Social Security Is The Best "Annuity" Deal, Say Experts

[mickeyd]

The author digs into his own SS account and discovers that it's a darn good deal after all. Prior to receiving my SS, I dug into SS as much as I could and came away with an understanding that SS was an excellent plan for the beneficiaries (not necessarily for the taxpayers) because it was so flexible.

I agree with much of what the author says in the piece.

By the time he retires, Klein estimates, he and his employer will have paid $314,000 to $381,000 into Social Security, depending on when he retires, far less than the cost of a deferred income annuity that would match the Social Security benefits.
Part of the reason Social Security is such a good deal, Klein explains, is the fact that the benefits go up 8 percent a year for each year the recipient delays receiving benefits after full retirement age until age 70.
To keep the calculations simple, Klein says he did not include his wife’s spousal Social Security benefits. But in fact, she will be entitled to half of the amount he is receiving when she reaches her full retirement age and she will receive either his full benefit amount or hers, whichever is higher, after he dies.

Social Security Is The Best "Annuity" Deal, Say Experts

 

[heeyy_joe]

After checking other current annuity rates, the author decided to go way out on a limb with this declaration, eh?

 

[HillCountry]

The author is clueless about present and future value of the money.

Excluding this year, I paid 17 years of tax, combined at a total of $194K (employers & self). If I stop working today, I will get a SSA payout of $15.4K (today's dollar) at 62.

Do I make my contribution $194K at 62? Definitely not!

Assuming 6% compounding, my $194K today over the 17 years should have been $309K now. And at 62, that is going to be $741K. Assume sustainable WR of 4%, my money will produce $29.6K. While SSA check will be $24K (assuming 3% inflation).

 

[nun]

......and it's even better if you can defer until 70. I came to the conclusion that Government sources of retirement income were a good deal 25 years ago and I decided to make voluntary payments into the UK equivalent of SS in addition to also paying FICA. So for the past 25 years I've paid an average of $200 a year to the UK and that will get me a full state pension at age 66 of about $1800/month........so I've doubled down on SS.

 

[nun]

The author is clueless about present and future value of the money.

Excluding this year, I paid 17 years of tax, combined at a total of $194K (employers & self). If I stop working today, I will get a SSA payout of $15.4K (today's dollar) at 62.

Do I make my contribution $194K at 62? Definitely not!

Assuming 6% compounding, my $194K today over the 17 years should have been $309K now. And at 62, that is going to be $741K. Assume sustainable WR of 4%, my money will produce $29.6K. While SSA check will be $24K (assuming 3% inflation).

A nice annuity then........the SS has political risk rather than market risk, but I believe it's good to have both in your portfolio.

 

[ziggy29]

After checking other current annuity rates, the author decided to go way out on a limb with this declaration, eh?

I thought this was pretty common knowledge by now, even more so today than in the past given horrible rates on annuities because of the ongoing low interest rates (aka The War on Savers)....

 

[ziggy29]

A nice annuity then........the SS has political risk rather than market risk, but I believe it's good to have both in your portfolio.

And in reality, if you are over 55 the political risk drops sharply. It doesn't vanish entirely, but as I mentioned in another thread this morning, I hear almost no one in Washington willing to suggest, let alone vote for, any changes that would result in *direct* benefit cuts for anyone over 55.

 

[ERhoosier]

And in reality, if you are over 55 the political risk drops sharply. It doesn't vanish entirely, but as I mentioned in another thread this morning, I hear almost no one in Washington willing to suggest, let alone vote for, any changes that would result in *direct* benefit cuts for anyone over 55.

Perhaps not direct benefit cuts, but certainly NET benefit cuts if/when taxes are increased on high-earners/high NW retirees. It's only a small jump to subjecting all SS benefits (from current max of 85%) to income tax. Most forget that prior to 1980's SS benefits were not subject to fed income tax. IMHO- there is very real political risk of increased SS taxation &/or benefit reductions with outside income.

 

[ziggy29]

Perhaps not direct benefit cuts, but certainly NET benefit cuts if/when taxes are increased on high-earners/high NW retirees. It's only a small jump to subjecting all SS benefits (from current max of 85%) to income tax.

Sure -- which is why I specifically said "direct". I fully expect some tinkering with the amount of SS that is taxable, or changes to how COLAs are calculated, but no one directly slashing benefits for anyone already old enough to get benefits, and probably not anyone over 55.

In reality, the lack of inflation indexing on the thresholds that trigger 50% and 85% taxation of SS benefits already is an ongoing stealth form of "reduced benefit" through bracket creep, and have been a rather significant source of lower *real* after-tax benefits over the years. That's really a topic that should have had seniors hopping mad for years, even more so than about proposed "SS reforms" that aren't likely to hit them too hard anyway (relative to their kids and grandkids).

As it is today, if you don't even have 50% of your SS taxed, you're probably living in poverty or very close to it, and that wasn't the case in the 1980s when this started. And the threshold that triggers 85% is generally considered lower middle class today. It's a little ironic that in the 1980s, when they eliminated "bracket creep" by indexing income tax brackets to inflation, they added a system of taxing SS benefits which were NOT.

 

[Independent]

The author digs into his own SS account and discovers that it's a darn good deal after all. Prior to receiving my SS, I dug into SS as much as I could and came away with an understanding that SS was an excellent plan for the beneficiaries (not necessarily for the taxpayers) because it was so flexible.

I agree with much of what the author says in the piece.

I think most people here would agree that if you're 62 and thinking about buying a private SPIA, you should defer your SS payment instead. Especially given today's low interest rates, SS is the better deal.

But, whether SS has been a good deal based on a lifetime's history of tax payments is a different question. The author appears to be completely ignoring investment returns that could have been earned on his taxes. I don't see how someone who claims to be a financial adviser can make that mistake.

 

[gauss]

The author is clueless about present and future value of the money.

Excluding this year, I paid 17 years of tax, combined at a total of $194K (employers & self). If I stop working today, I will get a SSA payout of $15.4K (today's dollar) at 62.

Do I make my contribution $194K at 62? Definitely not!

Assuming 6% compounding, my $194K today over the 17 years should have been $309K now. And at 62, that is going to be $741K. Assume sustainable WR of 4%, my money will produce $29.6K. While SSA check will be $24K (assuming 3% inflation).

But it sounds like you are counting the employer half of "your" $194K. You should be comparing the SSA check ($24k) to 1/2 of the sustainable WR, ie $14.8k if I am following your illustration correctly

-gauss

 

[comicbookgujy]

Why would anyone buy an Annuity in this low rate environment

So he contributed about $122,000 during his 35 years working. that's about $3,500 annually.

If he put that $3,500 annually into the S & P 500 for the last 35 years, his $122,000 would be $1,000,000.00(using the 10% return over the last 35 years...past performance is not an indication of future performance blah blah).

Hell of a lot more than the $600k he's talking about to buy an annuity!!!



"Over his working career, Klein and his employers have paid $243,000 into the Social Security system."

 

[AndrewJackson]

Like others have said, you need to calculate the fv the employee/employer tax payments. If one would have invested these funds, the beneficiary would have received a much much higher return, it would be of no liability to anyone, and it could be passed on to other generations. game/set/match

 

[obgyn65]

I did last year. I bought deferred annuities, as discussed in other threads. Please use the google function above for more details. I am also aware that other forum participants have bought deferred annuities and SPIAs. However, it is fair to say that a majority of participants here are not in favor of annuities.

IMO the rate environment will get worse so I locked in my rate last year. Only time will tell who was right.

Why would anyone buy an Annuity in this low rate environment

"

 

[nun]

But, whether SS has been a good deal based on a lifetime's history of tax payments is a different question.

It is a different question, and SS is completely different from equities so to compare the returns on a given contribution without including the relative risks isn't of much use IMHO.

 

[nun]

Like others have said, you need to calculate the fv the employee/employer tax payments. If one would have invested these funds, the beneficiary would have received a much much higher return, it would be of no liability to anyone, and it could be passed on to other generations. game/set/match

Risk needs to be included to make any comparison. Also people forget that SS is not just for you, it's for everyone who works and also provides disability payments. The SS of those on low wages is subsidized by higher earners.

 

[nun]

I did last year. I bought deferred annuities, as discussed in other threads. Please use the google function above for more details. I am also aware that other forum participants have bought deferred annuities and SPIAs. However, it is fair to say that a majority of participants here are not in favor of annuities.

IMO the rate environment will get worse so I locked in my rate last year. Only time will tell who was right.

I'll give a shout out for annuities as a part of retirement income planning. My post 66 income will be completely covered by SS, annuities and rental income. My equity and bond portfolio is there as a backstop and my WR will actually be negative.

 

[steelyman]

I'll give a shout out for annuities as a part of retirement income planning. My post 66 income will be completely covered by SS, annuities and rental income. My equity and bond portfolio is there as a backstop and my WR will actually be negative.

I think your teeth will be very white too.

 

[Midpack]

I did last year. I bought deferred annuities, as discussed in other threads. Please use the google function above for more details. I am also aware that other forum participants have bought deferred annuities and SPIAs. However, it is fair to say that a majority of participants here are not in favor of annuities.

IMO the rate environment will get worse so I locked in my rate last year. Only time will tell who was right.

Not impossible by any means, but how much worse can it get? There's not much downside left is there? One chart below, more at the link.

OTOH, better yields (annuities, bonds, CDs, etc.) are most likely years away if not a decade or more. I'm still not interested in a SPIA, but I never expected low rates to persist as long as it now appears they may.

Annuity Rates & Trends (Updated Monthly) — ImmediateAnnuities.com

 

[NanoSour]

The author is clueless about present and future value of the money.

Excluding this year, I paid 17 years of tax, combined at a total of $194K (employers & self). If I stop working today, I will get a SSA payout of $15.4K (today's dollar) at 62.

Do I make my contribution $194K at 62? Definitely not!

Assuming 6% compounding, my $194K today over the 17 years should have been $309K now. And at 62, that is going to be $741K. Assume sustainable WR of 4%, my money will produce $29.6K. While SSA check will be $24K (assuming 3% inflation).

Most of this conversation revolves around whether SS is a good deal for the contributor or not. For my money SS is much much more. Considering the life insurance aspect of SS for your family should you not make it to anywhere close to FRA. That's where it just became the deal of a lifetime.

We all cheer for how important it is for children to have a stay at home parent. Heaven forbid the bread provider pass early; but, it's nice to know there is SS for the spouse and children's benefit.

To me there's more to SS than meets the eye.

 

[Independent]

It is a different question, and SS is completely different from equities so to compare the returns on a given contribution without including the relative risks isn't of much use IMHO.

Yes, I could have gone further and said that SS is completely different from private pensions (at least since ERISA).

SS is an income transfer program in which current workers pay taxes that fund the benefits of current retirees.

The important question is not "What's my IRR, assuming the program is still around when I get old?"

The important question is "Am I comfortable paying taxes today to support people in my parents' and grandparents' generations? or, would I prefer to support them through direct cash assistance and private charity?"

 

[haha]

The important question is "Am I comfortable paying taxes today to support people in my parents' and grandparents' generations? or, would I prefer to support them through direct cash assistance and private charity?"

I don't see how that can be an important question, let alone "The important question". This choice is not going to be offered, ever. Workers will continue to pay; the only difference from today is that their middle class parents may not get much, and will need help in addition to what is being extracted from their children via taxes.

IMO, the only possible way SS gets fully dismantled is during a possible future dictatorship when the Big Chief says-SS cancelled because of lack of funds.

In effect, SS taxes have been going into the general fund for a long time, via governmental borrowing from SS. SS seems to be undergoing a transition into an outright welfare program.

Ha

 

[ziggy29]

The important question is "Am I comfortable paying taxes today to support people in my parents' and grandparents' generations? or, would I prefer to support them through direct cash assistance and private charity?"

And if you'd prefer the latter, you also have to ask if there are enough people out there who (a) agree with you *and* (b) put their money where their mouths are in order to make these senior services feasible with only voluntary donations.

It's a classic tragedy-of-the-commons situation: no one thinks they can make a difference alone, so few people try, thus ensuring no difference is made.

 

[Independent]

I don't see how that can be an important question, let alone "The important question". This choice is not going to be offered, ever. Workers will continue to pay; the only difference from today is that their middle class parents may not get much, and will need help in addition to what is being extracted from their children via taxes.

IMO, the only possible way SS gets fully dismantled is during a possible future dictatorship when the Big Chief says-SS cancelled because of lack of funds.

In effect, SS taxes have been going into the general fund for a long time, via governmental borrowing from SS. SS seems to be undergoing a transition into an outright welfare program.

Ha

Okay, neither question is "important" in the sense that you and I could change things.

We should stick to stuff like when to start benefits - we actually have individual choices on that.

 

[gauss]

Okay, neither question is "important" in the sense that you and I could change things.

We should stick to stuff like when to start benefits - we actually have individual choices on that.

Regarding SS, you have the choice to contact your legislators and weigh in on your thoughts on how the program should be changed, if any, when it is being considered for reform.

This is what I try to get people to do after pointing out to them the great sums of money that many have accrued under the current system.

-gauss