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Social Security Earnings vs Net Worth

As you plan for retirement, it’s important to look at Social Security benefits from a new perspective. Rather than simply viewing these benefits as a source of regular income, consider them as a key asset that can add substantial value to your net worth.

By calculating the present value of projected future payments, taking into account growth rates and life expectancy, you will see that your Social Security benefits can be a significant portion of your retirement wealth.

A unique advantage of Social Security benefits is their annual adjustment for inflation, a feature absent from many other retirement income sources. This inflation-proofing not only protects your income but also enhances the potential growth of your benefits, offering a compelling reason to delay the initiation of Social Security benefits.

Social Security can be seen as either an asset or as an income stream, depending on your retirement strategy. Whether you’re aiming for a certain asset target or a passive income goal for your retirement, incorporating the value of your Social Security benefits into your calculation is essential.

With that said, let’s dive into this compelling and often overlooked area of retirement finances. This article was submitted by Jorge Sanchez M.D.


Components of Social Security Earnings

Most people think of Social Security as strictly retirement income, but there is more to your Social Security benefits than just that.

There are three primary categories of benefits: retirement, disability, and survivor benefits. These benefits are calculated based on your lifetime earnings and the total number of years you’ve been in the workforce.

  • Retirement Benefits: The majority of Social Security payments are retirement benefits based on your highest 35 years of earnings. If you work less than 35 years, the calculation will include the non-working years as $0 when averaging your earnings. Your benefits will also vary depending on the year you were born and what age you start claiming them. You can calculate your expected benefit and learn whether or not you’ve passed milestones known as “bend points” using our Social Security calculator featured here.


Originally, retirees were eligible for full benefits at age 65, but starting for people born in 1943, the full retirement age is higher. You have the option of claiming benefits starting at age 62, but you will receive a reduced amount. You also have the option of delaying your retirement benefits past your full retirement age, which can increase your benefits.

  • Disability Benefits:  If you are unable to work, Social Security may provide disability benefits. Disability benefits are calculated based on your average earnings before you were unable to work. To qualify for these benefits, your work history must meet certain work requirements related to recency and duration.
  • Survivors Benefits: If a Social Security-eligible taxpayer dies, certain family members may receive survivor benefits. Survivor benefits can be claimed by a widowed spouse, minor child, disabled child, or dependent parents. These benefits are based on the deceased taxpayer’s work history.


Your work history and your Social Security tax contributions affect all of the benefits above, with greater earnings and extended contributions yielding higher benefits. Lower-income taxpayers will receive higher benefits (as a percentage of their contributions) than higher-income taxpayers due to the aforementioned bend points.

There are a lot of variables that are factored into your Social Security benefits and they are subject to change based on the political climate, which might make relying on future Social Security payments seem like a risky move. Bearing that in mind, Social Security should only be one aspect of your retirement plan.


Five-Year Rule for Disability Benefits

The Social Security system in the United States includes a “5-year rule.” This is a requirement for individuals seeking to qualify for Social Security disability benefits that states that you must have worked for at least five of the ten years immediately before you became disabled to qualify for Social Security disability benefits.

This is a general guideline, and the specific requirement varies depending on your age when you become disabled. For instance, younger workers might qualify with fewer than five years of work. You can click here for a more detailed breakdown of the exact requirements based on age.

It’s also important to note that the “5-year rule” doesn’t apply to retirement benefits. To qualify for retirement benefits, you need to have earned at least 40 “credits” over your working life. You can only earn four credits each year, so this generally translates to ten years of work.


Taxation of Social Security Earnings

Many people assume that the government does not tax Social Security benefits, but, unfortunately, that is not the case. The taxable amount depends on your overall income and can range from 0-85%.

To determine how much (if any) of your Social Security benefits are taxable, you’ll need to calculate your combined income. Combined income includes your adjusted gross income (AGI) plus non-taxable interest and half of your Social Security benefits.

  • If you’re an individual filer and your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If it’s more than $34,000, up to 85% of your benefits may be taxable. If it’s less than $25,000, 0% of your benefits are taxable.
  • If you’re filing jointly and your combined income is between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits. If it’s more than $44,000, up to 85% of your benefits may be taxable. If it’s less than $32,000, 0% of your benefits are taxable.
  • If you are married and file separately, you will likely pay taxes on your benefits.

Note: the percentages above are the amount of your Social Security Benefits that are taxable – not the tax on your benefits. Your taxable benefits will be taxed at the same rate as the rest of your income.



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Common Concerns About Taxation

Some of the most common concerns include:

  • Unexpected Tax Burden: Many retirees are surprised to find that their Social Security benefits may be subject to income tax. This tax can place an unexpected financial burden on individuals who are no longer working.
  • Complex Calculations: Trying to calculate the amount of tax on your Social Security benefits can be confusing.  It involves calculating your “combined income” and understanding different income thresholds.
  • State Taxes: Some states also tax Social Security benefits, further complicating the issue. Knowing whether you reside in one of these states and how that impacts your overall tax burden can be a source of worry, so click here to see if that applies to you.
  • Increased Tax with Increased Income: If you have substantial income from sources other than Social Security, including investment earnings, a portion of your benefits may become subject to income tax.
  • Effect of Life Changes: A couple’s Social Security benefits may be taxed differently after a death or divorce.


Importance of Social Security Earnings

Social Security benefits are a critical component of financial security for millions of people. Not only do they provide a steady stream of income during retirement, but they can also provide a safety net in the case of disability or support for family members upon your death.

For many retirees, Social Security benefits represent a significant portion of their income. Per a study done in 2021, approximately 40% of retirees receive 50% or more of their income from Social Security.

According to the same study, the average monthly benefit for retirees is $1,825, highlighting that it should not be relied on as your sole source of income.

The highest benefit available in 2023 was $4,555. To achieve this benefit, you would have to have earned the maximum (or more) Social Security wages over 35 years. You would also need to delay claiming Social Security benefits until age 70.


Other Benefits

As we’ve discussed, Social Security isn’t solely about retirement. It’s also a comprehensive program that provides benefits to disabled workers. The Social Security Administration pays benefits to approximately eight million disabled workers, which represents approximately 5% of the working population. Having a system that provides income in such a scenario can mean the difference between financial stability and hardship.

Other benefits, such as unemployment and disability benefits, can have an impact on Social Security earnings.

Unemployment benefits do not affect Social Security retirement benefits, but if you’re receiving Social Security disability benefits, there are limits to how much you can earn without affecting your benefit amount.

Receiving disability benefits from other sources, like worker’s compensation or public disability benefits, could also reduce your Social Security disability benefits.


Relationship Between Social Security Earnings and Net Worth

Social Security benefits can play a significant role in contributing to an individual’s net worth, primarily by providing a reliable income stream during retirement. For many, these benefits form a foundational part of their retirement income strategy, thereby indirectly influencing their net worth and capacity to spend in retirement.

Although Social Security is not directly counted as part of an individual’s net worth – since it’s not a liquid asset you can sell or a debt you can pay off – it still affects your financial standing in substantial ways. It provides a guaranteed monthly income, which can help cover living expenses, reduce the amount you may need to withdraw from savings or investments, and thus help preserve and even grow your net worth over time.

While Social Security earnings play a crucial role in financial planning and maintaining one’s net worth, it’s vital not to overlook other key aspects of net worth that can help you throughout retirement.

  • Personal Savings: This includes any money set aside in savings accounts, checking accounts, or other savings vehicles. It forms a crucial part of your net worth and provides liquidity for both expected and unexpected expenses.
  • Investments: The value of your investments, including stocks, bonds, real estate, or retirement accounts, contributes directly to your net worth. Not only do they have the potential to increase in value, but they can also provide income in the form of interest, dividends, or rental income.
  • Physical Assets: These are items of value that you own, such as your home, car, or valuable personal items. These assets contribute to your net worth and can be sold if needed, although they may also come with associated liabilities, such as a mortgage or car loan.


Although Social Security benefits are an important piece of the puzzle, a comprehensive approach to financial planning and growing net worth should take into account personal savings, investments, and other assets, along with a strategy for managing liabilities.

Achieving a robust net worth typically involves a balanced approach to saving, investing, and debt management, with Social Security forming a meaningful part of the retirement income strategy.


Components of Net Worth

It’s important to have a firm grasp of your net worth when approaching retirement, so we’ll outline in more detail some of its main components.

Net worth is a snapshot of your overall financial health at a single point in time and is calculated by taking the total value of all your assets less the total amount of all of your liabilities.

The following is a list of assets that you can own that have value.

  • Real Estate: This includes the current market value of any property you own, such as your home, rental properties, or land.
  • Investments: This includes stocks, bonds, mutual funds, cryptocurrency, and other investments. These could be in taxable brokerage accounts or tax-advantaged accounts like individual retirement accounts (IRAs).
  • Savings: This encompasses all cash or cash equivalents that you have saved, whether in a regular savings account, checking account, cash, or other type of savings vehicle like a money market account.
  • Retirement Accounts: This includes money saved in accounts specifically for retirement, such as 401(k)s, 403(b)s, traditional IRAs, Roth IRAs, or any pensions.



Liabilities include forms of debt or other obligations toward creditors that fall into the following categories:

  • Mortgages: The outstanding balance on your home loan or any other real estate loans you have, including liens or home equity lines of credit.
  • Loans: These could be student loans, car loans, business loans, personal loans, or any other type of borrowed money that you have to pay back.
  • Other Debts: Any other outstanding debts, like credit card balances, medical bills, garnished wages, or unpaid taxes.

Regularly checking your net worth – but not too regularly – can help you make sound financial decisions. If your net worth is negative, it means you owe more than you own, which could signal the need for changes in your financial habits. Or it could just mean that you’re a doctor in training or early in your career. A positive net worth indicates that you’re on the path to financial stability and, eventually, independence – a key ingredient to a successful retirement.


Factors Affecting Net Worth

It’s crucial to your financial health to understand the factors that influence your net worth.  This will help you make informed financial decisions, whether that’s crafting an effective budget, minimizing debt, or increasing your savings. A variety of elements play into shaping your net worth, including the following:


  • Income: Your income forms the basis of your wealth. It’s the starting point for your ability to save, invest, and accumulate assets. The higher your income, the greater your potential for increasing your net worth, assuming you manage the other factors effectively.
  • Expenses: Your expenses include everything you spend money on, from necessary living costs like housing, food, and transportation, to discretionary spending like entertainment and travel. Keeping your expenses low increases the amount of money you can save and invest, thereby growing your net worth.
  • Savings Habits: The proportion of your income that you consistently save will have a significant impact on your net worth. Saving money allows you to build a financial cushion, prepare for emergencies, and work towards larger financial goals. This money can then be invested to grow over time.
  • Investments: Investment returns can increase your net worth over time, thanks to the power of compound interest. The sooner and more you invest, the more your wealth can potentially grow. However, investing also comes with risks, so it’s important to have a thoughtful investment strategy and consult a financial professional if needed.
  • Debt Management: Debt can significantly hinder your net worth growth, especially if compound interest is working against you. High-interest debt like credit cards can quickly erode your income and savings. Effective debt management involves paying down the higher-interest debt first and avoiding unnecessary debt as much as possible.


Bearing these factors in mind, the path to a high net worth is often not a matter of earning more, but rather a combination of diligent saving, sensible spending, and judicious investing.


Final Thoughts on Social Security Earnings

To summarize, Social Security benefits should be considered a valuable asset that contributes to your net worth — even if it technically doesn’t count towards it. By calculating the present value of projected future payments in addition to factoring in growth rates and life expectancy, you can get a good idea of how these benefits can impact your retirement wealth.

The annual adjustment for inflation in Social Security benefits also provides a unique advantage that can serve as an excellent hedge against retirement risks. Whether you’re aiming for a specific asset target or passive income goal, incorporating the value of Social Security benefits into your retirement calculation is crucial.

Finally, while Social Security benefits are an essential aspect of retirement planning, it’s important to recognize that they should not be relied upon as the sole determinant of your net worth. Personal savings, investments, and other assets can and should play a significant role in shaping your overall financial standing. By taking a comprehensive approach to financial planning, considering all aspects of net worth, and managing debts effectively, you can strive towards a secure and fulfilling retirement.




Can Social Security be part of net worth?

Net worth is typically calculated as the total value of your assets (such as cash, savings, investments, real estate, etc.) minus your liabilities (debts like mortgages, student loans, credit card debt, etc.).

Social Security benefits, being a form of income stream rather than a lump-sum asset, don’t typically factor directly into your net worth calculation. You don’t “own” your future Social Security payments in the same way that you own assets like stocks, a home, or a savings account, so you can’t sell them or pass them on to heirs as part of your estate. Also, the government could theoretically change the rules regarding Social Security payments at any time, which adds an element of uncertainty to their long-term value.


What is more important: income or net worth?

Both income and net worth are important – acting as two sides to the same coin – but they serve different functions. Ultimately, their importance can depend on one’s personal financial situation and goals.

Income is the money that you earn from your job, investments, or business and is essential for meeting daily expenses, such as food, rent, utilities, and transportation. Income can also be used to save for future expenses or invested to generate additional income.

Net worth, on the other hand, is the total value of everything you own (assets) minus what you owe (liabilities). This includes your home, car, savings, investments, and any other assets, minus your debts such as mortgage, car loans, student loans, or credit card debt. Net worth is a measure of your overall financial health and long-term financial stability and is an important metric to track over time, especially when planning for long-term goals like retirement.

While income can provide a certain standard of living, it’s your net worth that truly reflects your financial independence. A high income doesn’t necessarily mean a high net worth, especially if you have a lot of debt or don’t save and invest wisely.


What are the highest earnings for Social Security?

The amount of earnings subject to Social Security tax changes each year, but for 2023, the maximum amount is $160,200.


Is Social Security considered income?

Yes, Social Security benefits can be considered income. However, whether or not these benefits are considered part of your taxable income depends on your overall income level and tax situation.

If Social Security benefits are your only source of income, they generally are not taxable. However, if you have other substantial income (such as wages, self-employment, interest, dividends, and other taxable income that must be reported on your tax return) in addition to your benefits, you could owe tax on a portion of your benefits.


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As you continue on your retirement planning journey, be aware that Social Security earnings are just one piece of the puzzle, and a holistic approach to financial planning is key.

Happy 4th of July!

-Jorge Sanchez, MD

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2 thoughts on “Social Security Earnings vs Net Worth”

  1. The article misses the huge hidden tax on SS Benefits from Medicare. Since most Americans getting SS also get Medicare, that program dips into your SS benefits to pay for this hidden tax called IRMAA–Income-Related Monthly Adjustment Amount. IRMAA is income dependent and also will count double for married beneficiaries. IRMAA is also clever by half to tax you on so-called tax-free investments such as municipal bonds. IRMAA will be $300-500 a month for each beneficiary. This is taken directly out of your SS benefits.

  2. Subscribe to get more great content like this, an awesome spreadsheet, and more!
  3. Biden voted twice to tax social security benefits even though they were paid with after tax dollars while working. I wonder why he hasn’t jacked it up to 120%


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