Texas Insider Report: DALLAS Texas If you are worried about the future of Social Security join the crowd. With the nations debt swelling the pressure on Washington to cut spending will only rise. Consequently people 50 and below should change their retirement planning now to incorporate a benefit cut to Social Security says Laurence J. Kotlikoff an economics professor at Boston University.
What will life be like for a couple if the retirement age was immediately raised to 70 asks Kotlikoff?
At 35 years old:
- At this stage our couple is earning $120000 ($60000 each) and they have $75000 in total retirement savings.
- But to make up for the decline in Social Security benefits they need to save about $84474 above and beyond what they are already saving before they retire.
- He assumes they save the extra money in a taxable account that allows for easy access because they are already saving 10 percent or more of their total income in a 401(k).
- That extra money saved is equivalent to about a 7.8 percent increase in total retirement savings across all accounts.
This also means theyll have less discretionary income -- about 9.4 percent less to be exact -- to spend each year over the course of their lives.
At 45 years old:
- Our couple now earns $140000 and has amassed about $255000 in a 401(k) account.
- But if they learn their Social Security benefits are going to be cut by nearly 20 percent they will need to save nearly an extra $90000 -- which is about 8.3 percent more in their taxable and tax-deferred accounts -- by the time they retire.
- To do that they need to cut their discretionary spending by about 9.7 percent a year for the rest of their lives.
- They have a larger permanent reduction in their living standard than the 35-year-olds because they have fewer years to adjust (they cant spread out the loss in spending power over as many years).
At 55 years old:
- At 55 our couple is earning about $175000 and has nearly $525000 in total retirement savings.
- But to help offset the lost Social Security money they will need to save $82900 more -- or nearly 7.7 percent across all accounts -- over the next decade.
- To do that they will have to spend 10.4 percent less each year.
Source: Tara Siegel Bernard
Social Security Jitters? Better Prepare Now New York Times July 30 2010.
