Thinking about Social Security Benefits as Retirement Capital


Have you ever thought about the investment value of your Social Security benefits?  In a previous blog about having enough money in retirement, Associate Wealth Planner Danielle Parmenter discussed a relatively simple method to estimate how large an investment portfolio must be to support retirement expenses not covered by regular income sources.  The outcome was simple, the more income a retiree has, the smaller the portfolio necessary to enjoy a comfortable retirement.

For most people, Social Security is the primary income source in retirement.  Yet many do not think about it as an asset, let alone as a valuable investment.  This is true even though Social Security provides a guaranteed income for life and unmatched inflation protection.  Combine this mindset with the fact that Social Security comes with an immensely complex set of rules, and you have the perfect recipe for the loss of thousands of dollars of retirement capital.

Our goal at Legacy Trust is to help people understand the value of this valuable resource, navigate the Social Security claiming minefield, and create a strategy that maximizes all sources of retirement capital.

In 2021, the average annual social security benefit is $18,563, while the maximum benefit is $46,740.  With the current average life expectancy of a 66-year-old being nearly 20-years, (18.2 for men and 20.7 for women), most retirees will be collecting guaranteed, inflation adjusted and risk-free income for a long time.  Assuming the $18,563 average benefit for the above 66-year-old, 3% inflation and a risk-free rate of return of 2%, their benefit has a present value of about $407,000.  The value increases to over $1,000,000 if our retiree qualifies for the maximum benefit.  And these values only consider someone with an average life expectancy.  The reality is that most people with financial means are likely to live much longer than average, creating an even higher investment value.

Of course, a retiree can delay collecting their Social Security benefits and realize an 8% annual increase in their lifetime benefit for each year they delay, up to age 70.  Those who believe they will live longer than average and have other resources to fund their retirement expenses may increase the present value of their benefits even more.  Assuming the above retiree delays collecting benefits until age 70,  their average benefit would increase to about $27,578 annually, creating a present value of more than $590,000 if they live until age 90.  The maximum annual benefit would increase to over $69,000 and have a present value of nearly $1,500,000.

For many couples, the value of Social Security doesn’t end with their individual retirement benefits.  A married person with limited income throughout their lifetime will typically qualify for Spousal and Survivor benefits based on the higher income of their spouse.  The spousal benefit can be as high as 50% of their spouse’s Full Retirement Age payment.  If this same person survives their spouse, a survivor benefit is added to their spousal benefit to create total Social Security income equal to that of the deceased spouse.  However, a decision by either spouse to take their retirement benefits early may permanently reduce all benefits significantly, so careful planning and coordination is required to receive the maximum value of these benefits.

Social Security spousal benefits can be as high as 50% of their spouse’s Full Retirement Age payment.

Social Security is unique from most other forms of retirement capital because it cannot be outlived, and the value increases with inflation.  As retirement costs increase, so too will annual Social Security income.  This provision provides an unusual level of protection that cannot be easily replicated with other sources of retirement capital.  Using our above example with a 4% versus 3% inflation assumption increases the present value of the average benefit from $407,000 to $591,000, while the value of the maximum benefit increases by nearly $500,000.

I would be remiss if I didn’t address the most common question we hear when discussing the value of Social Security: “With the projected funding shortfall, will I ever realize any value from Social Security?”  This topic could be the subject of an entire article, so suffice it to say that I believe the answer to this question is yes.  I believe those who are close to retirement can count on their anticipated benefits without significant change.  However, future generations will probably experience changes in their benefit structure and higher Social Security related taxes.  The ever-increasing American life expectancy will dictate these trends.  However, Social Security is too politically sensitive and too many people rely on it to allow the system to go broke.

The unique characteristics of Social Security create hundreds of thousands of dollars in asset value for most American retirees, while providing a unique level of protection from certain uncontrollable risks.  However, they are also subject to a myriad of complicated decisions at retirement and making the wrong choices will cause an irreversible reduction in your retirement resources.  The choices are even more complicated for married couples.  Please don’t make your decisions without a complete understanding of how they will impact you in the future.  The advisors at Legacy Trust would be happy to help you consider your circumstances and develop a strategy to maximize your entire retirement portfolio, including your Social Security benefits.