# Comparing Your Retirement Savings to Social Security Benefits

I received a question from a reader that sort of dovetails with the post from last week about payback from Social Security, so I thought I’d run through the numbers on his question here.  As you may have noticed, I never met a spreadsheet I didn’t like!

Here’s the question from the reader, verbatim:

started work at age 20 retire at age 70.

Over 50 years of work I average \$50,000 a year.

If I put 10% of my income away every month from age 20 to age 70 how would I come out versus depending on the government social security checks I would receive after retirement.

### Initial Reaction

My initial reaction to this question was that you’d be much better off with the savings option, since you’re saving at a much greater rate (10%) than the withholding, and for fifteen more years than the Social Security system takes into account.  However, that’s not altogether correct, since the Social Security system includes both your withholding and your employer’s withholding, for a rate in 2010 of 12.4%.  But this rate is much lower in the earlier years of the calculations. So let’s go ahead and run the numbers.

### Assumptions

There are a few assumptions that we have to make in order to complete this problem:

• In order to come up with an average of \$50,000 per year, I first looked at the maximum Social Security withholding.  By calculating the average from 1961 to 2010, we come up with an average of \$43,804.  This is a little less than the average that the reader suggested, but it will work for our purposes and keep the calculations a bit simpler.
• Putting aside 10% each year requires that we come up with a rate of return for this investment account.  I used a simple 5% return, which is reasonable over that period of time.
• I assumed that the side account is an IRA or a 401(k), so taxes have not been factored into the equations.

### Calculations

As we saw in the previous post, earning the Social Security maximum over the final 35 years of your working career will give you a monthly benefit of \$3,204 in 2011.

Saving 10% of your earnings (using the maximum Social Security wage base) over 50 years at 5% will bring you to a total in your IRA or 401(k) of \$443,969.  Unfortunately, just running a few simple quotes from single premium annuity websites indicates that a joint and survivor annuity paying a \$3,200 monthly payment will cost a total of \$584,830 or \$610,909 depending on the website you choose.  And that’s a fixed payment, not a COLA-adjusted payment like your Social Security benefit is.

However, upon the death of both you and your spouse, there is nothing left over – so the question becomes one of longevity.  If you both live long, full lives, the Social Security option works out much better.  If you and your spouse die earlier, any time before about age 85, there will be something left over for your heirs in the savings option.

Of course, the Social Security benefit could be taxed, up to 85% depending upon your other income.  Since the savings option is in a qualified account or an IRA, 100% of the disbursements will be taxed.  If it was a non-qualified account, just a regular savings or investment account, the taxation would be considerably less.

### Conclusion

In the end result, it seems that the Social Security benefit option is a pretty good deal, especially since we all hope to live a long, full life.  The savings option works better if you die earlier than (roughly) age 85, providing a residual amount to your heirs.  This is a little different from what I’d originally thought, but when you consider that the average life expectancy of a male age 70 is roughly 84 (86 for females), there’s a high probability that you won’t outlive your savings, although there’s a similarly high probability that you will outlive your savings.

And finally, since you don’t really have a choice in the matter, the entire question is really moot – but an interesting exercise, nonetheless.

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

### One Comment

• RAy says:

seems your example fits a short article but it does not really properly weight the issue.

You can not count the social security nest egg as if it came from a 50k salary. The total of 12.5% put into social security is really off of a wage base that includes the employers level of contribution. If the employee makes 50k then the additional 6.5% payed by the employer must be added to the wage base of 50k making a larger nest egg. THe comparison must be adjusted. The wage earner is not saving from a 50k base if he is to be compared. The comparison must be then also a similar level of saving that the SS requires. Thus make calculatinos for comparison of 12.5% of the wage base set aside by the saver. A base level of increase should also be calculated closer to the stock markets average rate of return which is about 11% I seem to recall.
Finally to end the conversation by saying it is a mute point and we have no choice may be true at present. But to see the results and to say lets keep going on this is not a good economic piece of comment. IF we die much earlier such as the normal life expectancy of men at something like 76, that needs to be considered for the legacy of the money to my or someone’s heirs is very important. To raise the retirement age to 69 on that life expectancy of 76 makes a big difference in comparison.
MY questions arise about your view of an individuals ability to save for retirement. If you don’t think it is viable, that the average person can not save , why are you in the industry?