Why Even High Earners Should Consider Social Security As Part of Their Retirement Plan

Nov 13, 2018 / Amanda Chase, Horsesmouth Assistant Editor

Many advisors hear high earning clients and prospects tell them, “Social Security isn’t for me. I can’t count on it.” Okay, says this well-paid doctor, but you’ll be missing out. Here’s his argument for why even those who make a lot of money—and theoretically have a lot of savings—should consider Social Security as part of their retirement plan.

“A typical high-income professional’s Social Security benefit is extremely valuable. Take a look at your most recent Social Security statement if you don’t agree. Mine says if I work until 70 (and thus continue to pay in the maximum Social Security tax every year from now until then), my benefit will be $3,407 per month. Chances are I won’t work until 70, so it will be a little lower than that. Let’s call it $3,000 a month starting at age 70. My partner, to whom I am married, will get 50% of that. So $4500 total a month, or $54K a year, adjusted to inflation and guaranteed until we die. So the question is, who else can I buy something like that from and at what price?

Well, it turns out that insurance companies sell stuff like that, they call it an inflation-adjusted single premium immediate annuity. The guarantee isn’t quite as good as one from the government, but it’s almost surely good enough. At age 70, an inflation-indexed joint-life SPIA pays out about 4% (almost 6% without the inflation adjustment), maybe a little more. So that annuity is worth $54K/0.04= $1.35 Million. It’s not quite a military pension at age 38 with free health care forever, but it’s better than a kick in the teeth.

So what does that mean? If you want to “ignore Social Security” in your calculations, then you’re going to have to have a lot more money to retire safely than if you are going to include it. How much more? Well, $1.35 million more in my case. Over 30 years at 5% real, that’s $19,350 a year. For a doc making $200K a year, that’s saving 10% more a year.

Alternatively, let’s assume you’re saving $40K a year. You thought you were going to need $2 million to retire, but since you’re ignoring Social Security, you now think you’ll need $3.35 million. How much longer will that take at 5% real while saving $40K a year? Well, it’ll take 25 years to hit $2 million, but it’ll take 33 years to hit $3.35 million.

So, you can ignore Social Security if you like, but you can’t ignore the consequences of doing so. Those consequences are either saving 10% more of your salary or working an extra 8 years. Your choice. (I suppose some combination of the two would be okay too.)”

You can find the full article at www.physicianonfire.com.


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