A couple of weeks ago, I received an email from Social Security reminding me to check my Social Security Statement online. It is a good idea to check your Social Security Statement at least once per year to make sure your earning record is correct. If there is any mistake, then you need to correct the error within 3 years or else your social security benefits could be permanently affected. Everything looked good and I thought I’d update this article with the latest numbers. Also, I’ve been very busy turning over my rental condo so I need to do an easy post today. I’ll go over my estimated benefit and also update our Lifetime Wealth Ratio.
This article was inspired by J. Money’s post at Budgets Are Sexy – Do You Know Your Lifetime Wealth Ratio?
My estimated Social Security Benefit:
- At full retirement age (67): $2,272 a month
- At age 70: $2,817 a month
- At early retirement age (62): $1,599 a month
Alright! My benefit increased from $2,227/month to $2,272/month. That’s $45/month, not too shabby. In 2015, I predicted that my benefit estimate would stay pretty stable and it seems that I’m right so far. My online earnings have dropped a bit, but it is still way better than zero. Social Security Benefit is calculated over 35 years so the more earning years you have, the better.
Mrs. RB40’s estimated benefit:
- At full retirement age (67): $2,292 a month
Mrs. RB40’s estimate increased from $2,222/month to $2,292/month. However, this isn’t going to be accurate if she retires by 2020. Her income would drop and the benefit would follow suit. I used the Social Security Benefit online calculator to see what her benefit would be if she stops working next year and the it dropped to around $1,300/month. Wow, that’s a drastic decrease! Her AIME is about half way to the second bend point so she really could benefit from working a few more years. Don’t worry if this is all Greek to you. We’ll see how Social Security Benefits are calculated next.
Social Security Benefit Estimate
Let’s dig into how social security benefits are calculated.
Social Security benefits are computed using “average indexed monthly earnings.” This average summarizes up to 35 years of a worker’s indexed earnings. We apply a formula to this average to compute the primary insurance amount (PIA). The PIA is the basis for the benefits that are paid to an individual.
That’s from Social Security’s website. Basically, they will take your highest 35 earning years and average them. If you have some years with $0 earnings, then your benefit will be less. Let’s take a look at our earnings.
Wow, I made a lot of money as an engineer. My total lifetime earnings so far is $1,885,616. I used the Medicare earnings column because that one has no limit. That’s a lot more than I thought! Check out that big spike in 2012. I only worked full time for 6 months, but I sold a bunch of stock options that year. That inflated my earned income for that year to $200,000. My earnings dropped after I left full time work, but life is much better since I retired 5 years ago . What can I say? *shrug* Money isn’t everything.
As for Mrs. RB40, she joined the Peace Corps for 3 years after college so she got a later start than I did. She also took another 2 years off from full time employment to get her Master degree and made very little income during those years. Her total earning is $867,118. (Holy moly, together we earned over $2.7 million so far. Where did all that money go?) We’ll need these numbers for the Lifetime Wealth Ratio next.
Is the estimate accurate?
The Social Security Benefit is calculated with your highest 35 earning years. Currently, I have 20 good earning years and 15 blank years. Social Security filled in those 15 blank years with my latest earnings to get their estimate. So they assume I’ll make about $30,000 for the next 15 years. I don’t know if that’s really going to happen because we plan to take some very long trips. My income is good this year, but it will probably drop quite a bit in the future. However, the benefit should not drop that much even if my earned income decreased over the next 15 years. The social security calculator shows that my benefit would be about $2,000 even if I earned $10,000 per year for the next 15 years. Basically, I’m very close the second bend point and the benefit curve has flattened out for me. From now on, my benefit won’t change that much because I’ve paid in a lot already.
Here is a graph of the AIME (average indexed monthly earnings) vs PIA (the Social Security Benefits.) The benefit grows at a different rate depending on your AIME. It doesn’t take much to reach the first bend point. You only need to average just $856/month over 35 years. Then it’s a long slog to the second bend point. After that, your Social Security Benefit won’t grow that much even if you earn more.
Mrs. RB40 is about half way between the first and second bend point right now. If she keeps working, her benefit would also keep climbing at a steady rate. It looks like she needs to work full time about 8 more years to reach the second bend point. That’s the price she pays because she had some low earning years in her youth. We are not depending on Social Security so it’s not really a big deal. I prefer that she stop working full time earlier. She doesn’t need to maximize her Social Security Benefits if she doesn’t want to.
Anyway, the extra $3,500 to $4,500 Social Security Benefit would definitely come in handy when we turn 67. This will be our fun account and we can do whatever we want with it. Hopefully, we’ll still be in good health and can still travel a bit. We could also use this income as a donation fund like my father in law. He has a pension and he donates most of his Social Security Benefit. That would be a great way to give back.
Back to the Lifetime Wealth Ratio
Once you have your lifetime earning total, then you can figure out your Lifetime Wealth Ratio. Don’t forget that you need to use the Medicare earnings column in your statement. What’s the Lifetime Wealth Ratio? It’s basically how much wealth you have generated from the money you earned. (Invented by J. Money, of course.) The higher the ratio, the better you have been at saving, investing, and building wealth. You will need your net worth for this, too. The formula is very simple.
Lifetime Wealth Ratio = Net worth / Total Income Earned
I’m going to look at this as a team because the numbers look better that way. Our Lifetime Wealth Ratio is 83% at the end of 2016.
Here is J’s Chart.
- 0%-10% – Meh
- 10%-25% – Now we’re cooking!
- 25-50% – You’re on fire, baby! Give me your number!
- 50-100% – Marry me.
- 100%-1,000% – How do I get into your will?
Okay, this is geared toward single people, so I’m going to change “Marry me” to “Stay married, we’re a great team!”
Our Lifetime Wealth Ratio is increasing
We are doing fantastic at 83%. In 2 years, we improved from 77% to 83%. I think that’s pretty darn good, don’t you? The stock market and real estate market have done very well and our net worth handily outpaced our earnings. We still have a way to go before we reach 100%, though. I’m pretty sure we will get there soon. The Lifetime Wealth Ratio would increase much quicker after Mrs. RB40 retires. Our earning would drop quite a bit, but our net worth should keep increasing because we’ll stay invested in stock and real estate. The last 2 years have been great for investors so you should see similar improvement.
Here is your homework this week – check your social security statement and calculate your Lifetime Wealth Ratio. How does it look? Can you beat J (60%*) and the RB40 household (83%)?
*J’s LWR increased from 54% to 60% in 2 years. His net worth increased quite a bit due to various business moves. Great job!
If you want to invest in real estate, but don’t want to be a landlord, check out RealtyShares. You can generate very nice passive income from funding different real estate projects like apartments, offices, restaurants, and single family homes. See how I’m doing with my real estate crowdfunding investment.
Disclosure: We may receive a referral fee if you sign up with a service through a link above.
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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