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A recent comment in the Forum got me thinking about the inherent value of certain fixed income instruments. The commenter said they did not include their traditional pension or Social Security retirement benefit in their balance sheet when calculating net worth. This makes sense since neither of these is easily convertible to cash.
But pensions and SS clearly have significant value, and in many cases are the largest asset a retiree owns. I think it’s useful to get a feel for these amounts. You can compare them to your retirement savings and see how they stack up. There are several ways to do this. You could build a spreadsheet using the Present Value function with appropriate variables. You could price a commercial annuity that would provide the same monthly benefit. Or you could take advantage of Mike Piper’s Open Social Security tool – he’s done all the work for you.
Let’s consider someone who was born in 1957. Their full retirement age is 66 years and 6 months. In January 2024, the average Social Security monthly retirement benefit was $1,907. The maximum benefit for someone retiring in 2024 at their Full Retirement age is $3,822. The average expected longevity of our retiree is about 16 years for a man, or 19 years for a woman.
The table below shows the results from Open Social Security. The current value of future social security payments for an average benefit is about $320,000 for men, and $372,000 for women. For men and women receiving the maximum benefit, the current value is about $640,000 and $746,000.
| Men | Women | Men | Women | |
| Monthly Payment | $1,907 | $1,907 | $3,822 | $3,822 |
| Open SS PV Estimate | $319,641 | $372,060 | $640,623 | $745,681 |
Pensions often have a lump sum option. When this is available, you have a direct estimate of the present value of the future series of monthly pension payments. This is a function of several things – gender, age, and current interest rates. Different plans have different provisions, and the details matter greatly.
The data I have from my company’s plan is mainly from a low interest rate environment. When converting a monthly benefit into a lump sum, the lower the interest rate the large the lump sum. In 2017, a $5,000 per month benefit would have converted to a lump sum in the $800,000 range. That includes a 75% joint and survivor benefit.
I understand why someone would not use these estimates in calculating their net worth. I don’t when I do ours. But it is beneficial to understand the relative magnitude of these programs. Married couples with two high earnings record may have a substantial combined benefit. Social Security’s spousal benefit helps increase the value for couples where one spouse doesn’t have a significant earnings record.
Reading all these responses is very interesting! The only part of my pension that I count in our net worth is the portion that is saved or invested. When we begin taking SS, our net worth will just increase a little quicker than it does now. No mathematical calculations needed for income sources of unknown continuity. That said, we DO understand the value of those income sources to our financial picture.
It’s definitely important to understand the value of your SS and pension incomes for retirement planning and savings purposes. Many respondents have provided ways to estimate the value that make sense, e.g. use the 4% rule to determine the amount of savings one would need to replace the SS and pension income, determine the cost of the annuity required to replace the income.
That said, I only started doing this as I approached retirement, and it became more clear what my benefit would be. For younger workers the value of the benefit will be less clear for various reasons that most readers of Humble Dollar are probably familiar with. My advice to younger folks is to save with the expectation that you will not get a pension or Social Security. It’s a pretty conservative position, but it has served me well.
Adam, I am 65 and recall thinking when I started working that “there is no way SS will be around when I retire” and saved accordingly. While I have not begun taking the benefits yet, it feels like I may have been wrong back then! In any event, your advice to young readers is excellent,
I had a similar experience in that my high school government teacher told our senior year class that we were likely the 1st generation of students who would not see social security. I took it to heart when I started working. He was both right and wrong. I’m fairly certain I will get a SS benefit; however, the SS trust fund is now expected to be depleted by 2033, the year I turn 67. So, I doubt I’ll get the full benefit.
It’s gonna be interesting.