Although Social Security is underfunded by ~22%, I believe Social Security will make us all millionaires in retirement. Let me explain, especially with the massive cost-of-living adjustment for 2022.
When I was driving home from San Mateo one day I took a wrong turn and ended up at Hillsdale Mall. There I saw an amazing relic, a Barnes & Noble bookstore! Before 2011, I used to spend an hour every week reading personal finance books at my local San Francisco B&N. It was a lot of fun, but like the trees in Dr Seuss's story, The Lorax, the stores began disappearing.
There's nobody I know under the age of 40 who believes Social Security will be paid in full when it's time to collect. Maybe half of what's owed, but certainly not 100%. As a result, many have smartly decided to write-off Social Security from their retirement plans in order to focus on accumulating enough assets on their own. Depending on an inefficient government during our golden years is dangerous. Instead, we must max out our 401ks and IRAs, while investing even more into after-tax investments.
Out of all the books on the Personal Finance bookshelf, I decided to pick one up on Social Security because it's been off my financial radar screen for years. Here are some important bullet points we should all know about a program that will make us all millionaires if we work long enough!
THINGS TO KNOW ABOUT SOCIAL SECURITY
* Social Security's taxable FICA limit has increased over time due to an inflation index. For example, the maximum was $22,900 in wage income in 1979. Today, it's $147,000. It's best to earn at least the maximum taxable wage income plus an amount up to roughly $250,000 in Adjustable Gross Income (after deductions) per person. You'll see an immediate 6.2% – 12.4% salary increase on every dollar over $147,000 you make given the lack of FICA tax. But since we have a progressive tax rate with deduction phaseouts, making much more than $250,000 AGI doesn't do you much good. You'll probably just be overly stressed and unhappy!
* A 60-year-old couple who earned at or above the payroll tax ceiling their entire lives would get $31,972 each or $63,944 a year collectively if they began taking benefits at 66, which is their Full Retirement Age (FRA). $31,972 is not bad at all based on today's risk-free rate of 2%. In fact, $31,972 = $1,598,600 in assets at a 2% rate of return! Let's say the government lies to us and only pays 70% of what was promised, our Social Security is still valued at around $1,100,000. Take a look at https://www.ssa.gov/oact/quickcalc/ to calculate your estimated benefits in future dollars for yourself. We know that income generating assets are very valuable in low interest rate environments.
* Some of you have wondered how you'll ever be able to create enough meaningful passive income during your lifetimes. Problem solved! Social Security can be looked upon as the ultimate passive income generating machine because it's automatic until you die. The real debate is whether you try and start collecting as early as possible (62), or wait until 70 to get a bigger monthly check. Conventional wisdom is to wait for as long as possible before collecting since we're all living longer. But if you think you're going to die before ~80, then go ahead and collect that money!
* In order to qualify for Social Security, you need to have worked for 40 quarters, totaling 10 years. You don't have to work 40 consecutive quarters either. You can work for three years out of college, take a two year vacation by getting your MBA, and then work another eight years to show the world you didn't waste all that time and money. Once you're at the 40 quarter mark, THEN retire early and write a personal finance blog! Anybody who retires early before working 40 quarters is not being responsible with their finances.
* Social Security benefits can be passed on to your current spouse, your ex-spouse(s), your young children, your disabled children, and even your parents if you die a gruesome and sudden death before 62! And, if you decide not to get legally married so the government can tax you more during your lifetimes, then you are SCREWED! This is because despite you paying all that FICA tax while alive, when you die, your Social Security benefits are returned to the government rather than to your unwed spouse.
* If you would like to ensure your Social Security benefits don't go to waste, a good strategy is to delay marriage for as long as possible to avoid paying the marriage penalty tax, then get legally married at the age of 61, a year before you can start withdrawing from Social Security. Once you're married, the goal is to then live for as long as possible in order to collect as much Social Security benefit for as long as possible. Shoot for age 100, it's a nice even number. If your spouse dies before you do, his or her benefits will go to you and not to the government.
* The Full Retirement Age (FRA) is 67 for those born in 1960 or later, 66 if you are born between 1943-1954, and 65 if you were born in 1937 or prior. What happened to the years 1955-1959? Well, it's basically all 66 years old and 2-10 months for FRA. Yes, the government does not want to simplify things by saying those born between 1943-1959 because they can create confusion among collectors. And the more confusion you can create, the less empowered citizens are. The less empowered citizens are, the less likely they will be on the ball to collect what is owed. They will also probably pay tons of tax penalties given it's so confusing to decipher a 70,000 page tax document.
* Social Security benefits are inflation-proof! On January 1 of each year, Social Security adjusts all the benefits its paying by a consumer price index. The current maximum Social Security payouts might be around $30,000 a year currently, but in 20 years, they will be much higher! See for yourself by selecting the “inflated (future) dollars” option. I inputted a modest $50,000 a year income until 67 and got over $3,100 a month in future dollar payments. For those of you who are lucky enough to win the pension lottery, hopefully your pensions are also adjusted upwards as well. To supercharge your Social Security, all you've got to do is move to a lower cost state in retirement where the cost of living is lower.
RETIREMENT PARADISE AWAITS FOR SOCIAL SECURITY RECIPIENTS!
We all know the government is going to figure out a way to beat us in the end. So, despite all these positive data points about Social Security in this post, I still think we shouldn't get too excited. Let's continue to assign a big fat ZERO next to Social Security as part of our net worth calculations. Don't even include a line-item actually.
But if the government finds a way to honor its commitments, then millions of medium-to-high income people who've worked their entire careers will be millionaires by their mid-60s. I prove this by capitalizing the expected value of our Social Security annual income stream by the risk free rate of return e.g. $31,792 in annual Social Security benefits X 70% due to government's broken promises / 2% 10-year bond yield.
Add on our respective 401k balances after continuous max contribution, and it looks like everybody who works for at least a couple decades will be a millionaire by retirement time! Anybody confident enough to spend all their money now before finding out?
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I’m glad I found you and subscribed for your newsletter. I am not as informed as I need to be on retirement, social security, etc. I’m turning 61 next week, guess I should consider marriage, so that uncle sam doesn’t take what’s left of my SS. I’ll have to think about that. My dad died at 60, but my uncles and aunt on his side have lived into the 90’s. My mother lived until she was 89. So, I’m thinking of working to the max. The truth is, right now I’m working at getting out of debt for the third and last time. However, God has been good to me. My employer was an affiliated agency of the city government I live in. We were connected with the city by our employer paying the city to use their services (such as human resources, finance, etc.,) and in turn, the city made us a part of them. Our agency come under a commission governed by the state of Virginia. Due to my employer’s financial woes, the commission asked our agency to look at how much we are paying the city and if too much, requested we become an independent agency with our own benefits and get out of the city. And that is what has happened. Basically, I’ve been forced to retire from the city early and will be collecting my retirement pension on top of continuing to work for my employer and continuing to get paid twice a month as usual. Additionally, due to my debt, I am cashing out my 457 retirement plan and paying off my entire debt. I’ll also have to restore my credit score, fell way down. I plan on putting some of what’s left of my 457 plan and my monthly retirement pension into a new retirement plan (401K, or IRA, etc. Do you have any suggestions?). Anyway, as I have mentioned, I’m not too keen on matters concerning retirement and planning for my real retirement and maybe you can direct me to a website, take a class, or maybe some books to read up on to learn. Appreciate any assistance you can provide.
Read a quote the other day on SS. “If you don’t need it take it at 62!”. Sounded counter intuitive but sort of made sense once I thought about it.
SS is part of my mom’s retirement income (other is 50% of my dads pension, investment income. Come tax time one thing I’ve noticed is if she gets a larger ish cap gains hit or some other unplanned income—bam. 85% of SS is taxed vs. like 50% of SS. Quite an impact.
SS will always be there. It may be paid with printed money, and have reduced COLAs, means tested or other gimmicks, but it will be paid.
After I turned 55, I started including it. They generally do not make changes for the over 55 crowd.
That is why increasing the minimum wage may be good. More SS taxes. Of course, you have to be worth more, which is a downside for some.
I’d include SS in retirement if I was over 55 as well. I just would if one is 40 or under.
Good point about raising the minimum wage which raises SS taxes!
Hey,
This is an awesome article about SS, and I enjoyed reading some of these facts about SS. I never knew some of these so it was very interesting to read through them.
I really liked the the suggestion to just hold of getting married until about 61 and life until I am 100. That’s awesome, I just which I would have read this article maybe 10 to 15 yrs ago :)
You know another interesting fact is how many people can actually opt out of SS. That would be an interested article as well.
Well, I hope you’ve had a great marriage over the past decade at least! :)
Nobody can opt out of SS if they are making an income. The government will find them and crush them!
1. Social Security is already means tested. The payout formula favors those who made less by giving them proportionately more $ than those who earned the cap.
2. The adjustments will be to raise the cap in a linear fashion or create a doughnut hole where it isn’t taxed for a bit then comes back into play again at a figure like 250k. They will raise the age of eligibility for those under 40 to 64 to 69 with 69 being the NRA. There will be the usual phase ins to keep everyone confused.
3. They can change how inflation is computed and decease the increase in payments.
These aren’t hard fixes in theory but the politics are rough obviously. The real crime is that we shouldn’t be in this position. Had they managed this like a pension for the last 80 years in a real lock box then the money would be overflowing. That is not what happened. Can’t do anything about that now.
While I think it will be there, I go very conservative and don’t factor any social security payments into my long-term plans.
The more the sub 40 generation come into power and represent a bigger portion of the living, the easier reform will get.
I just wonder how many people realize how expensive Universal Health Care is now for those who make more than the subsidized income levels. It is extremely painful.
Sam – this is OT, but did read James Franco’s article about working at McDonald’s. I know you share a similar experience that you have written about many times. Anyway – thought it might make for a good post for you somehow. I never worked in the food industry – but it seems like a lot of successful people have.
I didn’t, but there’s not a lot of worse minimum wage jobs than starting off at McDonald’s. So, everything is a blessing on the upside and nothing is taken for granted, b/c none of us want to go back to working in fast food the older we get!
When first enacted, the SS program was not intended as the sole source of one’s retirement income, and life expectancy after retirement was only a few years. (But remember too that SS is not only a retirement but a disability program.) On the other hand, pensions (which are virtually non-existent in the private sector today) were a far larger component of a worker’s retirement plans. Having recently retired myself, I am looking at my 67th birthday in a few months but do not plan to take SS benefits myself until 70. This is because I saved pretty well for retirement in my IRA, and if I defer benefits I will have a far larger monthly check than if I started already.
I’ve read all sides of this issue and I do not think the program is in the kind of catastrophic condition some here believe. A small increase in the payroll tax cap could easily put SS on the road to solvency. It should not be forgotten either that currently SS keeps 20% of all people over age 65 above the federal poverty level, and when it was first enacted, about 50% of the elderly were living in poverty. Opponents to the program should consider if they want a return to such conditions, and though I won’t around to verify this, I think those who have convinced themselves they won’t see a dime from social security are going to be pleasantly surprised.
But who’s going to pay for it? Nobody is willing, especially not the sub 40 year olds who expect nothing. Especially not the over 40 year olds who’ve spent a long time paying into the system already. Definitely not the 62+ year olds who are no longer working!
Try these for a start:
https://www.fool.com/retirement/general/2012/10/15/5-huge-myths-about-social-security.aspx
https://econproph.com/2010/03/06/social-security-is-not-in-trouble-and-does-not-need-to-be-cut/
https://www.nytimes.com/2010/08/16/opinion/16krugman.html?_r=0
The fact that the “sub 40 year olds” expect nothing in fact is proof of nothing. It could be nothing more than resentment towards an older generation, or right-wing ideology. But I don’t see compelling reason to believe the program is going away any time soon, especially when it has worked very well in the past and the problems are relatively easy to solve.
Do you think perhaps you’re more optimistic on Social Security due to your current age? It’s kind of like a mega-millionaire saying “Money doesn’t matter, follow your passion!” I would be very bullish as well if I was within several years of collecting, or collecting right now.
If solving Social Security is relatively easy as you say, why hasn’t the gap been solved?
I didn’t realize an underfunded Social Security was a right-wing ideology. It’s just fact.
“The concepts of solvency, sustainability, and budget impact are common in discussions of Social Security, but are not well understood. Currently, the Social Security Board of Trustees projects program cost to rise by 2035 so that taxes will be enough to pay for only 75 percent of scheduled benefits. This increase in cost results from population aging, not because we are living longer, but because birth rates dropped from three to two children per woman. Importantly, this shortfall is basically stable after 2035; adjustments to taxes or benefits that offset the effects of the lower birth rate may restore solvency for the Social Security program on a sustainable basis for the foreseeable future. Finally, as Treasury debt securities (trust fund assets) are redeemed in the future, they will just be replaced with public debt. If trust fund assets are exhausted without reform, benefits will necessarily be lowered with no effect on budget deficits.”
Quoted straight from: https://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html
To briefly take your points in turn:
a) I recognize my personal situation from SS is likely favorable. That’s not the point, which is the long-range survival of the program for the future.
b) We have a do-nothing, fractured Congress that won’t address key issues like immigration or tax reform, but has wasted time and taxpayer money 65+ times in a futile effort to repeal Obamacare. Do you really expect them to take up something as important as entitlement reform?
c) The passage you highlight is not an absolute fact but a projection based on current trends, and you do not address the equally important projection that “adjustments to taxes or benefits that offset the effects of the lower birth rate may restore solvency for the Social Security program on a sustainable basis for the foreseeable future.” In any case, even if the program meets 75% of today’s benefits, that’s a far cry from “expecting nothing.”
And that’s why I bring in ideology. Restoring solvency to SS will require either adjustments to taxes or benefits, and right-wingers oppose tax increases because they believe government is inherently wasteful, inefficient, and incompetent. If on ideological grounds you reject the possibility of a solution via taxes, then of course the result will be as you expect, and our current political system is dominated by right-wingers. I don’t feel like spending a half-hour summarizing what you could easily read for yourself by Googling “why do Republicans hate social security,” but plenty of material is out there.
One final point on this question of ideology, as this passage from Wikipedia puts very well the relation between conservatism and reduced funding for spending on programs like social security:
(Quote:) “Starving the beast” is a political strategy employed by American conservatives in order to limit government spending by cutting taxes in order to deprive the government of revenue in a deliberate effort to force the federal government to reduce spending.
The term “the beast” in this context refers to the United States Federal Government and the programs it funds, using mainly American tax payer dollars, particularly social programs such as education, welfare, Social Security, Medicare, and Medicaid. (End quote)
The problem for conservatives however is that these last three are very popular programs. And so we have on the one hand people wanting to reduce federal spending, and then complaining that they won’t see any benefits from social security (and resenting the fact that they are paying for an older generation). But you can’t have it both ways. And that’s my last comment on the issue.
It’s OK not to care about the long-term survival of SS if you are going to be able to collect yours. I don’t blame you, and I don’t blame anybody who is going to see 100% of their Social Security benefits for not caring.
So the real question is this: Will YOU be willing to cut your SS by 30% for the long term survival of SS? Will YOU and your generation be willing to accept a cut and make some sacrifices?
And if you are, this is fantastic. Let’s create a 1X1 cut/benefit, starting with YOU and with ME. You send me 30% of your SS, and I promise to give 30% of my SS to the next generation 30 years from now.
To expect me to personally give you 30% of my benefits, while you pledge 30% to some vague undisclosed members of “the next generation,” is not a level playing field. The only equitable solution for all is either for payroll taxes to be raised or benefits lowered across the board for the long-term health of the program.
However, I quote you something I wrote here on November 26, 2012, in reply to the thread https://www.financialsamurai.com/should-i-borrow-from-my-401k-only-if-you-are-a-petulant-fool :
“For the record: I fully support major entitlement reform so that succeeding generations can also benefit, even if that means some reduction in my own benefits.”
I trust that answers your question.
SS can indeed be cool. I have a 64 y.o. friend with an 8 y.o. (this is his second time ’round raising kids). Next year, he’s going to start taking his benefits. Why, you ask, is he not waiting until full retirement? Because his 8 y.o. will also start receiving benefits (50% of his dad’s) until he’s no longer a minor – 10 years’ worth. College = paid for. It adds further inspiration to Sam’s strategy of waiting until 61 to marry :-) But this guy would’ve had 50% more reason to start at 62, but he didn’t know the rule until now.
Very interesting! Are you saying the 64 yo friend will get 100% of what’s owed to him PLUS his 8 yo getting 50% of what his dad is getting for 10 years? In essence, a 150% payout? Is that right?
Yes, FS, that is correct. If one has had multiple wives (each married at least 10 years), they are all entitled to his S.S. as well, whether he is alive or not. It’s all in the book.:-)
Nice. FULL benefits for each of say, 5 wives? Or 1/5th of his full benefits for each wife?
Kinda like the umbrella policy post I wrote. Get one for $3 million, but if you have 10 people in a household that incur 10 separate liability incidents, that’s $30 million, baby!
It pays to get busy!
Full. Each one. A 70-year old man with a current wife (she has never worked) married to him for over nine months will qualify them for 1.5X his full benefit, and current wife will get the full benefit if he died the next day. In the meantime, the five ex-wives, each married to him for 10 years (and not a day less) qualifies for his full benefit. LDS and Muslim multiple wives aren’t recognized in the U.S….yet. Looking forward to the ex-husband S.S. claims on the gay marriages, as well as the legally adopted children and illegitimate woodscolts. All millionaires! How about a family wedding in the backyard with all the exes, their spouses, friends-and-family, and the wedding procession slips on an icy walkway while the attendees get a soft-tissue neck injury trying to get the pileup on their iPhones? I’m thinking 150 claims on the umbrella liability, 150 SSDI claims, and all dependents filing for SS claims on the primary. It could happen!
There should be another option on your survey: I am financially planning for retirement without factoring in Social Security, but I fully expect it to be there.
There is a ZERO percent chance Social Security is going away entirely. ZERO. If NOTHING is done, Social Security could still go forward paying 70% of benefits pretty much indefinitely.
And the options to fix it are simple and plentiful, ranging from means-testing benefits (i.e. retirees with greater assets would get less Social Security); raising the taxable FICA limit on Social Security (frankly, it’s dumb that you stop paying Social Security once you magically hit $118k….you could eliminate the limit entirely, offer some cut to SS taxes on lower/middle incomes, and end up ahead both in funding SS and in terms of giving people more take home money in their pockets); raising the retirement age (dumb in my opinion, but YMMV); taxing all income and not just work income for SS (in other words, dividends and capital gains would have some type of SS tax placed on them; maybe not the current rate for wages, but something nonetheless); increasing legal immigration to receive more SS taxes from immigrants; and/or changing the COLA adjustments/formula to be a bit more conservative in payouts.
Politically speaking, all of these have problems….but all are INFINITELY preferable to elected officials than the wrath that would rain down upon them if Social Security were to fail, or even to be cut across the board by 70%. I’m 35, and I have no doubt that Social Security will be there in some form pretty similar to what we have today when I retire; even though I don’t factor it into my plans now (still too far away to really forecast it, and I’d rather focus on my own “self-provided” retirement savings), I still fully expect to get it and benefit from it.
That’s having your cake and eating it too. That type of thinking might not make you struggle as much for your own financial independence compared to if you expect NOTHING.
It’s like pretending to live poorly and struggling when your parents are mega rich. You know deep in the back of your mind that you’ll always get bailed out. As a result… why bother trying so hard?
For the ss issue to be fixed a movement needs to start at the demographic level of 30-40 year olds. Shame on us for simply saying it’s a bad program, underfunded and won’t be there for me. The older politicians who know the program is broken but won’t go near reform in order to win the older vote simply love this laziness.
America should be the model of excellence, particularly when it comes to a program such as this, but instead we are an example of failure. Politicians and the media would like for you to think this is a complicated matter, it isn’t.
1)Raise the retirement age, if older voters don’t like it, raise it on everyone under 35 by 5 years, we all think we won’t get any funding anyways, so what is the problem?
2) lengthen period for inflation adjustments.
3) lift salary cap, tax all annual earnings. (This will be unpopular but will create solvency)
Some of the above may be unpopular but it will create a solvent program. With solvency comes surplus and actual investable assets. Could America have a SWF for its citizens? Gasp….imagine.
These are the 3 most basic fixes. If they can’t be addressed then significant reform needs to occur. Alternatively give the opt, I know I can manage to save and invest the 7,300 I will save this year and every year going forward, but have no confidence others can.
Singapore and Australia are the models for an amazing social safety net.
It’s interesting when you spell out the $7,300 a year we’re currently max taxed. That does seem like a hefty amount… but doable for someone making $100,000+.
I agree. Australia’s superannuation forces retirement savings at ~ 9.5% with incentives to put even more away, and employers are required to put between 9-12% for employees. I think I heard the minimum contribution is going up, too. I like that idea as a concept and think, at least in theory, it is a better alternative to our social security system. I’d feel better if my government required savings were segregated (and would of course expect to pay taxes to provide a social safety net for the very poor).
I think social security will be around in one form or another. Seniors (AARP) are a very active lobbying group and older people tend to vote. As a Gen X (or Millennial), we just have to be ready to join and spend some of our retirement hours calling/writing to congress people and senators, writing letters to Op-ed sections, and being a pain in the ass to state/national governments.
That is a good optimistic outlook about the AARP being strong lobbying groups with big bucks.
you shouldn’t divide by an interest rate to value it. it’s a life annuity deferred to age 66 or whatever, most will collect 10 to 20 years, not forever.
I’m depressed now.
Thank goodness I left Corporate America when I did then!
Funny, I read Financial Samurai’s article earlier then just came upon this
https://www.forbes.com/sites/janetnovack/2015/05/08/harvard-study-social-security-in-far-worse-shape-than-official-numbersshow/
I voted earlier that I do include social security in my retirement plans because I believe social security wont be there for me.
Harvard schmarvard. This is Financial Samurai! Where analysis is done efficiently and with solutions!
Those who can’t, teach. Remember? :)
What worries me about SS is the Boomers that planned on full benefits. Both my husband and I come from long-lived families. If the inevitable cuts/means testing are applied to Boomers, we could be subsidizing our parents into our mid 70s in addition to not getting SS ourselves.
Taking Millennial paranoia to a new level.
But isn’t subsidizing your parents a good thing? They took care of us for 18-22 years after all.
Yes, it is and they did. My point is that the discussion focuses on not planning on getting SS. But if you really believe that SS won’t be there, not only do you have to adjust your savings target for the lack of income, but also for the added expense of supporting parents. You get hit from both sides.
I believe SS will be there in “some form” for generations to come. That’s because a) the majority of congress will likely always be members of the senior set and more importantly b) Seniors will always vote in droves (they have the time and interest in such things). Even wealthy seniors want their SS check as they believe its their money (I mostly agree). So those that think SS will not be there at all when they retire don’t understand that politicians from both parties know very well who goes to the polls and who doesn’t. I would have preferred you added a poll item “it’s in my plan but a small enough percentage that I will just tighten the belt a little if need be”. The “will my money last” projections I have done with multiple tools show green (monte carlo) with more money left over than I started with if SS is included for my wife and I and are slightly yellow without SS. So SS does make a difference for me (and I suspect many others here) cuz a million dollar swing (I agree that’s the rough value of SS) is significant.
It’s only a million dollars if you live long enough to collect it. Not everybody does.
that’s not the point. “rough value” is a million dollars, meaning it would take roughly a million dollars to generate an equivalent income (to SS)
Let’s just have you go with Choice #1! :)
“I don’t include Social Security at all in my retirement plans. If it’s there, great. If not, I’ll be just fine b/c I’m actively saving and investing for my future. (86%, 394 Votes)”
Dangerous to say you aren’t going to depend on it, but then actually do a little. Just write it off to ZERO.
My biggest concern isn’t whether I’m going to receive the same value from SS as I put in. I’m more concerned about the government somehow devaluing, restricting, or “liberating” my personal retirement savings be it IRA, 401k, or private investments.
The other shoe from 2008 has yet to drop, and it’s not going to be pretty when it does.
Wait, what’s the other shoe from 2008? A lot of shoes got dropped!
The book sounds like Laurence Kotlikoff’s “Get What’s Yours!” I also recently read it, although am still eight years from eligibility. Kotlikoff is running for President in 2016, btw. I always loved browsing bookstores, but between Amazon and Kindle…oh well. If you like a book, buy it! Support your satisfactions! It is fine to be thrifty, but if you receive something of value in content, support it! You could do worse than to buy this book, for your parents at least.
Lots of little gems in this book, including the fact that a spouse must be married at least nine months before being eligible for survivor benefits (unless the death is ruled ‘accidental’ by a faceless panel of S.S. bureaucrats). There is also guidance to “file-and-suspend”, which allows ‘spousal benefits’ to be taken by one partner based on the other’s earnings. In the meantime, the partner who has suspended benefits will continue to be eligible for an 8% increase each year up to age 70, at which time the partner taking ‘spousal benefits’ can either take their own benefits or continue to take spousal benefits at the new increased rate, whichever is higher. This can turn into $40-$60K in additional benefits per couple.
For 2014, the 25 percent tax bracket ends at $148,850 for married couples filing jointly. This is about $30,150 less than the doubling of a single-filer. What is rarely noted is that there is a ‘marriage tax benefit’ for every dollar below that amount. Hey, somebody has to pay for all that Obamacare and immediate eligibility for S.S. and Medicare for all the “New Americans” arriving!
My wonderful wife and I plan to take benefits as early as possible for two reasons. 1) 85% of the S.S. benefit is taxable beyond $24K/yr in earned income (this includes IRA, 401(k), 457(b), etc. withdrawals). 2) the ‘break-even’ for taking early benefits (62 at 70%) to our regular payout (67 at 100%) is age 78. Not only is the risk for an early demise removed for 15 years (not once, but twice for each of us), but we feel the utility value of a few hundred dollars a month in extra benefits after age 78 is lower than in earlier years. But, it is nice to be aware of the choices.
JayCeezy, does this mean you’re now going to pay me a couple bucks for each article I write? If so, I could be RICH, RICH, RICH!!
Now, let me go read your other paragraphs in your comment.
OK, read. What about taking a STAGGERED approach to withdrawal? One takes it early, one takes it late?
The 8% annual increase from 66 to 70 that JayCeezy refers to should not be overlooked. Consider that that is a time in your life when the “experts” say you should be shifting into less risky asset classes, like bonds. Social security gives you an opportunity to generate a risk-free 8% return for nearly a half-decade. Hard to pass up . . .
FS, my “buy the book, support your satisfactions” comment wasn’t directed at you, but at everyone who might be interested in the subject and this book. There is no better resource on S.S. than this book, at the moment, and that is why it has been a best-seller since February 2015. Amazing for such a dry subject. The author Kotlikoff also has a commercial software program, ESPlanner allowing Monte Carlo simulations and trial runs with different Social Security strategies. This is where your “stagger” approach can be back-tested. Not recommending anybody do anything, but as I said before it is nice to be aware of the choices.
Most likely social security will be means tested in the near future, so if you have over $x in assets you will not get any. Hence, I don’t expect to collect anything from SS, ever.
I’m 23 and don’t expect to see a single cent of Social Security. I always have and always will view it as a tax (i.e. an additional income expense that’s gone forever). I would gladly take a heavily discounted buy-out tomorrow! Something like 70-80% of present value of expected lifetime Social Security benefits – with a lump some of a couple $100k I could put a serious down-payment on a house (and maybe an additional rental property too)!
Ah, but the shortfall as admitted by the US GOV is about 25% currently. How about a 80% discount to PV? :)
You will help older folks live!
A 2% rate of return is nothing to write home about. I could easily get a much higher rate of return without having to wait till age 67 to collect assuming the retirement age is still 67 by then (doubtful).
Sorry, Sam, but I’d much rather be exempt from having to pay into it at all like those living overseas or the Chicago teachers union are so that I could get much more than a measly 2% rate of return.
Can’t be except. The government is omnipotent.
My take on social security is this. There simply is no way for the program to continue in its present structure. There must be significant reform to the whole program – through increased taxes or benefit reduction. There seems to be little appetite in this country for increased taxes – but that is certainly on the table. As for benefit reduction, we are likely to see means-testing and raising the retirement age.
I suspect (and am hopeful) that any means-testing reforms will ultimately undermine the popular support for SS – which has been falsely sold as a program you pay into and therefore you get your money out. Means-testing will show it to be more of what it really is – which is welfare program that you have no right to receive (Congress can take away your “benefits” at any time). Means-testing will affect certain people who will have believed (rightly to some extent) that they are due their benefits after a lifetime of paying full FICA. Once you start taking away SS from people who have paid a lifetime in taxes, support for the program as a whole will erode.
I’m not sure what this all means, but I believe that Generation X will be the generation that gets “screwed” (for lack of a better word) on SS. Gen Xrs will see less benefits paid out despite a lifetime of paying FICA taxes – at the high rate and income limit. The Boomer generation has too many votes and because of that no changes to SS will be made that will affect them. The millennial generation also has a lot of votes, but they can sustain a reduction in SS benefits if it is coupled with a reduction in FICA taxes. As a high-earning Gen Xr, I’m prepared for a reduced SS expected payout – through means-testing or some other format.
In short, it will be interesting to see what happens to SS. I have a long time until I would receive it, but I expect my SS check to be much less than what it would otherwise be if I were able to take it in a few years.
For now the best planning is to probably plan on not receiving it – whatever you get, consider it a bonus. Also, try to minimize the amount of FICA taxes you pay. Difficult to do as an employee but the self-employed have options in that regard.
The only risk to Social Security are Austrian economic ideologues.
In reality, the government can run deficits to pay for any social security expenses that go above and beyond payroll tax revenue. There is no possible way for the U.S. government to run out of dollars.
But if those dollars are worth less – it produces a similar effect.
But inflation has been almost non-existent for years. Deflation seems to be the real issue.
Yes this idea that Social Security will run out of money is ridiculous. When payroll taxes don’t cover the cost of the program the government will just cover the cost with income taxes or with borrowing. Some small benefit cuts are possible but I think it is more likely this would be done by raising the retirement age.
I wonder if the government will take advantage of the sub 40 year old generation b/c I seriously don’t know anybody under 40 who expects to have Social Security. Given nobody expects it (see the poll too), what’s the harm in screwing the under 40 crowd?
No surprise that SS should be excluded from potential income.
This is just like including the 401K as part of net worth. Just get rid of it (in your mind) and assume it isn’t there since you can’t touch it until 60+! Any income where he rules can be quickly changed by the government should be looks at with skeptisicm. Skepticism meaning assume retardation/you getting screwed. This is why everyone needs to start a business! You can always set it up outside of the USA if things really hit the fan.
Great marriage delay strategy there! Just another tax on emotional people who need some contract from the government to “prove” they are in love.
4% tax for nothing. Insanity!
An extra tax on marriage is insanity. One day the government will view a man and a woman who wants to work equally! But, not today. Maybe when Hilary becomes President.
Just surfing some backtracks and saw this comment.
Perhaps never, I guess.
Very good observation on social security. I like how you “value” the SS benefits using a different withdrawal rate. A social security check is similar to a Treasury Inflation Protected Bond.
I think many in their 20s and 30s will be positively surprised, because there will be social security benefits when they get in their 60s one day. I personally plan on taking this benefit as soon as I am eligible, unless of course I need to do IRA to Roth IRA rollovers first.
I wonder how we will feel at 62 (or whenever the new earliest age to withdraw from is) whether we really will be itching to withdraw the money as a “death hedge,” or whether we’ll just let things go until the last year to get a max monthly payout.
I bet the temptation for most is to withdraw the first half of eligibility rather than the second half.
And why not! Work hard and save hard your whole life to not need social security, why not use it to make the retirement more meaningful. Whats the point of watching money you don’t need grow? I want to spend it travelling and spending time with friends and family, not in a smoky casino or bingo hall.
In a post a while back you peaked my interest to see what my estimated SS benefits were going to be.
I was surprised to find out that I am looking at $2,700/month.
But like most readers on this blog I am not planning for it, it will just be a bonus on top of everything else I am doing.
If interest rates eventually climb, many people depending on SS to make the “Millionaires” will be disappointed. As you showed in your chart above a 3% interest rate just barely makes the cut for those collect the most in SS.
Cheers!
Basically you have a $2700/month pension with built-in inflation protection. That’s nothing to sneeze at!
And if you move to a lower cost state which does not tax retirement benefits, you would be living very well.
The one issue with SS I don’t fully grasp is what happens if, as you say, you work for 40 quarters and then stop working and rely on passive income such as stock dividends. SSA provides an estimate of what you’ll earn at retirement age, but I believe the amount quoted is contingent upon continuing to work up until retirement age. Thus, I’m confused about how I could calculate my actual monthly payout if I were to quit working after 40 quarters.
Good question! Since stock dividends and other passive income doesn’t pay any FICA tax, you are stuck with your 40 quarters.
Input your 40 quarters average income as if you would work until 62 or 67 or whenever the calculator asks. Then PRORATE the number that spits out by taking your 10 years / the total years the calculator is calculating and multiply that percentage by the calculator output.
Then add up your passive and more realistic SS amount.
Paying the FICA tax to get SS is ironically a motivator, albeit a small one, to keep working. Everybody needs to try and get to the minimum 40 quarters (10 years of work) to get something. Otherwise, the gov’t wins again!
At least 40 credits are also needed to qualify for full Medicare coverage, otherwise you may pay up to the entire premium, which isn’t cheap.
Could Sam or anyone else chime in here? I am also interested in the answer to Dividend_Beginner’s question.
You also need to consider a spouse. While my wife has worked, we made a decision for her to stay at home with the kids while they were young. Social Security takes the top 35 years of inflation adjusted earnings when determining your benefit (another theoretical reason it’s better to delay if you are at your higher earning years compared to early in your career). So for us, even though my wife is back working, given my wife’s income to date, she’d be better off taking half my benefit amount as her benefit when we hit retirement age. That creates a number of scenarios for us with respect to when is it best to take SS that we’ll consider (I do expect it will be around in some form for us when we retire).
Also, if you were married for a substantial period of time, and then divorced, you may still be able to collect from your higher earning spouse’s wage. For example, my FIL divorced my MIL after 25 years of marriage. When he died in his mid sixties, and she later was eligable for SS, she actually got his full benefit which was significantly higher than hers would have been. Had he been alive, she could have been eligable for the spousal benefit (half of his) as well, until he predeceased her. I’m not certain of the formula, or if remarriage changes things, but it’s worth checking out especially if the one spouse earned a much more while they were married. So it’s all situation dependent.
Indeed. Hence this point in the article:
* Social Security benefits can be passed on to your current spouse, your ex-spouse(s), your young children, your disabled children, and even your parents if you die a gruesome and sudden death before 62! And, if you decide not to get legally married so the government can tax you more during your lifetimes, then you are SCREWED! This is because despite you paying all that FICA tax while alive, when you die, your Social Security benefits are returned to the government rather than to your unwed spouse.
The value of SS is more than just the benefits to you!
it’s become a cliche these days to say SS won’t be there.
Interesting take on SS, delayed marriage until 61 yo. The problem is if the spouse die suddenly before that, the millionaire dream would also go. No marriage protection, Uncle Sam will get you on taxes . :) there is no escape.
True, but you will have your own Social Security valued at over $1 million if you live long enough! The spouse was just extra :0) Always think positive!
Delaying SS depends entirely on when you expect to die. I ran the numbers and it doesn’t pay for me to delay SS unless I expect to live until 90. Yes, 90! That is when I reach breakeven for delaying. I doubt I’m going to roll the dice and bet I’m going to live until 90. My family history says that’s unlikely. But if I’m healthy at 62 then I may reassess. Here are the facts. If I delay until 67, I lose out on $115k in payments over those 5 years. If I delay until 70, I lose out on $184k in payments over those 8 years. You must subtract those out to determine when you hit breakeven because that is money you’re leaving on the table. For me, waiting until 90 just to break even is not worth it. Run the numbers and you will see. I have a model with the calculations that I could send you Sam.
Good thing I expect you to live until 91!
Sure, send me your model. Would love to see it.