Understand Your Social Security Benefits

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Social Security benefits will help make you rich. Retirement in our country changed forever after 1935. Since federal Social Security laws were enacted citizens who have work throughout their life can expect a guaranteed income after retiring.

When lifespans were shorter and retirement years were brief there was plenty of money to send those few elderly. Now there are fewer workers per elderly retiree and the system is being strained. Nevertheless, it is a great benefit to understand. Social security provides monthly guaranteed income for life. It also gets adjusted upwards with inflation.

Will Social Security Even Be Around?

Doctors sometimes dismiss Social Security altogether. They think the amount will be too small to be important. Or they think the system will be bankrupt or nonexistent at their retirement time. I think neither is the case. Although Social Security income is unlikely to provide a full income replacement in retirement for the average physician, it will be there. Social security is a Federal legal obligation and is sustainable going forward as a transfer payment system. When you are young and working you pay some of the elderly retirees. When you are old and retired, younger workers pay you.

It is a misconception to think you paid into a fund and then the money will come out of that fund for you later. That misconception is what drives fear about the fund running out and being bankrupt.

Fewer Young Paying for More Old People

There are fewer workers supporting more elderly over time. Fertility and immigration have declined. Longevity has increased. Workers retire. This mix is straining the Social Security system. But straining doesn’t equal destroying. Congress has already acted to make it more sustainable. One example was making 67 the new full retirement age (FRA).

Will Social Security Provide Enough to Matter?

Yes. An additional 30K – 70K per year counts. That money is consistent and guaranteed by the U.S. Government. That is nothing to sneer at. Now that pensions have been scrapped for almost all of us, steady guaranteed income like Social Security is even more important. It won’t cover all of your spending needs. But nor should it be dismissed and ignored. Doing so may require you to work longer than you need under the assumption your portfolio will need to be bigger to cover all your spending.

Equities Outpace Inflation

Many of us have inadequate equity investing. We may be overly conservatively invested for the long haul. Stocks tend to consistently provide growth well above the inflation rates over long periods of time. Short-term fluctuations in stock prices, however, make many of us nervous. Because of our fear and anxiety, we carry too low a percentage of equity in our asset allocation. It is just one example of the many ways in which our psychology and behavior make us poor at investing decisions.

You Own a Social Security Bond

One way to become more comfortable with a larger percentage of equity investing would be to consider your fixed income in a broader context. Social Security income is basically a guaranteed pension that is backed by the US government. It is also inflation adjusted. This is an excellent annuity and is comparable to having a large investment in fixed income securities with much less risk. So, basically, you have more bonds than you realized.

When adding up your fixed-income investments, consider adding your future Social Security as a single lump sum investment rather than as a monthly income stream. I thank Darrow Kirkpatrick for making this concept clearer to me in his excellent book, “Can I Retire Yet?” Mr. Kirkpatrick has a lot of credibility with me since he successfully retired at age 50. He does not argue strongly that we should adjust our asset allocation based on Social Security as I am arguing here. But he clearly understands the concept and illustrated the calculations in his book.

How Does This Work in Practice?

The example he gave was an expected Social Security benefit of $2500 per month. That is $30,000 per year. How much money would you need to have to generate that much income through passive investing? We can use the 4% safe withdrawal rate. If you multiply $30,000 per year times 25 that equals $750,000. That is the amount you would need in a portfolio to produce $2500 per month – like what will be coming in through Social Security is a guaranteed income.

We then need to make a couple of adjustments. Since the income is at a future date, we need to discount that amount to the present value. He suggested using a rate of return of 3%. If the working couple in the example are 50 years old and they plan to receive Social Security in 20 years, the present value would be $415,257 (=PV(3%,20,0,-750000))

Let’s Make it Conservative

Because it is difficult to predict all of the economic cycles, political shifts, reduction in benefits, means testing criteria, etc. we could make this estimate more conservative by taking 25% off the total. 75% of future Social Security may be a more reasonable figure over such a long time. That means the conservative amount in today’s dollars would be $311,443 (75% of 415K).

Early Retiree Social Security

Let’s say in my case I am 50 years old and will retire at age 70. First – as an aside – why would I not take Social Security at the earliest opportunity? Let’s say age 62? At age 62 I would receive $1953 per month. If I delayed taking Social Security until age 70, I would receive $3609 per month. We often quote that we receive 8% per year return by delaying Social Security. Although that is true, it minimizes the magnitude of this effect. By starting at age 70 rather than 62 I would receive 85% more income. Furthermore, the income stream is inflation adjusted and guaranteed for life!

I’m a Social Security Millionaire

So back to my example. $3609 per month is equal to $43,308 per year. This would start in the year 2037. What amount of investable assets would be required to produce $43,308 per year using the “4% rule?” The answer is revealed by $43,308 times 25 which equals $1,082,700. Holy smokes. Social Security is extremely valuable.

Now let’s make a couple more adjustments. Since this income is 20 years away, we can discount it at 3% as in the prior example. This yields an equivalent investable asset amount of $600,000 (=PV(3%,20,0,-1082700)). If we conservatively estimate only three-quarters of this amount, that is still $450,000.

Social Security Asset Allocation

How could I use this concept to better understand and adjust my asset allocation? Let’s say I have a $2 million portfolio. $1 million of bonds and $1 million of stock. My asset allocation with regards to equity is therefore 50% (1,000,000÷2,000,000). If I add in the $450,000 from the equivalent Social Security as an annuity/bond, the ratio would change. This would better reflect my actual risk level. My equity percentage would then be 41% (1,000,000÷2,450,000).

If you carry out the calculation using your own Social Security numbers at the SSA website, you may have more courage to invest in equities. That one change would likely enrich you in the long haul.

Navigating Social Security

Social Security provides about 1/2 of retirement income for 1/2 of married couples. You likely should also plan on receiving some.

You Pay up to a Point

Employees pay 6.2% of their salary into this system. Their employer contributes an equal amount to total 12.4% This is up to a limit. That limit in 2019 is $132,900. If you are self-employed you need to pay 12.4%, since you are responsible for both the employee and employer portions.

You Didn’t Pay Into Social Security

There is a misconception that we contribute, and that money is saved in a fund that will later pay us back in our old age. It is a government transfer fund. Active workers who are paying taxes now are paying for the current beneficiaries. This is worrisome since there are more nonworking elderly in the future than there are young employees paying the tax. This becomes an increasing burden.

Will The Trust go Bust?

The trust fund is expected to be depleted in the year 2033. What will happen will likely be a reduction in benefits, later retirement ages, and/or stricter benefits testing in order to preserve the fund going forward.

Early Retirement Social Security Problem

To be eligible to receive Social Security you need 40 credits. You can earn up to four credits per year while working. This means you’re really required to work for 10 years before you are eligible to receive Social Security income. How much income you receive depend on your highest earning years. Social Security will look at your 35-year work history. If you have not worked 35 years, zeros will be filled in for years that you did not work. There is a benefit to a long work career since that avoids zeros in your income record.

Waiting Until Age Seventy

If you take Social Security before “full retirement age” your benefits will be permanently reduced. Delaying taking benefits until your Full Retirement Age or beyond to age 70 results in the equivalent of a guaranteed 8% return on your investment. There are other benefits to taking it later. For one thing, working during early retirement will reduce your Social Security income during those years.

As a spouse, you are eligible for a benefit from being married to a wage earner as defined by social security. The spousal benefit is worth 50%. Thus, a married couple could take up to 150% of the working spouse benefit.

If you understand all that is in this brief primer, you are way ahead of about 80% of Americans who have limited knowledge of how social security income works. Do you look forward to receiving this guaranteed income stream?  Are you invested in more equities because you own a “Social Security Bond?”


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  1. Dr. MB said:

    My government benefits and my tax deferred RMD account make up my retirement fund. I make sure this is in guaranteed income.

    I invest in equities with my “risk portfolio” in my other accounts. It allows me to take risk since I know my guaranteed money will provide enough income for my basic living expenses.

    December 10, 2018
    • RMD + Guaranteed income sounds like a great combination to me, Dr. MB.
      We just need enough in equities to have some growth of our portfolio. It is great to have a steady income that isn’t so fickle as the stock market.

      December 10, 2018
  2. I think the concept of considering your future social security as a bond fund in your portfolio is brilliant. It will get people to put more money in equities and get a higher overall return. I guess that means I have some bonds now. I personally have been one of those who does not use my future social security payments in my retirement plan figures. I treat it as a nice bonus, which makes my calculations very conservative. Since I really don’t know what my SS payments will be, as it is different based on when I would start taking it, it is a moving target. I am leaning towards taking it early, since I won’t need it anyway, and discussed why here:


    Thanks for providing me with a new prospective on SS.

    Dr. Cory S. Fawcett
    Prescription for Financial Success

    December 10, 2018
    • Thanks for the comment, Cory.
      I think if the rest of my readers end up as financially successful as you have been, then Social Security can be viewed as an optional bonus. Since 1 in 4 doctors don’t even have a million dollars by age 65, Social Security will play a bigger role in the lives of many.

      December 10, 2018
    • Refugee from Academia said:

      Dr. Fawcett: You can log into the Social Security website and see the current estimates of what your benefit will be at 62, full retirement, and 70.

      December 11, 2018
  3. Very informative WD. I agree people don’t give SS the value it deserves. A $70k annual benefit is like having $2mm nest egg at a 3.5% SWR. My brother’s father-in-law and his wife live solely on their SS benefits in expensive Silicon Valley. Granted, their home is paid off (as it should be by retirement age) and they are moderately frugal. It goes to show that it can be done.

    December 10, 2018
    • MD,
      Wow, that is impressive that they can live off SS in a HCOL area. Social security income was certainly a big part of the income for my grandparents and father in their later years.

      December 10, 2018
  4. Gasem said:

    I’m taking at 70. The law is written for a ~ 24% reduction slated in 2033. Since it’s law congress doesn’t have to act they simply stand back and let it happen. People will bitch, to bad so sad. By waiting till 70 I will have 13 years of age 70 benefits that will revert to slightly more than my FRA benefit at 83. My wife OTOH will take when she is 62 and I will claim spousal until I turn 70. At 70 she will continue to take her age 62 benefit and I will take my full benefit. Upon my death she will claim survivor benefits raising her benefit to about 3500/mo inflation adjusted for life. This benefit dance results in about 200K improved payout over 30 years. In addition SS is only taxed at 85% so you get COLA and a tax break. I am retiring in what I call epochs. My first epoch was to cash out some stocks for money to live on while I Roth convert so I can convert at max efficiency. The next epoch will be to glide down my conversion by my wife’s SS + my spousal amount therefore converting a slightly smaller amount but I am pre-loading the Roth maximally prior to the SS kicking in. At 70 Roth conversion will be complete and a new epoch will ensue of which SS will play a prominent if not dominant role for the rest of our lives. It won’t provide all of our income by any means but will dramatically reduce the WR required from other accounts preserving their value. I don’t look at SS as a bond but as an annuity.

    Good article

    December 10, 2018
    • Gasem,
      Thanks for sharing your thought and details. It sounds like you have a solid plan.

      December 10, 2018
    • Dr. MB said:

      My government benefits are definitely my annuity.

      Cheaper and safer since the government is the counterparty.

      It mitigates market risk, inflation risk and longevity risk. Good luck trying to buy an affordable annuity that can accomplish that!!

      December 10, 2018
      • Good point, MB.
        Most of the affordable annuities (SPIA) are not inflation-adjusted. There is always a risk of the insurer going bankrupt as well.

        December 11, 2018
  5. Xrayvsn said:

    Love this post WD.

    Novel idea of treating Social Security as a bond like investment which can change your asset allocation to have a more equities tilt.

    I have sort of in jest stated that the Social Security system is like a big Ponzi scheme in terms of the top of the pyramid (the retirees claiming social security) are getting the funds mainly through the base of the pyramid (the current workers). As you have pointed out this can set up for some trouble ahead as there are fewer and fewer workers to support the growing older population (whose longevity is increasing thanks to medicine). The FIRE movement certainly doesn’t help in this respect either.

    December 10, 2018
    • Thanks, Xrayvsn
      Even those invested 100% in equity actually have some steady income coming. We can think of that as an annuity or a fixed income security. There may be further restrictions or means testing coming in the future. We still will have some money coming to us though.

      December 10, 2018
  6. Crispy Doc said:

    While I should not be surprised that you continue to broaden my financial thinking in new ways, conceiving of social security as a bond allocation is a wonderful innovation. That should lead to some interesting reconfiguring of my asset allocation, or at least give me consolation after the last quarter of 2018.

    Appreciate the insights as always,

    Crispy Doc recently posted…Investing Ought To Be Boring: Don’t Jump The SharkMy Profile

    December 30, 2018
    • CD,
      I’m glad you enjoyed it.

      Those of us who grew up in the post defined benefits era tend to think our financial future depends only on our savings, investing, and stock returns. We forget that we already own a government-backed annuity. It is reasonable to think of this as a “bond” and adjust our asset allocation accordingly.

      After all, I’m scheduled to receive $3714 / mo. That is $44,568 per year in guaranteed, inflation-adjusted income. Think about how big of a portfolio I would need to replace that.

      December 30, 2018

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