In Perspectives

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.

Legacy Trust and Your Right to Financial Privacy

At Legacy Trust we have established policies and practices that respect the financial privacy of all individuals who use our trust company. We believe it is critical to comply with the laws and regulations designed to secure your financial privacy. Your relationship with us as our client is very important to us, and we want you to understand our policies and practices about handling your information.

This Policy applies to you – This Policy applies to our relationships with individual clients who inquire about or obtain products or services from us for personal, family and household purposes.

Strict security measures – We take the security of information very seriously. We have established security standards and procedures to prevent access to client information. We maintain physical, electronic and procedural safeguards to guard client information.

Limited employee access – We have established procedures to limit employee access to information to only those employees with a business reason for accessing such information. We educate our employees about the importance of confidentiality and client privacy. We take appropriate disciplinary measures to enforce employee responsibilities regarding client information.

Why we collect information – We collect information about you to:

  • accurately identify you;
  • protect and administer your records, accounts and funds;
  • help us design or improve our products and services;
  • understand your financial needs;
  • save you time when you apply for new products and services; offer you quality products and services; and comply with certain laws and regulations;

We collect information – We collect and maintain your personal information so that we can provide investment management and other services to you. The types and categories of information that we collect and maintain about you include:

  • Information we receive from you to open an account or provide investment advice or other services to you (such as your home address, social security number, telephone, financial information and investment objectives).
  • Information that we generate to service your account or from our transactions with you (such as account statements and other financial information).
  • Information on your transactions with nonaffiliated third parties.

We have established procedures so that the financial information we collect is accurate, current and complete. We are committed to work with you to promptly correct any inaccurate information.

Our selective sharing of information – In order for us to provide investment management and other services to you, we do disclose your personal information in very limited instances, which include:

  • Disclosures to nonaffiliated companies as permitted by law, including those who help us service your account (such as providing account information to brokers and custodians).
  • Other limited disclosures as permitted by law, for example, required reports to government entities.

We do not share your information with third parties for marketing purposes. We do not sell your information.

Former clients – If you end your relationship with us, we will continue to adhere to the privacy policies and practices described in this notice.


Important Information About Procedures For Opening A New Account

To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account.

What this means for you: When you open an account, we will ask for your name, address, date of birth and other information that will allow us to identify you. We may also ask to see your driver’s license or other identifying documents.

We apologize for any inconvenience this may cause; however, federal law prohibits us from waiving these requirements.

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