What is the most valuable financial asset that will support us in retirement?
Most of us think that’s our retirement accounts (regular savings as well as tax-deferred ones). Others might think of the net equity in our homes. Still others might point to a pension, rental property income, and so on.
Few of us will identify our Social Security benefits as our most valuable asset, yet for the vast majority of us—80% or more—that is the case.
Why do we undervalue the importance of this benefit? Probably because we only see the value as a monthly payment, which is difficult to compare to our other assets. We need to “convert” Social Security into a value that provides an “apples-to-apples” comparison.
Consider someone who typically earned an annual income of $60,000 over the course of their working career. This income level would roughly qualify them for a Social Security benefit of around $1,943 if they start claiming at age 66 and a benefit of $2,565 if they claim at 70. If married to a spouse with a similar income and benefit, their combined age 70 benefit would be over $5,000.
As an International Living reader, you’ll already know that this benefit level can provide a comfortable lifestyle in almost any location overseas…with plenty left over to save for a rainy day.
Now, let’s try to find out how much money we would need to have saved in order to be able to draw down this benefit of $2,565 without fear of ever running out of money, no matter how long we live.
We can do this by considering a financial product sold by many insurance companies called an annuity: In a basic annuity, we pay a lump sum to the insurance company and then they pay us a fixed amount of money each month for the rest of our lives. A specialized type of annuity adjusts the monthly amount of the payment for inflation each year…much like Social Security.
So how much would we have to pay an insurance company at age 70 to buy one of these “inflation-adjusted” annuities that would pay us the Social Security benefit of $2,565 for the rest of our lives?
For a married couple, it would cost around $418,000 for his benefit and $474,000 for hers. Why more for her? Because the insurance company knows she will live longer on average and therefore the company will likely need to pay out several years more in benefits.
Think about that: for this couple, their benefits at age 70 are comparable to having saved $892,000 in a savings account…not a tax deferred account where you still have to pay income taxes when you draw it down, but an after-tax account.
That’s a lot of money. Our Social Security benefits are valuable. And like any valuable asset, we need to learn how to get the most out of it.
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