Without Social Security, Who Can Afford to Retire?

Last Updated May 14, 2009 9:46 AM EDT

So the news isn't exactly surprising, but it's still quite unsettling. Social Security and Medicare are in deeper trouble than anyone thought. Thanks in part to the recession, both government programs are expected to be insolvent years earlier than Uncle Sam expected. The Medicare fund that pays hospital bills could go bust by 2017 and the Social Security trust fund by 2037.

In the past, I didn't pay much attention to the headlines surrounding these government programs, particularly Social Security. From the time I started working, I was warned that I should aggressively save for retirement because I won't be able to count on a check from Uncle Sam. I took that advice at face value and have tried to squirrel away as much as possible.

Maybe it's because Social Security is expected to fail at just the time I'm hoping to retire, or that my own 401(k) is in the toilet, but suddenly I'm obsessed with what's going to happen to this program. And more importantly, I want to know how the news will affect my bottom line.

Ugh. Turns out, my "bottom line" isn't looking very good. And most likely, yours isn't either. With help from T. Rowe Price's Retirement Income Calculator, you can figure out how much you need to save each month to have enough to live on during your golden years. (A good rule of thumb: aim for 75% of your current annual income.) Given the precarious state of Social Security, you should crunch the numbers under three different scenarios:

  • First, assume you'd get full Social Security. (T. Rowe Price's calculator will provide you with an estimate.)
  • Third, add in nothing for Social Security, imagining the entire program just disappears. (Admittedly, this scenario is unlikely.)
How bad is it? Let's take a look at a fictional 37-year-old who plans to retire at 65 in the year 2037. He earns $75,000 a year, has already socked away $100,000 in a 401(k) and wants $4,375 a month in retirement income.

Scenario 1: If he receives all of the Social Security he's entitled to -- $1,838 a month -- he'll still need to squirrel away $1,682 a month, or $20,184 a year, to reach his retirement goal. (This is a truly eye opening exercise!)

Scenario 2: If his Social Security income drops to $1,397 (76% of the original figure), he suddenly needs to save $2,152 a month, or $25,824 a year, to reach his retirement goal. That's a painful 25% increase.

Scenario 3: If Social Security disappears altogether, he would need to save an unrealistic $3,571 a month, or a whopping $42,852 a year. That's more than half of his pretax pay, and clearly an impossible goal.

So what did I learn from crunching all these numbers? Maxing out my 401(k) isn't enough. I'm going to have to start saving even more aggressively if I ever want to retire.

My First Social Security Card image by veganstraightedge, CC 2.0