We’re talking about what kind of value you actually get from your Social Security taxes. Is this a good investment? If you could stop paying in your part to SS and invest it instead, could you create as much income? We’ll do a side by side comparison of your SS benefits vs. investing and find out…the results may surprise you…
I receive a lot of comments about opting out of SS and investing the money instead. Since my research tends to be driven by curiosity, I decided to take a deeper look at the numbers and see which would work out better…
Investing the tax you pay in or sticking with Social Security?
To get the results I made a few assumptions.
First, I assumed that your goal would be to create income in retirement as opposed to buying a vacation house or something else that would require a lump sum.
Second, I assumed that you took only your part of the SS tax and invested it.
For a refresher…the total FICA tax is 15.3%. If you are an employee you only pay ½ of that or 7.65%. Of that amount, 1.45% goes to Medicare and 6.2% goes to Social Security. It’s that 6.2% that I assume you invest.
We could chase the rabbit trails of investing the full SS tax, but if opting out were allowed, I hardly think an employer could be compelled to give you 6.2% to invest. (At least not the ones that I’ve worked for….)
And ultimately, I wanted to look at ‘what if you could invest the dollars that are currently taken out of your pocket?’
Then we assume a 7% return. Obviously you may do better than this or not as well as this.
At your full retirement age, the invested balance would be used to fund an income stream that would be equal to the amount of SS for which you would have been eligible. There are multiple ways to illustrate the withdrawal, but this is the only way to keep it apples to apples.
Finally, I looked at multiple income levels while working in a job from age 19 to 66. To get a baseline I used the national average wage index which is published by the Social Security Administration.
The first income level was for an individual at 50% of the national average wage index. Then I looked at 100%, and then at 150%. For a maximum SS benefit, I also looked at an individual who would’ve earned the maximum taxable wages for every year he or she was working. With these earnings figures, I used the calculator on the SSA website to calculate what the benefit for each of these income levels would be at full retirement age. I then increased that amount by 2% per year to keep up with the SS cola. That is the number that I illustrated withdrawing from the portfolio accumulated from the invested SS taxes.
I don’t want to overcomplicate this, but at this point there is really another assumption to consider. Would you continue to get 7% return in retirement, or would you move your money to an investment that may have less market risk?
If you did, you’d most likely get a lower return. So, in retirement I modeled out two rates of return. One at 7% and one at 3%. Now that you know all of the parameters and assumptions, are you ready for the results? Here they are…
For an individual at 50% of the average wage index, the portfolio value would last beyond the expected 85 year life expectancy if invested at 7%. If the portfolio received a 3% return, it would run out at age 80. This is because a lower income individual would have a larger SS benefit relative to the amount of taxes they’ve paid in. So the withdrawal percentage would be higher for them.
Next I looked at an individual at 100% of the National average wage index. At 7% their money would last well beyond age 100. At 3% return they would be out of money at age 84. This is where things change… If an individual had earned 150% of the NAWI they would see their benefit increase and would have more in their account when they died than when they started. At 3% it would still last until around age 90.
And finally an individual who had earned the maximum wage base on an annual basis would see similar results except this time they would never run out of money in either scenario during a normal life expectancy.
To make sure my numbers were right, I spoke with Dr. Brandon Renfro. Dr. Renfro is a finance professor and a numbers guru. Things checked out!
So what’s the point of all of this? Can you opt out and invest it? No you can’t. This is mostly to satisfy the curious who have wondered…could I do better on my own. It appears that the answer to that is your income level. If you’re lower income, it would be tight. If you’re higher income, you probably could.
Hey remember…THIS IS YOUR RETIREMENT. Stay curious and STAY INFORMED. You’re making the right moves by reading articles like these, but don’t use this as specific advice for your own situation. Do your research and talk to your own advisors. Most importantly, continue to educate yourself.
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Thanks for reading…have a great day.