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Social Security vs. Saving


Photo credit: jb

I received a question from a reader that sort of dovetails with the earlier post about payback from Social Security, so I thought I’d run through the numbers on his question here. I never met a spreadsheet I didn’t like!

Here’s the question from the reader, verbatim (yes, I get emails this brief and to the point sometimes):

started work at age 20 retire at age 70.

Over 50 years of work I average $50,000 a year.

If I put 10% of my income away every month from age 20 to age 70 how would I come out versus depending on the government social security checks I would receive after retirement.

Initial Reaction

My initial reaction to this question was that you’d be much better off with the savings option, since you’re saving at a much greater rate (10%) than the withholding, and for fifteen more years than the Social Security system takes into account. However, that’s not altogether correct, since the Social Security system includes both your withholding and your employer’s withholding, for a rate in 2022 of 12.4%. So let’s go ahead and run the numbers.


There are a few assumptions that we have to make in order to complete this exercise:

  • In order to come up with an average wage, I first looked at the maximum Social Security withholding.  By calculating the average from 1962 to 2022, we come up with an average of $60,422. This is more than the average that the reader suggested, but it will work for our purposes and keep the calculations a bit simpler.
  • Putting aside 10% each year requires that we come up with a rate of return for this investment account.  I used a simple 5% return, which is reasonable over a long period of time.
  • I assumed that the side account is an IRA or a 401(k), so taxes have not been factored into the acquisition phase equations.


As we saw in the earlier post, earning the Social Security maximum over the final 35 years of your working career will give you a monthly benefit of $3,878 in 2022 if you file at age 70.

Saving 10% of your earnings (using the maximum Social Security wage base) over 50 years at 5% will bring you to a total in your IRA or 401(k) of $1,055,178. Running a few simple quotes from single premium annuity websites indicates that an immediate joint and survivor annuity with a single deposit of $1,055,178 will result in approximately a $4,873 monthly payment.  And that’s a fixed payment, not a COLA-adjusted payment like your Social Security benefit is.

As well, the $4,873 is fully taxed, whereas the Social Security benefit is, at most, 85% taxed. It could be much less, even zero, depending on your other income in retirement. If we take the reader’s word as literal, that this is all he has available to him (either the IRA or the Social Security), we see that the annuity will be taxed at 12% assuming married filing jointly (2022 rates), while the Social Security would be tax free. The end result is that the savings is a better option, with a net $4,609 per month after taxes, versus $3,878 in Social Security (no tax).

With a modest 1.5% COLA, the Social Security benefit catches up with the net annuity by his age 82.

However, upon the death of both you and your spouse, there is nothing left over in either situation – so the question becomes one of longevity. If you both live long, full lives, the Social Security option works out much better. If you and your spouse die earlier, any time before about age 85, there may be something left over for your heirs in the savings option.


In the end result, it seems that the Social Security benefit option is a pretty good deal, especially since we all hope to live a long, full life. The savings option works better if you die earlier than age 85, by possibly providing a residual amount to your heirs. This is a little different from what I’d originally thought, but when you consider that the average life expectancy of a male age 70 is roughly 84 (86 for females), there’s about even probability between outliving and not outliving your savings.

The fact that the Social Security benefit is tax preferred (85% at most, as little as zero taxed), subject to COLA adjustments, and is guaranteed (ok, don’t beat me up on that one, because any adjustments to the guarantee are bound to be pushed out way beyond the lifespan of this individual), it’s a triple-decker. Social Security is the hands down winner, assuming you live long enough. Plus, instead of 10% being put into savings, only 6.2% of your own income is going toward the Social Security taxation. The other 3.8% could be diverted to savings, making the SS side even better.

And finally, since you don’t really have a choice in the matter, the entire question is really moot – but an interesting exercise, nonetheless.


  1. Eric Allwardt says:

    Your amount for the savings option was taken assuming buying a single premium annuity. If you do that, then there is nothing left over when you die. If this was merely a way to arrive at an amount, then the saver is dependent upon being able to self-annuitize with a discipline that few people have.

    1. jblankenship says:

      True. Being a hypothetical exercise, it’s imperfect but the purpose was only to illustrate possibilities.

  2. Tom Dean says:

    I am 72 yrs and i have some extra money. I wonder if I can repay SS what I have collected and then start collecting at a higher monthly amount? I have been collecting since I was 62. Would this make sense if I were to live until 85?

    1. jblankenship says:

      You may have been technically able to do this – until the new rule was enacted on 12/8/2010 (yesterday). Now you’re allowed to go back 1 year, 12 months, in payback. In your case that wouldn’t buy you any increase.


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