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Old 06-04-2010, 10:07 AM   #21
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Thanks for the article, which is very useful. I like the idea of a discretionary fund.
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Old 06-04-2010, 10:49 AM   #22
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Originally Posted by Rich_in_Tampa View Post
It's essentially having a "leisure bucket" and rebalancing periodically.

I would not just call it a 'leisure bucket'... sure, it can be... but the way it was written it can be a 'charity bucket', or 'help the worthless kids bucket'... or even 'help the SIL gambling debt bucket'... (I just had to throw that in... )

From what I got out of it... it is what you would call your 'mad money'... something that you can spend on whatever... but when it runs out... you are done... after it is gone... you can then take a look and see 'are we doing so much better in our regular withdrawal that we can move some money over here and be mad again'... but that you could NOT fill it up if it would affect your regular withdrawals...
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Old 06-04-2010, 10:56 AM   #23
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.

She will need that, since I've been responsible all our married life for all household expenses. Her $$ is her $$, to do with as she wishes (that's another thread/story), and in reality, she spends most of it on her passion (no, not me), travel.

I would "lose" two small pensions for her (single-life, at age 65), but she will spend that on travel, anyway.

Maybe we're different (OK, strange ), but in our case, the demise of one would not affect the other - in a financial sense.

Your wife is a lucky woman ! If anything happens to her I am semi -available and I love to travel especially with that kind of budget !
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Old 06-04-2010, 11:03 AM   #24
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Thanks for the link. I have learned a lot from Guyton's past papers - especially his withdrawal rules.

We use an emergency/discretionary fund which was around 5% of our initial portfolio. If you are using a x% of portfolio value withdrawal method, I think an emergency fund is necessary to smooth out your annual budget. It felt good to have it available when the markets tanked in 2008 leading to much lower withdrawal for us in 2009. In the end, we stayed within the 4% withdrawal, but it was good to know we could dip into the emergency fund if it proved impossible. There are obviously, other uses for it too - like large periodic expenses - cars, roofs and the like.

If we tap the emergency fund, I plan to replenish it from annual withdrawals when the portfolio recovers - before giving ourselves a raise.
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Old 06-04-2010, 11:18 AM   #25
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Your wife is a lucky woman!
After all we've been through together (and still are), I consider myself the "lucky one" ...

She stuck by me through my military service (drafted; served in Nam) when a lot of guys were getting "Dear John" letters and even long periods of separation even before I had my "SEA vacation". And yes, I'm a disabled vet (please, no comments; just trying to show what she has to put up with).

She stuck by me when I spent little time at home due to my traveling for wo*k. Sure, you could say I did it for the "benefit of my family", but I worked with others (both male/female) who's relationships could not stand the pressure, and the travel.

And we still share responsibility for our adult (disabled) "child" - till we're gone.

In our situation, the stats are that 75% (or more) of marriages don't last having a disabled child, with our son's condition. I would like to think in our little world that we are both lucky, and "special"....

Her desire to travel is based (I'm sure) somewhat on the challanges she faces on a day to day basis. It gives her a chance to get away from the day-to-day immediate pressure (even though we do call home daily, regardless of where we are in the world).

We leave for three days in London next week, followed by a Baltic cruise (Denmark, Sweden, Finland, Estonia, Belgium, Russia).

In September, she will go with her "travel buddy" (another women she met last June when we spent the month in Australia, with the same "travel bug") to Canyon Lands/Vegas (no, I don't ask). In November, the two of them are off to a Nile cruise.

Sounds exotic/extravagent? It isn't. Sometimes what you think is "extravagent" is just a coping mechanism for day-to-day reality.

BTW, I'm the lucky one. When she goes to Vegas/Egypt, I get to say home and play with the "puppies" (AKA "my buds")...
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Old 06-04-2010, 01:10 PM   #26
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After all we've been through together (and still are), I consider myself the "lucky one" ...

...

You are both sooo lucky to have found each other . They say nurse's are saints but we get to leave our work after our shift not so for parents of disabled children . You are on duty 24/7 and you both deserve all the happiness in the world . Thanks for a great post !
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Old 06-04-2010, 01:19 PM   #27
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Thanks for a great post !
No, thank you for a kind word....
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Old 06-04-2010, 01:29 PM   #28
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He adds a "discretionary fund" of 5% to 10% of your assets to do whatever you want to with, so you don't have to argue about 3.5%, 4% or 4.5% SWR in some years.
I'm thinking we will end up wanting 5-15% in a discretionary fund on top of whatever our portfolio needs to be to support a reasonable SWR. The higher range of 15% would be necessary if the SWR is tied to a percent of portfolio value each year instead of annual guaranteed CPI raises.

We will have some known/expected lumpy expenses in ER. But the magnitude of those expenses won't necessarily be known with a great deal of certainty. Our kids will probably be in elementary or middle school when we FIRE, and the teenage expenses of cars, insurance, and eventually college expenses will come up shortly after FIRE. We will have some dedicated 529 plans that have sizeable amounts by FIRE, but might not be quite adequate for what we want to pay for. Added to these lumpy expenses would be large travel expenses for a possible long trip around the world. Or not.

I'm thinking maybe $50,000-$100,000 in the discretionary fund to allow a little flexibility in withdrawals and to fund some lumpy expenses on an as-needed basis if the regular portfolio withdrawals weren't keeping up. Or to pay for SIL's gambling habit .
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Old 06-04-2010, 03:16 PM   #29
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I was thinking about having a pre-funded "slush fund" (the level of funding has yet to be determined). We plan on spending 3-3.5% of portfolio value each year. In bad years, we will have to cut expenses but the slush fund might allow smaller cuts than otherwise dictated by our plan. In good years, when the 3-3.5% withdrawal exceeds expenses, the slush fund will be topped off.
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Old 06-05-2010, 10:26 AM   #30
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The folks who advocate delaying SS in order to maximize the monthly SS checks you'll eventually collect implicilty assume that you'll: a) be in good enough health to do the things you want to do with that larger income, and b) will still be alive.

We live in a community where there is a high percentage of retirees. You will be unsurprised to learn that retirees tend to be older and their health tends to be poorer than most working age people. There are a LOT of them who are now single because one spouse has died, and a lot of them where one spouse has significant health problems---heart attack, stroke, bad legs/knees/hips, Parkinson's, etc.

Hiking Machu Picchu in your 40's or 50's? Piece of cake. At 70? Not so much. When you hit retirement age, there is less of your life ahead of you than behind you. And your health and physical abilities are only going to go downhill----you are already on the downward slope, and it gets progressively steeper (worse) with each passing year.

Whatever you call it, I think that a large pot of "discretionary money" when you begin retirement is a great idea. Use it to do those things that you can do now, rather than delaying them so long that you might well be unable to do them.
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Old 06-05-2010, 10:44 AM   #31
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Hiking Machu Picchu in your 40's or 50's? Piece of cake. At 70? Not so much.
I was surprised to learn yesterday that my brother just got back from hiking Machu Picchu at age 67, and he has never been athletic. He said it was "rigorous"...

He also said that he had never seen such a spectacular setting and he loved it.

But taking social security or not had nothing to do with it. His spending money is the same as it was before taking SS. Like me, he simply withdrew more from his investments prior to age 66 when he took it.
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Old 06-05-2010, 01:05 PM   #32
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I concocted something that I call my Liquidation Plan several years ago. It sets out general and specific financial resources that we have and puts them in a decreasing sequence to make it easy to pick them off one at a time. I probably should tweak it again, but its still pretty accurate. Here is part of it (altered)~

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All future required minimum distributions (RMD) that are received from IRA investments at Vanguard will be directed the Prime Money Market fund.


Our assets will be liquidated in the following order:
  • Checking Account
  • Prime Money Market Fund (Joint)
  • Vanguard Short Term Bond Index Fund (Joint)
  • Less than 1000 Shares of corporation common stock
  • Cash value of old LI policy
  • Vanguard Total Stock Market Index Fund~ Taxable~ Specific Shares (Joint)
  • IRA Rollovers @ Vanguard
  • Roth IRAs @ Vanguard
  • Proceeds from sale of house
  • Value of any other remaining assets of value not named above
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Old 06-05-2010, 09:38 PM   #33
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Originally Posted by rayvt View Post
The folks who advocate delaying SS in order to maximize the monthly SS checks you'll eventually collect implicilty assume that you'll: a) be in good enough health to do the things you want to do with that larger income, and b) will still be alive.

We live in a community where there is a high percentage of retirees. You will be unsurprised to learn that retirees tend to be older and their health tends to be poorer than most working age people. There are a LOT of them who are now single because one spouse has died, and a lot of them where one spouse has significant health problems---heart attack, stroke, bad legs/knees/hips, Parkinson's, etc.

Hiking Machu Picchu in your 40's or 50's? Piece of cake. At 70? Not so much. When you hit retirement age, there is less of your life ahead of you than behind you. And your health and physical abilities are only going to go downhill----you are already on the downward slope, and it gets progressively steeper (worse) with each passing year.

Whatever you call it, I think that a large pot of "discretionary money" when you begin retirement is a great idea. Use it to do those things that you can do now, rather than delaying them so long that you might well be unable to do them.
+1 for this post. very insightful -
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Old 06-07-2010, 06:43 AM   #34
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The folks who advocate delaying SS in order to maximize the monthly SS checks you'll eventually collect implicilty assume that you'll: a) be in good enough health to do the things you want to do with that larger income, and b) will still be alive.
i disagree, many years ago i provided an example of how delaying SS could actually allow the 62 yo to spend more between the ages of 62 and 70 than s/he would have if SS had not been delayed. (the amout spent after 70 was the same whether you delayed or not.) given that the increase in spending happens immediately you are not assuming a) anything about your health (you know what your health is in the present) or b) that you are alive (you know you are alive in the present).

here it is:

Quote:
OK, let me set the stage: You are coming up on your 62nd birthday and you need to decide if you are going to take SS at 62 or wait. You have no desire to leave an estate when you die and are reasonably healthy. Your experience and calculations tell you that you need $1979/mo (CPI adjusted annually) to have a reasonable lifestyle from now till you die but you would like to spend more than that the next several years if possible. You have a portfolio worth $256,500 in a TIRA and your SS matches CFB’s

Quote:
Originally Posted by Cute Fuzzy Bunny
My statement says $1124 at 62, $1979 at 70.
What do you do? Well your portfolio will produce $10260/yr ($855/mo) CPI adjusted annually using a 4% SWR, which should last 30 yrs. That $855/mo plus SS of $1124/mo will provide you with the $1979/mo you are looking for.

OR you could wait and start SS at age 70 which will provide you CPI adjusted $1979/mo from age 70 until you die, but what about the time between age 62 and age 70? Well you still have $256,500 which you decide to divide into eight equal portions (for the eight years between 62 and 70) giving you $2671.87/mo to spend. You also decide to put the money in a money market account so that all eight portions keep up with inflation. Now granted if you do this you will have zero money to pass on when you die (provided you live longer than 70yo) but you do get to spend more in the next 8 years than if you took SS at 62. Also if you delay taking SS your income after age 70yo is protected by the full credit and faith of the US government (which is kind of like investing in T-bills), unlike the taking SS at 62yo plan where 60-75% of your portfolio would be invested in stocks.

With that example explained let me provide another very related example. In this example the $1979/mo number is your bare-bones retirement number, i.e. the number you absolutely need to have. But you would like a budget of $3979/mo so that you also have plenty of discretionary money. Also you have a $856,500 portfolio and the same SS options as above. If you take SS at 62 and use a 4% SWR on your portfolio you will get your $3979/mo but if you delay taking SS until 70yo then you get the same income stream after 70yo but you get $4671.87/mo (CPI adjusted) to spend between age 62 and 70. This has the same advantages as were pointed out above and the $600k of your portfolio that is producing your discretionary money has the same chance of surviving you that your entire portfolio has if you take SS at age 62.
doing something similar could instead create a pot of "discretionary money" ($66,516 in the example above) while keeping a constant (in real terms) spending level ($1979/mo in the 1st part of the above example or $3979/mo in the 2nd part)
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Old 06-07-2010, 07:57 AM   #35
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The folks who advocate delaying SS in order to maximize the monthly SS checks you'll eventually collect implicitly assume that you'll: a) be in good enough health to do the things you want to do with that larger income, and b) will still be alive.

I would suggest that each person must make the SS decision, based upon their personal situation, and lifestyle.

As I wrote before, in our case I'm not delaying SS till age 70 to maximize the amount received for me, but rather for my DW (assuming I'll pass first). Additionally, I'm not going without SS. I'll be claiming 50% of her FRA benefit, when I turn my FRA age (we're the same age, within a few months).

To your point of having "good enough health", I accept the idea of I will not be able to do the same things I do today (age 62). But I also accept the idea that as I age, I will have to pay others to do what I do today (example, home maintenance - both interior/exterior). The expense level will still be there, and possibly higher since I'll need to pay for services that i currently do on my own - however, what those expenses are will change.

As far as "being alive"? Money is for the living - not the dead. I'm only concerned about maximizing what I can get/spend while still on this "mortal coil".

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We live in a community where there is a high percentage of retirees. You will be unsurprised to learn that retirees tend to be older and their health tends to be poorer than most working age people. There are a LOT of them who are now single because one spouse has died, and a lot of them where one spouse has significant health problems---heart attack, stroke, bad legs/knees/hips, Parkinson's, etc..

I would suggest that your observations (correctly) are based upon where you live. Live in an old age/retirement area/complex? Sure; more of a chance to see folks whose spouses have passed. Nothing unusual about that, IMHO.

As to health problems? Again, normal for that stage of life. Nothing unusual there, either. It will cost you more to live in old age if you still want the kind of lifestyle you had at a younger age (e.g. you will have to pay somebody else to do it for you, from driving to the doctor, to driving you to the grocery store).

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Hiking Machu Picchu in your 40's or 50's? Piece of cake. At 70? Not so much. When you hit retirement age, there is less of your life ahead of you than behind you. And your health and physical abilities are only going to go downhill----you are already on the downward slope, and it gets progressively steeper (worse) with each passing year..

I'll certainly agree. That is one of the reasons that we travel extensively and have done so for many years (BTW, we're off again in a few days ).

As far as Machu Picchu? Too many tourists. Anyway, our desired travel has never been of the backpack variety. After our first trip to Hawaii (where we had a condo for a few weeks), my DW said "I'm not here to cook". OK, so we stay in better accommodations than Hotel 6/8. That's just what we want (OK, it's what my DW wants - and I want what she wants ).

As to your comment on the "downward slope"? I agree. I also believe that slope gets more expensive as time goes on. Another reason to have more (guaranteed) income as you age - not less.

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Whatever you call it, I think that a large pot of "discretionary money" when you begin retirement is a great idea. Use it to do those things that you can do now, rather than delaying them so long that you might well be unable to do them.

That's why we didn't delay anything in our wor*ing years. We traveled extensively then - we do the same now, in retirement (Well, I'm retired - my wife may soon may be)...

As to that "large pot of discretionary money"? Heck, we have that now, and don't need SS to supplement it at this time of our lives. Just another advantage of the LBYM lifestyle for many, many years (yes, it works)...

We're leaving SS till later on when we need it to ensure a quality lifestyle when we will need somebody else to do many things we do for ourselves, now.

If we pass before that time? I'm sure we won't be worrying about "what we left on the table". It can go to others.
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Old 06-07-2010, 10:18 AM   #36
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The folks who advocate delaying SS in order to maximize the monthly SS checks you'll eventually collect implicilty assume that you'll: a) be in good enough health to do the things you want to do with that larger income, and b) will still be alive.
I suppose you would say that people who buy homeowners insurance "implicitly assume" that their houses will burn down. I'd prefer to say that both groups see a non-zero probability and think that insurance is a good way to deal with that fact. JDW-fire's example shows that this can be the better approach for some people.

Quote:
We live in a community where there is a high percentage of retirees. You will be unsurprised to learn that retirees tend to be older and their health tends to be poorer than most working age people. There are a LOT of them who are now single because one spouse has died, and a lot of them where one spouse has significant health problems---heart attack, stroke, bad legs/knees/hips, Parkinson's, etc.

Hiking Machu Picchu in your 40's or 50's? Piece of cake. At 70? Not so much. When you hit retirement age, there is less of your life ahead of you than behind you. And your health and physical abilities are only going to go downhill----you are already on the downward slope, and it gets progressively steeper (worse) with each passing year.

Whatever you call it, I think that a large pot of "discretionary money" when you begin retirement is a great idea. Use it to do those things that you can do now, rather than delaying them so long that you might well be unable to do them.
I had a co-worker who said that retirement comes in three phases: Active, Passive, and Dependent.

I agree that it's a good idea to have a pot of money to spend for the "extras" during the Active phase. But, it's possible that your spending is going to ramp up again in the Dependent phase. I'm not comfortable assuming a steady decrease in spending.
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Old 06-07-2010, 06:17 PM   #37
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This discussion kinda reminds me of the "should I pay off my mortgage / refinance my mortgage?" discussions. It is extraordinarily easy to get caught up with all the possible scenarios & details that you can't see the forest for the trees.

In this instance, the topic was whether to take SS at 62 or to wait until FRA or 70 and get a large monthly payout. The fact that you may have other investment portfolios (TIRA, etc.) has no bearing on the SS matter. None.

Other retirement assets may have a bearing on whether you can afford to delay or not, though. Nobody wants to eat Alpo for a few years in order to wait until the SS checks will be large enough to cover sirloin.

I grant there is one small area where the total lifetime family SS benefits can be maximized by clever footwork, but this is pretty uncommon. It's when the younger spouse is significantly younger than the other.

The Ryan article in FPA mentions a couple of key points that summarize why I think it is generally better to take SS early, and to not do a subsequent reset. (After you cease working, of course. Otherwise the taxes are very large.)

1) Reductions or increases to retirement benefits are actuarially equivalent for the person with average life expectancy.

2) After repaying benefits, time must elapse before the retiree breaks even on the transaction.

In the example he shows, the break-even period is 7 years. Much too long to interest me.
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Old 06-07-2010, 06:52 PM   #38
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I went back and updated my spreadsheet, putting in the SS-estimated figures for age 62/66/70 benefits using "future dollars" instead of "today's dollars". As was said in a related thread, this is what you should use when making comparisons. The annual SS statement they send shows today's dollars---which is where I went wrong.

I used these numbers, and figured my break-even points of 66 vs. 62, assuming 3% COLA and different earnings rates on the amount collected between 62 & 66.
At 0% earning, my BEP is age 78 (191 months after my 62'nd birthday)
At 2%, 80 (214 months)
At 4%, 83 (249 months)
At 5%, 85 (275 months)
At 6%, 88 (311 months)
At 8%, 102 (479 months)

To get a feeling for the length of the break-even periods, I note that a 30 year mortgage is 360 months, and a 15 year mortgage is 180 months.

I then looked at SS's life expectancy table, for my year of birth at various ages.
At 60, l.e. is age 81
At 65, 82
At 70, 84

So.......if I can earn an average of 4% or more, my 66 vs. 62 break-even point does not occur in my lifetime. Note that this is *not* 4% SWR, it's 4% earnings.

Of course, things may change in the future, but I will take note that my current portfolio of (investment-grade) preferred stocks has an average yield of 9%. And the "typical" yield of new preferred stock issues is about 6%.
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Old 06-07-2010, 07:14 PM   #39
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I went back and updated my spreadsheet, putting in the SS-estimated figures for age 62/66/70 benefits using "future dollars" instead of "today's dollars". As was said in a related thread, this is what you should use when making comparisons. The annual SS statement they send shows today's dollars---which is where I went wrong.

I used these numbers, and figured my break-even points of 66 vs. 62, assuming 3% COLA and different earnings rates on the amount collected between 62 & 66.
At 0% earning, my BEP is age 78 (191 months after my 62'nd birthday)
At 2%, 80 (214 months)
At 4%, 83 (249 months)
At 5%, 85 (275 months)
At 6%, 88 (311 months)
At 8%, 102 (479 months)

To get a feeling for the length of the break-even periods, I note that a 30 year mortgage is 360 months, and a 15 year mortgage is 180 months.

I then looked at SS's life expectancy table, for my year of birth at various ages.
At 60, l.e. is age 81
At 65, 82
At 70, 84

So.......if I can earn an average of 4% or more, my 66 vs. 62 break-even point does not occur in my lifetime. Note that this is *not* 4% SWR, it's 4% earnings.

Of course, things may change in the future, but I will take note that my current portfolio of (investment-grade) preferred stocks has an average yield of 9%. And the "typical" yield of new preferred stock issues is about 6%.
Thank you. I've been leaning very strongly towards the take it at 62 camp (I'm currently 60) and I find your findings very convincing.
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Old 06-08-2010, 01:57 AM   #40
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In this instance, the topic was whether to take SS at 62 or to wait until FRA or 70 and get a large monthly payout. The fact that you may have other investment portfolios (TIRA, etc.) has no bearing on the SS matter. None.
This is soooo not true. If you dont have any other retirement assets you dont have a choice, which has great bearing on the decision.

When to start taking SS really depends on several things, some of which follow. First, how you are funding your retirement i.e. do you have a large pension and almost no portfolio or are you funding via a portfolio only or do you have both? Second, what are your spending goals i.e. do you want to maximize your ability to spending in your retirement or do you have more than enough income to produce your desired spending money and therefore dont need to produce anymore; also do you want to be able to spend more early in your retirement? Third, how healthy are you? Fourth, do you want to leave an inheritance to someone i.e are you interested in continuing to build wealth and preserve wealth at all costs, even if it means less spending money in retirement?

Motivation is very important since some motivations can require actions that would go against other motivations eg. maximizing your spending conflicts with maximizing the inheritance you pass on. The example i gave in my last post deals with this trade off while attempting to not increase the risk of your retirement "failing". Of course the risk is different and which is more risky depends on whether the retiree feels depending on the "4% rule" (i.e. the stock and bond markets) is more risky than depending on SS.

Many analyses of when to take SS focus on how will you get the most money out of SS (as seen in the below quote). When analyzing SS this way average life expectancies (LEs) are integral. However when planning for retirement maximum LEs are usually more important (nobody wants to run out of money). Therefore i submit that analyzing SS using your average LE is inappropriate unless you have such great assets that there is no danger of you ever running out of money and in essence your main goal is to maximize your estate for future generations. More often than not the concerns expressed by posters on this board revolve around when will they have enough assets to be able to retire safely with some given spending plan and therefore, IMO, the best approach to deciding when to take SS is to use it as longevity insurance and maximizing its value that way. Now if you have great concerns about our government not paying out on the promises made for SS then that also needs to be taken into consideration.



Quote:
Originally Posted by rayvt View Post
I grant there is one small area where the total lifetime family SS benefits can be maximized by clever footwork, but this is pretty uncommon. It's when the younger spouse is significantly younger than the other.

The Ryan article in FPA mentions a couple of key points that summarize why I think it is generally better to take SS early, and to not do a subsequent reset. (After you cease working, of course. Otherwise the taxes are very large.)

1) Reductions or increases to retirement benefits are actuarially equivalent for the person with average life expectancy.

2) After repaying benefits, time must elapse before the retiree breaks even on the transaction.

In the example he shows, the break-even period is 7 years. Much too long to interest me.
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