Find out how much your retirement accounts would have to be worth to double your social security. It’s less than you think.
Big Numbers are Paralyzing
The more I talk to people about their financial future, the more I realize that talking about hypothetical large numbers sometime far down the road is often either paralyzing because the numbers just don’t feel real, or (worse) demoralizing because they don’t seem attainable.
I have heard so many people say they’d like to be a millionaire by the time they retire, but they “know” it isn’t going to happen. For one reason or another, the goal does not feel attainable, which can result in them getting paralyzed by fear of failure. You can’t fail at a goal you don’t set.
So, instead of setting some pie-in-the-sky number that isn’t based on anything significant, I like to take a different approach. I like to show people how much it would take to double their income during retirement, and just how little they would have to save monthly during their working years to make it happen.
(Almost) Everyone is Dependent on Social Security
Retirees in the US are incredibly reliant on Social Security. Recent surveys have shown that about half of seniors depend on Social Security for at least 50% of their income, and as many as 20%-25% of Seniors depend on Social Security for at least 90% of their income.
The future of the Social Security program is often in the news, and I won’t be getting into the politics of the situation in this article. Instead, let’s look at Social Security and start making real progress toward having a plan instead of (or on top of) Social Security for your own retirement.
To do that, we are going to answer the question: How much would you have to save to double your income during retirement?
Doubling Your Social Security: The Math
In 2019, the average monthly Social Security benefit is $1,461 per month. That comes out to $17,532 per year.
What I’m about to show you is a real-world, real-numbers example. However, it is not an investment recommendation or a prediction of future results. Before making any investment decisions, please consult an investment advisor and your tax professional.
In this example, I am going to use a High Income Bond Fund to show how to create $17,532 of annual income, with enough room to increase that income to adjust for inflation. The fund I have selected is the Fidelity High Income Fund (SPHIX). I chose this fund because it is in my own portfolio, so I have easy access to performance data at my fingertips. Again, it is not an investment recommendation, I chose this fund for the convenience of not having to hunt down distribution information for some other fund.
Over the last five years (2014-2018) SPHIX has paid out distributions to their shareholders ranging from $0.47 to $0.62 per share per year. In fact, the $0.47 per share paid in 2016 was the lowest distribution in at least 10 years (as long as I’ve been an share holder).
To be extra conservative, we are going to use $0.47 per share to determine how many shares it would take to have an annual income of $17,532. By using the smallest annual distribution in recent years, we can try to protect against even lower distributions in the future. More on that in a bit.
With just a little algebra we can determine that with just over 37,300 shares (37,302.128 to be exact), a $0.47 per share distribution would equal $17,532.
So, you need about 37,300 shares of SPHIX to double your Social Security. How much would that cost?
SPHIX cost $8.86 per share on 7/31/2019. Buying 37,300 shares at that price would cost approximately $330,500.
So, for just over $330,000, you could double your Social Security.
But wait, it gets better. Much, much better.
Re-Invest Extra Income
Remember that distribution table a few paragraphs ago? It showed that $0.47 was the lowest annual distribution SPHIX has experienced in recent years. In 2018, the distribution was $0.49, which would equate to about $18,250. In 2014, when interest rates were even higher, the annual distribution was $0.62 per share, which equates to over $23,000 for the same number of shares.
However, when building income portfolios, I do not recommend spending the difference. Instead, I recommend only taking out the lowest annual distribution (in this case $0.47 per share), and reinvesting the rest.
In this example, that would mean using about $5,500 to buy additional shares. SPHIX ended 2014 with a price of $8.90, so that additional $5,500 would have purchased approximately 620 new shares. And, using our $0.47 per share distribution, that would mean a raise of almost $300 per year, or $25 per month, which is the same as a 1.7% Cost of Living Adjustment (COLA).
Pass the Shares on to Your Heirs
One important note: this exercise showed how to generate enough income to double your Social Security during your life. However, there is one massive difference between this income stream and Social Security: when you die, your heirs would receive all of your shares of SPHIX (or whatever investments you use to create this income). That means your heirs could choose to continue to generate this income forever. And, as I discussed in an earlier article, you can do it without ever selling a share.
Social Security does have a few survivor benefits, primarily aimed at spouses. But, nothing as generous as this!
Also, depending on the type of account you use to buy these shares, there could also be some tax benefits. Seniors with income over certain limits have to pay taxes on part of their Social Security benefits. If you bought SPHIX inside a Roth IRA and followed the rules, then you would not have to add these distributions to your taxable income, avoiding tax on this income and potentially keeping you from paying tax on your Social Security too!
How Much Do You Have to Save Monthly?
How much would you have to save each month to have enough to double your Social Security? If you assume a 6.5% rate of return, here are the monthly savings required to have $330,000 by age 65:
|Age||Monthly Savings Required|
So, depending on your age, you can keep these numbers in mind when you are creating your undetailed budget.
Another interesting tidbit: the $206 required for a 30-year old to save monthly to double their social security equals $2,472 per year. The average income tax refund in 2019 was $2,725. If that is you, you could invest the $2,472 out of your tax refund and still have over $250 left over, double your income during retirement, and not have to save monthly! Or, you could just blow that tax refund on some doo-dad or gadget like everyone else does. It is up to you.
(For a more thorough look at how to divvy up tax refunds, check out my article on the Windfall Waterfalls.)
Managing personal finances can be hard and confusing. Goals that are too far away, and too large can be demoralizing and keep you from even trying.
I hope this has helped demystify some of the challenges we will all face in retirement. It is much easier to take action on a plan that feels achievable and real. Saying “I’d like to be a millionaire by the time I retire” is not helpful. But, saying, “I’m 30, and if I can put $200 aside per month, I’ll be able to retire with twice as much income than I would if I just relied on Social Security” is much more actionable and reasonable.
I hope this has been helpful! I welcome your comments with your thoughts and questions. And, don’t forget to subscribe to the newsletter to get notified whenever a new article is posted.