Where do you see yourself in 5 years from now? Well, we’ve all heard that one before and anyone who’s ever tried to apply for a job probably has a ready answer to that question just in case it pops out at an interview. But change that number to 30 or 40 years – and many of us would actually find it difficult to answer. We focus so much on our nearest future that we often forget about what might be the real challenge: what’s going to happen when you retire? And more specifically: how are you going to survive without your salary?

Back in the day, the most popular answer would be, “Duh, that’s why I’ve got a bunch of kids! They’ll surely support me when I get old”, and if you went back in time far enough, you would hear the same answer everywhere around the world. Nowadays, financial support provided to retired parents by their offspring seems to be the standard only in some third-world countries, and those countries happen to be struggling quite a bit. So imagine living in one of those places – even if all goes well, your children don’t hate your guts by the time you’re 60 AND at least some of them survive long enough to be able to help out, they themselves might find it hard to make ends meet.

Fortunately, you might say, we live in a civilized world now and you don’t have to rely on your children once you get old. After all, you’ve been working hard and paying all your taxes so it is only fair that all the money you have been giving to the system will eventually be paid back to you. And of course, you would be right. Unless the entire financial system collapses, a zombie apocalypse happens or we are taken over by an evil AI, once you retire, you will be looking at a steady retirement income of… exactly how much? Let’s take a closer look:

First, according to the Pension Rights Center, in 2016 85% of people at the age of 65 or older relied on Social Security. 65% relied on their assets. Only 31% received pensions, 24% were still working and about 7% were getting some other help from the government, e.g. veteran’s benefits. Summing it all up, their median annual income for 2016 was $23,394. That means half of them actually received less. So what is this about? Did all these people not work as hard as you? Oh, they certainly did. What is more, they probably didn’t even hope to receive that much in their retirement at the beginning of their career – for instance, the median household income in 1970 in the USA was only $7,701, compared to $57,617 in 2016.

One of the culprits here is inflation. Ever since the U.S. abandoned the gold standard, and then completely cut the link between the dollar and gold in 1971, the real value of a dollar has constantly been dropping, which in turn causes salaries to rise – and the pensions usually don’t keep up that well.

Another thing is how your Social Security is calculated. The basis for the calculation is your Average Indexed Monthly Earnings, or AIME, which is the sum of your 35 highest years of earnings divided by the number of months. Then you calculate your Primary Insurance Amount, the PIA, for each of these years, and you can see how much of your actual income mysteriously disappears at that stage – the PIA thresholds for 2018 are:

  • 90% of the first $895 of your AIME
  • 32% of anything higher than $895, up to $5,397
  • 15% of anything surpassing $5,397

Then you adjust the number by the cost-of-living adjustments, or COLA, in an attempt to make up for the inflation, add or remove several percent based on the actual age at which you retire, and voila: you get a nice estimate of how much you will get back from the government once you’re no longer able or willing to work. And as you probably see by now, it’s not going to be that much.

So what can you do to improve your prospects for the future? If your only knowledge about the stock exchange is that you should have invested in Facebook and Apple back when you first heard these names, it’s probably not the best option for you. What you can do, though, is start saving up, while at the same time making sure that the inflation doesn’t render your savings worthless within a couple of decades. One way to avoid that might be to open an Individual Retirement Account, which – provided that you compare the best IRA rates available and choose carefully – should at least balance out the inflation, thus already proving to be a better option than stacking the envelopes under the mattress. Or… well, perhaps you could also take out a few bucks, take the kids to the park and buy them some really good ice cream. You know. Just in case.