The Extremely Frayed Retirement Safety Net

Let's pretend for a moment that Social Security and Medicare are both solvent, well-funded retirement programs.

You're right to snicker … but back to our hypothetical: Temporarily ignore the Social Security Administration's own report that Medicare is currently hemorrhaging cash and will be bankrupt by 2019 -- and that Social Security will be bankrupt by 2041.

In this imaginary world, let's also assume that you're an average prospective retiree. You're simply looking forward to enjoying the benefits you've earned from a career of paying into those safety-net systems.

What do you get?
As of July 2008, the average retiree received $1,084.47 per month in Social Security benefits. Medicare Part A is free to people who qualify, and that gets you pretty decent inpatient hospital and skilled nursing-home care. So far, so good. If you want medical tests or preventative screenings covered, or if you have diabetes or are worried about your heart or emergency services, you'll probably want to enroll in Part B as well.

Part B is not free, nor is Part D, which helps with prescription drug coverage. If you want insurance to cover the other holes in Medicare, like preventative care and Medicare's own coinsurance and deductibles, you might want a Medigap plan, too.

The premiums for Part B are fairly standardized, but the costs of Part D and Medigap insurance vary tremendously based on the features you choose. Incorporating typical costs for 2008 gives the following chart:


Estimated Monthly

Medicare Part A


Medicare Part B


Medicare Prescription Drug Plan (Average)


Typical Medigap Insurance


Total Premium Cost Per Month:


Sources:, Henry J. Kaiser Family Foundation,

What's left?
If you pay your typical Medicare insurance premiums out of your average Social Security check, you're left with $806.08 per month. That's before you cover things like:

  • Eating.
  • Having a place to sleep.
  • Keeping warm.
  • Buying clothes.
  • Visiting your grandkids.
  • Paying the remaining out-of-pocket costs for any medical treatment you need.

You know … the basics.

If you plan to enjoy your golden years, you'll need some serious savings on top of what that safety net will provide. And remember, that's in our fantasy world, where both Social Security and Medicare are and remain healthy, solvent systems. In reality, I wouldn't count on either program to continue to deliver on their historical promises for any significant length of time.

Start saving now
If you want your retirement cash to last as long as you do, the rule of thumb is to pull an inflation-adjusted 4% of your retirement-day balance from your retirement portfolio every year. If you'd like an additional $40,000 per year (about $3,333 per month) to supplement what you might get from Social Security, you'll need to save a cool $1 million.

The key factors in determining how long it will take you to reach your savings goal are how much you can sock away every month and what you earn on your money. This table shows how many years it'll take you to reach that million-dollar milestone, depending on the choices you make:

Return Rate

$200 Per

$500 Per

$1,000 Per

$1,500 Per


71.9 years


































Unless you have some serious spare cash at the end of every month, you need to reach for returns at the higher end of that spectrum.

Which means stocks.

Yes, stocks. I realize the market has been brutal this year, but over the course of the decades it'll take to build a comfortable retirement portfolio, average returns dominate over individual year swings.

The market in a box
The easiest way to get those long-run returns is to buy the market itself. A fund like Vanguard's Total Stock Market Index (VTSMX) will get you market exposure without the additional risk and effort associated with picking individual stocks. It gets you an ownership stake in strong and profitable companies such as:


Market Cap

Trailing-12-Month Earnings

Kroger (NYSE: KR  )

$18 billion

$1.2 billion

UnitedHealth (NYSE: UNH  )

$28 billion

$3.5 billion

Caterpillar (NYSE: CAT  )

$23 billion

$3.8 billion

Apple (Nasdaq: AAPL  )

$96 billion

$4.8 billion

PepsiCo (NYSE: PEP  )

$89 billion

$5.7 billion

Bank of America (NYSE: BAC  )

$106 billion

$5.2 billion

General Electric (NYSE: GE  )

$195 billion

$21.1 billion

Source: Yahoo! Finance, as of Oct. 31, 2008.

There's no such thing as a guarantee when it comes to investing, but it's certainly better to try than to depend entirely on our frayed and failing safety net.

At Motley Fool Rule Your Retirement, we want our members to have the best shot possible at a comfortable retirement. That means the right investments, the right asset allocation, and the right plan. If you need any help making your golden years golden, I encourage you to try Rule Your Retirement free of charge for the next 30 days. As an added bonus, if you sign up today you can participate in our five-week video series, "The Five Steps to Ruling Your Retirement."

At the time of publication, Fool contributor Chuck Saletta owned shares of Bank of America and General Electric, and his wife owned shares of Kroger. Bank of America is a Motley Fool Income Investor recommendation. UnitedHealth Group is a Motley Fool Inside Value selection. UnitedHealth Group and Apple are Motley Fool Stock Advisor recommendations. The Fool owns shares of UnitedHealth and has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 02, 2008, at 7:51 PM, IsleDance wrote:

    I really appreciate your articles. It's amazing what we're dealing with, yet it's amazing that we're alive and "get" to deal with this. Thanks so much for keeping the numbers in perspective.

  • Report this Comment On November 07, 2008, at 1:59 PM, kersuet wrote:

    Seriously, this is not new, let alone insightful news. I think there are very few people under 50 who believe that they are going to receive retirement benefits comparable to what those in their 70s and beyond are receiving now. You can get this type of information by reading any decent newspaper.

  • Report this Comment On November 07, 2008, at 4:32 PM, richardme wrote:

    I agree this is elementary, but there are a lot of people who have no clue. Also a lot of people repeat the story that Social Security is "broke". But they have no back-up plan. Social Security says they will be able to pay 70% of their promises after they go "broke". That is more than nothing that a lot of people have saved for their retirement. Clearly a lot of people will have to work till they croak unless they start saving. Having 20 times their income saved is a good starting point. The basics of this article should be followed by every person who cares about a decent life at retirement.

  • Report this Comment On November 09, 2008, at 2:00 AM, pete3510 wrote:

    The article ignores the huge tax break of home ownership. The tax-free sales rules means millions of people will be able to take a quarter to half of their needed million out of their hopefully mostly paid-for homes when they retire.

    I am not a real estate professional, and I don't know which party is responsible for the tax break. I just think it is neat, and a fundamental part of retirement planning.

    Yes, Congress could abolish it. But I wouldn't want to be the guy who tried to do that.

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