Quantifying The Enormous Value of Your Social Security Income

Quantifying the Value of Social Security Income

If you had to replace your Social Security income, how much would you need? It’s probably more than you think.

The fact is, the income you receive from Social Security may deserve more respect.  For all the years that I’ve helped folks with retirement planning, Social Security income is the only income stream that I’ve seen with the following attributes:

  • It’s adjusted almost every year for inflation
  • It’s not 100% taxable
  • It’s backed by the US Government
  • It will pay you for as long as you live

That’s a long string of benefits for one income source. But back to the question; how much would you need to replace your benefit?

The average benefit for a retired worker is $15,528 per year.  For a couple, the average is $24,576.

For our exercise let’s assume that you are single.  You walk into my office and say, “Devin, I need to receive $15,528 per year in income.  How much do I need to invest to get that income?”

After I’d explained that there were multiple methods to obtain that income, I would tell you that it  ultimately comes down to one choice.

Do you want money left at your death?

Option #1

If yes, we’d look at investing in a portfolio with a safe withdrawal rate.  Somewhere around a 4% annual distribution rate.  While this strategy certainly would not have the guarantees attached that come with Social Security, it should last for your lifetime and have assets left over at your death.  The investment amount needed for this strategy?  $388,200.  For a couple, it would be $614,400.

This strategy, while historically sound, still has multiple risks associated that Social Security does not.  Market risk and interest rate risk are two of the most obvious risks.

Option #2

If you didn’t really care about having assets left at your death, you could simply purchase an immediate annuity.  This is the closest you would come to reconstructing your Social Security income.  These work very much like a pension.   With an immediate annuity you give an insurance company a lump sum of cash in return for regular income payments until you die.  You could also set this up jointly to pay a benefit to your spouse if you die early.  The investment amount needed for this strategy?  Somewhere around $230,000 for a single life expectancy.  For a joint case, it would be around $410,000.

It should be noted that the last scenario is based around using an insurance product.  The premium amount needed could change based on age, interest rates, residency states and a variety of other factors.

Either way, it’s pretty clear that Social Security income is valuable and not easily replaced. That’s why I still find it so strange that many in my industry still downplay the role of Social Security in your retirement income analysis. Bear this in mind when talking to a financial advisor/planner.  If they don’t want to give you specific advice on a stream of income with this value, it may be time to look for a new advisor.


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