Category: Investment Updates

CALCULATE YOUR MONTHLY SOCIAL SECURITY PAYMENT

Do you ever wonder how much retirement income to expect from Social Security?

Many people do not understand how their Social Security retirement benefit works. Understanding this can help you calculate your benefit. Or, Social Security will do it for you (based on existing data). Just go to your MySocialSecurity account and use the Retirement Calculator. If you know how Social Security benefits are calculated, perhaps it can help you make better decisions when you approach eligibility age.  

Publication No. 05-10070 explains how your benefit amount is calculated. Prior to 2020, this form contained the income index factors as well as the worksheet. It appears now, you must go to the Annual Statistical Supplement, Appendix 2.A8 at www.socialsecurity.gov/policy/docs/ statcomps/supplement to find your indexing factors.

I'll try to make it easy:

Your benefit is computed from your income information in the year you turn 62. If you work past this, it will be recalculated when you reached your Full Retirement Age (FRA)

1. The first amount to calculate is your 'average indexed monthly earnings' or AIME.

To calculate your AIME, the SSA takes each year of earnings throughout your working lifetime, up to the Social Security taxable maximum for that year. Then, each year's earnings are adjusted for inflation, or "indexed." In the table, find the year of employment on the left and the year you turn 62 at the top. The intersection will determine the indexing value for that year’s income. Just take your earnings times this number and that is what’s used for that year.

An example, say you turn 62 in 2020. In 1980 (when you were 22) your earnings were 15,000. You would multiple this by 4.1671768 (on page 2.14 of the 2022 version) giving a total of 62,507.65. This is the amount you would use for that year’s indexed earnings.

The formula uses your 35 highest indexed years of earnings to determine your AIME. The calculation is done by adding the 35 highest years of indexed earnings together (years with zero earned income are added as 'zero'), dividing by 35 to find your annual average, and dividing this result by 12 to determine your lifetime monthly average. 

• Next, find your Primary Insurance Amount or PIA. You use your AIME in the following manner. NOTE: This is for someone turning 62 in 2019. The income indices and PIA change yearly, so your calculations will most likely be different. The publication's Appendix D will take you through all these steps.

Your AIME is then used to determine your basic Social Security retirement benefit, which is officially referred to as your primary insurance amount, or PIA. This is the number that, along with your age at the time you apply, determines your initial Social Security benefit.

To determine your PIA, your average indexed monthly earnings are applied to a formula. For 2019, the formula is:

90% of the first $926 in AIME

32% of the amount of AIME greater than $926, up to $5,583

15% of the amount of AIME greater than $5,583

These percentages stay the same each year (under current law), but the thresholds (known as "bend points") change. The thresholds change with inflation, so make sure you use your year’s bend point amounts. These are represented by $926 and $5,583 above. Add these three numbers together to get your PIA.

As you can see, the system favors lower lifetime income levels to provide more relief to workers with less lifetime income.  

Here's an example of how this works: Let's say that I'm turning 62 in June 2019 and my average indexed monthly earnings are $5,000.  My PIA will be:

90% of the first $926, or $833.40

32% of the remaining $4,074, or $1,303.68

15% of the amount over $5,583, or zero 

Combining these three amounts gives me a PIA of $2,137.08 per month. Note that this isn't the actual amount I'd get if I claim at age 62. At 62, there would be a 28% discount (.56% per month times the number of months until FRA). It would be more like $1540.

A recap

So, in short, the process used to determine your actual Social Security retirement benefit is as follows:

Your average indexed monthly earnings, or AIME, are calculated as the average of your 35 highest-earning inflation-indexed years, divided by 12.

Your AIME is applied to the Social Security benefit formula, using the bend points that were in effect for the year in which you turned 62. 

Any applicable cost-of-living adjustments are applied to your PIA, based on the year in which you actually claim your retirement benefit.

Finally, if you choose to start your benefits at any age other than your exact full retirement age, your monthly benefit will be adjusted up or down.

REF: The Motley Fool https://www.fool.com/retirement/2018/05/26/heres-how-the-social-security-retirement-benefit-f.aspx

My 50 month experiment is over. My FRA (Full Retirement Age) is 66 years and 2 months, so as of August, I'm officially at FRA. As you may know, I took SS as soon as I could after turning 62 in June of 2017. 

I started with a theoretical balance of $200,000 in an IRA invested in Vanguard's Dividend Appreciation Admiral Fund (VDADX). I ran an experiment where I had three scenarios:

1. Draw down an amount equal to the 'net' amount needed to match an SS payment, waiting for FRA to file for SS. This is for an Iowa taxpayer, who basically pays state taxes on IRA distributions, but not on SS payments. Most taxpayers pay federal taxes on 85% of their SS payment.

2. Claimed at 62, invested the check, and drew down the IRA as in scenario 1.

3. Filed at 62 and left the IRA untouched, using the SS payments for expenses.

Results:

total SS income - $105,150

Accumulated value of SS investment - $154,333 (this includes $5110 in dividends)

Scenario 1 (Willie Waiter) -  IRA balance of $186,360. Claiming at FRA would amount to $2853/month ($721 more than I'm getting now)

Scenario 2 (Irma Investit) - IRA balance of $186,360 Plus $154,333 from the invested SS payments, for a total of $340693.

Scenario 3 (Sam Spendit) - $349,483 in the IRA account

This fund (VDADX) in the time period tested, averaged 11.3% annual return. The future cannot be predicted, but at this rate, waiting would never make sense. If the fund averaged what the general stock market has averaged since 1929 (depending on who you ask) that is roughly 10%, also higher than the SS enticement of 8% annual increase.

At least during this time span, filing at 62 was the right thing to do for me. Technically, I have a $149,483 nest egg courtesy of Uncle Sam (the difference in my portfolio by not touching my own savings). 

Your mileage may vary!

OUCH! Corona virus news got serious and bad real fast. By the end of the month, the Dow Jones Industrial average had retreated 10.5%, and as I write this in mid-March it's gotten a whole lot worse! It is a time like this that makes it extremely hard to stay the course and not panic. The experts will tell you historically people who cash out of their investments due to the news of the day normally don't time it right, and more devastingly, don't get back in at a good time either. So they lock in and guarantee their losses. It's hard to do, but I'm staying fully invested, optimistic an end to this pandemic comes sooner rather than later, and the underlying good health of our economy restarts. Take care of your health and the health of your loved ones, we will get through this!

SCORECARD

Our fund, VDADX, was down about 8.9% for the month of February.

Willie had a month end balance of $169,870.17. His monthly benefit check (including the COLA) would be $2,574.05 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $2100 check and withdrew $2520 from her existing account, so her net total is $243,615.28. Her Social Security investment account now has $73,745.11.

Sam used his benefit check to supply $1680 of his monthly expenses. His untouched IRA account sat at $247,184.65.

I read an article in a financial magazine recently that answered the question, “How does my life expectancy factor into my Social Security claiming decision?”. I've addressed the basics of what life expectancy is in a posting under the CESS tab. The article, like so many others, only treats the benefit as an annuity decision and not an investment decision. The article basically states what I've read many times –“ if you expect to live to be 80, delay claiming until age 70”. Why do I completely disagree with this? In my blog post, I state that (actuarily) a 62 year old male born in 1955 has a 12.66% chance of dying before age 70 (females are apt to live longer). This means 107 men (of 838) in this cohort will not collect a dime themselves. It's well known the payments are structured to equal out (regardless of what age you were when you claimed Social Security) at age 80. Everyone who reaches age 80 would have the same amount of total payments. For males, another 226 of that 838 would never reach this threshold. Put another way, if you've lived to be 62, you have a 40% chance of short-changing your Social Security benefit payment total. I will address how the effect of compound interest makes it even worse (by waiting to file) in a future post.

The impeachment circus in Washington dominated the news cycle this month. Will the Democrats ever stop hounding the President? It seems the market has become numb to the doings in Washington and rarely reacts for long on impeachment developments. The market (Dow Jones average) had a good steady month.

SCORECARD

Our fund, VDADX, was up about 2.8% for the month. Each year, in January, a cost of living adjustment (COLA) is applied to benefit payments. For 2020, this is 1.6%, or $33 for Irma and Sam.

Willie had a month end balance of $190,227.06. His monthly benefit check (including the COLA) would be $2,533.78 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $2100 check and withdrew $2520 from her existing account, so her net total is $268,905.67. Her Social Security investment account now has $78,678.61.

Sam used his benefit check to supply $1680 of his monthly expenses. His untouched IRA account sat at $269,785.74.

The market (Dow Jones average) had a good steady month.

Our fund, VDADX, was up about 2.8%.

SCORECARD

Willie had a month end balance of $201,366.98. His monthly benefit check (including the COLA) would be $2,203.99 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $2011 check and withdrew $2413 from her existing account, so her net total is $234,518.37. Her Social Security investment account now has $33,151.39.

Sam used his benefit check to supply $1583.24 of his monthly expenses. His untouched IRA account sat at $235,447.93.

The market (Dow Jones average) had a good start, but steadily declined in the latter two-thirds of the month finishing down about 500 points. Don't let that number spook you too much. On Black Friday (September 29, 2008) the Dow dropped 777 points in a single day. That represented a 7% drop. 777 points on June 30, 2018 would represent a little over 3%. Even though it is still a loss and worth getting your attention, it is not nearly the same impact it was 10 years ago. Stay the course!

Our fund, VDADX, was up a bit despite the Dow Jones average being lower.

SCORECARD

Willie had a month end balance of $197,253.81. His monthly benefit check (including the COLA) would be $2,189.54 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $2011 check and withdrew $2413 from her existing account, so her net total is $227,396.88. Her Social Security investment account now has $30,143.07.

Sam used his benefit check to supply $1583.24 of his monthly expenses. His untouched IRA account sat at $233,384.97.

It's been one year since I made the decision to claim Social Security benefits. There was an early rise then steep fall during the last half of the month. This caused the running tally to be less than it had been by motn's end. I try not to take 'snapshots' of my position, because it can greatly distort trends. Although I seldom worry about trends, it's prudent to be aware of what the market is doing.

Our fund, VDADX, was down a tad from May month end, but again, just like clockwork every 3 months, we received a dividend. This time 15.35 cents per share! For Irma, this amounted to nearly $150 in her Social Security deposit account.

SCORECARD

Willie had a month end balance of $190,676.11. His monthly benefit check (including the COLA) would be $2,175.18 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $2011 check and withdrew $2413 from her existing account, so her net total is $218,496.97. Her Social Security investment account now has $26,865.30.

Sam used his benefit check to supply $1583.24 of his monthly expenses. His untouched IRA account sat at $222,875.77. He has reinvested more than $4,000 of dividends in the first year.

Sell in May and go away?

This well known adage is based on the historical underperformance of some stocks. The theory basically states that many traders are on summer vacations and therefore the reduced activity causes reduced stock prices. However in recent years, especially 2016, this would have been a huge mistake as the market rose 10%. Trying to time the market, based on these types of strategies could work or might not. I have tried to time events and have chased last year's winners and I have found the best policy for total return and peace of mind is to do nothing.

May was another month that at various times would tax your resolve to stay the course. A few ups and downs but generally the month was positive. Our fund, VDADX, was up from April month end, 27.64 versus 27.17.

SCORECARD

Willie had a month end balance of $193,579.56. His monthly benefit check (including the COLA) would be $2,160.92 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $2011 check and withdrew $2413 from her existing account, so her net total is $218,496.97.

Sam used his benefit check to supply $1583.24 of his monthly expenses. His untouched IRA account sat at $219,190.99.

Do you ever wonder how much retirement income to expect from Social Security?

Many people do not understand how their Social Security retirement benefit works. Understanding this can help you calculate your benefit. Or, Social Security will do it for you (based on existing data). Just go to your MySocialSecurity account and use the Retirement Calculator. If you know how Social Security benefits are calculated, perhaps it can help you make better decisions when you approach eligibility age.

Publication No. 05-10070 explains how your benefit amount is calculated. Prior to 2020, this form contained the income index factors as well as the worksheet. It appears now, you must go to the Annual Statistical Supplement, Appendix D at www.socialsecurity.gov/policy/docs/ statcomps/supplement to calculate your indexing factors.

I'll try to make it easy:

Your benefit is computed from your income information in the year you turn 62. If you work past this, it will be recalculated when you reach your Full Retirement Age (FRA).

1. The first amount to calculate is your 'average indexed monthly earnings' or AIME.

To calculate your AIME, the SSA takes each year of earnings throughout your working lifetime, up to the Social Security taxable maximum for that year. Then, each year's earnings are adjusted for inflation, or "indexed."

The formula uses your 35 highest years of indexed earnings to determine your AIME. The calculation is done by adding the 35 highest years of indexed earnings together (years with zero earned income are added as 'zero'), dividing by 35 to find your annual average, and dividing this result by 12 to determine your lifetime monthly average.

2. Next, find your Primary Insurance Amount or PIA. You use your AIME in the following manner. NOTE: This is for someone turning 62 in 2019. The income indices and PIA change yearly, so your calculations will most likely be different. The publication's Appendix D will take you through all these steps.

To determine your PIA, your average indexed monthly earnings are applied to a formula. For 2019, the formula is:

90% of the first $926 in AIME

32% of the amount of AIME greater than $926, up to $5,583

15% of the amount of AIME greater than $5,583

These percentages stay the same each year (under current law), but the thresholds (known as "bend points") change. These are represented by $926 and $5,583 above. Add these three numbers together to get your PIA.

As you can see, the system favors lower lifetime income levels to provide more relief to workers with less lifetime income.

Here's an example of how this works: Let's say that I'm turning 62 in June 2019 and my average indexed monthly earnings are $5,000. My PIA will be:

90% of the first $926, or $833.40

32% of the remaining $4,074, or $1,303.68

15% of the amount over $5,583, or zero

Combining these three amounts gives me a PIA of $2,137.08 per month. Note that this isn't the actual amount I'd get if I claim at age 62. At 62, there would be a 28% discount (.56% per month times the number of months until FRA). It would be more like $1540.

SCORECARD

At the end of April:

Willie had a month end balance of $191,596.03. His monthly benefit check (including the COLA) would be $2146.75 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $2011 check and withdrew $2413 from her existing account, so her net total is $213,988.57.

Sam used his benefit check to supply $1583.24 of his monthly expenses. His untouched IRA account sat at $215,463.80.

I just read an article by a well known financial planner. He gave an example of a 66 year-old woman who had the choice of filing for Social Security and receiving approx. (he doesn't say for sure) $3,000, or waiting until age 70 to get an additional $1,050. I don't know what COLA he used, so I can't be sure what the age 66 amount is. His argument was if the woman waited, and spent down $150,000 of her savings during those 4 years, the added $1,050 benefit per month was equal to plopping down $250,000 on an annuity to get the same $1,050 per month guarantee.

This logic has me scratching my head on a couple of levels. First, let us assume the client does have the $150,000 (or the $250,000?). Second, the assumption is the only investment alternative available is the annuity. Annuities are priced to ensure the issuer makes money. Anytime some middleman skims off some of your gain, it benefits them, not you. One thing many people may not know, when you die, that annuity money remains with the issuer, not your heirs. It is gone forever! I think a better plan would be to file at 66 and spend the Social Security benefit checks and to let the savings build through the magic of compound interest. The life expectancy for a 66 year-old woman in America today is roughly 20 more years. To keep the math simple, I'll just use the base monthly numbers and not try to predict COLA or inflation:

At age 86 with a modest 5% gain on her investment, she would have $193,002 on her 86th birthday. Plus, in the meantime, if she dies or needs a big chunk of money, that $150,000+ is always there. If she spent down the $150,000 and started depositing the extra $1,050 every month after her 70th birthday, she would have $186,025 on her 86th birthday. On her 70th birthday, she'd have zero savings and the promise and hope the government will pay her an extra $1,050 per month. I say keep your money!

Another down month, but a 10.8 cents per share dividend helped soften the blow. At the end of March:

Willie had a month end balance of $195,794.38. His monthly benefit check (including the COLA) would be $2132.68 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $2011 check and withdrew $2413 from her existing account, so her net total is $216,363.46.

Sam used his benefit check to supply $1583.24 of his monthly expenses. His untouched IRA account sat at $217,446.35.