President Obama recently warned that Social Security checks were not guaranteed to be paid in the event the debt ceiling does not get raised before August 3. Regardless of whether he meant it -- or if it was mere political posturing -- it underscores yet another problem with the Social Security system: It's not your money.
When all is said and done, your projected Social Security benefits are simply not your property. The Supreme Court has twice ruled that, in fact. You're simply assessed a tax based on your income and then may get something back in the form of a payment, should you live long enough and/or otherwise qualify -- and if funding remains available.
Add it to the list
So now, not only do you have to worry about:
... but you also need to worry about whether your benefits will be cut simply because of politics. The lesson in this is abundantly clear: Don't count on Social Security. Absent significant changes, its own trustees doubt its long-term solvency, and as the President warned, the benefits may be at risk as soon as next month.
Invest your money in your future
Whether it happens next month, the 2036 target that Trustees currently estimate for its trust fund to evaporate, or somewhere in between, Social Security is on track to reduce its payments. If you were counting on it to help fund your retirement, you essentially have two options:
- Save enough extra of your own assets to cover your anticipated income gap.
- Reassess your anticipated costs of living to determine what you can live without.
How much you need to replace depends on your specific circumstances, of course. For the sake of discussion, though, the average Social Security retiree received $1,181.59 this month, or an annualized rate of $14,179.08. If you believe the Trustees' version of the future, once the Trust Fund expires, Social Security will continue to pay out about three-quarters of its expected benefits.
In that scenario, the average retiree would need to cover around an additional $3,544.77 per year, inflation adjusted from today's dollars to their actual date of retirement. Based on the 4% rule, it means you'll need to save around an additional $88,619.25 in today's dollars to cover for Social Security's expected long-run shortfall.
If you're already aggressively saving for retirement, that's not an insurmountable additional hill to climb. If you haven't yet started, however, today's current politics-driven threat to Social Security should provide yet another incentive to help you get started.
Where to invest
If you're a firm believer that American ingenuity will triumph in spite of current political wrangling, you may still be willing to invest in America-centric funds. In that case, you might want to consider from among the following:
- SPDR Trust (NYSE: SPY ) : an ETF that tracks the S&P 500 index, 500 of the largest and most liquid companies headquartered in the US.
- Vanguard's Total Stock Market ETF (NYSE: VTI ) : an ETF that tracks the MSCI US broad market index, covering about 99.5% of the market of U.S.-headquartered listed securities.
- iShares Russell 2000 Index ETF (NYSE: IWM ) : an ETF that tracks the Russell 2000 index of small-cap U.S. stocks.
- iShares Barclays TIPS Bond Fund (NYSE: TIP ) : an ETF that holds Treasury Inflation Protected Securities, which are U.S. government bonds that are intended to hold their value in inflation-adjusted terms.
If, on the other hand, you think the rest of the world will benefit from America's malaise, an ETF like Vanguard's FTSE All World ex-US (NYSE: VEU ) may be more to your liking. Then again, if you like the idea of one-stop global diversification but aren't ready to completely throw America to the curb, there's always Vanguard's Total World Stock Market (NYSE: VT ) ETF.
You'll notice, though, that bonds got the short shrift in that list, with nary a mention other than the inflation-protected variety. Right now, Treasuries are priced to perfection and giving you a better chance at "return-free risk" than at anything resembling decent inflation-adjusted returns. In that kind of environment, long term Treasury funds like SPDR Barclays Capital Long Term Treasury (NYSE: TLO ) can be quite risky, indeed.
If you still want to own bonds, beware of that risk. To help mitigate it, consider short durations, TIPS, or look for bonds ones with adjustable rates, which should provide some protection against rates rising in response to inflation.
Own your own future
Thanks to both the short- and long-term risks to the Social Security system, securing your own successful retirement falls more on your individual shoulders today than it has in generations. No matter how you invest your money, one of the best benefits may be knowing that it is yours and not subject to the political whims of the day.