. The Social Security Trustees Report regularly tells us that 94 percent of all workers earn less than the wage base maximum.
Why is this important? Simple. If you’ve been a wage base maximum worker all your life, Social Security will replace 27 percent of your income at the full retirement age of 66. If your income is lower, Social Security will replace more — about 76 percent of income if you have the misfortune of very low wages for your entire work life.
If you earn more than the wage base maximum, you’ve got a different problem. The more you earn, the more you will have to save and invest in order to maintain your standard of living in retirement. If you are a doctor or lawyer who earns $300,000 a year, Social Security won’t do much for you because it will replace less than 10 percent of your earning power.
I don’t mean to sound unsympathetic, but that’s their problem. If you earn more, you have the means to save and invest for your own future.
The 94 percent all share a common bond: Social Security will be the most important part of their retirement income. And while the financial services industry continues its exhortations to save and invest more, the reality is that many of the 94 percent do quite well on the income they receive from Social Security. That’s one, but just one, of the big messages in the small solutions email.
One reason: Delaying retirement can stretch Social Security. Having a nonworking spouse can also stretch it. Here’s an example using that wage base maximum worker:
If Social Security replaces 27 percent of earnings at full retirement age, it will replace 35 percent by deferring benefits to age 70. A nonworking spouse the same age can get half the primary earner’s benefit at age 66. Adding that 13.5 percent brings the total replacement rate to 48.5 percent.
A middle-income worker has a replacement rate of 40 percent at full retirement age. It goes to 53 percent by deferring benefits to age 70. And benefits for a nonearning spouse at 66 add another 20 percent and bring the total to 73 percent.
Fortunately, we don’t have to replace 100 percent of our earning power to sustain our standard of living in retirement. Taxes go down. Saving can be eliminated. Aon Consulting estimates a replacement rate of about 77 percent for households in this income range.
And what about the remaining gap — as little as 4 percent and as much as 28.5 percent? Well, that’s where the grit and imagination of the 94 percent go to work.
As I’ll show in future small solutions columns, there are very human reasons that the gap is actually smaller. More important, the 94 percent has found some nearly foolproof ways to fill any gap that remains — without a lick of help from Wall Street or from our government.
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