Is Real Estate better than Social Security? (Humble, TX)
Real Cost of Social Security Cuts versus Real Estate Reductions
Investors on a fixed income or those thinking about retiring within the next few years are facing some of the most difficult decisions in decades; keep working as long as possible in order to build a better nest egg or try to "make do" and hope against all odds that your money holds out. It's not a simple choice especially with the dual threats of low interest rates combined with Social Security cuts. In fact, what may initially seem like minor modifications in calculations can actually result in thousands of dollars less over a period of time. Today we are going to compare and contrast the decline in Social Security versus real estate to see the true cost of each over time.
Social Security - not very secure. The first and most important thing every American should realize is that Social Security is anything but secure. Contrary to popular opinion, there is not a bank account with your name where all that money you have paid in over the years is earning interest in anticipation of your retirement. It's not there and never was. Instead, current workers fund the financial needs of present day retirees. Unfortunately, what started out with 16 workers supporting every 1 retiree has transitioned to the point that in the near future only 3 workers will fund every 1 retiree. Needless to say, that will result in a very real strain on their earning potential...or your future benefit plan.
If that wasn't bad enough, Social Security has raised the retirement age from 65 to 67 and is considering yet another increase to age 69. Just imagine, construction workers on the job at nearly 70 years of age, teachers trying to keep control of a rowdy class and aging emergency workers attempting to hide their declining health at a time when most merely want to play a round of golf before lunch. It's not a pretty picture but even worse, it's also not enough. The savings will not be sufficient to stem the rising tide of benefits despite adding almost four years (or nearly 10%) to the total work-life of the average American. Think about it for just a moment; someone that went to college and entered the professional world at age 25 expecting to retire after 40 years of work at aged 65 will now need to work an additional 4 years or 10% in order to start receiving Social Security. For the average worker this could represent a loss of SS earnings of well over $40,000 at today's benefit levels. Combine this for a couple and you have a loss of over $80,000.
Except the benefits are also less. For instance, the COLA or Cost of Living Adjustment for 2010 was zero and is expected to remain stagnant for 2011. Sadly, for those retirees on a limited income, the COLA rarely reflects the true nature of their expenses such as healthcare, food and insurance but instead, reflects the price adjusted hedonistic rates compiled by the federal government. Still, every little bit counts and over the years, the average COLA is roughly 2.5% or around $20 to $25 per month for the typical Social Security recipient. It may not sound like a lot to lose but over a 20 year span, it could result in over $12,000 loss for just these two years alone...and as much as $20,000 after compounding. Combine this for a married couple and you have a loss of $25,000 to well over $40,000.
For the sake of comparison, let's examine the loss of SS earnings as compared to real estate. Housing prices are down by 25 or even 35 percent in some areas so let's use the higher rate. Assuming our modest income couple purchased a house for $225,000 and it is now worth only $150,000 they still have not been impacted as much as a four year increase in the SS age. Of course, the comparison doesn't end there; most of the money used to purchase the home was probably in the form of a mortgage whereas the monies paid into the SS fund are not borrowed/leveraged but actually earned through hard labor day in and day out.
Held long enough, real estate is likely to make a come-back thanks to inflation...social security is inclined to lose purchasing power over that same period of time. Real estate provides numerous tax benefits whereas SS has been hit with increasing levels of taxation with more expected. Finally, one of the most interesting aspect is simply to compare the average anticipated SS check with the average rental income...one well bought house could equal your entire SS check at retirement. Now ask yourself, which can you really count on to be there when you need it most?
Charles Gardner, Realtor/Investor
Region Realty-Greater Houston Homes-Humble, TX
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