November 28, 2023

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Good day.

Social Security is a retirement blessing for many, but it's not perfect. Care to take a guess at where the U.S. ranks globally in terms of its retirement system?

Is it — A. 1st, B. 12th, or C. 22nd?

Here are the topics for today:

Retirement Without Social Security
Navigating A World of Expensive Debt
Investing is More Popular Than Ever

FINANCIAL PLANNING

Retirement Without Social Security

For most of history, retirement planning was nowhere near as prominent a figure as it is now. As humans began to live longer and ultimately improve our quality of life, the concept of "retirement" in old age became a thing — unfortunately, it costs money to do nothing.

Enter Social Security

In 1935, the government got involved by creating Social Security, a centralized means of forcing Americans to save for retirement, whether they wanted to or not.

It's far from a perfect system, (the U.S. retirement system ranks only 22nd globally) but it's become a linchpin of retirement planning over the last century and something that over 66M American retirees depend on.

Will it be there for you?

But the Social Security machine is expensive to run, and the system's funds are quickly drying up — current estimates put the trust fund running out of money around 2037.

Although lawmakers are searching for solutions, relying on Social Security to be there for us when we retire is gambling at best.

What does a retirement without Social Security look like?

Let's take a look: Right now, the average SS check is around $1,700 per month. Someone wanting to replace a $4,000 per month gross income in retirement needs to make up $2,300 per month from their own investments. Over the course of 40 years in the market at an average return of 8%, that means they would need to invest about $232 per month to secure an income of $2,699.71 over the course of a 25-year retirement.

What about without Social Security? Without that $1,700, the investor now has to make up $4,000 per month on their own. Assuming all else equal, this brings the amount they'd need to invest up to $345 per month for 40 years, giving them a nest egg of roughly $1.2M and $4,014.66 per month.

What investors should know

$113 extra might not seem like much, but those calculations change drastically depending on your situation. Age, genetics, expenses, income, current retirement savings, and a bevy of other variables will determine what your "retirement without Social Security" number is.
For example, if you only have 20 years left to your desired retirement age, that monthly contribution amount rises from $345 to about $2,045 — one is reasonable, the other is far-fetched.
The good news is that even in the event that 2037 does come to fruition, Social Security won't be disappearing right away. Instead, projections suggest that benefits will be cut by around 24% to start, and then further adjustments will be made if necessary.
Regardless of the outcome, the key is to start investing as soon as possible and invest like Social Security doesn't exist. While this might sound nihilistic, it's undoubtedly our safest option. In a worst-case scenario, you simply end up with more retirement income than expected.

BUDGETING & SAVING

Navigating A World of Expensive Debt

The Federal Reserve essentially speed-ran their rate hikes over the last 20 months, climbing the ladder at a historic pace not seen since 2008. The result? A meteoric jump in the cost of borrowing across the financial world — from mortgages to credit cards.

This is a new situation that many of us aren't used to. A low-rate environment has been the norm for over a decade now, and we've grown accustomed to this unsustainable reality.

It's a shock to the budget for both businesses and individuals alike, and a change that can quickly erode our finances if we're not careful.

Debt finally costs money again, and we have to adjust.

Tips for navigating a world of expensive debt

Prudence: In a world where lower APRs and introductory offers were abundant, there was more room for error when it came to taking on debt. Now, not so much. Credit card APRs are up noticeably over the last year alone and $1,000 in debt now costs about $30 more per year. With that knowledge, it's important we remain more apprehensive about taking on new debt right now, especially if it's discretionary in nature.
Homeownership: When you combine historic price increases with historic rate increases, you get a reality where it's more expensive to own a home than ever. Locking in a $400,000 home at today's rates would accrue an interest bill that exceeds the principal of the loan — yikes. Because of this, it's critical to not bite off more than you can chew and to be extremely patient when searching for a place to call home. Additionally, keep refinancing on your docket as a future possibility when/if rates come down.
Shore up defenses: Debt is almost unavoidable for most of us, so its increasing costs are inevitably going to eat into the budget. To protect against this, it's paramount to start shoring up defenses like your emergency fund, overall savings rate, and retirement contributions during these times if at all possible.
Investing: Although 2023 has been a very up and down year for fans of dollar-cost-averaging into the markets, the fact is that if done correctly, you're still getting ahead of those who were scared off. It might seem inconsequential to the world of debt, but the reality is that continuing to invest is almost always a habit that will better your finances in all ways over the long run. In short, investing combats debt too.

INVESTING

Investing is More Popular Than Ever

If the pandemic-era meme stock + crypto boom cycle brought us anything positive, it's the fact that it seems to have popularized investing for good. Investing in stocks became trendy back in 2020 and 2021, and it's a change that seems to have withstood 2022's bear market doldrums.

Every 3 years, the Federal Reserve publishes its triennial Survey of Consumer Finances — a comprehensive peak into the average household's finances.

Their most recent report, finalized for 2022, concludes that 58% of American households either directly or indirectly owned stocks. This marks a 5% increase from the previous all-time high of 53% during the dot-com bubble.
Subsequently, ownership of individual stocks also increased dramatically from 15% in 2019 to 21% last year, all but confirming what we saw during 2020 and 2021.
There's no doubt that the pandemic was the catalyst here and that increased access to user-friendly brokerage apps has facilitated consumer's ability to act on their newfound interests in investing.
Is this good or bad? It can be both. History, and therefore trends, tend to overcorrect for itself before normalizing in the long run, and an increased interest in stocks is a prime example of this. Sure, it has definitely led to some investors getting burned, rules being bent, and new ones being created, but in the long run, the net result is likely a win for financial awareness and well-being.

🌊 BY THE WAY

👴🏻 Answer: It's 22nd. Out of 47 nations recently rated by the Mercer CFA Institute Global Pension Index, the U.S. came in 22nd place. (AARP)
💌 Dating apps are losing their target audience (Axios)
👀 ICYMI. Stress testing your income (Finny)
🏠 Couples are asking for down payments as a wedding gift (Fortune)

Real Estate Investing Basics

Investing Basics

5 mins

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