Introduction
In my article “Social Security: Do Benefits Lag
Inflation?” we compared annual changes in Social Security benefits with the
annual rate of inflation. Published statistics show us that Social Security
benefits are not tied to the rate of inflation (as is claimed) for the period
2007 through 2017, and noticeably lagged the rate of inflation for the period
2013 through 2018.
But how does that affect me, you ask? In order to put
Social Security benefits into perspective we need to establish how well they
meet our financial needs. We can illustrate this point by examining a
hypothetical budget for two retired workers who live together. Let’s call them:
Linda and John Roman.
The Romans actually had a plan for their retirement.
Linda worked as a nurse for many years and retired with a small pension. John,
a mechanic, also retired with a small pension. They know finances will be
increasingly tight as they age, so they want to conserve their savings.
John and Linda retired in 2013 with a combined income
from Social Security of $31,108. This is about the national average for two
people on Social Security if both partners worked, accrued equal benefit
records, and have no dependents. The average for a retired worker with a non-working
spouse is substantially less. Let’s see how
the Roman’s spent their money in 2013 and then compare it with how much money
they would need five years later in 2018 to enjoy the same life style.
Remember, this is a base line budget using national spending data. It is likely
your budget choices will be different.
An Income Budget for Renters
John and Linda received an annual gross income from
Social Security of $31,108 in 2013. As promised, the Social Security
Administration (apparently) increased their annual benefits to match the rate
of inflation and in 2018 the Romans will have a combined gross income of
$32,852. That’s an increase of 5.6%.
But the Medicare news is not as good. This expense (which
reduces the Gross Income they receive from Social Security) has increased from
$2,518 in 2013 to $3,216 in 2018, up by a hefty 27.7%. As a percentage of their
Gross Income, annual Medicare expense has increased from 8.1% in 2013 to 9.8% in
2018.
Gross Income, less Medicare, left the Romans with a Net
Spendable Income (NSI) of $28,591 in 2013 and $29,636 in 2018. The money they
have left to spend on rent, food, medical care and so on has increased by only
3.7%.
Food Expense. The Romans decided to eat well. Not
lavishly, but just above the national average food budget for 2 people in a
household. The food they ate at home plus the food they ate away from home cost
them $6,604 in 2013. An identical menu will cost them $7,133 in 2018, - up 8%.
Food consumed 21.2% of their Gross Income in 2013 and will cost them 21.7% of their
income 2018. People in our age group like to eat out and by these calculations we
spend about 40% or our food budget on food consumed (mostly) away from home.
For the Romans, that works out to $2,853 in 2018. Food consumed at home will
cost them about $4,280. It would appear food consumed away from home costs
about 2.7 times more than food consumed at home. Please note, this shows how they
spent their money, NOT how many meals they ate away from home versus how many
meals they ate at home.
These expenses appear to be close to typical budget for
what the U. S. Department of Agriculture would describe as a moderate cost plan.
They do not include SNAP (the government’s Supplemental Nutrition Assistance
Program which replaced food stamps), other government meal or food nutrition
programs, private food programs, home production of foods (including farming,
hunting and fishing), and donations, all of which would reduce our cash outlays
for food.
Rental Housing Expense. The median apartment has ~ 1,059
square Feet of floor space. A typical 3 bedroom apartment is somewhere between
1200 and 1350 square feet. Let’s assume that in 2013 the Romans decide to rent
a condo, town home, apartment or house that has 1275 square feet of floor
space. The median monthly rent in 2013
was $.752 per square foot, giving them a housing expense of $11.506 per year
plus utilities. By 2018, national rents have increased to $.859 per square foot
and the Romans now have an annual housing expense of $13,145 per year (again
plus utilities). Their housing expense has increased by 14.2% in five years and
housing now consumes 40% of their Gross Income, up from 37% in 2013.
In the following graph, it is strikingly evident the
increase in Social Security income from 2013 through 2018 was far less than the
corresponding increase in rent and food expense.
Vehicle Expense. It’s probably not a good idea to plan on
having enough money from our Social Security income to buy a vehicle after retirement.
So the Romans did something really smart. They purchased a new vehicle for cash
(to avoid finance charges) just before they retired. With good maintenance, it
should last until neither Linda nor John can drive. The Romans bought a vehicle
with a reputation for incredible reliability (which minimizes annual
maintenance expense), and low per mile operating costs. Toyota, Honda, Hyundai,
Ford and Chevrolet offer good choices. They did their homework at Internet
sites like Edmunds or Kelly Blue Book to check out reliability issues before they
made their choice of a retirement vehicle.
In 2013 the Roman’s vehicle expense (including insurance, maintenance,
taxes, fees and gasoline) was $2,164. By 2018, annual vehicle expense has risen
to $2,764, - a 27.7% increase. Owning a vehicle, even a low cost vehicle,
consumed 7% of their gross income in 2013 and 8.4% of their income in 2018.
The Romans didn’t plan to spend a lot of cash on apparel
in retirement. They already had most of the clothing they would need. So
apparel expense only increased from $775 in 2013 to $800 in 2018, up about 3.2%.
Apparel expense consumes about 2.4% of their Gross Income.
We are getting older and that means more money must be
allocated for those things not covered by Medicare. Most people will need
glasses, several trips to the dentist, and so on. We buy a supplemental health
insurance plan. For the Romans, annual out of pocket health care costs increased
from $2,786 in 2013 to $3,146 in 2018, - up 12.9%. These costs consume 9.6% of their
Gross Income. In this analysis, we have assumed Linda and John are in
relatively good health, have Medicare and supplemental insurance coverage, no
skin care, no hearing aids, and one dental procedure per year. Actual costs are
likely to be substantially higher. These expense estimates do not include independent
living, assisted living or nursing home care. Medical out of pocket expenses
can easily exceed $10,000 per year.
At $250 in 2013 and $275 in 2018, the Romans will not be
splurging on recreation, which consumes less than 1% of their budget.
TV, Internet and telephone services provide both
communication and entertainment. John and Linda allocated $1,480 to these
services in 2013; but these same services cost them $1,600 in 2018, an increase
of 8.1%, and consumed 4.9% of their Gross Income both years.
Other goods and services include utilities, insurance,
personal care, taxes, and taking the dog to a vet. These would typically cost the
Romans about $2,360 in 2013 and increase at the approximate rate of inflation
(8.1%) to $2,550 in 2018. They set aside 7.8% of their income for these
expenses.
The total? These goods and services cost Linda and John a
total of $27,925 in 2013. They had $666 left over to save for future needs or
spend on something special. Unfortunately, by 2018 these identical goods and
services increased in cost to $31,413, and would have left the Romans $1,777 in
debt were it not for the extra income they receive from their pensions. While
Net Spendable Income from Social Security increased by 3.7% from 2013 through
2018, their expenses increased by 12.5%. That means, in order to survive
financially, the Romans - and anyone else in similar circumstances - would either
have to cut back on housing, food, medical care and other expenses, - or find
other income, to break even.
The information from this analysis is summarized in the
following Table.
Increase in Cost
of Living for a couple on Social Security & Medicare
|
Analysis of
renting a house, condo, duplex or apartment while retired.
|
|
|
|
|
|
|
|
|
|
|
% of 2013
|
% of 2018
|
|
2013
|
2018
|
Increase
|
Income
|
Income
|
|
|
|
|
|
|
Increase in Benefits
|
$31,108
|
$32,852
|
5.6%
|
|
|
Medicare
|
$2,518
|
$3,216
|
27.7%
|
8.1%
|
9.8%
|
Net Spendable Income
|
$28,591
|
$29,636
|
3.7%
|
|
|
Food
|
$6,604
|
$7,133
|
8.0%
|
21.2%
|
21.7%
|
Housing
|
$11,506
|
$13,145
|
14.2%
|
37.0%
|
40.0%
|
Vehicle
|
$2,164
|
$2,764
|
27.7%
|
7.0%
|
8.4%
|
Apparel
|
$775
|
$800
|
3.2%
|
2.4%
|
2.4%
|
Medical, Dental, Eye Care
|
$2,786
|
$3,146
|
12.9%
|
9.6%
|
9.6%
|
Recreation
|
$250
|
$275
|
10.0%
|
0.8%
|
0.8%
|
Telephone, TV and Int.
|
$1,480
|
$1,600
|
8.1%
|
4.9%
|
4.9%
|
Other Goods and Services
|
$2,360
|
$2,550
|
8.1%
|
7.8%
|
7.8%
|
|
|
|
|
|
|
Total Cash Budget
|
$27,925
|
$31,413
|
12.49%
|
|
|
|
$666
|
-$1,777
|
|
|
|
As shown in the following graph, the increase in Gross
Income and Net Spendable Income (NSI) received from Social Security are both
dwarfed by estimated price inflation from 2013 through 2018.
The moral of this analysis?
No one should assume Social Security income will keep up
with the rate of inflation. Every retired person will need additional income
from other sources (pension plans, annuities, IRA plans, savings accounts, part
time work, and so on), or from other government programs (like SNAP - the Supplemental
Nutrition Assistance Program), or other organizations in order to assure their
financial security.
Try to pay down any debt obligations, such as credit card
balances or vehicle loan payments, before you retire. A load of debt will definitely
jeopardize your financial security. As the years go by, your expenses will typically
increase faster than the Social Security benefits you receive.
An Income Budget for People Who Own Their Home
The Romans are in relatively good shape through 2018,
thanks to the extra income they receive from their pensions. But what would
happen if they owned their home? Let’s assume we make one change to the budget
discussed above. Let us simply assume the Romans paid off their mortgage long
before retiring and own their home “free and clear”.
In this scenario, the Romans own a house that has 1275
square feet of floor space and a garage on a small lot in an inexpensive
suburban or rural area. The only change to their budget is the cost of housing.
They pay property taxes, fees, insurance and maintenance on their home. The
effect on their financial security is dramatic. The money they must spend for
housing drops from $11,506 to $4,438 in 2013 and from $13,145 to $4,720 in
2018. That increases their spendable cash on hand from $666 to $7,734 in 2013.
Even with the increase in the cost of living, instead of being in debt or
having to draw down on their pensions, they have an additional $6,648 to spend
in 2018. The following graph illustrates the difference owning your own home
can make to your financial security.
The information from this analysis is summarized in the
following Table.
Increase in Cost
of Living for a couple on Social Security & Medicare
|
Analysis of
owning a house while retired.
|
|
|
|
|
|
|
|
|
|
|
% of 2013
|
% of 2018
|
|
2013
|
2018
|
Increase
|
Income
|
Income
|
|
|
|
|
|
|
Increase in Benefits
|
$31,108
|
$32,852
|
5.6%
|
|
|
Medicare
|
$2,518
|
$3,216
|
27.7%
|
8.1%
|
9.8%
|
Net Spendable Income
|
$28,591
|
$29,636
|
3.7%
|
|
|
Food
|
$6,604
|
$7,133
|
8.0%
|
21.2%
|
21.7%
|
Housing Owned
|
$4,438
|
$4,720
|
6.4%
|
14.3%
|
14.4%
|
Vehicle
|
$2,164
|
$2,764
|
27.7%
|
7.0%
|
8.4%
|
Apparel
|
$775
|
$800
|
3.2%
|
2.4%
|
2.4%
|
Medical, Dental Eye Care
|
$2,786
|
$3,146
|
12.9%
|
9.6%
|
9.6%
|
Recreation
|
$250
|
$275
|
10.0%
|
0.8%
|
0.8%
|
Telephone, TV and Int.
|
$1,480
|
$1,600
|
8.1%
|
4.9%
|
4.9%
|
Other Goods and Services
|
$2,360
|
$2,550
|
8.1%
|
7.8%
|
7.8%
|
|
|
|
|
|
|
Total Cash Budget
|
$20,857
|
$22,988
|
10.22%
|
|
|
|
$7,734
|
$6,648
|
|
|
|
Like John and Linda Roman, everyone contemplating
retirement needs a financial plan that includes, little or no debt on the date
of retirement, and other income to supplement the benefits you will receive
from Social Security.
Good luck.
Ron
References:
Income and Medicare data:
US Social Security Administration
BLS
US Department of Commerce
Rental and Owned Housing References:
Zillow Rent Index
Lincoln Institute of Land Use Policy
FHFA
Case Schiller Housing Index
BLS CPI-U
Food Expense references:
Official USDA Food Plans: Cost of Food at Home at Four
Levels, U.S. Average, December 2013 and 2017, Family (Male and Female), and age
51 - 70 years.
BLS CPI-U
Various institutional Internet resources
Other Expenses:
BLS-CPI-U
Various Internet Resources
.
