Listened to Ramsey for the first time today...

[humandraydel]

I was driving on a long trip (8 hours) today and Dave Ramsey came on the radio. I've never heard him before, and I already knew I disagreed with a lot of the stuff he says, but I was curious so I listened. I'm was shocked by something he said, and I'm pretty sure he is either flat out lying or very misinformed.

He was talking about how messed up social security is, and he said that even for someone who makes minimum wage their entire life, if they were to save one-tenth of the SS amount - so, 1.5% of income since SS is 15% of income - they would have TEN times the income at retirement than SS will provide. Does anyone else think this sounds impossible? Maybe I'm giving the Government too much credit, but surely it can't be THAT bad. I might have to run some scenarios.

[DebtFree&Broke]

I'm not waiting until retirement to find out whether he is right or wrong! Plan to fund your own retirement and any SS you get will be gravy.

[disneysteve]

I haven't run any numbers but keep in mind that Dave Ramsey does all of his investment planning based on a 12% annual return. Using that figure lets him throw out incredible scenarios like this one. Most normal folks and financial professionals use more a more realistic projection like 7%.

Let's say you earn 50K and invest 1.5% of gross and earn 7%/year from the time you graduate college at 21 until you retire at 65. You'd amass 238K. With a 4% withdrawal rate, that would get you about $800/month. Does anyone have any idea what SS would pay that same person?

[bjl584]

I think Dave's math may be off, but he may be talking about the argument that you can earn more on your own as opposed to contributing to SS.

[bjl584]

if they were to save one-tenth of the SS amount - so, 1.5% of income since SS is 15% of income - they would have TEN times the income at retirement than SS will provide.

Social Security taxes for the employee is 4.2%, so what do you mean by SS being 15% of income?

One tenth would be 0.42%. If the average worker saved 0.42%, then I don't see how they could come out ahead of anything.

[kv968]

I haven't run any numbers but keep in mind that Dave Ramsey does all of his investment planning based on a 12% annual return. Using that figure lets him throw out incredible scenarios like this one. Most normal folks and financial professionals use more a more realistic projection like 7%.

Let's say you earn 50K and invest 1.5% of gross and earn 7%/year from the time you graduate college at 21 until you retire at 65. You'd amass 238K. With a 4% withdrawal rate, that would get you about $800/month. Does anyone have any idea what SS would pay that same person?

I checked it out on their estimation calculator and if you were 21 now and worked until 65 (2056) you would get about $1659/month.

Granted, that's if SSI is still around in it's current form.

I don't really listen to him, but evidentally you have really check out what Ramsey says. 12% annual return rate? I've never heard anyone use that as a benchmark/projection.

[dczech09]

It would not surprise me for someone to claim that investing on their own would produce a greater benefit than SS income. I think I am going to have to run the numbers myself as I have a hard time trusting other people's math sometimes.

But lets think of it this way-
The government levys a tax for SS and has all of us put money into a pot. When it comes time for the government to pay out benefits, all they have is what is put into the pot. Sure, they may have some small return for government bonds, but does anyone actually believe that the government invests the SS money for long-term growth? C'mon, be realistic!

So they have a pot of money to pay benefits. All they can pay each beneficiary is the amount that they had put in (maybe a little less). The SS program has administrative costs, employee payroll, and other expenses to cover. So without growth investing, all they can really hope to pay out in benefits is what was originally put in (maybe a little less).

Realistically, the government cannot pay us though this program what we put it. The SS program is nothing more than a "forced cookie jar" program. They administer it, and force it, because they do not believe that the majority of people can do better.

And lets be honest... if SS was not around and people kept the 4.2% in their paychecks, what would they likely do? While most of us on this forum would likely save it, others would spend it.

I in know way condone this program, but I do see where they are coming from. It is a perfect example of a program with a great motive, but horrible execution.

[dczech09]

I don't really listen to him, but evidentally you have really check out what Ramsey says. 12% annual return rate? I've never heard anyone use that as a benchmark/projection.

Yes, Dave Ramsey uses 12% as a benchmark. The 12% is definitely a little "rosy." While yes there are a lot of mutual funds generating around that figure consistently, they are generally growth stock funds.

Who invests in growth stock funds for their whole career? Rule number 1 is to not put your eggs into one basket. Diversification throughout different asset classes is important, primarily when you are older.

I am 25 years old, so I could certainly go 100% equity. But I certainly would not recommend a 50 year old to invest the same way.

[humandraydel]

Social Security taxes for the employee is 4.2%, so what do you mean by SS being 15% of income?

One tenth would be 0.42%. If the average worker saved 0.42%, then I don't see how they could come out ahead of anything.

The employee pays 6.2% in SS tax and 1.45% in Medicare tax and the employer pays the same amount, for a total of 15.3%. If you just include SS, that's 12.4% total.

[humandraydel]

keep in mind that Dave Ramsey does all of his investment planning based on a 12% annual return. Using that figure lets him throw out incredible scenarios like this one. Most normal folks and financial professionals use more a more realistic projection like 7%.

Oh yeah - I forgot about his crazy return assumption - that pretty much explains it all. I realize that he uses these numbers to motivate people, and that's fine I guess, but it just makes him look stupid when he makes ridiculous comments like he was making. Then again, I guess his average listener isn't smart enough to throw the BS flag.

[MonkeyMama]

Even with an assumption of a 12% return, he is exaggerating profusely. Heck, even if social security total failed very early on in your retirement, you'd do better with social security than investing on your own at 1/10 of the level. Investing 1.24%** of your income for 40 years does not amount to a hill of beans. Social security is at least significantly more substantial.

**Social security contributions are 12.4%. The other 2.9% is for medicare.

[dczech09]

The employee SS tax rate was 6.2% in the early 2000's but went down to 4.2% in 2010. This is where it currently is.

I ran an analysis for a hypothetical John Smith born on 5/5/1950. John worked from 1975 through 2015 (from 25 yo to 65 yo) then retired. He earned $40,000 per year each year with no raise. I also assumed no benefits to the exclusion of SS tax.

His SS benefit would be $1,953 per month.

If he did not pay into the system and instead invested the SS employee rate towards retirement and getting an average return of 8% per year, he could retire at age 65 and have a nest egg of $867,564.

Assuming that money is invested at 6% and he draws for 30 years in retirement, the monthly benefit would be about $5,201. I then assumed taxes would be 20% total, thus he would have $4,161 per month for a retirement income (more than he earned while working).

That kicks the SS benefit's butt! Not surprising!

[humandraydel]

Even with an assumption of a 12% return, he is exaggerating profusely.

I KNEW it!!

**Social security contributions are 12.4%. The other 2.9% is for medicare.

One COULD argue that medicare is a form of "retirement expenses" and therefore appropriate to consider the cost/benefit of.

[disneysteve]

Let's say you earn 50K and invest 1.5% of gross and earn 7%/year from the time you graduate college at 21 until you retire at 65. You'd amass 238K. With a 4% withdrawal rate, that would get you about $800/month. Does anyone have any idea what SS would pay that same person?

I checked it out on their estimation calculator and if you were 21 now and worked until 65 (2056) you would get about $1659/month.

One thing to consider here is that my numbers use the 4% withdrawal rate which never hits the principal. In reality, as you get older, you could increase spending and start spending down principal and have a lot more per month.

[maat55]

[QUOTE]

Realistically, the government cannot pay us though this program what we put it. The SS program is nothing more than a "forced cookie jar" program. They administer it, and force it, because they do not believe that the majority of people can do better.

SS is Madoff with a gun to your head.

And lets be honest... if SS was not around and people kept the 4.2% in their paychecks, what would they likely do? While most of us on this forum would likely save it, others would spend it.

This is why mandated private accounts is a decent compromise.