A Different Way to Think About Social Security

Maybe the Social Security benefits you are going to get in retirement are being unfairly maligned. They could be more valuable than you think.

Let me explain.

Invariably (and correctly) the traditional advice when it comes to thinking about how you are going to fund your retirement is “don’t plan on relying on Social Security.”

And you shouldn’t.

It’s not that Social Security is going to disappear any time soon—there are too many people depending on it to one degree or another for politicians to let that happen—but it is because the amount of money you are going to receive once you retire is not all that much.

A 54-year-old who is entitled to receive the maximum benefits will receive only $2,352 a month if he retires at age 66 (which is now full retirement age—or the age at which people born between 1943 and 1954 are entitled to receive unreduced Social Security benefits. To figure the Social Security benefits you are entitled to go to www.socialsecurity.gov.)

And most of us are going to be hard pressed to live on $2,352 a month.

Still $28,224 per year is nothing to sneeze at.

I was trying to figure out how to give you another way of thinking about how much your Social Security benefits could be worth, and I hit on this: “I wonder how big an annuity I would have to buy to have it pay me $28,224 a year?

An annuity, as you know, is an arrangement where you receive a regular series of cash receipts or payments.

Traditionally, it works as a contract between you and an insurance company. (It is not insurance.) You pay the insurance company a fixed sum of money—either in one lump sum, or through a series of payments—and the insurance company promises to pay you your money back, with some sort of interest, on an ongoing basis at some point in the future.

How much, I wondered, would a 54-year-old have to give the insurance company to get back $28,224 starting at age 66?

The answer, according to the math supplied by the annuity calculator at www.1728.com is $564,905.22. (This assumes the current 54-year-old lives to age 79, which is about normal according to the actuarial tables, and the annuity is earning 6% annual interest, which seems a reasonable assumption.)

What kind of annuity would that Baby Boomer need to buy if he retired at age 62 (the earliest moment he could take Social Security?)

Well, his monthly benefit would be $1,756. And using the same assumptions as before, that would require an annuity equivalent of $630,171.91.

How about if he retired at age 70—which would generate the greatest benefits from Social Security--$3,125 a month?

That would take an annuity of 456,779.81.

Looking at the numbers this way, those Social Security benefits are worth more than you might think.