Out Earn Social Security?
Here are some key takeaways:
1. Social Security benefits increase by 8% per year if delayed until age 70, which is a guaranteed return compared to the potentially higher – but riskier – stock market returns.
2. On a risk-adjusted basis (using the Sharpe ratio), the Social Security increase is significantly better than investing in the S\&P 500 (4.0 vs 0.38).
3. Guaranteed income sources like Social Security, pensions, and annuities provide a stable income floor in retirement, offering flexibility for other investment strategies.
4. Having multiple “buckets” of retirement income (e.g., Social Security, pensions, annuities, retirement accounts) provides more options and flexibility in retirement planning.
5. Is it technically possible to out earn social security? Perhaps, for short periods of time, but invites risk to the equation.
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Out Earn Social Security – Transcript
Wanted to shift gears here to another interesting Social Security question. There’s multiple different questions.
People think of the craziest things with Social Security and they try and game the systems. This question is along those lines.
Basically, should you try to “out earn social security” in the stock market?
If you wait until age seventy, each year you wait your social security payment grows by eight percent per year. But some people might think, “you know if you look at the S & P 500 over the last ten years or so, it’s averaged, on an annual basis, ten or eleven percent per year.
That’s more than eight percent.
So “if I can out earn Social Security in the stock market, should that be something I’m thinking about do it?”
Tom what do you think?
If you are going to do this and you’re going to take your monthly check (I’m old enough to remember people actually getting their checks in the mail, not direct deposit) …and if you’re going to do this, technically you’re going to be dollar cost averaging into the stock market.
Which is something we try and tell people to do, all the time.
True.
That’s the beauty of these 401ks and these other kind of retirement plans. Because, uh it’s set up automatically good market bad market, up day, down day — doesn’t matter. When your contribution hits, it gets invested, and it keeps you in the game. I think sometimes with where you have to do it manually, people stop and decide before they click that button and say, “what’s the Fed gonna do.”
So that would be what they’re doing with their Social Security checks; they would be, you know, getting the check, kind of surveying the environment, if you will, and then deciding whether or not to invest that money.
My answer to the question is, you know you can have these annualized returns of ten or eleven percent per year, but you have to think about it from a risk perspective.
This eight percent per year from your Social Security going up is guaranteed. It’s going to happen.
Whereas if you invest it in the stock market, to try and out earn social security, it could all go away tomorrow.
Right. You could out earn social security and the eight percent per per year. But you could lose it all as well. So if we want to talk about a risk perspective and risk adjusted return – we want to really dive into things. Now, going back to our studying for CFP days and the Sharpe ratio.
If we calculate the Sharpe ratio – which is a measure of risk adjusted returns; the Sharpe ratio, if you will, of the Social Security increase is 4.0 and the S & P 500’s Sharpe ratio – using the eleven percent per year return – is 0.38.
Now, the higher the Sharpe ratio, the better. So four is much higher than 0.38. On a risk adjusted basis, it’s a no brainer.
Yes, it is. And, sidebar conversation with this topic of can you “out earn social security,” …we DO have folks who come in to meet with us. And they’ve put money into a deferred annuity.
And usually the first question that we’re asked is, well they will preface it with “we knew\… we found out… this wasn’t such a good investment.”
Quickly followed by them asking us, “how do we get out of this?”
I think there’s some “less than scrupulous” folks in our business – who will try and figure out a way to get people out of an investment product like that – just so they can manage the money, rollover into – or sell them another annuity, or do something else with it.
But one of the things we’ve shown folks when they come in with these products — they feel like they’re in jail! — but we show them “hey, if you’re looking for some type of guaranteed income – in addition to a pension or social security, or both, – in retirement… you can just turn on the switch with this.
This is guaranteed income for life – and maybe over two lives.
And that is something I think a lot of people overlook.
Just think about annuitizing your contract.
You’re doing the same thing with Social Security.
You have a guaranteed source of income.
Do you wanna pay tax on that — and then put it back into the market, where you’ll pay more tax in terms of capital gains?
Good point. Good point.
I don’t know. I don’t know if that’s really the best path to take.
Right. I know in practical terms, a lot of people like having that “income floor” in place in retirement, if you will. And I think that Social Security, if you have a pension, or an annuity product – if you have that monthly income floor in place, uh that gives some flexibility in other areas, like whether to draw down your investments – or not.
We we have a saying around the office that we use a lot. It it didn’t come from this, but the phrase is “options give you options.”
Not that we want to talk about trading options. That’s not what this is about.
But the more you have, in terms of different “buckets” to pull from, the better options you’re going to have.
So just referring back to what Casey was talking about. If you’re in a situation where you have a retirement account, and social security, and maybe you have a small pension. And then you have money sitting in an annuity.
Those are a lot of different “buckets” you can pull from.
One of the options that we may talk about with you is, “hey if we’re going to pull income from this annuity product, maybe we don’t have to start taking Social Security. We can let that compound a little longer. AND it’s going to compound at eight percent, until age seventy.
Yes. It’s a lot to consider.
A lot of different levers that can be pulled. And it’s all about (I think) putting yourself in in that situation in the first place.
Like you said, the more options the better.
