When it comes to planning for retirement, many of us neglect to see the real value that Social Security provides. Perhaps that’s because active investing is seen as more exciting or because we hear a lot of doom and gloom about Social Security. But your Social Security retirement benefit has extraordinary value.
Let’s consider a married couple, a man and a woman who are both 65 years old that are retiring this year. And of course we don’t have control of this, but let’s assume that they both live until age 95, giving them 30 years of retirement. The man worked and contributed to Social Security, but his wife did not.
In this hypothetical case, the husband’s benefit is $2,000 per month and because the wife did not contribute, she receives only the spousal benefit of $1,000 per month for a total of $36,000 for the year that they retire.
If that income grows at 2% of year (cost of living increase) how much total benefit would they get over their 30 years retirement?
Together they would have a total of $1.5 million paid to them from their Social Security benefits.
What would this couple had to have done with their own investments and savings to match this?
I ran the numbers and I think this is going to surprise you. They would have had to accumulate an investment portfolio of about $900,000 at the beginning of retirement to generate an equivalent amount of Social Security income ($36,000 per year). This was calculated by taking the desired amount of annual income, $36,000, and dividing by a safe withdrawal rate of 4%.
Most retirees do NOT end up with a million dollar retirement portfolio. Most have far less.
But these small amounts of Social Security taxes that were collected throughout the years gave them the EQUIVALENT of a $900,000 investment portfolios. That is probably quite a return on investment for each of those dollars deducted from his paycheck for Social Security taxes.
In fact, I was curious what kind of a return on investment each of the dollars they he may have contributed to the Social Security system actually had. So I did some math.
Well let’s assume the man in our couple contributed for 35 years at the maximum contribution rate for Social Security (6.2% of income up to a maximum wage base). They would have contributed just over $100,000 to Social Security during that period of time. So they contributed just over $100,000 and wind up with an equivalent investment portfolio of $900,000 at age 65.
With a little reverse engineering, I calculated that the return on investment for their Social Security contributions over those 35 working years is nearly 14%.
So how valuable is oft neglected Social Security to your overall retirement picture? I’ll answer that question with a question: Where else can you get a such a high return on investment?
Social Security of often overlooked and discounted when it comes to retirement planning but the value it can add is truly incredible. You can even maximize Social Security to get even more money and an even higher return on investment through strategic planning.
If you have any questions about maximizing your Social Security retirement benefits, please contact me here.