The Value of Your Social Security Benefits
For years, we've heard that Social Security benefits are at best modest and should not be counted on as our only source of retirement income. Sometimes, it's even suggested to completely forget about Social Security benefits when planning for retirement, because changes in the system will probably be necessary when the huge number of baby boomers start retiring. But the fact is that Social Security benefits are a very valuable benefit, especially since benefits are adjusted for inflation annually.
For instance, the maximum Social Security benefit in 2007 for workers retiring at full retirement age is $2,116 monthly. While that might not seem like that much money, consider how much you'd need to accumulate to generate that monthly income. A 66-year-old male would have to pay approximately $420,000 for an annuity that would pay $2,116 monthly for life with annual inflation adjustments, while a 66-year-old woman would pay approximately $468,000 (Source: Vanguard, 2006). Suppose you want to invest the assets yourself. A common rule of thumb is you should withdraw no more than 4% annually. Thus, to generate a monthly income of $2,116, you would need assets of $635,000.
While it's easy to dismiss the value of Social Security benefits, that value becomes apparent when you realize how much is needed to generate that income. Although no one knows how the Social Security system may change in the future, benefits currently paid are very valuable to retirees.
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