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Social Security: The Great Equalizer

Whether you are in middle management or the C Suite, one area where economic equity seems to be alive and well is with respect to social security retirement benefits.


For example, consider the income patterns of two different workers who started work on the same day and are the same age. Worker A took the fast track to the corner office route right out of business school, and through hard work and many long hours built a high paying career as she rose to the position of Executive Vice President after 40 years. The other worker - worker B - has also had a satisfying and rewarding career but took a different path and he is now a middle manager at the same firm.


Let's say both of these workers are now at full retirement age for the purposes of Social Security (66 and a few months) and are reviewing with their advisor their expected retirement benefits from the program.


Expected Monthly Social Security Retirement Benefits:

  • Worker A: $3,240

  • Worker B: $3,240


How could two people with such vastly different careers and income patterns end up with the same social security retirement benefit? For example, last year, worker A earned $1,470,000 in total cash compensation, while worker B earned 10% of that - $147,000.


Worker A, our soon-to-be-retired C-Suite executive, earned ten times what worker A was paid last year. In fact, Worker A's income history has far exceeded worker B's earnings record for most of their careers. Yet here is where both worker A and B are in the same boat: both have earned up to or in excess of the Social Security maximum taxable wage base for the last 35 years, which means both are entitled to the same maximum social security retirement benefit in 2022.


For example, in 1987, worker A earned about $75,000, while worker B earned the same as the maximum taxable wage base at that time, or $43,800.

  • Ten years later, worker B's income still mirrored that maximum wage base, as he earned $65,400 in 1997 while worker A was now deep into six figures, as she earned about $200,000 that year.

  • By 2011, worker B was now earning $106,800, again eerily mirroring the wage base maximum (who knew?) while A's earnings eclipsed half a million bucks that year.


Which brings us to the present, 2022, with A and B preparing to retire this year. Given their past 35 years of earnings history, and that they are at full retirement age (FRA) in 2022, they each will enjoy the maximum benefit of $3,240 per month, or about $39,000 a year. Assuming both workers have spouses, who will be entitled to a spousal benefit of one half of the worker benefit, that means total annual cashflow from Social Security for both workers A and B and their spouses will be roughly $58,000 in their first year of retirement at age 66.


Worth a mention is another similarity in the retirement resources for both workers A and B. Neither can look forward to any defined benefit pensions awaiting them. Social Security will be their only form of guaranteed cash flow for their lifetimes. And for worker A, someone nobody will take pity on given their impressive earnings history, that could become a major challenge when it comes to sustaining an affluent lifestyle built over decades of hard work.


For worker B and his spouse, that $58,000 Social Security retirement benefit represents a solid portion of their preretirement income of $147,000, or roughly 40%. It can serve as a solid base and may even help satisfy the bulk of B's nondiscretionary income needs in retirement. But for our C-suite retiree, worker A, that same $58,000 represents only 4% of their income.


Chances are, worker A doesn't need the same $1.5 million they earned in 2021 to sustain their lifestyle in retirement. But with no pension, they may still need a substantial income not only to continue their lifestyle want, but their income needs. Chances are also very good that those income wants, and needs are a vast multiple of the $58,000 they rely on from Social Security.


The key question is - have they accumulated enough to completely insulate themselves from the need for an income stream that is guaranteed and perhaps that is enough to satisfy their nondiscretionary needs for the next three decades?


Let's say they've amassed $10 million in investable assets, with more than half of that money in IRAs. RMDs alone in six years at age 72 will require they withdraw 3.65% of those IRA values, creating a potentially significant sequence risk event unless a significant chunk of that money sits in inflation eroding cash. Let's review what this wealthy couple is up against:


  • No pension to rely upon

  • Domestic equity values remain elevated compared to history and may produce lower than average returns over the next decade, with forward P/E of about 19

  • The 40-year bull market in fixed income may be ending, creating a powerful headwind to future fixed income return potential

  • Very high standard of living and high expectations for continuation of such

  • Funding of both nondiscretionary needs and lifestyle for the next 30 years will be predicated on consistently effective decumulation management in the absence of additional guaranteed solutions

Meanwhile, couple B may also have accumulated substantial sums, but with 40% of their preretirement income already spoken for by Social Security, the stakes are ironically much lower than they are for couple A in both meeting their needs and satisfying their wants.


Summary

For those that continue to believe that the need for annuities and their guaranteed lifetime cashflows remain the sole province of the mass affluent, think again. For many pension-less high net worth couples within a few years of retirement, the risks to their retirements may be higher than for those of more modest income histories and lifestyles. Think about that the next time you bump into a couple with a $5-10 million-dollar investable net worth and a high working income and consider the role that annuities can play in shoring up a solid future for them in the face of a panoply of risks unlike those seen over the last few decades.












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