Feed on

Just got my social security update in the mail today. It tells me that if I keep working and “contributing” like I am now until age 70, my monthly payment would be $2,922 per month, or $35,000 per year. That of course would be taxable income to me, so it would be like getting something less than $30,000 in “pension.”

How much is this “pension” worth? If it were infinitely lived – in other words, if my children could inherit it like they could a private defined contribution account, it would have its maximum value. Of course, when I die, social security payments stop with it. But let’s be generous. Further, let’s assume a really generous risk-free rate of interest. And let’s be even more generous and assume that the “income” is not taxable. In that case, an asset that pays me an income stream of $35,000 per year, forever, would be worth about $1.17 million. In reality, the stream is taxable, and it only lasts for my expected length of life (hopefully long, but let’s say 15 years). How much is a $30,000 cash flow stream worth over 15 years (ignore inflation)? About $360,000 under the assumptions above. Let’s call it a cool half-million for argument’s sake.

Now, I am a person that likes to plan ahead for my life. I fully expect to have to pay lots of money for medical care in my older age – it is not someone else’s responsibility to do it.  I do not take extravagant vacations or spend much money on new clothes and other things like that, because I know I want to have a comfortable retirement and be able to save for our children’s college. I am not exactly someone that would not have money left in retirement if the government did not “set it aside” for me because I am too short-sighted or irrational. That said, let’s see what I would have been able to accumulate by age 70 if instead of the government taking my income to pay off elderly voters, they let me keep what I earned.

I’ve already “contributed” $96,000 over my working life to this program. And if nothing changes in the next 35 years, I probably would “contribute” about $525,000 more into that program.  Here is how much money I would have accumulated in savings at various interest rates by age 70:

  • 2% rate = $942,000
  • 4% rate = $1.484 million
  • 6% rate = $2.409 million
  • 8% rate = $4.004 million

So, even taking the worst case investment return, and no increase in salary for the next 35 years, I would have a nest egg (on top of what I am already saving privately) of $942,000. My likely outcome would be something higher, so let’s say it was $1.5 million. If I took that $1.5 million and bought tax free instruments with it, such as US government debt, paying 4% per year, that $1.5 million would generate tax-free income to me of $60,000 every single year as long as I live. And when I die, I would still have that $1.5 million (assume the bond market does not collapse) and my children and grandchildren would have those funds when I passed on.

Under the most favorable conditions one could imagine for Socialist Security, I would “earn” $35,000 per year for 15 years or so as compared to earning $60,000 per year forever. How that deal ever got made is  a wondrous thing. But I am not expecting to see a single penny from social security. So in my mind, I am losing a perpetuity paying $60,000 by participating in this wonderful piece of Progressive legislation. And I would continue to note, that our household income does not put us anywhere near what one could consider “rich” – although with the budget deficits at the state and federal levels continuing to explode, we may soon be deemed rich.

Have a nice day.

2 Responses to “I’m Not Planning on It”

  1. Speedmaster says:

    Wait, what about the “lock box” we heard so much about a few years back?! 😉

  2. Harry says:

    Speedmaster, a genius comment.

    Wintercow, the advice I have given to my daughter for her 401-K is to at all costs max out every dime of matching funds, and to get out of any debt that costs her any more than 2% per year. She had a choice of funds in which to put her money, and I told her to put it into the S&P 500 option.

    My daughter knows my view of the world, which includes the possibility that things might get bad, but also the hope that we may likely remain, in the long run, a prosperous, free country.

    Most of my own money is invested in bonds, although I and Linda own some stocks.

    But I never planned on Social Security. My Uncle Harry advised me of that in the same time he told me of the value of having money working for you, and that was forty years ago. My advice to my daughter is never to expect anything positive from the government, and to run away from anyone promising an easy buck. Uncle Harry was the one who owned my two Bastiat books.

    Therefore, Wintercow and Speedmaster, as long as you are young, invest courageously and wisely. I think our happy Republic will survive.

    The socialist mantra is two steps forward, one step back, but their faith depends on a theory of history that is corrupt at the root.

    My optimism is reinforced by the presence of one Economics Perfesser at the U. of R., and his student and friend, the extraordinary Speedmaster.

Leave a Reply