Planning on social security?

Where are you and where are you going?
Emanuel
Posts: 90
Joined: Sun Jul 25, 2010 4:04 pm

Post by Emanuel »

(S)ocial (S)lavery


photoguy
Posts: 202
Joined: Fri Aug 20, 2010 4:45 pm
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Post by photoguy »

"At full retirement age, (in my case 66) you could go to the SS office and then pay it back, rehash your benefit, and it would be as if you waited."
I don't have first hand knowledge of this, but from posts on other forums I understand this is very difficult to do (paperwork wise) and may be going away.


Mo
Posts: 443
Joined: Wed Jul 28, 2010 1:35 pm

Post by Mo »

It's hard to know what SS will be in the future. I have spent some time calculating how things are at present, and the results were interesting to me, so I'll share them here.
Since SS is currently calculated by using your best 35 earning years, I made these calculations by assuming that someone had contributed the maximum to SS over the past 35 years, and calculated the benefit that would result using resources from the SS website. All of the numbers are in 2009 dollars, using the SSA adjustment, not the BLS CPI.
As firefighter pointed out, the first $319,600 in taxed earnings produces the highest return. The next $1,606,500 in taxed earnings produces a lower level of return, while the last $1,400,280 in taxed earnings produces the lowest level of return.
Currently we pay a 6.2% tax on earnings to fund SS, so on the first $319,600, you're paying $19,816 in tax, that results in an annual benefit of $8219. From one perspective, you're getting a return of about 41.5% per year on your first $19.8k of contributions, and in theory SS is adjusted for inflation. Seemingly this is an absurdly good return. The next two brackets break down as:
Earnings: $1,606,500

SS Taxes paid: $99,603

Annual Benefit: $14,688

Benfit/Contributions: 14.75%
Earnings: $1,400,280

SS Taxes paid: $86,817

Annual Benefit: $6001

Benfit/Contributions: 6.9%
All of these seem like relatively good investments to me (so long as SS pays out at 100% of current levels at age 67). For comparison realize that a 67yo Female buying a commercially available immediate annuity might get around 7.2% in Benefit/Contribution-- with no COLA, no spousal benefits, etc...
Still, as you contribute more to SS, the relative return of your contributions decrease.
Keep in mind, because of the wage base your annual contributions to SS are capped, so if you earn $3.3m in one year you don't max out your SS benefit. Maxing out the SS benefit requires you to earn money over a 35 year period.
Lastly, many people say things like "I'll have too many zeros averaged in to get any significant benefit." A zero doesn't help your benefit, but all other things being equal, the number of zeros doesn't make a difference. For example, if you earn $80k/year for 4 years and never work again you'd have 31 zeros, but you'll get the same benefit as someone who earns $40k for 8 years and has only 27 zeros.


Mo
Posts: 443
Joined: Wed Jul 28, 2010 1:35 pm

Post by Mo »

Oh yeah, if you're self-employed you need to double the contribution numbers, keep the benefit numbers the same, and thus the return is halved.


firefighter
Posts: 18
Joined: Tue Aug 03, 2010 1:03 am

Post by firefighter »

Mo-
Your analysis is correct, and I suspect you already knew

this, but your example at the end is problematic. Just so others don't get confused by your example at the end,

I wanted to point out that if you only work 4 or 8 years

and have all the rest zeros, you will likely get NO

benefit... Aside from disability, you need 10 years

(40 quarters) to qualify. The essence of what you're

saying is correct, but that example is lacking.
Can we substitute the following?
Perhaps

"80k for 12 years, all the rest zero =

40k for 24 years, all the rest zero"
Thanks,

FF


Mo
Posts: 443
Joined: Wed Jul 28, 2010 1:35 pm

Post by Mo »

@FF, you're correct. My example wasn't a great choice, just an attempt to illustrate a point about the number of zeros.
I suspect that most people, even in the ERE crowd, will earn enough credits to qualify. Since it only takes $1120 in earnings to get a credit. Thus anyone earning $4500 in a year gets the full 4 credits.


Mo
Posts: 443
Joined: Wed Jul 28, 2010 1:35 pm

Post by Mo »

Here's a question open to all who have an interest in the SS benefits issue:
From Q3 2001 to Q1 2005, FICA taxes were withheld from my paycheck. Recently, it has been acknowledged that these earnings were FICA exempt. I can have the FICA contributions refunded to me (about $11k), with interest, but I lose the value of the contributions if I do so. Meaning, I lose the credits and the value of the contribution to my ultimate SS benefit.
If I take the refund, I'll be knocked back down to 34 credits, and my benefit will go down by at least $130 per month.
So, what do you think-- take the refund, or not?


George the original one
Posts: 5404
Joined: Wed Jul 28, 2010 3:28 am
Location: Wettest corner of Orygun

Post by George the original one »

If you're within two decades of claiming SS, then I would not take the refund. $11k @ 4% safe withdrawl rate is only $36.66/mo and SS is promising you $130/mo. Significant difference!


JohnnyH
Posts: 2005
Joined: Thu Jul 22, 2010 6:00 pm
Location: Rockies

Post by JohnnyH »

SS will default, or be inflated to nothing, under the baby boomers...
I SS still exists in 30-40 years and is paying 40% (based on gold value) of what it is today, I'll eat every hat I own. :)


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