How Much Are Your Social Security Benefits Worth?

Americans routinely underestimate what their benefits are worth.

Hundred dollar bills and a measuring tape.
••• Think your benefits aren't worth much? Measure their value and you might change your mind. BartSadowski/E+/GettyImages

I’ve been providing retirement planning services for over twenty years. And for over twenty years the families and singles I work with routinely underestimate what their Social Security benefits are worth.

To value your benefits appropriately, start by thinking of your Social Security (or pension benefits) in terms of what you would have to have in the bank at retirement to deliver the same amount of monthly income to yourself.

How to Value Your Benefits

Suppose starting at age 66 you will receive $1,500 a month from Social Security, and each year that $1,500 a month will go up if the cost of living (as measured by the consumer price index) increases. Now suppose you will live twenty years. How much is that income stream worth?

You can answer this question by taking the present value of this stream of cash flows.  You would need $263,977 in the bank earning a 5% annual rate of return in order to pay yourself $1,500 a month (increasing at 2% a year) for twenty years.

If you live thirty years, you would need $348,535 in the bank.

And, if you assume that instead of a portfolio earning 5% that you are using safe investments earning 2% (the same rate of assumed inflation at which your income increases each year) then you would need $352,941 in the bank for the income to last twenty years, and $529,411 in the bank for the income to last thirty years.

A $1,500 per month Social Security benefit, at a minimum, is worth hundreds of thousands of dollars.

And that does not factor in ancillary benefits like spousal benefits or survivor benefits.

Value is Even Higher for Married Couples

When you consider what Social Security can be worth for a married couple, you might be shocked to find out it is not uncommon for the benefits to be worth more than a million bucks.

Take a couple (this is a real couple that I worked with) where both were born in 1950, and both worked earning decent wages. His benefit at his full retirement age will be $2,668 a month, and hers at her full retirement age will be $1,659 a month. If they each claim their own benefit at their full retirement age, and he lives to 85 and she to 90, the present value of their lifetime benefits is about $941,000.

But if he files and suspends his benefit at age 66, this allows her to claim a spousal benefit. She would claim a spousal benefit for four years, then switch to her own benefit at her age 70. He would begin his benefit at his age 70. In this way they both get the delayed retirement credits that allow them to collect the maximum monthly benefit amount.

This claiming strategy boosts the present value of their lifetime benefits to $1,057,000. These present value numbers were calculated using a for-fee online Social Security calculator called Social Security Timing. I assumed a 2% annual increase in benefits due to inflation, and a 5% discount rate, or rate of return that the lump sum would have to earn.

Valuing Other Benefits

Upcoming retirees routinely underestimate what a guaranteed income stream is worth.

This tendency to underestimate the value of income applies to pension benefits as well as to Social Security.

While underestimating the value of guaranteed income, retirees tend to overestimate the value of their own savings and investments. They often assume the investments can produce more income or earn a higher rate of return than what is realistic. This can lead people to choose a lump sum option for their pension instead of an annuity option, simply because they are not aware of the true value of that annuity income stream.

Don’t dismiss the value of your Social Security benefits or other sources of guaranteed income. This monthly income is likely to be worth far more than you think.