If you qualify for Social Security benefits and have not begun to draw, you may be looking forward to receiving a monthly check in retirement. While there is uncertainty about the solvency of these benefits*, the present value of these future benefits should also be considered no matter what amount you receive.
For example, let’s say you expect to receive $15,000 a year in Social Security benefits at age 62. If you collect these benefits for 20 years with no other changes you should receive a total of $300,000 ($15,000 X 20)! While that is a large sum to receive over time, the present value of these payments, assuming 2% interest rates, is only about $245,000 or $55,000 less!
Think about how inflation lowers the value of a dollar – would you rather receive $1 today or $1 in 10 years? In a similar way, the $15,000 to be received each year in the future — discounted at 2% interest — is not worth as much today.
Here’s how interest rates have an impact:
As you can see, higher interest rates make for a lower present value, so you need to consider ways to maximize these benefits. Some methods include delaying payments, evaluating the opportunities for spousal benefits and also trying to minimize the taxes paid on your Social Security benefits. So if you can, make plans to save as much as you can on your own and in other places!
* www.ssa.gov “Your estimated benefits are based on current law. The law governing benefit amounts may change because, by 2034, the payroll taxes collected will be enough to pay only about 79 cents for each dollar of scheduled benefits.”