Social Security is kind of like the Rodney Dangerfield of the financial world. It don’t get no respect. Or, at least, it don’t get the respect it deserves.
But have you ever stopped to think about what that monthly Social Security check is really worth?
The average monthly Social Security benefit for a retired worker, according to the Social Security Administration, was about $1,230 at the beginning of 2012, or $14,760 per year. Many people, of course, receive much higher benefits, and couples might receive twice that amount.
Assuming you follow the 4% rule of thumb, and withdraw and spend 4% of your portfolio value per year, you would need investments of $369,000 to generate that same benefit check each month. Couples would need a portfolio of $738,000 or more.
That’s a long way from the first Social Security check issued to legal secretary Ida May Fuller in Rutland, Vermont on January 31, 1940. Her check was only for $22.54.
This all explains why Social Security benefits are no longer the “afterthought” they might have been in more prosperous times.
Helen Modly, a CFP® in Middleburg, Virginia, makes that point in a recent Morningstar column.
“Just a few short years ago, clients would tell us to ignore any Social Security benefits in their retirement planning analysis. “I don’t expect it will exist 10 years from now,” or “I don’t want to have to count on it,” were some of the comments we heard.”
And it wasn’t only clients who gave short shrift to Social Security. While financial planners obviously factored benefits into retirement projections, our industry as a whole seemed to devote limited attention to the intricacies of how to time and claim Social Security benefits to maximum advantage.
Today, that’s all changed. Financial trade publications are full of articles on Social Security claiming strategies, and CFP® professionals can devote hours to continuing education focused on maximizing benefits for couples and widows, divorced and single recipients (and might I add, STILL not fully understand the most convoluted and complicated set of rules ever devised by the federal government!).
As financial planners, we know that Social Security benefits provide the majority of income for over three-fifths of Americans age 65+. But the fact is that nowadays even those we consider more “comfortable” need that monthly Social Security check in retirement to make ends meet. Why? Chalk it up to the disappearance of pensions, rising medical and living costs, inadequate savings, and longevity concerns.
It’s time to give Social Security its due. It’s an irreplaceable source of stable, guaranteed and growing income, equal to that produced by an almost $400,000 portfolio. That’s a pretty big deal for what initially started with just a $22.45 check.