Present value of Social Security

[Sam]

There was some discussion on the Present Value of SS in the recent Net Worth thread. Several suggestions were made, 25x, 14x, or just the sum of expected payments...

I estimated mine using FIRECalc in the following procedure. Example:

Input 1)
Desired annual expense: EXP
Years: YRS
SS: 0
Desired success rate: 95%
Let FIRECalc calculate the required nest egg: NestEgg1

Input 2)
Everything's identical to input 1) except
SS: Actual value.
Again let FIRECalc calculate the required nest egg: NestEgg2

The present value of my SS is: NestEgg1 - NestEgg2

 

[wheel9]

And your calculation showed how many times for the value?

 

[Sam]

If I were to retire today (age 49), and to collect SS at 62, and to die at age 79, it would be 10.5 times the annual payment.

10.9 times for same scenario as above, except to die at age 89.

 

[haha]

If I were to retire today (age 49), and to collect SS at 62, and to die at age 79, it would be 10.5 times the annual payment.

10.9 times for same scenario as above, except to die at age 89.

This is lower than the other figures that people have determined using other methods. I imagine the differences, at least when contrasted to other valid methods, come mostly from the fact that Firecalc implicitly uses a discount rate in the area of 4%

Ha

 

[jdw_fire]

This is lower than the other figures that people have determined using other methods. I imagine the differences, at least when contrasted to other valid methods, come mostly from the fact that Firecalc implicitly uses a discount rate in the area of 4%

Ha

The difference in values (10.9x & 25x) of an income stream mainly comes from how long you have to wait before actually starting to receive said income stream. The 25x valuation is a rule of thumb for an income stream you are presently receiving. (It is just a rule of thumb because the actual value depends on how long you expect to receive said income stream i.e your life expectancy and the prevailing ROR at the time the valuation is made.) The above valuation of a SS stream is considerably lower than the 25x ROT because it won't start for another 13 yrs.

 

[Sam]

The above valuation of a SS stream is considerably lower than the 25x ROT because it won't start for another 13 yrs.

Exactly. So the same consideration should be taking into account for non-SS pension too. If you are not currently receiving payments, the present value of the pension could be significantly less than 25x.

 

[Peaceful_Warrior]

What's social security?

I don't have confidence I'll ever see a penny of what I pay into the system...

 

[Sam]

I have all the confidence that SS will be there for me in 13 years.

 

[tryan]

Found the Bogle reference ... it's from a Scott Burns article. Here ya go :

"Think about everything, not just your investment program. That means think about Social Security. If you're fortunate, it can be $25,000 a year. It's great money. When you do your asset allocation, you want to include that. At 5 percent, that $25,000 is like having $500,000 [in assets]. As a life income, it's more like $350,000. That should be part of your calculation."

Suppose, for example, that your Social Security income is $17,000 a year – a typical figure for a couple – and your 401(k) rollover account and other financial assets are $400,000. Then you start your asset allocation with a conservative value for your Social Security at 14 times the income, or $238,000. Added to your $400,000 in savings, this means you have the equivalent of $638,000. In effect, 38 percent of it is already allocated to a bond equivalent.

"Don't count your house as long as you are going to live in it," Mr. Bogle said.

http://www.dallasnews.com/sharedcon...umns/2003/stories/102603dnbusburns.50a9e.html

 

[RgrGd]

If you have the Excel spreadsheet, click on Tools, Easy Calc, Other, Financial.

There you will find a formula PV(payment, rate, term)

Make sure the 3 variables are all stated in the same time frame, i.e., years and as others point out, the PV - Present Value is at the start of the payment series. This does not account for future COLAs.

If you are looking at the present value for a string of payments at some time in the future, you can do the above calculation to get the PV at the start of that series of payments, then treat that number as the Final Value to bring it back to current day. That formula is also there.

 

[jdw_fire]

Neither of these methods are realistic. The best way to value a lifetime income stream that is annually adjusted for inflation is to see what a comparable SPIA with the same payments and CPI adjustments would cost you and then discount that amount for the time between now & the date the lifetime income stream you are trying to value actually starts.

 

[d]

The best way to value a lifetime income stream that is annually adjusted for inflation is to see what a comparable SPIA with the same payments and CPI adjustments would cost you and then discount that amount for the time between now & the date the lifetime income stream you are trying to value actually starts.

ditto

 

[tiredofwork]

Neither of these methods are realistic. The best way to value a lifetime income stream that is annually adjusted for inflation is to see what a comparable SPIA with the same payments and CPI adjustments would cost you and then discount that amount for the time between now & the date the lifetime income stream you are trying to value actually starts.

Also, I would use the 30-yr TIPS rate to do the discounting for the period between now and when the income streams starts, perhaps with a small adjustment to reflect the probability that you could die during that time period and not collect.

 

[Running_Man]

I read last night that the present value of all outstanding liabilities for Social Security and Medicare using the same rules pension funds must use is 75 Trillion dollars which is greater than the total value of all stocks and bonds in the world. So the odds of Social Security remaining at the same payout are very low.

 

[tiredofwork]

I read last night that the present value of all outstanding liabilities for Social Security and Medicare using the same rules pension funds must use is 75 Trillion dollars which is greater than the total value of all stocks and bonds in the world. So the odds of Social Security remaining at the same payout are very low.

Most of the problem is with Medicare. Biggest issue with Medicare is pinning down medical inflation, making it very difficult to know when it is "fixed". The recent prescription drug benefit didn't help matters either. Social Security obligations are clearly defined and fairly easy to fix with well-known adjustments.

 

[vimwick]

i'm confused. what i don't get is the appropriate discount rate. i see pension valuations use the 30 yr treasury rate but the expected inflation rate for the period seems right to me. one is saying how much money do i need to safely invest today to have the money to purchase the annuity tomorrow. the other is saying how much are those tomorrow dollars worth in today's dollars. any insights as to which discount rate is appropriate for personal ss valuation would be appreciated

 

[d]

the treasury rate, or other reasonable investment return, should be used.

edit: as jdw notes below, if using a "current $" estimate, a real rate should be used

 

[jdw_fire]

i'm confused. what i don't get is the appropriate discount rate. i see pension valuations use the 30 yr treasury rate but the expected inflation rate for the period seems right to me. one is saying how much money do i need to safely invest today to have the money to purchase the annuity tomorrow. the other is saying how much are those tomorrow dollars worth in today's dollars. any insights as to which discount rate is appropriate for personal ss valuation would be appreciated

Actually when you use SS payment estimates that are given in current year dollars the appropriate discounting rate would be the expected real ROR between now and when you start receiving SS. As per tiredofwork

I would use the 30-yr TIPS rate to do the discounting for the period between now and when the income streams starts

However I would not make the

small adjustment to reflect the probability that you could die during that time period and not collect.

Also, a case can be made that SS is more valuable than a comparably paying SPIA since the SPIA is not backed by the US government and thus has more credit risk than SS.

 

[d]

more credit risk than SS

.. but a SS has a congressional risk!

 

[vimwick]

so, discounted by the yield of the appropriate year tips? i'm just looking for the consensus prudent way to value social security and pension income as share of (extended) net worth. thanks for the input

 

[Cut-Throat]

.. but a SS has a congressional risk!

So do T-Bills, $100 Bills, $20 Bills, $10 Bills etc. etc. etc. 8)

 

[ERD50]

From that Bogle interview (that tyran posted above):

http://www.dallasnews.com/sharedcon...umns/2003/stories/102603dnbusburns.50a9e.html

That means think about Social Security. If you're fortunate, it can be $25,000 a year. It's great money. When you do your asset allocation, you want to include that. At 5 percent, that $25,000 is like having $500,000 [in assets]. As a life income, it's more like $350,000. That should be part of your calculation."

Why does he say $25,000 in SS looks like $350,000 in assets? That is a 14x multiplier. The FIRECALC runs I do (and the rule of thumb thrown around here) shows SS (or COLA pension) would require about a 25x in assets to replace it, and I get 26.8x for a 50 year time frame.

14x seems pretty close to what I get for a NON-COLA pension (12.8x for 30 years, 17.2x for 50 years).

Is Bogle discounting SS for some reason (he is assuming changes in SS)? In the context, it does not sound like he is talking about taking it in the future, he is talking about someone 'about to retire'.

confused - ERD50

 

[Sam]

Why does he say $25,000 in SS looks like $350,000 in assets? That is a 14x multiplier.

14x is actually quite good. Mines are much lower. I used FIRECalc to arrive at these multipliers, and they look alright to me.

If I were to retire today (age 49), and to collect SS at 62, and to die at age 79, it would be 10.5 times the annual payment.

10.9 times for same scenario as above, except to die at age 89.

 

[ERD50]

14x is actually quite good. Mines are much lower. I used FIRECalc to arrive at these multipliers, and they look alright to me.

If I were to retire today (age 49), and to collect SS at 62, and to die at age 79, it would be 10.5 times the annual payment.

10.9 times for same scenario as above, except to die at age 89.

Yes, but your number is accounting for *not* collecting SS from age 49 until age 62. So certainly, the portfolio required to replace SS will be less if the payouts are postponed for 13 years. In that case, I would agree with your multipliers.

I just don't see anything in Bogle's statement to include that caveat. He is a bit vague with that 'near retirement' phrase - I would take 'near' as within a year or two, not 13 years away.

For someone age 62, wouldn't SS payouts beginning at age 62 be equivalent to a ~ 25x nest egg?

-ERD50

 

[Sam]

For someone age 62, wouldn't SS payouts beginning at age 62 be equivalent to a ~ 25x nest egg?

I don't see how one would ever achieve 25x. At 4%, when you die, on average you're left with portfolio 2 times larger than the one you started with. With SS, you're left with a few hundred dollars for death benefit.