Comparing My SS to Investing in th S&P500

[Time2]

Just for fun,

I recently update a spreadsheet that multiplies my yearly SS payments times the S&P multiple from the end of the SS payment year until the end of 2020. Note: 2021 SS payments through December I did not start growing those until January of 2022 and we aren't done with the year, so no number yet for that.
I find when I total all the S&P growth plus dividends for every year since I started paying SS in 1970, I get $1,149,771 If I multiple that by 4%, I get $45,990. If I had taken my SS at the end of 2020, my payment would have been $22,200. The difference is probably nothing we weren't aware of, but a just a little data. Note: included in SS is a disability policy for me and survivor benefits for my family. These did nothing for me and my family, but it did help my parents, my father was disabled at 43 years old.

Just a point of interest, my SS payment would about 1/2 of what I could have expected, if I had invested in the S&P 500 and used the 4% rule.
I used this S&P calculator and I included dividends.

https://dqydj.com/sp-500-return-calculator/

 

[Fermion]

It is sometimes a lot better value for a spouse.

$0 contributed to the S&P500 would grow to $0 over 30 years, while $0 invested in SS could result in a annual payment of $13,000 or so after 30 years.

 

[Time2]

It is sometimes a lot better value for a spouse.

$0 contributed to the S&P500 would grow to $0 over 30 years, while $0 invested in SS could result in a annual payment of $13,000 or so after 30 years.

I'm surprised at that amount since many retirees that worked enough quarters to qualify, don't get much more than $1,000.
How does a spouse qualify if no money was ever paid in?

 

[Fermion]

I'm surprised at that amount since many retirees that worked enough quarters to qualify, don't get much more than $1,000.
How does a spouse qualify if no money was ever paid in?

Well, I did say *could*

"In April 2022, the average monthly benefit for retired workers was $1,666.49. The average monthly benefit spousal benefit was $837.34."

So on average, a spouse benefit for someone who contributed $0 is $10,048 a year. Not $13,000 but still beats investing $0 in the S&P500 though don't you think?

 

[Sunset]

....
How does a spouse qualify if no money was ever paid in?

The spouse of someone eligible to collect SS can collect 50% of the spouses amount without any earnings.

This does not subtract from the spouse's SS in any manner.

Can also collect if was married for 10 years and then divorced.

 

[pb4uski]

There are some flaws with the comparison though.

First, as you noted, a portion of what you pay in SS provides disability benefits to you and life insurance benefits to your survivors in addition to retirement benefits, so that money should be carved out in comparing to retirement benefits. I recall seeing something at one point that about 72% of what is paid in relates to retirement benefits, so that would reduce your $45,990 to $33,113.

Second, if an insurer were offering a deferred annuity where the policyholder was making premium payments for 30-40 years and then annuitizing it, there is no way that it would be allowed to invest the policyholder funds 100% in stocks... the same for a defined benefit pension plan... so it is a bit of a false comparison to begin with. The assets backing such a liability would likely be 20% stocks at most.

Third, if we could trust people to regularly invest for their retirement rather than living above their means and living paycheck-to-paycheck so they would have money for retirement then there would be no need for social security... but alas, we can't. You won the game, but there might be someone that was similarly situated to you at age 20 that had similar career earnings but made different decisions or had some bad luck and didn't win the game and is thankful that SS provides a backstop for their living expenses when they can no longer work.

I've actually done a similar analysis but a bit differently. I scheduled out my SS earnings for each year from my social security statement, calculated what I paid in SS each of those years based on the SS rate for those years... got pretty close to the total shown SS taxes paid as shown on my SS statement. Then I multiplied each year's payment by 72% to reflect the amount paid for retirement benefits. I then added retirement benefits assuming that I started at my FRA and COLAs average 2% (the Fed's long-run inflation target).

I calculated the IRR of the cash outflows and inflows from when I first started working in 1970 to various ages and derived the table below:

Age	IRR
70	1.91%
71	2.77%
72	3.44%
73	3.97%
74	4.41%
75	4.78%
76	5.09%
77	5.36%
78	5.59%
79	5.80%
80	5.98%
81	6.14%
82	6.28%
83	6.41%
84	6.53%
85	6.63%
86	6.73%
87	6.81%
88	6.89%
89	6.96%
90	7.03%
91	7.09%
92	7.14%
93	7.19%
94	7.24%
95	7.28%
96	7.32%
97	7.36%
98	7.39%
99	7.42%
100	7.45%

The analysis suggests that my "return" based on my retirement benefit contributions compared to my projected retirement benefits through an "average" age of 83 is 6.41%, which doesn't seem all that bad.

Of course, higher than 2% COLAs will increase the IRRs... below is the results with a 4% COLA rather than 2% COLA to give you a sense of the sensitivity of the IRRs to the COLA assumption.

Age	My Contrib
70	2.25%
71	3.14%
72	3.83%
73	4.38%
74	4.84%
75	5.23%
76	5.56%
77	5.85%
78	6.10%
79	6.33%
80	6.52%
81	6.70%
82	6.86%
83	7.00%
84	7.13%
85	7.25%
86	7.36%
87	7.46%
88	7.55%
89	7.63%
90	7.71%
91	7.78%
92	7.84%
93	7.90%
94	7.96%
95	8.01%
96	8.06%
97	8.10%
98	8.15%
99	8.18%
100	8.22%

 

[Time2]

Not $13,000 but still beats investing $0 in the S&P500 though don't you think?

Yes. Unquestionable logic!

 

[Time2]

The spouse of someone eligible to collect SS can collect 50% of the spouses amount without any earnings.

This does not subtract from the spouse's SS in any manner.

Can also collect if was married for 10 years and then divorced.

OK, I read it wrong, I thought the dead spouse earned $0 and the living spouse collected money.


It all kinda misses my point about what I paid into FICA vs what I collect from SS.

 

[Time2]

There are some flaws with the comparison though.

First, as you noted, a portion of what you pay in SS provides disability benefits to you and life insurance benefits to your survivors in addition to retirement benefits, so that money should be carved out in comparing to retirement benefits. I recall seeing something at one point that about 72% of what is paid in relates to retirement benefits, so that would reduce your $45,990 to $33,113.

Yes, I noted it, but lacked the info, regarding your 72% concept.

Second, if an insurer were offering a deferred annuity where the policyholder was making premium payments for 30-40 years and then annuitizing it, there is no way that it would be allowed to invest the policyholder funds 100% in stocks... the same for a defined benefit pension plan... so it is a bit of a false comparison to begin with. The assets backing such a liability would likely be 20% stocks at most.

I was thinking more about not paying SS and investing the amount myself.

Third, if we could trust people to regularly invest for their retirement rather than living above their means and living paycheck-to-paycheck so they would have money for retirement then there would be no need for social security... but alas, we can't. You won the game, but there might be someone that was similarly situated to you at age 20 that had similar career earnings but made different decisions or had some bad luck and didn't win the game and is thankful that SS provides a backstop for their living expenses when they can no longer work.

100% agree, and have made the argument that without SS we would be supporting seniors in another way. Most won't invest for themselves.

I'm absolutely sure others made different decisions, my wife and I had a middle, middle class income yet saved and invested ourselves to the top 5% of net worth in the US. I'm sure we are a rare species! But, I'm anticipating the $53,000 in SS my wife and I will get in 2 years 8 months when I turn 70.


I can't figure out where I messed up the quote function, Please point it out if you see it.

 

[athena53]

It's complicated.

Someone posted a link to this study a few years ago. It was done by the Office of the Actuary at SS and compared the annuity value of SS benefits (including al the bells and whistles- COLA, spousal and survivor benefits, etc.) with what the wage earner and employers put in, accumulated at the "imputed" rate of interest on SS funds.

https://www.ssa.gov/OACT/NOTES/ran7/index.html

Results vary by date of birth, marital status and earnings level but it appears I'm getting about 60-70% of the accumulated value of what my employers and I paid in, with imputed investment income. (I started maxing out the wage cap early in my career.) I know the formula is tilted in favor of low-income earners and I'd be OK with that of it weren't for the additional taxes I'm now paying on my SS income.

And I agree with Time2- we need a socialized plan for those who can't or won't save for retirement. Right now nearly 50% of seniors rely on SS for 90% or more of their retirement income and most of them need income-based benefits funded by the taxpayers such as Meals on Wheels, Medicaid/Medicare combinations, subsidized housing and Medicaid-funded LTC.

 

[MichaelB]

I can't figure out where I messed up the quote function, Please point it out if you see it.

You ended each quite with the forward slash in the wrong location [quote/] instead of [/quote]

 

[RetMD21]

Just a point of interest, my SS payment would about 1/2 of what I could have expected, if I had invested in the S&P 500 and used the 4% rule.
I used this S&P calculator and I included dividends.

https://dqydj.com/sp-500-return-calculator/

Are 4% withdrawals guaranteed?

 

[Time2]

you ended each quite with the forward slash in the wrong location [quote/] instead of

[/quote]


lol!
I see you fixed that for me.
Thanks.