I've been thinking about those regular benefit statements we all get from Social Security. You know the ones I mean. They report on your lifetime earnings. And then they also say that about the year 2038, the system will have to cut benefits by 27% to stay solvent.
The Problem
A benefit cut sucks, of course. Working with current benefit amounts and present-day dollars, a 27% cut equates to about a $282 cut in monthly benefits. Yikes.
The Cost to Fix
But weirdly enough, you can solve the Social Security problem at least for your own personal retirement by accumulating an extra $30,476 in your retirement savings.
In other words, if you save up an extra $30,476 in retirement money, you'll be able to step in and "pay" yourself an extra $282 a month during retirement.
Sound crazy? Maybe it is. Or maybe it's only crazy that Congress hasn't already worked out the math for us.
The following Microsoft Excel formula makes this calculation, by the way, assuming that you can earn a real rate of return equal to 5% annually:
=PV(0.05/12,(78-66)*12,-282)
Just to get anal for a second, the formula result of $30,476 is technically the inflation-adjusted present value of a $282 monthly stream of payments that grow at the inflation rate over the typical years of retirement (from age 66 through age 78).
A Quick and Dirty Personal Fix
But back to what's interesting about this. Once this present-value calculation is done, you can calculate how much you need to save each month to accumulate this extra $30,476.
If you will retire at the point the system crashes-which is the worst possible scenario--the actual monthly savings required equals $34.36. In other words, if you save, say, an extra $35 a month between now and the time you retire you'll be fine.
The following Excel formula makes this second calculation. Let me again note that I'm assuming you can earn a real rate of return equal to 5% a year.
=PMT(0.05/12,(2038-2007)*12,0,-30477)
Closing Caveats
Four quick notes in closing: First, I rounded the $34.36 formula result up to $35 a month because, well, basically, I'm a scared-y cat.
Second, you would need to inflate your monthly savings by the inflation rate. If inflation next year equals 3%, for example, you'd need to inflate your savings by 3% (to roughly $36 a month) in 2008.
Third, because Social Security benefits often aren't taxable, you would probably want to save using a Roth-IRA account so the money you end up pulling out of your private social security account is tax-free, too.
Fourth, to check my math, copy the Excel formulas shown above into an Excel workbook cell.
