Tuesday, June 18, 2013

THE STOCK MARKET vs. SOCIAL SECURITY, PART II: Your Retirement, Worst Case Scenarios

Last week I posted a comparison of what you could expect to get in retirement after adjusting for fees ...

Specifically, I asked how much can you expect to get after depositing $598,000 with social security over your working life versus what you can expect to receive from the private sector after contributing enough to build a $500,000 nest egg. Long story short? Privately managed investment accounts eat up as much as one-third of your retirement account while social security will return almost all of your money (assuming you live a normal retirement).

As promised last week, here's what happens to your private portfolio under the worst case scenario. If we use the last market collapse in 2008 as our indicator, we find that private investment losses with another 2008-like market meltdown will cause your private retirement account to dive in value like this ...


So, yeah, if you had a portfolio worth about $450,000 in 2008, after the market meltdown you would have been left with a portfolio valued at less than $200,000 by 2009/10. For the math challenged out there this means you would have been left with a portfolio valued at about 45 percent of what it was before the market meltdown.

(The thing to keep in mind here is that the rate of return in the private sector is really just smoke and mirrors because Wall Street's been propped up by American taxpayer backed bailouts, favorable legislation, and regular money dumps from the Federal Reserve - i.e. the Greenspan Put - over the past 25 years.)

OK, now let's take a look at your social security contributions under the worst case scenario.*



Yeah, that's right. If we do absolutely nothing for social security, and the worst case scenario* develops, the average American will still end up with 75 cents on the dollar. But this assumes that the U.S. Congress stands by and does nothing to fix the problems associated with reckless tax cuts, artificially low interest rates, and on the jobs front (among others).

So, let's recap.

Lesson #1: As I pointed out last week, if you contribute enough to have $500,000 in your private investment account when you retire, administrative and management fees will leave you with about $350,000. However, if you and your spouse contribute $598,000 to social security you can expect to collect $556,000 over a normal lifetime.  
Lesson #2: Under the worst case scenarios for private investors and social security recipients you can expect your private account to leave you with 45 percent of what you invested, but social security will leave you with about 75 cents on the dollar.  

But don't trust me on this. Click on the links and do the math for yourself.

Next, in Part III of "The Stock Market vs. Social Security": Why does Wall Street want to privatize social security? Hint, it has everything to do with greed and a bailout in perpetuity.

- Mark

___________________________
* Worst Case Scenario: The worst case scenario assumes (1) the economy stays in the toilet, (2) unemployment remains steady, (3) previous tax holidays (like the recent 2 percent payroll deduction) aren't made up, (4) artificially low interest rates remain (which lowers the income stream from social security bonds), (5) we don't raise COLAs, (6) we don't rescind the Bush tax cuts, and (7) we don't raise the social security income tax cap ($113,700) that's currently  in place.

1 comment:

Mcx Tips said...

Wow this site is really amazing and inspirational to me, i am impressed by this site, i am also gonna share this site to my friends.