When you’re calculating your retirement savings, it’s easy to forget to treat your Social Security retirement benefits as an asset the way you treat the assets in your Individual Retirement Accounts or 401(k)s, if you’re fortunate enough to have them.
But when someone calculates the value of these benefits for you—and adjusts for the fact that your payments rise each year at the same rate as the Consumer Price Index—you end up with some pretty impressive numbers.
And here they are, directly from the Social Security Administration, which crunched the numbers at my request for people who will turn 65 next year and begin taking benefits the month after their birthday.
I’m assuming, to keep things simple, that the people we’re discussing will be getting a retirement benefit of $1,500 a month, which is about the average for Social Security recipients.
If you’re a male, the value of that $18,000-a-year benefit when you begin drawing it is $200,910. If you’re a female, the value is $218,085—the female benefit is higher because women typically live longer than men.
Now, watch what happens when you add the value of the inflation adjustment.
A male’s total benefit rises to $266,105, up 32.5 percent; and a female’s rises to $295,350, up 35.4 percent.
To put it another way, the inflation adjustment accounts for about a quarter of the value of your Social Security retirement benefits.
That’s a lot of value, and people have been getting it since 1975, thanks to Congressional legislation.
For the quants among you, Social Security says that the values it gave me are based on its mortality-rate statistics; on 2.4 percent annual growth in the Consumer Price Index, its historical rate; and on the historical interest rate for Treasury securities of 2.3 percent above inflation. These assumptions are included in the Social Security trustees’ recent annual report.
Please understand that I’m not suggesting that you begin drawing benefits just after you turn 65. That’s just the example that Social Security and I decided to use.
The longer you wait to draw benefits, the bigger they are. They rise at about eight percent a year.
If you decide to wait until you’re 70, the maximum age at which you can start collecting benefits, rather than taking them at 65, your benefit will be about 40 percent higher—but you’ll be collecting it for five fewer years.
You may die before collecting a penny. Or you may die in your early 70s, before your higher monthly benefits have made you whole for the five years of benefits that you didn’t collect. Or you may live well into your 80s or 90s, which would allow you to come out ahead.
If you want to put an approximate value on your benefits, compare your projected payment to the numbers above. If you’re looking at, say, $1,800 a month, add 20 percent. If you’re looking at $1,200 a month, subtract 20 percent.
For reasons I won’t bore you with, the value of the benefits would be somewhat less if you begin drawing them before you turn 65 and somewhat higher if you began drawing them at 66 years and 2 months (the age you’ll need in 2021 to get full benefits) or at the maximum age of 70.
But that doesn’t mean that waiting until 70 is necessarily the right thing for you to do. There’s more to deciding when to begin taking benefits than just chasing the highest number. It’s something you need to decide for yourself, based on your financial circumstances, your health, your expected lifespan and, if you’re married, your spouse’s situation as well.
I’m not counting some of the more interesting—and valuable—aspects of Social Security, including spousal and survivor benefits. That’s because those depend on peoples’ individual circumstances.
I’m also not assigning any value to the favorable tax treatment that Social Security retirement benefits get. In most states, they’re exempt from state and local income taxes, and between 15 percent and 100 percent of them (based on your total income) are exempt from federal income tax.
And finally, I’m avoiding topics like what would happen if the Social Security trust fund runs out of money in the 2030s or if the benefit formula is changed at some point to put the system on a sustainable track.
Those are topics for another day.
For today, all I want to do is give you an idea of how to include the value of Social Security retirement benefits—especially the inflation adjustment— when you do your retirement math.
I hope you find these numbers useful. And perhaps comforting, as well.
Correction: An earlier version of this story said that Social Security retirement benefits were exempt from state and local income taxes. That is the case in most, but not all, states. The story has now been updated.