How to Retire Without Government Programs

BOSTON (TheStreet) -- In the unlikely event the government slashed all support for retirees, could you survive without Social Security or Medicare? How far can "self-reliance" take you?

The most conservative of politicians have advocated that Americans could, and should, develop the personal responsibility to prepare for their future needs without interference or aid from the government. That conversation has progressed with renewed vigor amid talk of the ballooning national debt and deficit.

Getting a grip on what you would need to save in a possible post-government retirement world is a multi-step process.

Getting a grip on what you would need to save in a post-government retirement world is a multi-step process. You would have to determine what you need to live on and what share would normally be subsidized by Social Security and Medicare (for the sake of limiting complexity, we'll keep our calculations to just those two federal programs). Then add back money you would otherwise have had to pay into the system that can now be invested.

The average earner in the U.S. is paid about $44,000 a year (the mean for all occupations, according to the U.S. Bureau of Labor Statistics). A single worker would pay about $7,000 in federal income tax. On top of that, there is Social Security and Medicare withholding (which rises back to 6.2% of their taxable income once a 2% "tax holiday" expires at the end of the year. In the interest of simplicity, we'll set aside the variable of state taxes.

In a broad stroke, that leaves $34,000 to work with as disposable income for our hypothetical "average" person. Replacing 70% of that take-home pay (a frugal estimate) leaves a retirement target of $24,000 a year. A more realistic total would add in money lost from Social Security, which averages nationally to $1,179.50 a month, just over $14,000 a year.

That leaves the total target that rests entirely on a retiree's shoulders at $38,000. Planning for a 25-year retirement means saving upward of $950,000 -- and that doesn't even include inflation.

An alternative strategy for replacing the lost share of Social Security, and to have that money preserved in a lower-risk stream, is to establish an annuity. A typical retirement-aged person could arrange to secure that $14,000 a year in income by investing roughly $250,000 in a typical annuity product (which could cost more if the annuity offers inflation protection).

No government also means saying goodbye to Medicare.

In reviewing a proposal by U.S. Rep. Paul Ryan, R-Wis., to overhaul Medicare by 2022, the nonpartisan Congressional Budget Office determined that the average American would get a "voucher" for $8,000 under his plan and be on the hook for an additional $6,150 in out-of-pocket expenses.

Lacking a "voucher" would mean seniors will have to pay roughly $14,770 out of their own savings. Added to our hypothetical retirement target, the total needed to live modestly for 25 years after working is more than $1.3 million. The cost could be even greater depending on the rate of medical inflation.

For a 30-year-old planning to retire at age 70, that works out to having to save more than $490 a month (assuming an annual yield of 6.5%) into an IRA or 401(k).

There is consolation that the percentage of your pay being withheld for Social Security and Medicare could be rolled directly into your retirement plan. Less likely is that your employers' equal share of that tax will find its way back into your paycheck.

Every little bit helps. An analysis by Principal Financial Group ( PFG) found that a 30-year-old earning $50,000 a year who defers the extra 2% of the temporary FICA tax break into his or her 401(k) account this year would boost the weekly contribution by a little more than $19. That amount, however, could potentially grow to more than $16,600 by retirement at age 66.

What complicates the matter is that most Americans actually get more back from the system than they pay in.

Research by the Urban Institute -- a nonprofit, nonpartisan policy research and educational organization -- found that a single male earning $43,100 in 2010 dollars and turning 65 in 2030 would get a total of $569,000 in Social Security and Medicare benefits for the $476,000 in taxes they paid in.

The difference is even greater for a comparable woman: $627,000 in benefits compared with $476,000 in taxes.

Beyond a strong commitment to save and invest (the latter depending on the good graces and returns of the marketplace), trimming expenses would be a necessary step to make a post-entitlement retirement work.

To successfully retire on as little as possible, owning a house before retiring is crucial, even if that means scrimping and saving to pay off the mortgage in an escalated 15-year term. Some might suggest that owning a house is being trapped with a "money pit." But rent is subject to inflation and would be a recurring cost.

Cutting costs might lead some to the option of going off the grid or back to nature -- farming, fishing and hunting to provide food. One could also pull up stakes and move overseas to a country with a lower cost of living. There is also the stressful but perhaps necessary option of turning to your family for support and shelter.

How willing would Americans be to making a go of retirement on their own, and how capable?

There would certainly be a shock to the system for the many that have grown dependent on Social Security. According to the Social Security Administration, roughly a third of those over the age of 65 rely on the monthly benefit for 90% or more of their income; roughly 22% rely on it as their only source of retirement income.

The most recent Wells Fargo ( WFC)/Gallup Investor and Retirement Optimism Index found that investor sentiment has turned negative in recent months, putting a fright into pre-retirees, some of whom may be preparing themselves to say goodbye to government entitlements.

"The decline of investor optimism among average Americans is concerning and comes at a time when investors are worried about high energy prices and the federal budget deficit," says David Carroll, head of Wells Fargo Wealth for brokerage and retirement services. "It is striking to see that retirees in the U.S. have maintained consistent optimism levels over the past quarter, with the major slide in sentiment concentrated among working Americans who continue to face the pressure of supporting day-to-day expenses in the midst of trying to plan for their future."

The May poll found significant differences between how today's retired Americans are funding their retirements and how those yet to retire expect to do so.

Current retirees are more likely to depend on employer-sponsored pensions and Social Security, while future retirees expect to rely on their own savings.

Nearly two in three (65%) of the nonretired say the 401(k) will be a major source of retirement funding for them, compared with 37% of the retired. Only 30% of nonretirees expect Social Security to be a major retirement funding source, compared with 52% of retirees.

Only one in three nonretired have a "great deal of confidence" or "quite a lot of confidence" that they'll be able to fund their health care needs in retirement beyond what Medicare offers.

-- Written by Joe Mont in Boston.

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