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Retirement: Social security timer bomb

Co-produced with Treading Softly

Here at High Dividends, we aim to pay attention to the horizon, just like a Minesweeper must always be aware of the risks lying just below the water.

Source: Navylive

Therefore, we need to warn retirees and those planning to retire a big risk ahead.

Before COVID-19 caught everyone’s eye, the Social Security Administration released their short and long term reports. In 2010, they raised a red flag:

Currently, the Social Security Commission expects program costs to increase by 2035 so that taxes are only enough to cover 75 percent of the scheduled benefit. This increase in costs is the result of population aging, not because we are living longer, but because the fertility rate drops from three to two children per woman. Importantly, this shortage basically stabilizes after 2035; Tax or benefit adjustments that offset the effects of a lower birth rate may restore the solvency of Social Security on a sustainable basis in the near future. Finally, when Treasury debt securities (trust assets) are acquired in the future, they will be replaced by public debt. If the assets of the trust run out without reform, the benefits will necessarily be reduced without affecting the budget deficit.

Source: SSA

Social Security is designed to replace about 30% -40% of a person’s pre-retirement income. However, a large proportion of retirees rely primarily on income from Social Security. According to another SSA report, the reliance on Social Security for retirement is huge!

  • Among elderly Social Security beneficiaries, 50% of married couples and 70% of unmarried people receive 50% or more of income from Social Security.
  • Among the elderly people receiving Social Security, 21% of married couples and about 45% of unmarried people rely on Social Security with an income of 90% or more.

Source: SSA fact sheet

What is causing the problem?

Before diving into the solutions or steps to avoid this problem, we need to take a minute to consider why it happened.

First, Social Security payments are financed through taxes. As more and more retirees begin to collect payments, they must be financed from taxes to be transferred to and / or the huge reservoir of Social Security.

The problem that is happening in the formula is that Social Security now depends on an average birth rate of three children per family. It’s important to note from the first quote above that long life doesn’t seriously drain Social Security, but a lower birth rate is the cause..

Historically, American families have had a high birth rate. This creates a large number of workers. Now, the rate drops below 3 children per family, or more importantly, per woman.

The report cited above is from 2010. Birth rates only continue to decline in the US.

A report on interim data from the Centers for Disease Control and Prevention shows remarkable fertility and population metrics hit record lows in 2019. For example, American women are now projected. there will be approximately 1.71 in its lifetime – a 1% decrease from 2018 or less the 2.1 ratio needed to accurately replace a generation.

Source: US News & World Report

Immigration also plays a role in this. Immigration is a crutch in which the reduced birth rate has been complemented by legal immigration. Young immigrants actually benefit Social Security rather than harm it. The reason is that they work for many years before withdrawing benefits and cannot withdraw benefits until they have worked for at least 10 years paying into the system.

Immigration in COVID-19 has stood still and the birth rate has not yet recovered. Social Security’s formula for long-term viability is at risk.

The second problem is unemployment. Social security depends on who is working on paying the system so it can pay retirees. Before COVID-19, the United States had reached the level of being considered “full-time”. Now, with the economy swayed by outages and home orders, more and more Americans sit on the sidelines, many by no choice. This reduces the money to Social Security and forces it to withdraw from its reserves faster.

It is very unlikely that Social Security can maintain full payments until 2035. In 2010, they raised the alarm. They don’t know COVID-19 will come, immigration will stall and the birth rate will continue to drop.

So deadlines could have been pushed closer due to the declining birth rate, the lack of immigrants and the now lower employment rates due to COVID-19, while in 2010 when the 2035 was created, we are in the “full employment” status and have a slightly higher birth rate / immigration level.

You need to take steps to avoid having a big impact on your income. SSA has stated that it will need to cut payments by 25% by 2035 unless something changes. Add baby. Immigration more. Taxes are higher. Chances are, the first two rates will remain low, meaning the third will be more likely to happen. Historically, however, Congress has waited until the 11th hour to pass a law to try to fix the problem. Why? No matter how you try to fix the problem, certain groups of people are suffering. Non-proportional tax increases hurt young people. Benefit cuts are a headache for retirees. Increasing the minimum retirement age hurts anyone who hasn’t retired.

So, you need to do some of the steps yourself.

Build your own income stream

The time has come to let go of your math skills and build a stream of your own income. Average monthly SS is $ 1,513 monthly or $ 18,156 annually. It is estimated that the average retiree can experience a 25% reduction in annual benefits, or $ 4,539.

To replace this annual income, you can buy a security that pays dividends or interest now to generate income streams that offset this cut. How much do you need to save for replacing cuts? It all depends on the expected output.

Productivity Amount to save
3% $ 151,300
5% $ 90,780
7% $ 64,843
9% $ 50,433

As you can see, investing in low-yield securities will require nearly all of the average retiree’s retirement savings to cover an annual loss of $ 4,539.

The High Dividend Opportunity model portfolio has yields between 9% -10%, and our Sub-Bond has an average yield of 7% for more conservative investors. To save $ 65,000 by 2035, a retiree only needs to save $ 362 monthly. By calculating the 7% interest rate over those 15 years, you only need to save $ 204 a month to reach your $ 65,000 goal.

If you can save more – $ 362 monthly for 15 years at 7% yield, you’ll have more than $ 115,000 in your portfolio, allowing you to cut back on your return if you want when the cut Social Security reduction comes.

To keep your income as safe as possible, buying child bonds or incentives can keep making your income as easy as possible with low effort.

Consider the following options:

  1. RLJ Lodging Trust, $ 1.95 Series A Cumulative convertible preference shares (RLJ.PA) yield 8.6% and haven’t missed a beat in years. Furthermore, it is callable and immature. Buying this preferred security allows you to generate income for many years without adjustments.
  2. Crestwood Equity Partners LP, 9.25% Preferred Partnerships (CEQP.PR) yield 13.4% and issue K-1 at the time of tax calculation. This preferred partnership is similar to an RLJ-A in that it is not due and cannot be called. Although it is more volatile than RLJ-A or a bond, it compensates for investors by offering higher yields and very friendly terms for investors. If Crestwood Equity Partners (CEQP) ever misses a fancy payment, the profits will go higher. CEQP has solid coverage of their preferences and there is no sign they will miss a payout.
  3. Sachem (SACH) introduces a pair of sub-bonds maturing in 2024. They Sachem Capital Corp., 6,875% Notes due 30/12/2024 (SACC), and Sachem Capital Corp., 7.125% Notes due 30/6/2024 (SCCB). Both are currently trading just below PAR but productivity more than 7%. These sub-bonds will mature before our 15-year maturity but will give us the yield we want and a small increase in the total dollar amount at maturity – helping us meet our overall goal. body. We’ll then re-invest that dollar into new opportunities at the time.

Alternatively, you might consider buying a preference equity closed-end fund that could expose you to hundreds of individual incentives and thus diversify instantly. We have also introduced them to our investors. Another great CEF that I personally have a great position is John Hancock Priority Income Fund (HPI) with a generous yield of 7%.


The looming benefit-cut continues to come close. We really felt that COVID-19 brought it closer to reality. Although 2035 seems a long way off, for many retirees 25% of their income could be affected and the impact will be financially hard.

By taking proactive steps now, you can eliminate the impact of these cuts and have a stronger financial independence. We’re always happy to help you discover new children’s relationships and the priorities we hold in our Model Portfolio and have heated discussion in our chat rooms.

Today is the day to prepare and build a high-dividend portfolio for sustainable income.

Be careful! There’s a mine in the foreground! Let’s avoid together.

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Disclosure: I am / we are long RLJ.PA, SCCB, HPI. I wrote this article myself, and it represents my own opinion. I received no compensation for it (other than Seeking Alpha). I do not have a business relationship with any of the companies whose stocks are mentioned in this article.

Further disclosure: Agility, Beyond Savings, Value Traps, PendragonY, Preferred Stock Traders and Enduring Players, all are supporting contributors to High Dividends.

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