I was surprised that I saved thousands of dollars last year, tax-free.**
Something called "Social Security," I think. I've heard a few things about it, and I'm coming to believe there is value in that payroll deduction.
tl;drThe questions for you, Mustachians:
* Why do we like to ignore Social Security?
* What is the value of Social Security benefits?
I like examples.
Let's take a typical person, we'll call him Dave (no relation). Dave started work in 1999 at age 22 earning $40,696. In 2014, Dave hit FIRE with 2013 earnings of $51,939. It looks like Dave earned exactly the median income each year before retiring after 15yr of work at 37.***
Okay, so maybe Dave isn't a typical person. But who around here is? Bear with me.
Every year, Dave "saves" 6.2% of his income thanks to sound financial advice provided by his Uncle Samuel who works in finance at some fancy government office, OACT or something. And Dave's company generously matches his contribution 100% all the way up to the 6.2% limit. Whoa! better than the 50% match and 4% limit on the 401(k)!
Earnings and Savings are as follows:
Year Earnings Savings, with Match
1999 $40,696 $5,046
2000 $41,990 $5,207
2001 $42,228 $5,236
2002 $42,409 $5,259
2003 $43,318 $5,371
2004 $44,334 $5,497
2005 $46,326 $5,744
2006 $48,201 $5,977
2007 $50,233 $6,229
2008 $50,303 $6,238
2009 $49,777 $6,172
2010 $49,276 $6,110
2011 $50,054 $6,207
2012 $51,017 $6,326
2013 $51,939 $6,440
So Dave earned $702,101 (nominal) and saved $87,061 (nominal) for retirement. A bit of indexing (using SSA values) gets those to $847,549 and $105,096 (real, 2014).
When Dave hits full retirement age (age 67), that $847,549 of real earnings will result in a monthly payment of: .9*816 + .32*((847,549/420)-816) = $1,119.
That's 2014 dollars, using the SSA 2014 formulas.
Dave FIREs at 37, so his life expectancy at that point is about 82. He can expect to collect that $1,119/mo for 15 years, assuming he dies on schedule. That's
$201,425 expected value (real, 2014).
If inflation plods along at 2%, Dave's looking at $429k (nominal) in expected payments.
The IRR on SS in Dave's FIRE scenario is 3.5% nominal or 4.7% real (2014) @2% inflation.
If my math is right, Dave has a $200k+ asset with a
3.5% guaranteed return. Well, at least as guaranteed as staying alive (and even dead, SS can pay out). Pretty decent for a "typical person", I think.
A FIRE 4% SWR is even safer with SS.
We like to ignore Social Security benefits, but why? I'm interested to know what others think.** are FICA payroll deductions tax-free? Hmmm, maybe when there is a 100% company match.
*** yes, with a 50% savings rate, a median salary over that period would build a $600k portfolio, using the actual annualized 6.9% market return (S&P500). We can nit pick about asset allocation and lots of other things, but the basics are close enough for this exercise.
Boring extra reading:
1. All the SS info you need is online at the SSA's OACT. Maybe start with
http://www.ssa.gov/oact/progdata/retirebenefit1.html2. Median income from Federal Reserve:
https://research.stlouisfed.org/fred2/series/MEHOINUSA646N3. SS as an asset:
https://www.kitces.com/blog/valuing-social-security-benefits-as-an-asset-on-the-household-balance-sheet/UPDATE: a few cFIREsim runs (imprecise, but easy) and it looks like a $1m stash with 4% SWR ignoring SS is equivalent to a $900k stash with 4% SWR and SS. Effectively, SS means you can FIRE $100k sooner.