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Today, we bring you a Saturday Selection from The White Coat Investor, touching on a topic that I haven’t ignored — Social Security.
How much can you expect? I built a calculator to help you determine how much you could expect based on your work history to date. SSA.gov can help you with the earnings history, but the on-site calculator assumes you’ll work until full retirement age.
You can find my downloadable calculator, which will show you your benefit based on what you’ve earned so far here: Social Security & Early Retirement 2018: Know Your Bend Points!
The post below was originally published on his site by The White Coat Investor.
Top 5 Reasons Not to Ignore Social Security
I run into people all the time who argue that Social Security is not going to be there for them, so they’re not counting on it. As near as I can tell, few of those folks actually understand what that means.
1) Social Security Isn’t Going Anywhere
First of all, I don’t personally think Social Security is going anywhere. In my opinion, this is one of the best government programs we have. Even if you don’t think it’s a good program, you cannot argue it is not immensely popular.
The votes to abolish it simply are not there. No politician who ever expects to be reelected, ever, speaks out against it. You want riots in the streets? Get rid of Social Security. 54 Million people are currently receiving benefits. They vote, they demonstrate, and they riot.
2) Social Security Will Change
Now, Social Security’s detractors have many good points. Social Security needs to be shored up. This isn’t the first time, though. It’s been shored up before. The formula isn’t that tough.
You can raise the retirement age (my personal favorite solution). You can raise taxes a little. You can lower benefits (or even just the inflation adjustment) a bit. You can tax the benefit a little more for some or all people. You could even take the benefit away from certain people, I suppose, but that also seems an unlikely solution.
Could it become more means-tested? I guess so, but I doubt we’ll see anything too dramatic. Most likely, the solution to fixing Social Security will be a combination of the above, and it will be done at the last minute or perhaps gradually over years. But if you want to worry about an insolvent government program, worry about Medicare.
3) Your Social Security Benefit is Immensely Valuable
A typical high-income professional’s Social Security benefit is extremely valuable. Take a look at your most recent Social Security statement if you don’t agree.
Mine says if I work until 70 (and thus continue to pay in the maximum Social Security tax every year from now until then) then my benefit will be $3,407 per month. Chances are I won’t work until 70, so that will be a little lower than that. Let’s call it $3,000 a month starting at age 70.
My partner to whom I am married will get 50% of that. So $4500 total a month, or $54K a year, adjusted to inflation and guaranteed until we die. So the question is, who else can I buy something like that from and at what price?
Well, it turns out that insurance companies sell stuff like that, they call it an inflation-adjusted single premium immediate annuity. The guarantee isn’t quite as good as one from the government, but it’s almost surely good enough.
At age 70, an inflation-indexed joint-life SPIA pays out about 4% (almost 6% without the inflation adjustment), maybe a little more. So that annuity is worth $54K/0.04= $1.35 Million. It’s not quite a military pension at age 38 with free health care forever, but it’s better than a kick in the teeth.
How much would your check be? Enter your numbers into my Social Security Calculator or download the spreadsheet to use at your leisure.
4) Increase Savings Rate by 10% or Work 8 Years Longer, Your Choice
So what does that mean? If you want to “ignore Social Security” in your calculations, then you’re going to have to have a lot more money to retire safely than if you are going to include it. How much more? Well, $1.35 Million more in my case.
Over 30 years at 5% real, that’s $19,350 a year. For a doc making $200K a year, that’s saving 10% more a year.
Alternatively, let’s assume you’re saving $40K a year. You thought you were going to need $2 Million to retire, but since you’re ignoring Social Security, you now think you’ll need $3.35 Million. How much longer will that take at 5% real while saving $40K a year? Well, it’ll take 25 years to hit $2 Million, but it’ll take 33 years to hit $3.35 Million.
So, you can ignore Social Security if you like, but you can’t ignore the consequences of doing so. Those consequences are either saving 10% more of your salary or working an extra 8 years. Your choice. (I suppose some combination of the two would be okay too.)
5) Play It By Ear
A better solution in my view is to just play it by ear. If you’re thirty, maybe use your worries about Social Security to get you to save a little more than you otherwise would. If you’re fifty-five and Social Security still looks like it’s alive and kicking, well, maybe it’s time to start counting on it a bit.
What do you think? Do you count on Social Security when running your retirement projections? How do you do so? Do you discount it somehow? Why or why not? Comment below!
11 thoughts on “Top 5 Reasons Not to Ignore Social Security”
I heard the program will be fine if we just get rid of the cap. Why not fix it that way?
I’m not planning to depend on Social Security benefits, but who knows. Hopefully, everything will work out like I planned and I can use my Social Security benefit as a donation fund. My FIL is doing that and I think it is pretty cool.
#5 is a classic sliding scale approach employed by lawyers oftentimes when we don’t have a good, one-size-fits-all answer. And as much as I like to crap on my own profession, I think it’s sound advice here and probably one of the few times you should be proud to borrow from the law 🙂
I think some people ‘don’t count’ (on) social security because the idea of not receiving it until you are 70, when our grandparents lived well on it (nostalgic reflection perhaps) from their 50s, makes it feel intangible. I look at it as an unvested stock option or long term incentive, I don’t count those in my networth until I actually own it.
The reason they keep raising the social security age is to hope people die off before they collect benefits, the government is literally betting on me dying before they have to give me too much money.
I plan to re-evaluate my financial needs at retirement, early or otherwise, and decide when to file for social security, but if I’ve saved and invested well, to be decided. Maybe I collect and donate it, there will likely be people who could use it more than me, if I did plan properly. *shrug*
In 2034 SS doesn’t go broke. The benefit by law will reduce to 79% of the present if there isn’t enough to maintain the present. That reduced benefit is slated to last till 2090 (when I’m 138). Congress needs not do anything for this to happen. If you wait till 70 to claim SS at 79% you will be back to about FRA benefit.
Social Security remains a horrific ‘investment’. If I were allowed to opt out tomorrow and just be given the actual $200K+ I have paid into the system in the last 15 years(no interest, just the actual cash paid in), I’d take it in a heart beat.
However, since that will not happen, one should make the best of it. Yes, it is highly likely one will not get what one would based on current rules if you are now in your 20s/30/40s . But you will get something. Just estimate low and go with it.
I 100% agree with everything you said here, and often get in debates about this, but it seems irrefutable – SS is an asset just like any other, there’s no real reason not to count it except for being (too) overly conservative, but you probably need to make reasonable discounting for political risk into account.
That being said, can you share the assumptions to arrive at that $1+M number?; seems way off to me. Maybe correct for the number for a currently 70 year old, but for someone in, say, their late 40s, but only starts paying out at 70, the price of that annuity would be less than half of your number.
I’m assuming the point is to arrive at a present asset value; I use a calculator that results for me and my wife about $350,000 (joint monthly inc of about $2500), and I value it at 70%, about $250k, given likelihood in some reduction in the formula in the interim. Indeed the price of a private annuity would be higher, but should be in the same ballpark.
I factor it in. Im 48 and plan to retire at 51. Instead of using a 3.25% swr im using a 3.65% swr. I calculated a 15% reduction in my SS benefits to figure out what my comfortable swr would be for me.
You know I think you’re right about #1. It is immensely popular and no politician no matter how foolish would be popular much if they tried to get rid of it. But hopefully people understand no one should be relying on someone else so far out of their control for their general well-being in old age. Definitely shouldn’t be a government entity!
I wrote about social security being compared to a Ponzi scheme as you need more and more people at the base to contribute to support the people currently at the top.
It definitely is not sustainable at its current iteration as it is projected to run out of money in the late 2030s.
I agree that it will never be eliminated but there will be definite changes to benefits as well as likely increasing taxes or raising the current cap of income subject to social security tax.
Given that I plan to retire in my early 50s even in best case scenario I don’t expect more than $20k/yr in benefits given the 0s that will be put into my calculation based on years not worked.
I have not really figured what the benefit will truly be to work into my retirement calculations so I chose not to include it. Anything received will be a bonus
Your spouse will receive one half of your benefit up your full retirement age, not to age 70.