Uniform Way To Get Present Value of Future Social Security

[sengsational]

In a couple of other threads there was some talk about adding future cash flows to your current assets (resulting in a number that I will not name). It's just a number that might equalize people that DO have future cash flows from those that DON'T have future cash flows.

First, you need to know how long you'll live (we can't have some people just setting it to 100 or we'll get inconsistent results). I found an actuarial calculator that's probably as good as any: How Long Will I Live? - Life Expectancy Calculator

Next, go to i-orp.com and put in your future income streams, when they start, etc. Many of us have done this before so shouldn't be an issue. Just make sure you set your life expectancy long enough (if your spouse is older, you'll need to increase it). The value of i-orp is that it 'knows' the SS rules, so should be good to get a fairly good income stream.

Just to keep it easy, I'd say leave the CPI at 2.5%. Not saying that's perfect, but it's the default.

On the results page, you can click in the table of contents "Other Sources of Income". Select that table and paste it into Excel or your favorite spreadsheet. You might need to do a "Data > Text to Columns" with space as the delimiter.

Now on the top of the data, if your current age is not on the first line, add enough zero rows so the first line IS your current age. Now on the bottom of the data, overwrite values with zeros in for years which is past your expected age of living (for both you and your spouse).

In an empty column write a formula to add the two cells (you and spouse) for each year to get a family total by year, then write a formula that uses that new column to get net present value (mine was this: =NPV(2.5%,E10:E47).

The result from the formula is the net present value of your future income streams, presuming you live to an average age and presuming the CPI is level at 2.5%. NONE of those assumptions are TRUE! But with those assumptions, one may do an apples-to-apples comparison.

 

[mickeyd]

I recently read an article that said a good rule of thumb for calculation PV of SS was to multiply the annual amount by 20. Don't know how accurate that way is but it's surely easy to calculate.

 

[fritz]

Personally see Social Security as a valued income source, but because it goes away when you do (as an annuity does) - have a hard time justifying including it in our net worth. We won't include my wife's SS (next year) in our base income for covering basic retirement expenses. We'll use it for travel and extras, and not for paying any ongoing bills (would be a mistake to use it for living expenses as when one of us is moved on - the other will have to live on just mine). Consider net worth apples, and retirement income sources oranges. Good to have both and we use our apples as oranges, but our oranges aren't to be considered apples.

 

[pb4uski]

What is the purpose of this calc? and what is is used for?

If one is doing such a calculation, I would think an expected present value calculation would be more appropriate. First, calculate the PV of cash flows assuming you live to be your current age +1, your current age +2, etc until where your current age + the add-on is 120 (for example). So if you are 50 now, you would have 70 numbers. Then multiply each of those results by the probability that you will live to the relevant age and sum the results.

So the resulting present vlaue takes into consideration the various probabilities that you will live to a certain age and the time value of money. For SS, the nominal amounts could be based on today's SS and use a real discount rate rather than a nominal discount rate.

 

[donheff]

I recently read an article that said a good rule of thumb for calculation PV of SS was to multiply the annual amount by 20. Don't know how accurate that way is but it's surely easy to calculate.

Sounds like a good way to do it to just get a ball park of what it is worth as a bond or whatever. Why worry about whether you could fine tune it degree unless you are proposing a replacement system.

 

[NW-Bound]

How about looking up the premium for an SPIA (Single Premium Immediate Annuity) that will provide the same payment?

On the Web, I found a quote calculator that gave the answer to the following hypothetical scenario for a 65-yr old male, joint life policy with a 62-year old wife.

Premium amount of $500K will provide monthly payments of $2471 or $30,483 annually.

I have read somewhere that a COLA'd policy would require an additional 20%, so make that $600K for $30.5K COLA'd annual benefit. That works out close to 20X, as an earlier poster mentioned.

 

[sengsational]

What is the purpose of this calc? and what is is used for?

If one is doing such a calculation, I would think an expected present value calculation would be more appropriate. First, calculate the PV of cash flows assuming you live to be your current age +1, your current age +2, etc until where your current age + the add-on is 120 (for example). So if you are 50 now, you would have 70 numbers. Then multiply each of those results by the probability that you will live to the relevant age and sum the results.

So the resulting present vlaue takes into consideration the various probabilities that you will live to a certain age and the time value of money. For SS, the nominal amounts could be based on today's SS and use a real discount rate rather than a nominal discount rate.

The way I figured it, if the age of passing was normally distributed, then the calculation you proposed would yield the same value as the single predicted date of passing.

The purpose of the calculation was to provide a leveling yardstick for queries requested in posts on this forum. In other words, if someone is pension rich, so to speak, this would give us the ability to level between someone who was pension rich vs. current assets rich. you know, the old example, if I went and took my entire investable assets and bought an annuity, would I be suddenly poor?

How about looking up the premium for an SPIA (Single Premium Immediate Annuity) that will provide the same payment?

On the Web, I found a quote calculator that gave the answer to the following hypothetical scenario for a 65-yr old male, joint life policy with a 62-year old wife.

Premium amount of $500K will provide monthly payments of $2471 or $30,483 annually.

I have read somewhere that a COLA'd policy would require an additional 20%, so make that $600K for $30.5K COLA'd annual benefit. That works out close to 20X, as an earlier poster mentioned.

Doing the analysis on immediate annuities was my first thought! But after poking around, I realized that it was difficult to separate out the overhead and also I found that the calculators were for immediate distribution as opposed to delayed. For instance if someone is 55 years old and they plan to take social security at 70, then you would need to delay the income stream for 15 years.

 

[NW-Bound]

...I found that the calculators were for immediate distribution as opposed to delayed. For instance if someone is 55 years old and they plan to take social security at 70, then you would need to delay the income stream for 15 years.

I saw a calculator that would accommodate the delayed payment, but they wanted some minimal info and I did not want to be bothered by salesmen. I could put in some bogus personal info but did not do that.

As SS is actuarially neutral, I guess one can just use the benefit at 62 and it would be close enough. But when one is only 55, he can discount it using the Treasury rate minus the inflation rate for the 7 years.

 

[NW-Bound]

It just occurred to me to do the following comparison between SS and SPIA.

A 62-year old man will get $6216/yr for a $100K single-life SPIA, i.e. not joint. A 70-year old man will get $7668/yr, or 23.4% more.

In contrast, my SS calculator shows that I will get 73% more when delaying from 62 to 70. A much larger increase!

What's going on Note that the SPIA above is not COLA'd, whereas SS is.

 

[nun]

All you need to do is to take all your FICA contributions and compound them by some annual interest rate (TBD) to get the Present Value. Then do the calculation of an increasing annuity putting in your first payment, some annual inflation rate (COLA), some number of periods (life expectancy - current age) and solve for the underlying interest rate to see how it stacks up.

http://www.financeformulas.net/Present_Value_of_Growing_Annuity.html

FYI SSA has a life expectancy calculator.

 

[NW-Bound]

All you need to do is to take all your FICA contributions and compound them by some annual interest rate (TBD) to get the Present Value...

If you do that, you will not like the result because FICA is not at all like a personal 401k. That is because highly-paid workers subsidize low-paid workers. It's a known fact.

The max FICA-taxable wage was around $100K/yr recently. That used to be a lot lower. The max taxable earned income was increased faster than inflation in order to keep SS afloat.

I looked up the benefit for a worker who maxed out each year from the age of 24 to 65, and compared that with a worker making half as much (ending at $50K when he retired), and one making $25K at retirement. The SS benefits are not at all proportional to the contributions.

The $100K worker does not get 4X that of the $25K worker. Instead, he gets something like 2X. There used to be some straight examples from the SS.gov site showing the same effect.

 

[nun]

If you do that, you will not like the result because FICA is not at all like a personal 401k. That is because highly-paid workers subsidize low-paid workers. It's a known fact.

The max FICA-taxable wage was around $100K/yr recently. That used to be a lot lower. The max taxable earned income was increased faster than inflation in order to keep SS afloat.

I looked up the benefit for a worker who maxed out each year from the age of 24 to 65, and compared that with a worker making half as much (ending at $50K when he retired), and one making $25K at retirement. The SS benefits are not at all proportional to the contributions.

The $100K worker does not get 4X that of the $25K worker. Instead, he gets something like 2X. There used to be some straight examples from the SS.gov site showing the same effect.

Yes I understand that a lower paid worker gets proportionally more SS, it's always a topic of conversation when the Windfall Elimination Provision is discussed. Being a socialist I actually approve of the the way SS is calculated.

If you think the calculation of US SS is unfair you'd be outraged at how it's now done in the UK. The UK has a new flat rate payment that has no earnings component and is only calculated on the number of years of contributions. The $100k worker gets exactly the same as the $25k worker. This actually works out very well for me as I've been paying a special voluntary expat rate of UK SS taxes for the last 30 years of something like $200/year. Also because these are voluntary contributions my UK SS pension does not trigger WEP on my US SS....so I end up with SS checks from both the US and the UK.

 

[gauss]

If you do that, you will not like the result because FICA is not at all like a personal 401k. That is because highly-paid workers subsidize low-paid workers. It's a known fact.

Actually high lifetime cumulative earners subsidize lower lifetime cumulative earners. This fact can lead to a useful strategy for folks interested in ER since their lifetime earnings would be lower than if they had worked a full traditional career.

This was part of my decision to ER once I realized that I was beyond the sweet spot for SS in my mid 40's (my lifetime earnings had crossed over into the highest SS bracket, thus maximizing the benefit from the first two SS brackets.)

Conceptually this is similar to maximizing your 15% tax bracket each year by doing Roth conversions except that SS calculations are done on a lifetime basis.

-gauss

 

[gauss]

It just occurred to me to do the following comparison between SS and SPIA.

A 62-year old man will get $6216/yr for a $100K single-life SPIA, i.e. not joint. A 70-year old man will get $7668/yr, or 23.4% more.

In contrast, my SS calculator shows that I will get 73% more when delaying from 62 to 70. A much larger increase!

What's going on Note that the SPIA above is not COLA'd, whereas SS is.

Two ways that SPIAs differ from delaying Social Security are:

• In pricing, SPIA's assumes adverse selection based on the assumption that you have private knowledge that your life expectancy is longer than average.
• Profit/overhead in the SPIA world that exceed SS.

This is why it is commonly said that delaying SS until age 70 is the cheapest (inflation adjusted) annuity that you could ever purchase.

-gauss

 

[NW-Bound]

Yes I understand that a lower paid worker gets proportionally more SS, it's always a topic of conversation when the Windfall Elimination Provision is discussed. Being a socialist I actually approve of the the way SS is calculated.

If you think the calculation of US SS is unfair you'd be outraged at how it's now done in the UK. The UK has a new flat rate payment that has no earnings component and is only calculated on the number of years of contributions. The $100k worker gets exactly the same as the $25k worker. This actually works out very well for me as I've been paying a special voluntary expat rate of UK SS taxes for the last 30 years of something like $200/year. Also because these are voluntary contributions my UK SS pension does not trigger WEP on my US SS....so I end up with SS checks from both the US and the UK.

Why even bother with years of work? As far as I know, the Australian system provides a minimum pay upon retirement age, regardless of the income and years of work. It is quite a bit higher than the minimum SS payment of the US.

No matter what we think is fair, all these systems have a component of welfare built-in and cannot be looked at the same way one does with 401k or personal savings. So, back to this thread topic, to compute the present value, we start with looking at the benefit to an individual. How much he paid into the system does not have a direct or proportional impact on that present value.

Actually high lifetime cumulative earners subsidize lower lifetime cumulative earners. This fact can lead to a useful strategy for folks interested in ER since their lifetime earnings would be lower than if they had worked a full traditional career.

This was part of my decision to ER once I realized that I was beyond the sweet spot for SS in my mid 40's (my lifetime earnings had crossed over into the highest SS bracket, thus maximizing the benefit from the first two SS brackets.)

Conceptually this is similar to maximizing your 15% tax bracket each year by doing Roth conversions except that SS calculations are done on a lifetime basis.

-gauss

That is correct. Same as many people here, I discovered that retiring at 55 vs. working till 66 would not change my SS benefits much.

Two ways that SPIAs differ from delaying Social Security are:

• In pricing, SPIA's assumes adverse selection based on the assumption that you have private knowledge that your life expectancy is longer than average.
• Profit/overhead in the SPIA world that exceed SS.

This is why it is commonly said that delaying SS until age 70 is the cheapest (inflation adjusted) annuity that you could ever purchase.

-gauss

I was thinking that perhaps private SPIA sellers keep up-to-date on modern longevity, but SS benefit calculation may be stuck in the old era where geezers dropped like flies when they reached their 70s. If SS calculation is actuarially outdated, they may cut back on benefits in the future to keep the system solvent.

 

[nun]

No matter what we think is fair, all these systems have a component of welfare built-in and cannot be looked at the same way one does with 401k or personal savings. So, back to this thread topic, to compute the present value, we start with looking at the benefit to an individual. How much he paid into the system does not have a direct or proportional impact on that present value.

All you need to do is to know the annual payment you are/will be getting, the number of years you'll get it, the COLA rate and the discount rate....plug those in and you get the present value. The big problem is knowing the discount rate....I suppose you could just use annuity rates. How good a deal you are getting will depend on your compounded net contributions, but as you say, SS is more than an annuity.

If I assume a 3% COLA, a 4% discount rate and a life expectancy of 82 and use future dollar estimates for the value of my SS payments at age 66 my US SS will have a PV of $315k and at age 67 my UK SS will have a PV of $243k.

 

[nun]

Why even bother with years of work? As far as I know, the Australian system provides a minimum pay upon retirement age, regardless of the income and years of work. It is quite a bit higher than the minimum SS payment of the US.

I think Australia has a basic age related pension and also a wage related component. In the UK there is now no wage related component, it's just based on years of contributions. You don't have to earn income to be credited with contributions, you can earn them if you stay at home to care for a child or relative, are on certain state benefits like unemployment, and you can buy them by making voluntary contributions. I've been buying them by making voluntary contributions for the last 31 years.

 

[NW-Bound]

Out of curiosity, I looked at the Australian system a while back. As I remember, the wage related part is similar to the 403b or 401k of the US. The basic retirement is a safety net and the only requirement is age. I recall that it was around US$22K, hence more than the minimal US SS benefit. But then, the US has other assistance programs to the indigent, so the big picture is more complicated.

 

[sengsational]

All you need to do is to know the annual payment you are/will be getting, the number of years you'll get it, the COLA rate and the discount rate....plug those in and you get the present value. The big problem is knowing the discount rate....I suppose you could just use annuity rates. How good a deal you are getting will depend on your compounded net contributions, but as you say, SS is more than an annuity.

Absolutely! One of the reasons I posted the thread was the thought that some folks here, probably not many, but some, might not have training in time value of money calculations. So laying out a specific way to calculate it made the calculation a "cookbook" for anyone to follow.

If I assume a 3% COLA, a 4% discount rate and a life expectancy of 82 and use future dollar estimates for the value of my SS payments at age 66 my US SS will have a PV of $315k and at age 67 my UK SS will have a PV of $243k.

I figured that this discussion would come-up (COLA vs discount rate). The calculation is sensitive to those values. If you are currently collecting SS payments, then it's really just the difference between those two values.

I calculated using the guidlines in the OP (2.5% for both), and also ran it if the CPI lagged by 1/2 percent (so 2.5% CPI and 3.0% discount rate). That cut the present value by about 12%!

 

[Totoro]

If you have COLA the biggest uncertainty is life expectancy.

A $12k per annum pension starting at age 65 can be worth anywhere from $0k up to $540k.

If you just want a statistical point estimate or number, take your 50% survival rate from https://personal.vanguard.com/us/insights/retirement/plan-for-a-long-retirement-tool

Multiply your remaining years with the pension, et voilá. In example above for a male that would be 18 years, so $216k.

Without COLA the value will be less obviously, and you'll need to estimate inflation. I'd build a cash flow model for that in Excel. As a rule of thumb your pension value will halve every 30 or so years, so a typical adjustment downwards of 25% can be a rough yard stick to work with. But it can be anywhere from -10% to -50%.
https://personal.vanguard.com/us/insights/retirement/plan-for-a-long-retirement-tool

 

[nun]

Out of curiosity, I looked at the Australian system a while back. As I remember, the wage related part is similar to the 403b or 401k of the US. The basic retirement is a safety net and the only requirement is age. I recall that it was around US$22K, hence more than the minimal US SS benefit. But then, the US has other assistance programs to the indigent, so the big picture is more complicated.

US$22K seems high for a minimum pension as the max US SS at age 66 is currently around US$31k. By comparison the new flat rate UK pension is only US$13k. I know the UK has other benefits too (housing, food, heating allowance) and I imagine Australia does too. The UK also has a DC or 401k type system that has strict Government contribution rules and you can chose your provider or use a public-private trust set up by the Government.

 

[nun]

Absolutely! One of the reasons I posted the thread was the thought that some folks here, probably not many, but some, might not have training in time value of money calculations. So laying out a specific way to calculate it made the calculation a "cookbook" for anyone to follow.


I figured that this discussion would come-up (COLA vs discount rate). The calculation is sensitive to those values. If you are currently collecting SS payments, then it's really just the difference between those two values.

I calculated using the guidlines in the OP (2.5% for both), and also ran it if the CPI lagged by 1/2 percent (so 2.5% CPI and 3.0% discount rate). That cut the present value by about 12%!

Yes there is a lot of room for assumption and tweeking in these calculations, and the value of a guaranteed monthly check while being high is difficult to assess without knowing someone's full financial situation. I've been doing a lot of this recently as I'm converting my DC retirement account to a state DB pension. It's a great deal as it starts at age 55 and the discount rate is 7%.

 

[NW-Bound]

OK, I found my post a while back reporting what I found about the Australian system. The minimum payment was $20K, not $22K, and was means-tested.

http://www.early-retirement.org/for...t-to-look-less-healthy-62330.html#post1216186

Back on the present value of SS, I do not care about that as much as what cash flow it provides. Even with my savings which have real values, I have to convert it to cash flow to know what I can spend.

 

[nun]

OK, I found my post a while back reporting what I found about the Australian system. The minimum payment was $20K, not $22K, and was means-tested.

http://www.early-retirement.org/for...t-to-look-less-healthy-62330.html#post1216186

Back on the present value of SS, I do not care about that as much as what cash flow it provides. Even with my savings which have real values, I have to convert it to cash flow to know what I can spend.

OK, if it's means tested that sounds more sensible....the UK US$13k is not means tested, you just have to have at least 35 years of qualifying contribution years.

I agree that the regular monthly check is at least as important as the PV or value that you are getting for it.