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A Retirement Plan That's Guaranteed to Fail

Chuck Saletta
June 24, 2009

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: