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What’s Your Social Security Benefit Really Worth?

What’s Your Social Security Benefit Really Worth?
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Your lifetime Social Security benefit may be more valuable than you realize. Rob Williams, director of income planning at Charles Schwab, explains.

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Rick Karr:
We’re talking about Social Security and how it’s valued, from the market to the intangible, in this installment of the Insights & Ideas podcast brought to you by Charles Schwab. My guest, Rob Williams, will tell us what the market thinks Social Security is worth, why a lot of people think it’s worth a lot less, and a basic trait of human psychology that might help explain why they differ.

 

Rob Williams:
As humans, we’re notoriously not very skilled at estimating the cost of things financially.

 

 

Rick Karr:
I’m Rick Karr. Rob Williams is director of income planning at the Schwab Center for Financial Research. He started by telling me how much it would cost to buy an annuity with benefits identical to Social Security’s guaranteed income for life that was indexed to inflation.

 

 

Rob Williams:
So here’s an example. A 65-year-old woman who, let’s say, this is a little bit above average for the average Social Security collector, but with $25,000 in income.

 

That would cost you about $545,000 today to go out and buy that in the open market in the form of annuities. So a $25,000 payment per year for a single female for the rest of her life, growing with inflation, would cost about $545,000. For a male it’s a little bit lower. About $508,000 is the current market value of that. Life expectancy of a male is lower.

But it really starts to ramp up when you talk about a couple—so a joint life. So both a male and a female for however long they might last—$25,000 today would cost about $620,000 in the open market to purchase. That’s a tremendously valuable asset, not just in monetary terms but emotionally.

 

Rick Karr:
Why is that number so surprising? Why do we have such a hard time as humans estimating the value of something like that?

 

 

Rob Williams:
We can’t know how long we’re going to live. We can’t know what inflation will look like.

 

Those are all things that are inherently both difficult to estimate but also very emotionally challenging to cope with. We also find that it’s very difficult to estimate and to appreciate what inflation does. And this isn't just for retirees; it's for—we talk about that's the people saving. You really need to be in the market to get your assets growing to be able to pay for the cost of future goods and services.

Maybe an example would be helpful. Think in real-dollar terms. One dollar today in 10 years would be about 75–74 cents in 10 years at a 3% inflation rate. That’s about in line with what we’ve seen over the last 100 years or so. It’s been lower recently. In 20 years, that one dollar would be worth 55 cents.

 

Rick Karr:
[Because] it’s being eroded by inflation, basically?

 

 

Rob Williams:
Just being eroded by inflation. And that’s for the cost of goods and services, which are going up 3%. A bigger challenge and unknown are costs like health care and other things where the inflation rate has been higher. So we’re programmed as humans to think about today and not so much about tomorrow, so it is very difficult to anticipate and see how inflation erodes your assets and your spending power over time.

 

 

Rick Karr:
I wonder why that is: that we, as humans . . . Do you have a sense of that? Why are humans so bad at that sense of what things are going to cost in the future? You would think that that would be a survival skill we’d have developed at some point.

 

 

Rob Williams:
You’d think we would have evolved; but as humans, we still have two parts of our brains. One part of our brain thinks in the short term and reacts to what’s right in front of us: the cost of a cup of coffee today; the cost of “Oh, no. The market was down 15% yesterday. I need to overreact.

 

Fifteen percent in one day obviously would be maybe grounds for some fear, but even small drops in the market in the short term. We’re programmed to think about risk in the short term: a tiger chasing us; a car, as you walk out in the middle of a road, and getting out of the way. And then there’s another part of the brain that’s separate that thinks about the longer term. And it's a little bit more thoughtful. It slows down and thinks about longer term.

And that part of our brain has evolved more slowly. That’s one theory about why we think about the short term versus the long term somewhat separately. Another reason is just math. Math is conceptually not always easy to understand in terms of how the compounding effect of a 3% inflation rate really adds up over time.

The math is not always something that’s right there in the front of our minds.

 

Rick Karr:
Something else occurred to me just a second ago, which is that Social Security itself is pretty long term. The benefits are for life. They just keep coming. That seems like it could be pretty valuable.


Rob Williams:

 

 

Yeah, that’s a really great point. That’s one of the most underappreciated aspects; it’s having a baseline of income that, in the U.S., is becoming more rare. You don’t have a defined-benefit pension.

 

What that does is allow you to have some income that is taking the emotion out of it. Those who have it, those who have pensions consistently we see are happier, see themselves as being wealthier in retirement. Now, that doesn’t mean it’s everything. For the average saver or investor, they want to have savings, as well. And having and maximizing Social Security is often a good way to help you feel more comfortable managing the rest of your portfolio because that guaranteed income stream that can rise with inflation, as we talked about, is really valuable.

It’s really difficult to reproduce elsewhere. You can do it with your portfolio. There are lots of strategies to make sure your investments last and increase your income the longer you live. But sometimes it’s good to turn over some of that risk to somebody else, and in this case the government has offered to help protect some of that risk for retirees. And that’s a really valuable benefit.

 

Rick Karr:
Rob, thanks a million.

 

 

Rob Williams:
Yeah. Thanks, Rick. Thanks for having me.

 

 

Rick Karr:
Rob Williams is director of income planning at the Schwab Center for Financial Research. And that is it for this installment of the Insights & Ideas podcast brought to you by Charles Schwab. You can find us on iTunes or at Insights.Schwab.com. My name is Rick Karr. Thanks for listening.

 

Important Disclosures

The cost and other information concerning single premium immediate annuities was derived from the quote calculator at immediateannuities.com on November 19, 2015. Such information is subject to change and may vary based on your individual circumstances.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Charles Schwab & Company, Inc. Member SIPC.

(1115-9ZHR)

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