Retirement: A Beginner's Guide To Replacing Social Security (Part 5)

Includes: GE, JNJ, MSFT, PG, XOM
by: Regarded Solutions

To continue this series for the younger investor who has a longer time horizon and is just starting out, I believe it is prudent to discuss Social Security.

For the purposes of this article I will use today's dollars to make a rather simple comparison. Numbers can be plugged in later to account for any variation of inflation percentages one believes will exist over time.

Remember we have a "Beginning Core Portfolio" consisting of huge mega cap dividend paying blue-chip stocks.

  • General Electric (NYSE:GE)
  • Exxon Mobil (NYSE:XOM)
  • Proctor & Gamble (NYSE:PG)
  • Johnson and Johnson (NYSE:JNJ)
  • Microsoft (NASDAQ:MSFT)

In future segments we will explore all of the various strategies that will make the most out of this simple basket of stocks, but for now let's assume that Social Security will not be around when the typical 30-year old retires.

These days, in order to "max out" an individual can collect at age 67, with an enhanced amount at age 70. For argument's sake, let's use age 67 for comparison sake and what it would take to receive $2,500/month in income without Social Security.

With a time horizon of 37 years, and living to about 106 years of age (Hey, I am an optimist!) you will need to save a total of about $450,000 at an annual rate of growth of roughly 6% to replace a social security benefit of $2,500/month.

A daunting task to be sure, but remember, this scenario is based on the unlikely event that Social Security of ANY kind will be non-existent, so it might not be as daunting as you might think.

Keep in mind that if there is NO Social Security, your income will not be taxed for it, and that money can be re-directed by yourself to replace the income stream from Social Security.

To receive a monthly stipend from Social Security of roughly $2,500, an annual income of roughly $100,000 would be required and the FICA tax on that amount would be about $7,650/year. (A full 7.65% employee rate of tax for 2012)

Based on that amount here is the Social Security Benefit you would receive IF it were to be available in full for a 30-year old employee today:

Retirement Benefit Estimates
Retirement age Monthly benefit amount 1
62 and 1 month in 2044 $1,739.00
67 in 2049 $2,480.00
70 in 2052 $3,076.00
Click to enlarge


For this article we are assuming there will be no Social Security and you will not be taxed. Taking control of that $7,650/year on your own, in a portfolio that looks something like the one we have put together, at an annual rate of growth of just 6%, would give you a total amount of $1,032,017.17, which is more that twice the amount you will need to replace the Social Security benefit of $2,500/month at age 67.

As you can clearly tell, by taking responsibility of just the taxes you would have paid for social security yourself, and investing that money in a simple portfolio (as suggested above) over the same period of time, and re-investing the dividends, you will be far ahead of whatever "plan" the government can concoct.

The key is to take responsibility, stay disciplined, stay on course through good times and bad, and to keep saving.

If this strategy is implemented and stuck with, the overblown apocalyptic gloom and doom, "never be able to retire" crowd, CAN be proven wrong.

This little exercise alone shows you that you can have more than double what the government will give you, and that is BEFORE you begin saving in a 401k and an IRA or any other form of savings you plan on doing.

Remember, you are just re-directing the taxes that will no longer be paid IF Social Security were to be completely gone, no additional funds! The likelihood is slight, but the anxiety over not having Social Security should be alleviated by just taking responsibility for your own future.

Stay tuned for our next segment for the beginning investor: Making Money With A Simple Option Strategy.

Disclosure: I am long XOM, JNJ, GE, PG.