The Shockingly Simple Math Behind Social Security
Social Security can feel like choosing a health insurance plan. You have to read and study every little detail about it and then when you fill out the paperwork, you kind of hope that everything is going to work out like you think it did. Unlike health insurance, you can’t hit the “undo” button at the next open season. You only get one shot at choosing when to collect benefits. As with many complicated financial decisions that are highly personal, tons of people have blanket advice about what to do. And the internet is littered with “articles” that are actually funnels to expensive financial advisors to help you make this decision. So when I saw that Mr. Money Mustache, one of the most famous financial bloggers of all time said the math behind Social Security was “shockingly simple”, I knew I had to read the article.
But when I did the math on all of this, I realized that it’s more confusing than it needs to be. Because when it comes to deciding on how Social Security fits into your retirement strategy, it really boils down to only one number: The Net Present Value of your future lifetime stream of Social Security payments.
~Pete Adeney (Mr. Money Mustache)
Pete Adeney, who has blogged under the name Mr. Money Mustache for XX years is most famous for his post, “The Shockingly Simple Math Behind Early Retirement”. In this article, he walks readers through the Trinity study, the basis of the “4% safe withdrawal rule” to calculate the amount of money they’d need to retire at any age. He then shows how the percentage of income you save each month can be used to calculate the number of years it takes to reach your target retirement savings. Breaking these concepts down into plain language launched the “FIRE” (financial independence/retire early) movement and earned him millions of loyal fans. In this article, Mr. Money Mustache walks you through how to calculate the net present value of your social security benefits. You can then use this net present value in your FIRE calculations.
When the “Shockingly Simple Math” is…Shockingly Wrong
When Pete Adeney says something, everyone in the personal finance space listens… and then they often respond with their own hot-takes on his hot-take. The Shockingly Simple Math Behind Early Retirement has been called overly optimistic and overly pessimistic. It has been praised and hated. And although the article is very politically neutral and just introduces equations to calculate a future stream of payments from your net worth, commentators from both the right and left have used this article to point out what is wrong with society. So it’s no surprise that when Mr. Money Mustache wrote an article about something as controversial as Social Security, it was bound to bring out commentators of all stripes and qualifications to point out how their viewpoint differs from Adeney’s.
Because when choosing a discount rate, it’s important to match the risk of the cash flows. In simple terms, that means our discount rate must reflect the “risk” built into Social Security. A common phrase in discount rate discussions is “your next best option of similar risk.”
~Jesse Cramer, The Best Interest
In this article, Jesse Cramer takes issue with the interest rate that Adeney used in his present value calculations. Adney uses the inflation-adjusted average returns from the S&P 500 when trying to calculate the current value of social security. Cramer points out that Social Security is a risk free guaranteed investment. The returns on such an investment are much more closely related to inflation protected treasury bills or TIPS, which have an interest rate much lower than the S&P 500. Adney’s suggestion that the future value of your social security benefits being the highest if you begin withdrawing at age 62 is not true if you use the interest rate for TIPS– using this interest rate in the calculations shows that it’s best to wait until your last possible age to being collecting to have the highest present value. Of course, it is possible that there is some truth in both approaches. Cramer’s calculation may make sense if you’re at retirement age looking at when is the best time to begin withdrawals whereas Adney’s numbers may make more sense if you’re in your 30’s and trying to understand how something as distant as social security might play into how much you need to save for retirement. While the headline declares that Adeney is “shockingly” wrong, the article does highlight the complexity and nuance needed to apply these numbers to your own personal financial situation.
Online Business Ideas For Introverts
When it comes to starting a business, it can feel like extroverts are at a huge advantage. Almost every business requires you to “sell” something at some level. And sales require convincing someone to buy something that you’re selling. While not all business adventures require cold-calling strangers, even the quietest entrepreneur needs to have some sales copy written to highlight how they can help potential customers. Given the need for human interactions in sales, is it possible for introverts to start a business?
You can choose work that lets you stay in your own space, set your own schedule, and focus deeply without constant interruptions. Many of these ideas can start small and grow slowly, which can feel less stressful and more manageable.
~Ana Rose, Just Start Investing
In this article, Ana Rose lists several business ideas that are great for introverts. Most of the business ideas do not involve contacting others, and when they do, the contact can be done safely from behind your laptop screen; no camera required. While the list includes some obvious examples such as drop shipping or making print-on-demand objects, there are several other interesting jobs on the list as well. While these jobs are highly suited for introverts, it may be difficult to build your audience without making some contact with other people. However, if you’re an introvert looking to start an online business this list is a good place to start.