Certain professions are offered the ability to opt out of Social Security. Normally, a tax rate of 12.4% is applied to the first $ 106,800 of earned income — half paid by the employer and half paid by the employee. When an individual opts out, the 6.2% of their salary that their employer contributes to the Social Security Administration is deposited into a tax-deferred account specifically for the individual involved. The employee can either invest the 6.2% of his salary that he would normally need to pay in Social Security taxes to the same tax-deferred account, or even spend it.
A case I recently looked at involved a 36-year old male. By projecting his estimated benefit utilizing a tool provided by the Social Security Administration (ssa.gov) we determined that if the man stopped participating in the program, his benefit would be reduced by $ 310 per month upon reaching age 62. After accounting for inflation, the difference was $ 8,022 per year. This difference was assumed to grow by inflation of 3% per year.
If this individual contributed the 6.2% of his salary that would normally go towards paying the tax along with his employer’s 6.2% contribution, was he able to make up the difference of his smaller Social Security payment? Keep in mind that the S&P 500 (a broad measure of the stock market) has achieved an annualized return of approximately 10% since 1929. If the individual achieved a return of 8% while he was employed and only 6% during retirement, he would have been able to make up for the smaller Social Security payment and still have $ 177,129 left in his investment account upon reaching age 90.
Of course, investing on your own rather than relying on a steady payment from the U.S. Government involves more risk. However, this analysis doesn’t consider the strong possibility that Social Security benefits may be reduced by the time this individual begins taking withdrawals. The takeaway from this example is that if you have the ability to opt out of Social Security, it is worth examining.
Lon Jefferies is an investment advisor representative with Net Worth Advisory Group, a fee-only financial planning and investment advisory firm in Salt Lake City, Utah. He specializes in developing custom financial plans, implementing investment strategies, and providing ongoing support and service in order to help clients reach their financial goals. He can be contacted at (801) 566-0740 or email@example.com. Visit the Net Worth Advisory Group website at http://networthadvice.com and read Lon’s blog at http://www.utahfinancialadvisor.blogspot.com.
Social Security For Dummies, 2nd Edition (9781119293330) was previously published as Social Security For Dummies, 2nd Edition (9781118967560). While this version features a new Dummies cover and design, the content is the same as the prior release and should not be considered a new or updated product.
Praise for Social Security For Dummies:
"Social Security for Dummies is a must read for people of any age who want a comfortable retirement. Jonathan Peterson does a great job of explaining this complicated system and helps you understand how to get the most from the benefits you've earned. The difference between a smart claiming strategy and a dumb one can cost you hundreds of thousands of dollars, so you'll want to invest in this book."
—Liz Weston, personal finance columnist and author of The 10 Commandments of Money
"This is your go-to book on Social Security. Chock-full of useful tips, easy to use, and well organized, it answers all your questions about Social Security."
—Steve Vernon, author of Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and CBS MoneyWatch commentator
"Social Security for Dummies is indispensable for anyone who wants to get the best possible deal from Social Security—and that means all of us, young and old, because everyone will need Social Security benefits in this era of disappearing pensions and dwindling savings. Strategies for single people, for married couples, for survivors, for divorced people: You can find expert advice on all these subjects and more in this easy-to-understand guide to a very complex subject."
— Bob Rosenblatt, editor of HelpwithAging.com and Senior Fellow at the National Academy of Social Insurance
Take the mystery out of Social Security and maximize your benefits when you retire
Social Security For Dummies is the definitive resource to navigating the often-complex world of Social Security retirement benefits and the U.S. Social Security Administration. If you're nearing retirement age, or assisting someone who is, this guide will show you how to avoid common pitfalls, determine when you should claim your benefits, and figure out how much you can expect to receive each month.
This newest edition provides updates to relevant dates and resources as well as an in-depth look at policy changes that will affect those about to retire. Packed with information that will help you make decisions that will maximize your financial well-being, this great resource makes it easy to understand everything you need to know quickly and easily.
- Understand new Social Security Administration policies and what they mean for you
- Determine how to incorporate Social Security into your overall retirement plan
- Get answers to common questions
- Find resources to use when you're stumped
With Social Security For Dummies, you can take charge of your retirement and successfully navigate the U.S. Social Security Administration.Price: $12.21
- For Dummies