Present value of Social Security

[Cut-Throat]

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Originally Posted by FIRE'd@51 I would just say if I could randomly draw a 62 year-old's SS stream from the distribution of all 62 year-olds, and sell it to you and C-T for a 25 multiple, that is a trade I would do all day long in as much size as I could. Statistically I would make a tanker-load of money doing this trade.

OK - I see your point! and maybe S.S. should not be valued at 25, but I'm guessing not 15 either! - If you are married and your spouse would get your S.S. upon your death would be a valid Comparison.

- So what tell me what is the SWR of a COLA Annuity at age 62 with survior benefits? - I'm thinking it's a lot less than 6.66% which would be a mulitpler of 15 - Maybe around 5% - which would be a mulitplier of 20?

And then you have to decide which is a 'safer' bet the U.S. Government or an Insurance Company.

[FIRE'd@51]

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Originally Posted by Cut-Throat That's why I might buy an annuity at that time. - But if I were depending on my own Nest Egg, I'd still only take 4% at age 62. - Which is a multiplier of 25. Vanguard plays the averages, individuals can not! That is why I find the Cola Annuity idea attractive at that age.

I don't see how you can put a multiplier of 25 on something that someone else (who is not the low-cost provider) will sell at a multiple of 19.

[FIRE'd@51]

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Originally Posted by Cut-Throat If you are married and your spouse would get your S.S. upon your death would be a valid Comparison. - So what tell me what is the SWR of a COLA Annuity at age 62 with survior benefits? - I'm thinking it's a lot less than 6.66% which would be a mulitpler of 15 - Maybe around 5% - which would be a mulitplier of 20?

Well, now you are changing the problem. We've been talking about a 62 year-old single male.

But again, the present value of a SS stream (or any annuity for that matter) can only be calculated if you know the lifetime of the stream, and this will require an assumption about joint-life expectancy. A multiplier of 20, using the TIPS rate as the discounter would imply a level payment stream that went on for 28 years, and this is neglecting the fact that the payment would drop from $1 to $0.67 after the first spouse died which would lower the present value (i.e., the multiplier).

[Cut-Throat]

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Originally Posted by FIRE'd@51 Well, now you are changing the problem. We've been talking about a 62 year-old single male.

The problem was valuing S.S. - S.S. has spousal benefits. How am I changing the problem? - I never understood why you were talking about a single 62 year old male. - Weren't we trying to value S.S. benefits?

[FIRE'd@51]

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Originally Posted by Cut-Throat The problem was valuing S.S. - S.S. has spousal benefits. How am I changing the problem? - I never understood why you were talking about a single 62 year old male. - Weren't we trying to value S.S. benefits?

That was the example I used (and stated clearly) to compute a present value in response to ERD50. But that's OK, read the second paragraph of my last post.

[youbet]

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Originally Posted by Cut-Throat The problem was valuing S.S. - S.S. has spousal benefits. How am I changing the problem?

SS does not always have spousal benefits, even if you are married. I think you would need to define the problem to take this into account.

[ERD50]

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Originally Posted by FIRE'd@51 I would just say if I could randomly draw a 62 year-old's SS stream from the distribution of all 62 year-olds, and sell it to you and C-T for a 25 multiple, that is a trade I would do all day long in as much size as I could. Statistically I would make a tanker-load of money doing this trade.

But aren't you trying to assign a 'market value' to something that is not 'marketable'?

Are you saying that since I value the SS at 25x, I should jump at the chance to buy that protection on the free market at 19, or that I would be willing to buy more, even at 25x? OK, but consider - I didn't 'buy' my SS, it was handed to me. Now that I know what it should be, I can place a value on it. That does not mean I wish to buy more, even at a lower cost. I can't fully trust Feds to deliver on their promise, I ccertainly can't fully trust a private annuity insurer to deliver 40 years from now. As pointed out in a recent post, there are survivor benefits to SS also (those were not factored into the FireCalc numbers though).

In a way, it is a bet against the Feds delivering, and the market delivering. That 25x number is based on the markets performing at their historic worst. Odds are, the markets will do much better. I'm not sure I want to bet any more of my future on the fed or a private insurer than I already have.

That is not to say I would not buy a private annuity. I doubt that I would, the numbers might not add up, but it might be a decent diversification strategy between Mr Market and Uncle Sam.

-ERD50

[FIRE'd@51]

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Originally Posted by ERD50 But aren't you trying to assign a 'market value' to something that is not 'marketable'?

Well, the title of the thread is "PV of SS", so I was just trying to come up with a framework to do the valuation.

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Originally Posted by ERD50 Are you saying that since I value the SS at 25x, I should jump at the chance to buy that protection on the free market at 19, or that I would be willing to buy more, even at 25x? OK, but consider - I didn't 'buy' my SS, it was handed to me. Now that I know what it should be, I can place a value on it. That does not mean I wish to buy more, even at a lower cost.

No, I'm not saying that at all. I was just using Vanguard's price as another possible indication of the value. If Vanguard/IAG prices an equivalent payment stream at 19 (and we know they are making a huge profit on these annuities), then I don't see how you can argue that it's price should be 25.

I am not trying to argue for or against an annuity here. I agree we have paid (overpaid) for our SS, so of course we are going to take it. But to value it properly one must compare it to other similar securites that exist in the market place.

[ERD50]

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Originally Posted by FIRE'd@51 Well, the title of the thread is "PV of SS", so I was just trying to come up with a framework to do the valuation.

And I'm certain that you are technically correct in your calculations. What I've been saying is, those calculations are fine in a general sense, but are not that meaningful to an individual....

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But to value it properly one must compare it to other similar securites that exist in the market place.

And I don't think you can compare being handed SS with other marketable items. This is probably a really lousy analogy, but...

The old rusty sink in my bathroom has no market value to anyone. Yet, I take care of it until I'm ready to remodel, because if it got damaged, I'd need to spend $$ and labor to replace it. So, it has value to *me*, I can even define that value in the price of a cheap sink to replace it until we remodel and can pick colors and style for a permanent replacement, and the labor to replace it, but it still has no market value. So, I claim that an item can have individual value separate from it's market value. Tangible, measurable value.

So, when I run FireCalc, or just think through C-T's analysis, I see the value of those SS payments to *me*, and I don't think it makes any difference what the market value of a similar product is. That does not change the equation for me. Unless I could sell my SS benefits and buy some other benefits - but I don't think that's possible. So it is a personal value thing, outside of market forces.

I think.

-ERD50

[Sam]

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Originally Posted by ERD50 Run FIRECALC. Set to retire in 2007 and the defaults. Set the results to show portfolio required for 95% success. I get $754,716 starting portfolio with zero SS. I get $503,135 starting portfolio with $10,000 SS starting in 2007. So that is a delta of $251,501 in starting portfolio. Divide by the $10,000 SS payment, and you get... 25.15x.

Huh? Why would I want to that? I'm only interested in the PRESENT value. Presently, I'm 49, so 2020 is the earliest I can collect SS.

That exercise might be applicable to you, if you're 62 now, and believe that you would live to 92 or beyond.

[ERD50]

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Originally Posted by Sam Huh? Why would I want to that? I'm only interested in the PRESENT value. Presently, I'm 49, so 2020 is the earliest I can collect SS. That exercise might be applicable to you, if you're 62 now, and believe that you would live to 92 or beyond.

Sam, you are right. This exercise was not meant to be applicable to your situation. It was to explain that for someone age 62, retiring at 62 and wanting to be prepared for age 92 or beyond, the SS payment is equivalent to ~ 25x the nest egg. We were trying to figure why Bogle used a 14x multiplier, and to get a baseline number with a simpler case.

Your multiplier is clearly less. Your equivalent nest egg would not be paying out that cola'd $10,0000 for 13 years. Big diff.

You should be able to run your scenario in Firecalc. In my view, the diff in the starting nest egg required ( with and w/o SS) represents the pv of those future SS payments.

-ERD50