BOHANON & CUROTT: The risk Bohanon would take to double his retirement

Nothing beats getting a check in the mail—although a letter indicating that one can expect future checks is surely the next best thing. Bohanon recently received his Social Security Administration update informing him that, if he starts taking Social Security in January 2021—his full retirement date—he will receive just a tad under $3,000 a month for life. Hooray!

The missive from Social Security included other details: a warning that the system’s solvency will be in question after 2034, and a meticulous account of Bohanon’s earnings subject to Social Security tax since his first work experience in 1971. Pathetic geek that he is, Bohanon loaded the earnings record into an Excel spreadsheet. He then visited Social Security’s website, found the relevant tax rates for every year and dutifully noted the years the earner portion of the contribution was reduced (1984, 2010 and 2011). He then constructed a year-by-year record of the dollar contributions made to Social Security from his earnings.

In the course of the exercise, a simple thought crossed his mind. What if Bohanon had been allowed to invest his Social Security payments in common stocks? The most famous and readily accessible stock index is the Dow Jones industrial average. Suppose on the last day of 1971, Bohanon had invested the $47.56 he paid in Social Security taxes into shares of the Dow? As the Dow closed at 890 on that day, he would have purchased just over 0.053 share. Finding the year-end Dow close from 1971 to 2018, it was easy to calculate the value of Bohanon’s theoretical portfolio on Dec. 31, 2018: $1.36 million.

It was also relatively straightforward to turn that amount into a private lifetime annuity for Bohanon and spouse, set to start in January 2021. Note that $1.36 million is an underestimate of the 47-year cumulative returns to the Dow as the calculation does not include dividend payments the theoretical portfolio would have earned over the period.

Bottom line: Bohanon and spouse would be looking at a monthly check of $6,731 starting in January 2021. The projected Social Security check is just 44% of the Dow-funded lifetime annuity. It’s true the private annuity is not indexed for inflation and it’s also true that a precipitous decline in the Dow between now and then could reduce this projection. But Bohanon would take the risk. The only thing that beats a check in the mail is a bigger check!•

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Bohanon and Curott are professors of economics at Ball State University. Send comments to [email protected]

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