For the first time since Social Security started offering Cost of Living Adjustments (COLA) in 1975, recipients won't be getting an automatic raise next year. Thanks to a negative inflation rate, combined with a prohibition against downward COLA changes, payments will remain flat for retirees. In addition, those who participate in Medicare Part D will see their Social Security checks drop slightly (about $2 a month), due to premium increases for that program.
As many headlines as that minor nominal payout cut has generated, it's nothing compared to what's in store in the future. The Social Security trust fund is slated to run out of money around 2037, slashing benefits by about a fourth. If you think things are rough for retirees now, just wait until that particular tap runs dry.
Actually, don't wait: prepare
There's little that can be done to stop Social Security's eventual collapse without tearing the program completely apart. The age to get full benefits has already been scheduled to be raised, the tax rates to support it have leapt more than five-fold since the program's inception, and the salary subject to that tax has increased from an inflation-adjusted $45,000 to over $100,000.
Add an aging population and a stagnant economy to this structurally insolvent mess, and it quickly becomes evident that there's no way Social Security will survive in its current form. If you're counting on Social Security to fund a big chunk of your retirement and you expect to live past 2037, you'd better change your plans. Otherwise, you will find yourself in significant financial pain when you're least able to do anything about it.
The sooner you begin, the better
If you're hoping your finances will survive to a ripe old age in spite of the ticking time bomb that is Social Security, there really is no time better than today to start saving for your future. The longer you have before you retire, more time is your ally. The longer you wait, on the other hand, the more time becomes your enemy.
Just take a look at how quickly the amount escalates that you have to sock away each month to reach a million dollars at retirement:
|
Years to Go |
6% Return |
8% Return |
10% Return |
|---|---|---|---|
|
40 |
$502 |
$286 |
$158 |
|
35 |
$702 |
$436 |
$263 |
|
30 |
$996 |
$671 |
$442 |
|
25 |
$1,443 |
$1,051 |
$754 |
|
20 |
$2,164 |
$1,698 |
$1,317 |
|
15 |
$3,439 |
$2,890 |
$2,413 |
|
10 |
$6,102 |
$5,466 |
$4,882 |
|
5 |
$14,333 |
$13,610 |
$12,914 |
Not even a shift to the more aggressive 10% return side of that chart changes the fact that the more time you have on your side, the easier it is to come up with the cash to reach your goals.
But the market is scary
While it's absolutely true that there are no guarantees in investing, over the long haul, the stock market has produced incredible amounts of wealth. In addition, you can use some fairly straightforward principles to protect yourself from utter financial disaster. They include:
- Appropriately diversifying your holdings so that you don't depend too heavily on any one company or industry.
- Ensuring your holdings show solid balance-sheet strength, such as keeping debt-to-equity ratio in check.
- Looking for companies with both positive earnings and strong operating cash flows to back up those earnings.
- Accepting dividends as signals of financial stability and strength, so long as those dividends are well covered by earnings and cash flows.
When you follow those principles, you wind up with companies like these:
|
Company |
Industry |
Debt-to-Equity Ratio |
Net Income |
Cash from |
Dividend Yield |
Payout Ratio |
|---|---|---|---|---|---|---|
|
ExxonMobil
|
Energy |
9% |
$31,150 |
$35,994 |
2.4% |
26% |
|
Microsoft
|
Information Technology |
15% |
$14,569 |
$19,037 |
2.1% |
31% |
|
Wal-Mart
|
Consumer Staples |
68% |
$13,393 |
$22,878 |
2.1% |
30% |
|
Johnson & Johnson
|
Health Care |
29% |
$12,739 |
$15,084 |
3.2% |
41% |
|
McDonald's
|
Consumer Discretionary |
83% |
$4,250 |
$5,728 |
3.6% |
49% |
|
ABB
|
Industrials |
19% |
$2,467 |
$3,479 |
2.4% |
43% |
|
Chubb
|
Insurance |
27% |
$1,563 |
$2,410 |
2.9% |
31% |
Data from Capital IQ, a division of Standard & Poor's. Dollar amounts in millions.
Even though following those investing principles won't give you an ironclad guarantee of a comfortable retirement, you'll likely still be better off than if you'd relied solely on the shaky promises of Social Security.
Get started now
At Motley Fool Rule Your Retirement, we want you to have a fighting chance at a comfortable future. But to get there, you need to start funding your nest egg now. If you join us, we can show you how to design, build, and execute a plan that will enable you to have a far more comfortable retirement than you'd get by relying on Social Security alone.
To find out how we can help you get your future in order, click here to start your no-obligation free trial. If you decide it's not for you, simply cancel within 30 days, and you won't pay a dime.
At the time of publication, Fool contributor Chuck Saletta owned shares of Microsoft and Johnson & Johnson. Microsoft and Wal-Mart are Motley Fool Inside Value selections. Johnson & Johnson is a Motley Fool Income Investor pick. ABB is a Motley Fool Global Gains recommendation. The Fool's disclosure policy fully expects to outlast Social Security's current form.
