Social Security and Your Portfolio
You may be counting on Social Security for your retirement years, but if you’re not counting Social Security as a part of your overall asset allocation, you may be missing out on bigger gains in your retirement savings portfolio.
Many investment allocation models look at stocks, bonds, and cash. They don't take Social Security into account, even though Social Security can play a role in an overall investment plan, especially since it provides a relatively stable stream of regular income. How you weight it, though, is a matter of your own personal strategy.
Social Security works much like an annuity. Throughout your working life, you and your employer, if you had one, pay into the Social Security system. When you reach retirement age, you receive a set monthly payment that increases every year along with the cost of living. The income is generally tied to your life expectancy and is guaranteed by the government.
Valuing Social Security
If you look at Social Security as an income stream, you can value it relative to other investments. For instance, if you receive $20,000 per year in Social Security, it's similar to having a lifetime inflation-indexed annuity that pays $20,000 per year. Since it works similarly, you can compare the two values. For instance, if annuities pay 4% per year, a $20,000 income stream would cost $500,000, making your Social Security income roughly equivalent to having $500,000 of investments.
Delaying your Social Security benefits could result in a bigger payout.
Your Social Security benefit at full retirement age is based on your highest 35 years of earnings. But what if there is a low or zero income year in those top 35 years? By working an extra year in your late career, you could increase your payout by raising the amount in those top 35 years.
For 46% of women and 15% of men, working until age 63 instead of 62 replaced a zero-income year in that calculation, according to a new working paper from the Center for Retirement Research at Boston College.
If late-career earnings replace a zero in the calculation of your benefits, you could see an increase in the benefit you're entitled to at full retirement age.
"We were really surprised at how many people have zeroes in that top 35, especially women," said study author Matt Rutledge, a research economist at the center.
The big benefit of delaying is in the actuarial adjustment of when you claim Social Security in relation to your full retirement age. Claiming before your full retirement age permanently reduces your benefits; each year you delay from full retirement age until you turn 70 boosts the total by 8%.
Someone who retires and begins claiming Social Security at age 70 would receive a benefit that's 76% higher than the one he or she would receive at age 62, according to the study. Factor in late-career earnings replacing a zero-income year, and the increase becomes as much as 88% for women and 82% for men.
Women stand to benefit most from working longer because they tend to have more zeroes in their earnings record. Women work an average 29 years to men's 38, and they spend an average 5.5 years out of the workforce caring for children, and 1.2 years out as a caregiver for an older adult.
Get a copy of your earnings record from Social Security to see how much impact late-career earnings would have on your benefit.
Keep in mind that you might also have access to benefits based on the record of a spouse or ex-spouse. That benefit could already be larger than what you'd be entitled to with a few more work years under your belt.
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