Present Value of Social Security

[Telly]

I have been trying to come up with a PV muliplier for SS at age 62. That I can just use to multiply times my estimated annual payout starting at age 62. This would not be a true PV, as I am far from 62, but it would be better than nothing to get a feel for it.

Coming up with a non-COLA'd PV for SS is easy, immediateannuities.com would do it. If I use age 62, male, single life annuity, I get a dollar amount that is 12.5 times my estimated annual SS payment at 62.
But adding COLA should have a major effect, and there is no way to do it there.

I seem to remember a Scott Burns article once, that he quoted a range of multiples that could be used to PV SS. I think it was up in the teens, but where, I don't remember.

I tried searching here, that was pretty hopeless.

Does anyone remember the multiples?

 

[jeff2006]

Vanguard offers a COLA annuity. Maybe a quote from their calculator would help get a ballpark figure.

 

[SecondCor521]

No, but it's not that hard to do in Excel.

1. In cell A1, put your estimated annual payout from SS.
2. In cell A2, type the formula "=A1*(1+2%)" but change the 2% to whatever you think the SS COLA will be. I use 2% personally, which I think I got from the SS website a while back.
3. Copy and paste cell A2 down to as many years as you want to count on SS for. I would use the average life expectancy for a 62 year old male from the IRS website, which is probably 20 or 30 years. Let's say, for sake of example that you fill the cells down to A30.
4. In a blank cell, type the formula "=NPV(5%,A1:A30)" where 5% is the discount rate you want to use.

2Cor521

 

[d]

to the above you should include a random number (0 to 1), use that to multiply by the NPV result.

 

[New Thinking]

The SSA has the long-term COLA projection at 2.8%.

But I would take the suggestion to run the COLA annuity at Vanguard after using the "Quick Calculator" to run a projection at 62 WITH INFLATION (future dollars) so as to reflect the increases between now and then done by wage indexing. If you are married, figure your spouse at an additional half or do the same with her SS.

 

[hogwild]

For what it's worth, I get NPV for SS@66 is higher than the NPV for SS@62 for all discount rates between zero and about 12%. Your mileage may vary.

 

[retire@40]

For what it's worth, I get NPV for SS@66 is higher than the NPV for SS@62 for all discount rates between zero and about 12%.   Your mileage may vary.

Of course, that's if you make it to age 66

Like these people who would not have collected had they waited...

Peter Benchley, author ("Jaws") age 65
Kirby Puckett,Baseball Hall of Famer who played for Minnesota Twins, age 44
Dana Reeve, widow of Christopher Reeve, age 44
Vince Welnick, keyboard player for the Grateful Dead, age 51
Claydes Charles Smith, musician (co-founder and lead guitarist of Kool & the Gang) age 57
Patsy Ramsey, mother of slain child beauty queen JonBenet Ramsey, 49
Ken Lay, fomer CEO of Enron, who was convicted of conspiracy and fraud, age 64
Syd Barrett, musician (founder of Pink Floyd) age 60
Lt. Governor Win Rockefeller, Arkansas politician, billionaire great-grandson of Standard Oil founder John D. Rockefeller, age 57
Steve Irwin, Enviromentalist known as the "Croc Hunter," age 44
Sandra Dee, actress ("A Summer Place" and "Gidget") wife of Bobby Darin, age 62
John Walton, Wal-Mart heir, Sam Walton's son, age 58
Luther Vandross, R&B singer ("Never Too Much") age 54
Richard Pryor, actor, comedian ("Silver Streak") age 65
John Spencer, actor ( Leo McGarry on the "West Wing") age 58
Vincent Schiavelli, actor (Subway ghost in "Ghost") age 57

I know, some didn't even make it to 62!

It's later than you think.

 

[Mr._johngalt]

Of course, that's if you make it to age 66

Like these people who would not have collected had they waited...

Peter Benchley, author ("Jaws") age 65
Kirby Puckett,Baseball Hall of Famer who played for Minnesota Twins, age 44
Dana Reeve, widow of Christopher Reeve, age 44
Vince Welnick, keyboard player for the Grateful Dead, age 51
Claydes Charles Smith, musician (co-founder and lead guitarist of Kool & the Gang) age 57
Patsy Ramsey, mother of slain child beauty queen JonBenet Ramsey, 49
Ken Lay, fomer CEO of Enron, who was convicted of conspiracy and fraud, age 64
Syd Barrett, musician (founder of Pink Floyd) age 60
Lt. Governor Win Rockefeller, Arkansas politician, billionaire great-grandson of Standard Oil founder John D. Rockefeller, age 57
Steve Irwin, Enviromentalist known as the "Croc Hunter," age 44
Sandra Dee, actress ("A Summer Place" and "Gidget") wife of Bobby Darin, age 62
John Walton, Wal-Mart heir, Sam Walton's son, age 58
Luther Vandross, R&B singer ("Never Too Much") age 54
Richard Pryor, actor, comedian ("Silver Streak") age 65
John Spencer, actor ( Leo McGarry on the "West Wing") age 58
Vincent Schiavelli, actor (Subway ghost in "Ghost") age 57

I know, some didn't even make it to 62!

It's later than you think.

Good post. I could make a much longer list composed only of people
I knew personally.

JG

 

[New Thinking]

Everyone is different, but if the goal is to retire early and generate inflation - protected retirement income, risk-pooling with Social Security is a way to:

• Lower your taxes and thus put more money in your pocket
• Live on a higher income due to longevity risk pooling and "paying" the mortality premium
• potentially provide your spouse with a higher lifetime income when your are gone (when/if your benefit is higher if you predecease your wife)

Moderator edit: shorter URL here

Moderator fix of list formatting too

 

[rs0460a]

Everyone is different, but if the goal is to retire early and generate inflation - protected retirement income...

Agreed. DW/me are planning on starting SS at age 66 (our full SS age), even though we are going to ER in '07, at age 59. For all the reasons in the article (from a financial view), it makes sense, and luckily we don't need the SS check at 62 (based upon our planning).

Yes, there are many folks that need the $$$ at 62. For them, that's fine. For the people who have the $$$ to delay, but continue to profess that they feel they will be "cheated" if they "die early", I don't get it... If you're dead (and I don't think they changed the rules that "you can't take it with you") it doesn’t matter. If you're alive till you "break even", you've won twice (still alive and $$$ to boot!)

Yes, I've heard all the arguments (SS will not be there, SS will be reduced, SS will be taxed at 100%, you won't live to collect, etc, etc, etc), but these arguments are just that; they are "possibilities" of happening. The article shows what will happen (under current rules, without "what if") if you follow the guidance. Same as listening to your financial adviser (if you have one). I'm willing to listen.

If it doesn’t work out (due to one of the cited or even an unknown reason), that's part of "life" - there are no guarantees...

- Ron

 

[New Thinking]

Ron - Good for you..The only thing that I would suggest is consider staggering the SS and start one a couple of years earlier and one a couple years later. It depends on the amounts, but you could start yours at 68 and your wife's at 64 and your higher amount will go for the rest of your life. Then, if you die first, your wife will get your higher amount (and drop her own) for the rest of her life. If she dies first, her smaller amount dies off too. This way you maximize the survivor benefit too without giving up anything from an actuarial perspective. People don't get it because it is not intuitive but you are going to see signficant tax savings - depending on your other income. I have written and posted on this before, but basically you are choosing much higher amounts of SS than if you started at 62. So, you are choosing higher SS income and lower IRA withdrawal income. Thus your IRA income is reduced and your SS is going to be taxed at a much lower level, if at all. Effectively, one could take $64,000 of SS and not face any taxation. You'll see when you begin payments.

 

[Telly]

OK, I've got some data. My purpose was to find the multiplier that could be used to find the Present Value ("present" at future age 62) of the income stream of SS taken at age 62. I wanted to know this, to get a feel for what impact this could have on portfolio allocations when starting SS.

I did NOT make any Wage Adjustments to SS, nor did I try to PV it from the future back into to this year. Annuities were done with Single Life starting at age 62.

The multiplier is in the form of PV@62 divided by SS annual payments starting @62, so it can be easily applied to any annual SS payment.

12.5 - from immediateannuities.com, no infl. adj., not a good SS approx.

16.7 - PV calculation with COLA of 2%, Discount Rate of 5%.

18.1 - PV Calculation with COLA of 2.8%, Discount Rate of 5%.

19.1 - Vanguard annuity with inflation adjustment.

Putting some personal numbers on those last few multipliers shows that the effect of SS is to weight portfolio allocation to the Fixed Income side by a significant amount!

Thanks to jeff2006 for the Vanguard tip... Scott Burns then mentioned it in his column a couple days later!. But I had it all calculated by then.

Thanks to SecondCor521 for the easy NPV scheme for SS payments, and for teaching me that the "%" symbol can be used in Excel equations... I didn't know that, I had always been doing it math-wise! % is quicker and cleaner.

NewThinking, I ran it then with a 2.8% COLA also, Thanks.

Some thoughts on the Vanguard annuities multiplier - The more profit or safety built into the annuity for the annuity provider, will boost the $ wanted for the annuity from the customer. That would raise the multiplier. As such, I don't think I'll go all the way out to 19 times as a reasonable value. But this is all just a swag anyhow.

 

[OAG]

Let's see if this will work: Anticipated YOD (year of death) maybe 90? The 90 minus current age (62?) would equal 28 years to draw (YTD). Benefit increased by a factor for inflation (maybe 3.5%). After first year increases by 3.5% per year. Then take (in this case) 28 years of benefits to equal a logical present value (in todays dollars). Then each year the multiplier decreases by 1 (at age 63 you only run another 27 years to reach 90). The number does not mean too much since once started you have no influence over the withdrawals. Makes a nice "feel good" number however and seems to be as good as any other one. This method does result in the balance reaching 0 at age 90 and, on that basis, is somewhat logical.

 

[d]

to the above you should include a random number (0 to 1), use that to multiply by the NPV result.

as i suggested with this comment earlier ... you're likely missing something. the NPV should reflect the probability distribution of your living to collect that future stream of payments, and the likelihood of changes to that stream (in view of the status of the s.s. system).

 

[Telly]

d, my purpose in this exercise was to get an idea of the impact on portfolio allocations by SS, when taken. This was an outgrowth of my earlier look at my very small pension coming up.

I've been EER'd for some years now, so there have been no new contributions to SS. In my financial spreadsheets, I take the latest requested statement value of mo. benefit @ 62, and I adjust it upwards by a provisionable Wage Adjustment Factor each year though age 60. I presently have the W.A.F. set at 2.5%. Then at age 62, I take the adjusted benefit, and multiply it times a provisionable "reality factor". I have that set to 73%, so it whacks off 27% of the benefit right off the top. I then use that value for the first year of SS. Have a provisionable COLA factor from there on. I usually set the COLA factor to Inflation - 1.

I think my whacking 27% off of the top of SS is pretty very conservative! Of course, only time will tell!

 

[d]

telly:
my point is simply that the uncertainties going forward, unless included in the calculation make any npv potentially misleading. your 27% "adjustment" does equate well with my suggestion of adding a random number to the calculation, but i personally find the uncertainties so great at to make any npv calculation meaningless.
d