Author Topic: Did you save an extra 12.4% last year and didn't even know it?  (Read 3435 times)

DaveR

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Did you save an extra 12.4% last year and didn't even know it?
« on: September 25, 2015, 01:59:59 PM »
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;dr
The 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.html
2. Median income from Federal Reserve: https://research.stlouisfed.org/fred2/series/MEHOINUSA646N
3. 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.
« Last Edit: September 26, 2015, 09:37:26 AM by DaveR »

ShoulderThingThatGoesUp

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Re: Did you save an extra 12.4% last year and didn't even know it?
« Reply #1 on: September 25, 2015, 02:02:34 PM »
I am hoping Social Security will be means-tested by the time I am old, so it will be irrelevant to me because I'll have built up a big-ass net worth.

DaveR

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Re: Did you save an extra 12.4% last year and didn't even know it?
« Reply #2 on: September 25, 2015, 02:13:05 PM »
I am hoping Social Security will be means-tested by the time I am old, so it will be irrelevant to me because I'll have built up a big-ass net worth.

Means testing seems logical. But we are talking about a government program here, so politicians and their constituents aren't likely jumping to do something as sensible as that.

Mr. Green

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Re: Did you save an extra 12.4% last year and didn't even know it?
« Reply #3 on: September 25, 2015, 02:13:20 PM »
I am hoping Social Security will be means-tested by the time I am old, so it will be irrelevant to me because I'll have built up a big-ass net worth.
Unlikely since it would then be labeled welfare. However, there's nothing that says you have to take Social Security. If you have a big net worth just pretend SS doesn't exist.

SuperSecretName

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Re: Did you save an extra 12.4% last year and didn't even know it?
« Reply #4 on: September 25, 2015, 02:22:02 PM »
I am 30 years away from collecting and have no control over it.  Easier to pretend it doesn't exist.
« Last Edit: September 25, 2015, 02:23:51 PM by SuperSecretName »

FatCat

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Re: Did you save an extra 12.4% last year and didn't even know it?
« Reply #5 on: September 25, 2015, 02:47:01 PM »
My whole live I've heard that social security benefits will be gone by the time I'm old enough to get them. While this may or may not be true, most of my close relatives died before they were old enough to get anything back from social security anyway.

Lack of control + Lack of certainty + Far away date

Eric

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Re: Did you save an extra 12.4% last year and didn't even know it?
« Reply #6 on: September 25, 2015, 03:40:37 PM »
I am hoping Social Security will be means-tested by the time I am old, so it will be irrelevant to me because I'll have built up a big-ass net worth.

It already is.  At least sort of.  If your income is at a certain level, your SS payments get taxed.

http://www.ssa.gov/planners/taxes.html

DaveR

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Re: Did you save an extra 12.4% last year and didn't even know it?
« Reply #7 on: September 25, 2015, 03:43:04 PM »
Lack of control + Lack of certainty + Far away date

All valid points.

I'm a bit of a math guy, if that wasn't obvious. So I like to think about what these things do to the numbers...
  • Lack of control. Meaning you don't have the ability to choose where/how/if you manage your savings. I suppose a defined benefit pension plan (or any annuity) has the same concerns. I'll have to see how those are modeled. I suppose if the US Government becomes unable to make defined SS payments, we'll all have bigger issues.
  • Lack of certainty. We'll say this is certainty about longevity. The life insurance guys and actuaries have this one down. Getting hit by a bus is always a risk, but personal health plays a factor and is controllable to a degree.
  • Far away date. This is the easiest to reconcile. One nice thing (today anyway) is that SS is indexed to inflation. How nice; it takes purchase power erosion out of the equation. But the fact that it is far away just means the nominal value is higher.

Good stuff. I'm sure some academic has quantified perceived value of delayed gratification (in a unit other than marshmallows).

DaveR

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Re: Did you save an extra 12.4% last year and didn't even know it?
« Reply #8 on: September 25, 2015, 03:49:02 PM »
It already is.  At least sort of.  If your income is at a certain level, your SS payments get taxed.

Ah, yes, our good friends at the Internal Revenue Service. I'm glad they don't give those guys vacations.