Two years ago, I had dinner with an American couple that worked in Tanzania. The adventurous couple raised their children in Ethiopia, Kenya and Indonesia. Now in their mid-60s, they were thinking about retiring.
“Will you qualify for Social Security payments?” I asked.
“We left the United States when we were 22 years old,” they said. “So we couldn’t contribute. But we’ve saved a lot of money, and Social Security doesn’t pay much, so moving overseas was our best financial move.”
While digging my fork into the delicious regional food, I asked a question that made my wife cringe: “How much money do you have?”
They smiled and said, “We have about $800,000.”
That sounds like a lot. The latest TransAmerica Center for Retirement Study was in 2015. It reported that Americans in their 60s had a median investment portfolio value of $172,000. My friends had $628,000 more than that.
But if they had remained in the United States, instead of moving abroad, they might have been able to enjoy a better retirement…without saving a single penny.
That might sound crazy, so let me explain:
The average Social Security benefit was $1,503 per month in January 2020. My friends worked full careers in professions that earn above-average incomes. If they had remained in the United States, they might have qualified for a combined $3000 a month, or $36,000 a year.
My friends’ $800,000 sounds like a lot of money. But for them, I believe Social Security payments would have provided more. I base that assumption on the 4 percent rule. Back-tested studies reveal that if a retiree has a diversified portfolio of stock and bond market index funds, it should last at least 30 years if they sell an inflation-adjusted 4 percent per year.
Four percent of $800,000 is $32,000. That’s why my friends’ $800,000 portfolio is worth $32,000 a year. That’s less than what Social Security might have paid them.
“We’re doing pretty well, aren’t we?” they asked.
I stuffed Tanzanian bread in my mouth while considering how to answer.
They weren’t opposed to that. But they were somewhat shocked. “We have so much more money than our friends in the United States,” they said. “We should be able to retire much more easily than them.”
I shook my head and said, “That might not be the case.”
I explained how much their friends might receive in Social Security payments. I then explained how much their portfolio was worth, based on the 4 percent rule.
They just sat back in shock.
“So, you’re saying we could have stayed in the United States, not saved a penny and…we might be better off financially than we are right now?”
“There’s always a chance you would have earned less than $1,500 each, per month, from Social Security,” I said.
But considering their professions, and how long they worked, I didn’t believe that.
It’s easy to dismiss the benefits of Social Security. But it’s worth more than you might think. A retiree receiving $1,500 a month, for example, would require an investment portfolio of $450,000 just to equal that amount. A couple receiving a combined $3,600 from Social Security would require almost $1.1 million to match what Uncle Sam provides.
According to the TransAmerica Institute survey, just 29 percent of Americans in their 60s report knowing “a great deal” about Social Security. Just 38 percent report knowing “quite a bit.” That isn’t good. To maximize your benefits, it’s best to know how it works.
Social Security might not remain this generous forever. People are living longer and the program’s coffers are somewhat stressed. But in one shape or another, these benefits will keep coming. After all, The National Institute on Retirement Security says 40 percent of American retirees receive no other income. So unless you expect half of the nation’s retirees to be begging on the streets, Social Security’s benefits will continue.
And if you ask my friends in Tanzania, they’ll now agree that Social Security is worth much more than most people think.
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas