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My Social (in)Security Complex

There is only one thing I love more than my current Net Worth,  the future value of my Net Worth.  I created a simple ledger in excel that projects a 5% annual growth rate for individual assets and amortizes liabilities over their contractual life.  I use conservative values in order to dampen the effect of a roller-coaster market and assume no loan is paid off early as to avoid steep increases in the Net Worth from one year to the next.

So what does all this modeling do for me?  Two things.  One, as I look over the next 50 years, especially those years I am targeting to retire, it forces me to make good decisions, today, or face a hard retirement.  Save today, invest today, be financially smart today, and thank yourself tomorrow.  Secondly, it enables me to simulate my Net Worth with unexpected and/or major life events such as a home mortgage with a significantly higher rate, college education at varying cost levels, or an employment layoff with zero 401(k) contributions.  

I was so proud of this model, that I just had to share with my buddy and financial planner.  Not 10 minutes after receiving the file, his name popped up on my phone.  No “hello” or “how are you?”, he immediately asked me this true or false question:

“Social Security income will NOT be available to you when you retire?” 

Before I could get a word out, he shouted, “WRONG!”, because he knew.   He didn’t need me to confirm.  The proof was right there in my ledger, or lack thereof.   I never contemplated Social Security income coming in at age 62 because I wasn’t confident in the system.

Honestly, between all the media hype about the ever increasing national debt and the baby boomer retirement wave sucking the Social Security well dry, it’s easier to rely on myself to increase my savings, today, than rely on some uncertainty.  My insecurity led me to do what most people do best in these types of situations, ignore the problem and compensate in other ways.  Hence, I developed a Social (in)Security complex.   

Given how the call started, I could tell he wanted to take this issue head on.  He was quick to dispel this myth, that Social Security will not be available in the future, stating that as long as people continue to work and pay taxes, it will be there. If I was not going to include it in my future Net Worth ledger, then dismiss it because it is icing, not the cake (mmmm..cake).  And so, the Social Security lesson began.

How Social Security Works

Technically, it was never supposed to be something in which you were entitled; moreover, it is a “pay as you go” system.  When the program runs a surplus (i.e. payroll taxes collected > benefits paid out) the Social Security Trust is funded. This so-called trust is nothing more than an investment into good old U.S. Treasury Bonds.  Today, what payroll taxes are collected in any particular month are paid out to Old Age, Survivors and Disability (OASDI) beneficiaries, leaving nothing in surplus.    

As the boomers continue to retire and life expectancy increasing, the total number collecting is starting to exceed those paying into the system.  At this point, the Social Security administration begins to dip into the Trust in order to fund the deficit and ultimately deplete the money available.

When will the trust run out of money?  Who cares.  Don’t get caught up in the misdirection of its insolvency.  Misdirection is commotion, intentionally caused to make you focus on one thing, while the real focal point is happening right in front of you.  But you’re missing it.  And the “it” that you are ignorant to are HIGHER TAXES!  You didn’t think they were going to reduce or take away the benefits people are already receiving, did you?  Ha!  I don’t care what your political affiliation is, those elected officials know better than to piss off such a large voting population.  Therefore, the only logical solution is to raise taxes on the current workforce.

Just when you thought your payroll taxes couldn’t get any worse while in the workforce, let’s take a look at what happens while in retirement.

The Little Known (Ignored) Secret

You’ve made it.  Congratulations, you officially retired!  Your 30 year mortgage is paid off, your kids have moved out and you have transitioned from paying Social Security taxes to collecting them.  Fire up the grill and ice down the beer cooler!  Not so fast.  Before you set life to cruise control, did you know you most likely will have to pay Federal taxes on Social Security benefits?

How can this be?      

According to the Social Security Administration, this usually happens only if you have other substantial income (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return) in addition to your benefits.  Key word here, “substantial”. Below, is a screenshot from the Social Security website of how substantial is being defined:

Effectively, individuals making a whopping $34k+ and joint filers making $44k+ will have 85% of their Social Security benefits taxed!  Again, the system you have been paying into for years was never an entitlement program, meant to simmer and grow until the day you retired.  The fact of the matter is, it never was your money nor is it when you retire – hence the claw back via Federal taxes.    

Full Circle

Now to bring this full circle, remember my initial thoughts about Social Security earlier in the article that “it’s easier to rely on myself to increase my savings, today, than rely on some future unknown”?  Guess what? Those additional savings, which will undoubtedly get invested into some tax-deferred vehicle, will force you into the “substantial” income bucket.  I say ‘force’ because if you try not to dip into these accounts, Uncle Sam is only going to wait so longer before you are required to take minimum distributions at age 70 1/2.  

To make matters worse, your itemized deductions are reduced to nothing because you were a stand up citizen who paid your mortgage off.  Sure you have zero debt, but now you have nothing to reduce your income with, other than the standard deduction.

So instead of trying to figure out when the Social Security Trust fund will be depleted, maybe a better and more constructive use of our time should be trying to figure out how to minimize overall taxes on Social Security and other income in the future.

After maxing out the 401(k) and IRA contributions, what are people doing to maximize tax-free streams of income in the future?  Roth 401(k) or Roth IRA? Tax-free Municipal bonds? Life Insurance?  I’d love to hear how everyone is tax planning, now, for the future.


  1. I’m not planning on social security for retirement. I am using a combo of my 401k and Roth IRA hopefully to save up enough so that I can retire. If social security is available in the future. That will just be gravy. Otherwise I should be fine either way 🙂

    • It’s a great mindset to have, especially for something that is so uncertain. Like you said, if its around when you retire, it will be “gravy”. Curious to know if you are diversifying your Roth portfolio with alternative investments such as real estate or other assets? Or is the 401(k) and Roth IRA heavily invested in securities, now, only to have the risk profile re-balanced as time marches forward to retirement?

  2. Great information.
    I can relate to the disappearing Social Security mentality. It was used by investment advisors in the 1980s and 1990s when the water cooler buzz was about how badly the government was handling our Social Security pot.
    It’s a shame that people don’t understand that their lifelong piggy bank reserves may be subject to tax. I teach this in my tax classes over and over so that even if my students don’t know how to calculate the taxable portion, they will remember that the probability exists. One way to get around it is to keep modified adjusted gross income below the base amount. Imagine that? Avoiding work because of the diminishing returns of taxes due? Let’s hope that the rules don’t get harsher.
    I have a few ideas about accumulating tax-deferred retirement income. After maxing out the 401(k) and IRA contributions, a third layer can consist of Health Savings Accounts (HSA) contributions. This isn’t an option for everyone, but it offers some generous benefits. For 2017, a family can have an employer and employee combined contribution of $6,750 with a possible $1,000 over-55 catch-up contribution. For the past two years, I’ve contributed $200 a month into an HSA. My employer’s contribution is a base amount of $125 a month.
    Any balance over $1,000 can be invested and the account stays with you for the rest of your life. The money remains tax-free upon withdrawal if used for eligible medical expenses. The high-deductible medical plan may be a turn-off for some people, but there’s typical medical insurance coverage for preventive care and if doctors are within network, the HSA patient responsibility portion is manageable.

    • Dora-
      Thanks for the great comment. I love that you are teaching this to your students, I can’t remember that this topic was ever brought up during my studies.

      Interesting thought about the HSA. I will profess my ignorance about this type of account, but is it difficult to build up value if you are constantly pulling from it to pay for medical expenses? Is it more ideal for a younger person, just starting their career, to open up an HSA because of their good health and time on their side? Otherwise, I put money in, the company matches a certain percentage, the market fluctuates (up or down), and I continue to withdrawal for medical expenses.

      Curious to get your thoughts on the topic.

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