A Retirement Plan That's Guaranteed to Fail

A lot of people are barreling toward a retirement catastrophe. Almost a third of Americans, in fact, are setting themselves up for failure.

According to The Employee Benefits Research Institute's 2009 Retirement Confidence Survey, 32% of us think Social Security will provide a significant source of our retirement income. Even scarier, more than half of all people who haven't saved for retirement are expecting Social Security to step up to the plate with a large chunk of their support once they retire.

Yes, but ...
In a sense, they're right. If you do nothing to prepare for your retirement, the government's safety-net retirement program will be the only thing providing you any form of sustenance. The problem with that plan, unfortunately, is that the Social Security safety net is itself on very shaky grounds and isn't likely to last in its current form much longer.

In fact, for the first time in a quarter-century, Social Security expects to pay out more money in fiscal year 2009 than it will take in as tax. While the system is expected to remain close to balanced for a few years, by 2015, it will start to become a tremendous net drain on federal coffers.

This is serious. As recently as last year, the Social Security Administration thought it had until after 2011 before it started running a deficit and that its trust fund would last until 2041. The economic downturn has forced tax revenues to come in below expectations, and baby boomers signing up for early retirement benefits are exacerbating the situation. Once the trust fund evaporates, Social Security will be able to pay benefits based only on the taxes it receives.

So what?
In 2009, the average monthly Social Security benefit is $1,153, or about $13,836 per year. For comparison, as of this July, the minimum wage will be $7.25 per hour, or about $14,500 per year if you're working full time. As a result, by the end of this year, Social Security's average payout will be below the minimum wage.

When the trust fund is exhausted, Social Security is expected to be able to pay only around 78% of its promised benefits. That works out to an inflation-adjusted equivalent of about $10,792 per year -- or just under 75% of the new minimum wage.

If you're among the third of Americans expecting Social Security to deliver a big part of your retirement income, you're planning for a lifestyle somewhere between about minimum wage and well below minimum wage. If that constitutes a "substantial" part of what you hope your retirement lifestyle will be, it's certainly your choice. But if you'd rather have the cash to enjoy your golden years, you certainly need to look beyond just Social Security.

Put time on your side
When you're dealing with retirement, you're working in time frames measured in decades. You may very well work for four or five decades -- and enjoy retirement for two or three decades beyond that. That sense of scale is important to keep in mind when planning for your future. It's a long enough time frame that if you remain committed, you can look past short-term fluctuations and harness the still-substantial wealth building power of the stock market.

Certainly, the past year or so has been extremely rough. Even taking that into account, look at how these stocks -- all well-known and still profitable, in spite of the economic meltdown -- have performed over the past 30 years:


Trailing-12-Month Earnings
(in Billions)

$500 Turned Into ...

International Business Machines (NYSE: IBM  )



Coca-Cola (NYSE: KO  )



Boeing (NYSE: BA  )



3M (NYSE: MMM  )



General Electric (NYSE: GE  )



McDonald's (NYSE: MCD  )



ExxonMobil (NYSE: XOM  )



Total value of an initial $3,500 investment



Time period June 22, 1979-June 22, 2009, including dividend reinvestment. Source: Yahoo! Finance.

Past performance is still no guarantee of future returns, of course. Nevertheless, those results do showcase how a long-term perspective can significantly moderate even the level of market pain we've all felt from the market over the past year or so.

Build your better plan
Whether you've just launched your career or are staring retirement in the face, you may very likely have decades ahead of you. At Motley Fool Rule Your Retirement, we want you to be able to make the most of those decades. To do that successfully, you need to look beyond Social Security and the minimal benefits it will provide.

If you're ready to launch yourself onto the trajectory that can get you comfortably to and through your retirement, join us today. To learn more or to begin your 30-day free trial, click here.

At the time of publication, Fool contributor Chuck Saletta owned shares of General Electric. Coca-Cola and 3M are Motley Fool Inside Value recommendations. Coca-Cola is also a Motley Fool Income Investor pick. The Fool has a disclosure policy.

Read/Post Comments (16) | Recommend This Article (28)

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 June 24, 2009, at 1:38 PM, tpe59 wrote:

    There's a major flaw in the reasoning used by the author of this article. When there is no longer enough money in the Social Security fund to provide full benefits what will happen is that a means test will be applied. People that have adequately prepared for their retirement will be the first to see their benefits slashed. Those people that did nothing to prepare for retirement can probably feel pretty secure that their benefits will not be cut. That's just the way our government works, especially when it comes to social programs. Good judgment is penalized and bad judgment is rewarded. If you don't believe that this will be the case then just stand by and remember you read it here first.

  • Report this Comment On June 24, 2009, at 1:42 PM, moredividends wrote:

    tpe59 - you are correct. Social Security will be drastically reduced for those of us who have prepared. You read it here second.

  • Report this Comment On June 24, 2009, at 1:53 PM, PaulRochesterMN wrote:

    The article fails to point out that the Social Security "Trust Fund" is NOT some government vault where excess Social Security tax over-payments have been accumulating for the past decades. The Social Security tax over-payments have already been spent by various US government agencies (ie to build roads, bridges, etc). These US government agencies have, in return, given the Social Security Administration an "IOU" that needs to be paid back to the Social Security Administration. Of course that catch is, how are the various US government agencies going to pay back their "IOU's"??? The fact is, they can't. So, in reality there is no Social Security "Trust Fund". Once the Social Security tax revenues are less than the amount of Social Security payments to retirees, the US government will not be able to provide full Social Security benefits without adding to the already large US budget deficit.

  • Report this Comment On June 24, 2009, at 2:05 PM, HERSHEY1NY wrote:

    Madoff's ponzi scheme is small compared to the system set up by FDR, called Social Security.

    Hershey in NY

  • Report this Comment On June 24, 2009, at 3:56 PM, Pentaquark wrote:

    The Social Security coffers are pretty much drained, I agree. This happened without my knowledge or consent, of course, and had I been aware that SS would not be in a position to provide a significant third part of my income triad (SS, pension, savings) I may have saved more. Just kidding, I enjoyed my youth without a care as I'm sure many of your gentle readers did. Life is not always about preparing for the end.

  • Report this Comment On June 24, 2009, at 6:06 PM, badcadone wrote:

    All of the above are wrong. Social Security will remain with very little changes in benefits. There will be some adjustments to payroll taxes and to the cap - and remember you read it here first.

  • Report this Comment On June 24, 2009, at 6:59 PM, NotCrazy wrote:

    I don't know the future for sure. I know that my powers of prediction are very weak. But it just seems prudent to prepare on the assumption that Social Security will be essentially nill by the time I reach retirement age. That way, if I get SS checks, that's great, and if I don't, I won't suffer serious poverty.

  • Report this Comment On June 24, 2009, at 8:27 PM, WishToRetire2 wrote:

    If you look at and run a projection it shows a whole bunch of lines... some go way up.. some go flat... some go down... That's reality. You said it yourself: past returns are no guarentee of the future performance. You have the luxury of picking the stocks like Coca Cola and Boeing etc.. in your table above on an after the fact basis. That's not impressive or helpful.

    Please recommend a set of choices and forecast as best you can the worst case performance that buying and holding for 30 years would deliver. If you have no way of forecasting or estimating that then you leave us all with no choice but to do it ourselves using Firecalc (or similar technique) and then planning for Firecalc's worst case. that's the only way not to put one's retirement in jeapordy.

  • Report this Comment On June 24, 2009, at 9:13 PM, kizerman wrote:


    i wish you were right, but unfortunately not. just look at the demographic numbers of social security and there is no way this is sustainable. I hope you don't have a lot of assets, because means testing will be the realiity and you will be sorely disappointed. Obama say so daily, he will take from those that have, work and produce, and give to those that sit on their duff. Our sad government is all about rewarding failure and punishing success. It's amazing that as rapidly as China moves toward capitalism, we move toward socialism, perhaps even totalitarianism.

  • Report this Comment On June 25, 2009, at 1:47 AM, flyyoufools wrote:


    You forget something in your generalization. Social security benefits don't apply to non-workers. You actually have to a wage-earner over time to qualify. The qualifications aren't a high bar -- if you earn the maximum number of credits each year you can do it in 10 years -- longer if you don't hit the max each year -- but there IS a bar. Also, don't forget that your payout, while regressive, IS tied to your income based on an average of your 35 highest earning years. So, if you "sit on your duff" for half your life and still manage to qualify, your payout will be less than mine. Now, it is true that you'll get a disproportionally higher benefit to what you paid into the system than I will-- that's the regressive nature of the program.However... that's exactly what we want from a program designed to be a safety net.

    Because I expect my top 35-wage earning years to be just about at the social security cap, I will pay in about the same in Social Security tax as a CEO who makes 10 times what I do in a year (or more). I'll have less capacity than the CEO to make additional savings, but get the same social security benefits, thanks the the regressive system. In addition, people who work only 35 years, making half what I make and paying in less than half what I do over their lifetime will see probably 75% of my benefit, thanks to the regressive system.

    I should be the poster child for the "it's not fair" camp, but I'm not. Why?

    Because I have a much better chance to save for my own retirement than the poor chap trying to get by on minimum wage. I am blessed with a good family, a good education, good health, and the good sense to make the most of that situation. The CEO could probably chip in a little more to account for his good fortune, but Social security isn't the only regressive tax out there, so he's busy paying a higher proportion of this country's income taxes than I am -- assuming he isn't a tax cheat -- so I won't begrudge him the social security side too much while's he's funding our next transportation bill. (That said, raising that cap is probably the single easiest thing to do to address the shortfall, and I'm sure that will be a big part of the solution eventually.)

    This is a small price to pay for a safety net. Nobody gets rich and lives high off a government social security check. At the maximum benefit, it's still barely enough to get by at best if it's all you have. It's a floor under which we decide we're not willing to let our fellow Americans fall, and I think that's admirable.

    With apologies to Aaron Sorkin: "Imagine before you are born you don't know anything about who you'll be, your abilities or your position. Now design a tax system."

    On a side note, if you think this country rewards failure and punishes success, I'd like you to take a field trip to two homes.

    1. The home of a retiree who worked hard and faithfully most of his adult life doing grunt work in some company that was mismanaged into the ground over the last ten years. (Think: Line workers for GM, mail room clerks at Enron, whoever.)

    2. Now visit the home of a retiree who presided over that mismanagement before leaving the workforce.

  • Report this Comment On June 25, 2009, at 2:40 PM, rudya0 wrote:

    Very nicely stated "flyyoufools". For too long we have we have been bombarded with the propaganda of rewards for the responsible.

    What we have instead is foreclosures and evictions for the working class who are the victims of the fraud and greed on Wall St, and TARP $billions and bonuses for the very same banksters who got us into this mess.

  • Report this Comment On June 26, 2009, at 5:47 PM, sidehiller wrote:

    If you want to know why Social Security is going down the tubes, try considering how little people have to earn in order to earn a year's worth of retirement credit. This year, most folks only have to make $4,360 to get a full year's retirement credit (4 "quarters"). It's just INSANE for an increasingly insolvent retirement program to be giving away a full year of future retirement credit (pay out an average $1,153 x 12 months, adjusted for future inflation) to anyone who only works long enough to earn $4,360 in a whole year.

    Meanwhile, any public servants hammered by the Windfall Elimination Provision have had to accrue massive amounts of covered earnings (this year, $19,800) in order to get a year of Substantial Earnings credit--and have had to do this for over 20 years to avoid losing whatever Social Security they earned on other jobs (see SSA Publication No. 10045 at

    I believe that the quickest and best fix of the system will be to make everyone earn an amount equal to 1,600 hours per year (about 3/4 year) x Federal Minimum Wage. Stop confiscating Social Security retirement benefits from schoolteachers and town clerks--treat them the same as everyone else--and make everyone GET TO WORK instead of rewarding shirkers with benefits for what amounts to a month of house-painting wages per year. I've emailed the Prez with this idea, but so far he hasn't texted me back ;-}

  • Report this Comment On June 29, 2009, at 10:54 PM, sidehiller wrote:

    As a postscript to my previous comment, and to question something posted by "flyyoufools," I think that non-workers ARE entitled to receive some SSA benefits--I think that disabled children (well, their guardians) get the "gold check" under SSI. Personally, I would rather that the program to support disabled non-workers be funded by something other than workers' contributions for retirement and disability; I would rather reserve the SSI disability payment program for the folks (workers) who paid in.

    And the Prez STILL hasn't texted me back on this!

  • Report this Comment On July 02, 2009, at 5:01 AM, thisislabor wrote:

    flyyoufools, now visit the home of someone on SSI. oh wait he doesn't have one, nor did he have to work most of his life.

    you will always have statistical deviants left or right of the wage scale. best we can do is to help the general mass... or better yet to get the general mass to help itself.

    And as far as the CEO is concerned as far as I can believe I can't imagine any CEO out and out trying to destroy a company. To say they wrecked everyone's life on purpose is not the same as to say it was just a business falling out, a la GM.

  • Report this Comment On July 24, 2009, at 4:45 PM, crawlfish wrote:

    The last ten years have been a loss decade in the stock market. Because of the two crashes during that decade at the beginning and end no money was made in the stock market. I have been investing for 20 years and because of this decade have earned nothing. I am still investing in stock mutual funds and hope that returns over time will return to the past average. But I have no guarantee. There really is no other game in town. Ever other investment has been flat too. That is the value of social security . At least part of your retirement income is a know amount. Even pensions have turned out to not be completely dependable much less 401K retirement plans.

  • Report this Comment On September 16, 2010, at 9:47 AM, daven7 wrote:

    Why not combine Federal Employees Retirement System (FERS ) with Social security retirement system. This will make everybody equal the Federal Employees will help protect the new Social security retirement system.

    We will all be in the same boat you could say. we could Be treated equal in the benefits . With the baby boomers retirement coming this could be a wine wine with the people.

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