I received my Social Security statement in the mail and decided to do some math just for fun.  Let’s look at the numbers the government has presented me with.

The assumptions:

  • I’m 34 years old
  • Between me and my past employers we have contributed $100,000 to social security
  • According to Medicaid, the current life expectancy for a female who is 34 today is 80.3 years old

My Social Security statement tells me that they average out my annual earnings over all of my employed years and they assume that I will earn that same average amount, and will contribute that same average amount to Social Security, until I reach 62.  I’m not “working” or contributing to Social Security through a paycheck anymore so the numbers they give me are way high.  I expect the true payout, if there will be one, to be a fraction of what they currently estimate.  Actually, I expect no payout at all.

They say that if I continue the averages I just spoke of until age 62, I will receive $1,446 in benefits per month.  My employers and I have already collectively contributed $100,000 over the last 19 years that I’ve worked, so if we were to keep with the average rate, this would mean we would contribute a total of $147,000 more over the next 28 years.  So the government is figuring they have $247,000 to work with, and they plan to pay it out at a rate of $1,446 per month.  This is all assuming that no interest has ever been accrued on the money paid in.

If Social Security agrees with Medicaid that my life expectancy is 80.3, then at the age of 62 when I stop contributing and my $247,000 pool is as big as it will ever get, I will have 18.3 years to live off the $247k.  If we assume this money is put under the government’s pillow and there is no interest accruing, they have enough to give me $1,125 per month.  $1,125 is slightly under the $1,446 per month they plan to give me, but remember I’m assuming they’ve earned no interest during the 47 years that I will have worked, nor the 18 years that I would be retired.

What a minute! That 47:18 ratio is out of whack! Shouldn’t it be the other way around? I get 15 years off to gear up for life, then I work 47 years, then I get 18 years off?  No, no, no… that isn’t how it’s going to be at all.  But I digress.

Now to be more realistic, since I’m not contributing to Social Security anymore, let’s say there is and will only ever be $100,000 to work with.  If I had control over that money, how large could I grow it?  Well, if I put it into a super conservative paper investment that paid out 5% annually, by the time I’m 62 it would have grown to $392,031.  That’s significantly higher than $247,000 and I don’t even have to work to keep up my averages for 28 more years.

What could I grow $100,000 to by investing in real estate?  At first I was actually going to try to figure that out, but then I realized there are so many complicated variables, taxes, re-financing and re-leveraging, etc. it would be pretty hard to be close to accurate.  But let’s just say for super simplicity’s sake that I took my $100,000 and bought a property that’s currently worth $1,000,000.  If that property is in a market that would appreciate 5% a year:

  • Year 1: $1,000,000 value with $100,000 equity
  • Year 2: $1,050,000 value with $150,000 equity
  • Year 3: $1,102,500 value with $202,500 equity
  • Year 4: $1,157,625 value with $257,625 equity
  • Year 5: $1,215,506 value with $315,506 equity
  • Year 6: $1,276,282 value with $376,383 equity
  • Year 7: $1,340,096 value with $440,096 equity
  • Year 8: $1,407,100 value with $507,100 equity
  • Year 9: $1,477,455 value with $577,455 equity
  • Year 10: $1,551,328 value with $651,328 equity

And of course we still have 18 years to go before I’m 62!  And we’re assuming straight appreciation here with no profits from monthly cash flow the whole way through and no principle paydown/increase in equity from that.  The numbers are staggering!

I’ll take real estate investing over working at a job any day of the week!