Calculating SS break even point

[W2R]

No, you are correct, Heirloom did want to invest it. I don't understand why anyone would want to take it at 62 to invest it in this climate. If anything I'd be waiting till a later date if I didn't have any need for my SS.

SS is such a difficult issue for all of us who are around age 62 or so right now. There seem to be a lot of different opinions and strategies. I'm 63 and haven't claimed it yet, but I am "on the fence" so it interests me.

 

[GregLee]

I'm definately taking my SS at age 62 while it is still there and invest it in the best place at that time. Be it bond, mkt, or bank.

Anyhow....they are saying there will probably be a 3% increaes in SS in 2012. I will begin SS in Jan. of 2012, will my SS calcualtions be increased 3% or is the increase only for people who already were receiving SS?

Maybe someone who worked for SS can answer this.

I never worked for SS, but I think you will not be at any disadvantage for getting the approx. 3% COLA, whether you start SS sooner or later. I am investing my SS payments, started 11/09 at my age 67.5, in case you're interested, not because I'm worried about the SS system suddenly going into default, but just because I don't happen to need SS for living expenses. I put my SS payments into the stock market.

 

[heirloom]

I'm already getting a pension check and a severance pay. Plus unemployment because they eliminated my job. So.....I won't need the SS, just want to apply while I still can and before they try hiking the age .

My bank pays 2% interest in a check/savings account up to $20K. I'll put it there while I"m waiting for the mkt. to settle and then invest it in a roth IRA. I can still get an IRA for this year since I only retired in June. My husband is waiting until Feb. of next year so we can add to the IRA for next year.

People on this site were talking about I bonds. The ones you get in October pay 0.0 interest plus 2.4% inflation interest twice a yr. I was thinking of putting some there if the mkt doesn't settle next year. If it does, put it in a good dividend paying stock.

I already have intel, ge, msft, pfe, csco. I am hoping GIS or MO go down a little because they both perform very good. OR VZ is good too. But I really can't believe GIS, it still goes up even though the other staple stocks are going down.

 

[W2R]

Thanks, heirloom. Like you, I worry that the rules might change if I wait. I am hanging on for now (worried about living to a very old age too), but I definitely understand why you would prefer to have it in hand even in a declining market.

 

[GregLee]

My bank pays 2% interest in a check/savings account up to $20K.

That's pretty good, these days -- much more than my bank pays.

I see many recommendations for I-bonds from others here, but I know little about them, myself. My own investments are almost entirely mutual common stock funds.

 

[heirloom]

W2R,

It sure sounds like both SS and medicare are going to change depending on the outcome of the 2012 elections.

So, next year depending on the outcome you may need to TAKE IT!! [mod edit]

I went to the SS office last month and they ran a calculation of how much I will make starting in Feb./2010 and it showed the difference for each month up to age 70. It actually goes up .51% per month in 2012, then it goes up a little more in 2013. I just think I can do better myself,,,PLUS I know I will be getting it.

 

[W2R]

Believe me, I know where you're coming from, Heirloom.... It's hard to know what will happen.

 

[Alan]

People on this site were talking about I bonds. The ones you get in October pay 0.0 interest plus 2.4% inflation interest twice a yr. I was thinking of putting some there if the mkt doesn't settle next year. If it does, put it in a good dividend paying stock.

I think you are mis-reading the details on the site. If you buy an I-Bond in October you will get 4.6% for the next 6 months until it resets to the new rate which will be announced Nov 1st. If you download the Savings bond wizard and enter your bond details you can see its value and accrued interest month by month. Note that you don't pay tax on any interest until you decide to cash in the bond.


from the Treasury Direct site:
Composite Earnings Rates

Fixed rates and semiannual inflation rates are combined to determine composite earnings rates. An I Bond's composite earnings rate changes every six months after its issue date. For example, the earnings rate for an I bond issued in March 1999 changes every March and September.
If you would like to find the composite rates your bonds are earning, try our online Savings Bonds Calculator.
Here's how the composite rate for I bonds issued May 2011 – October 2011 was set:
Fixed rate = 0.00%
Semiannual inflation rate = 2.30%
Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]
Composite rate = [0.0000 + (2 x 0.0230) + (0.0000 x 0.0230)]
Composite rate = [0.0000 + 0.0460 + 0.0000000]
Composite rate = 0.0460
Composite rate = 0.0460
Composite rate = 4.60%

 

[rayvt]

W2R,

It sure sounds like both SS and medicare are going to change depending on the outcome of the 2012 elections.

Actually, both SS and medicare are going to change regardless of the election outcomes. They are on an unsustainable path, financially.

 

[rayvt]

I'm curious - - Suppose you were beginning SS right now instead of 3 months from now. Of the places you mention, where would you invest it today, and what returns would you expect?

The thrust of this question puzzles me. Three months is definitely short-term, and why would one make any kind of long-term decision based on short-term circumstances.

Nonetheless, here are some potential places to put money today.
Discoverbank - 1.25% interest
Alliant CU Savings - 1.15%

Or some preferred stocks:
JPM-C or JPM-W - 6.9% dividend, rated A2 (Moody's)
At lower ratings, but still investment grade:
BWF - 7.8%
KIM-G - 7.8%
PLD-R - 7.5%
PSA-H - 6.9%

Or, perhaps some bonds:
BND - 3.2%

 

[rescueme]

I'm already getting a pension check and a severance pay. Plus unemployment because they eliminated my job. So.....I won't need the SS, just want to apply while I still can and before they try hiking the age.

Since you are planning on taking it as an early benefit, there is little chance of changing that age, at this late date.

What they will do in the future (as has been done in the past) is reduce the amount you will get at age 62.

Most folks don't understand that the current benefit is paid based upon your full FRA age benefit (currently 66 for early boomers) and either reduced (up to 30% for age 62 claim) or increased 8% for every year from age 66-69 for those that wait to claim at age 70, the latest to claim without any further benefit to delaying. The age 62 reduction before the last SS change in the early 80's was 25%, before it was raised to the current 30%.

Also, don't exclude the options for a married couple (I don't know your status) that can greatly exceed an indivudial claim, over time.

I'm not saying you should not claim early (based upon your personal situation, as related to financial, health, and marital status) but just to say that you should have something other than "possibilities" or fear to drive your decision.

In the future, SS will change - more so for those much younger than say the age of 50. As for the older folks, sure it will change. Taxability will raise 15% (to 100% of benefit, depending on your total income) and qualifications may (may - not certain) reduce benefits based upon some unknown criteria.

To take action based upon reality (e.g. current rules/taxability) is good. To take action (and to lock in reduced benefits by 30% for the rest of your life) based upon an unknown fact is a much different situation, and is another thing completely, IMHO.

Assuming you don't need the immediate income but plan on investing your SS, you will have many years of "drag" on your invested benefit to make up for not delaying your claim and that 30% reduction, year over year, for the rest of your life.

Just my $.02, and something to think about.

 

[Texas Proud]

Since you are planning on taking it as an early benefit, there is little chance of changing that age, at this late date.

What they will do in the future (as has been done in the past) is reduce the amount you will get at age 62.

Most folks don't understand that the current benefit is paid based upon your full FRA age benefit (currently 66 for early boomers) and either reduced (up to 30% for age 62 claim) or increased 8% for every year from age 66-69 for those that wait to claim at age 70, the latest to claim without any further benefit to delaying. The age 62 reduction before the last SS change in the early 80's was 25%, before it was raised to the current 30%.

Also, don't exclude the options for a married couple (I don't know your status) that can greatly exceed an indivudial claim, over time.

I'm not saying you should not claim early (based upon your personal situation, as related to financial, health, and marital status) but just to say that you should have something other than "possibilities" or fear to drive your decision.

In the future, SS will change - more so for those much younger than say the age of 50. As for the older folks, sure it will change. Taxability will raise 15% (to 100% of benefit, depending on your total income) and qualifications may (may - not certain) reduce benefits based upon some unknown criteria.

To take action based upon reality (e.g. current rules/taxability) is good. To take action (and to lock in reduced benefits by 30% for the rest of your life) based upon an unknown fact is a much different situation, and is another thing completely, IMHO.

Assuming you don't need the immediate income but plan on investing your SS, you will have many years of "drag" on your invested benefit to make up for not delaying your claim and that 30% reduction, year over year, for the rest of your life.

Just my $.02, and something to think about.

+1 on this.....

If they make changes to people that have retired or are about to retire (say even 62 plus)... then I am sure they will make the changes for everybody, not just the ones who have not started taking SS... IOW, if you started taking SS the month before the change and I did the month after, I can not see them hitting me hard and not touching you at all... so, if you are scared they will make a change, it will probably hit you even if you start taking SS at the lower rate and you will have to live with it the rest of your life...

 

[Ken11]

Good point as this is another way of looking at the numbers. One has one's own portfolio to draw from while letting the SS get bigger or one can freeze the payout for the SS "portfolio" and withdraw from both portfolio's.

For my analysis above the payout went up by 0.933/0.867 = 1.076 or 7.6% (real return). So the SS portfolio real return for next year will be 7.6% for sure. Now all I'd need to know is what our stock/bond portfolio will do next year. Will it be up a lot making up for the recent down market or a continuation of the current miserable market situation?

Yes but...

If you trade a lump sum for later SS, you are trading a flexible portfolio
(that may outlive you) for a lifetime annuity

The 7.6%/yr SS "return" is not really that at all.
In 2012 your life expectency is less than it was in 2011. (Probably 3-4%% less)
Unfortunately, you are getting older and have less time to look forward to.
This affects the expected value of lifetime annuities such as SS.
This impact is not accounted for if you just look at the % delta in the annual payout.

 

[Lsbcal]

Right Ken, there are plenty of subtleties. Plus there are some tax angles (lower RMD's if IRA's are reduced some, possibly slightly higher Roth's as income blending will only commence when SS is taken, etc.).

Most people will decide based on a rough, maybe very rough, analysis. Some will decide based on emotions only. Who knows, they might be right for their case. For the analytical types (myself included), sometimes the problem seems intractable.

 

[Independent]

Anyhow....they are saying there will probably be a 3% increaes in SS in 2012. I will begin SS in Jan. of 2012, will my SS calcualtions be increased 3% or is the increase only for people who already were receiving SS?

I've never worked for SS. I also read the Bogleheads forum Bogleheads :: View Forum - Personal Finance (Not Investing)
If you are registered there, just start a thread with Social Security in the title and "sscritic" will show up. He/she seems to be very good with this stuff.

I think the simple answer to your question is "No, but most people make it up with wage indexing, but you might not."

Here's the long explanation, your initial SS benefit is calculated after indexing your past wages up to the year you turn 60. (Wages after that are entered at their nominal amount.)

Suppose A is one year older than B, but A and B had identical calendar year earnings up to the year A turned 61, when they both quit working.
When A retires, his wages are indexed to the year he turned 60, then A's PIA is calculated using the bend points for the year A turns 62.
When B retires, his wages are indexed to the year he turned 60 (one year later than A), then B's PIA is calculated using the bend points for the year B turns 62.

But, A is retiring a year earlier than B, so he gets a COLA in his second year of retirement that B doesn't.

When they enacted this system, probably everyone assumed that average wages would always go up, usually by about the same as the CPI or a little more. So B would get a bigger initial benefit than A, but A would get a COLA for one extra year.

As it turned out, the average wage was lower in 2009 than in 2008. I can't find a source for the 2010 wage, which may be the relevant year for you.

It's not clear from your post exactly when you are turning 62. If you turn 62 in Jan, your first check comes in March. So maybe you're turning 62 in 2011? or in 2012?

Here are some sources for the wage index, the start date on benefits, and the benefit calculation:
National Average Wage Index
Beginning month of retirement benefits
Social Security Retirement Benefit Calculation

 

[Rustward]

+1 on this.....

If they make changes to people that have retired or are about to retire (say even 62 plus)... then I am sure they will make the changes for everybody, not just the ones who have not started taking SS... IOW, if you started taking SS the month before the change and I did the month after, I can not see them hitting me hard and not touching you at all... so, if you are scared they will make a change, it will probably hit you even if you start taking SS at the lower rate and you will have to live with it the rest of your life...

Fully agree with this. If there happens to be a change that affects the 62 - 70 crowd the SSA will do something to compensate for the fact that, within that group, some people will have already started benefits and others will not have. Parallel examples: GPO and WEP. Not exactly the same thing, but have a similar affect. No free lunch.

Edit to add: Now, if you are 62 and have a condition that leaves you with a 5-8 year life expectancy -- that would be a good reason to start the benefit early.

 

[rescueme]

Edit to add: Now, if you are 62 and have a condition that leaves you with a 5-8 year life expectancy -- that would be a good reason to start the benefit early.

If you're single, I would agree.

If married, and having a higher SS benefit than your spouse (with an expected normal lifespan), along with being able to delay or not receive it at all, there are other considerations...

 

[Rustward]

If you're single, I would agree.

If married, and having a higher SS benefit than your spouse (with an expected normal lifespan), along with being able to delay or not receive it at all, there are other considerations...

Well you are right. There is rarely one solution that is best in every situation.

 

[oldtrig]

I will probably gamble and start at 64.5. I currently work and the time the government gets through with my check it looks bad. I have retirement, SS, and other deductions that eat away at the top number. If I retire I will have not taxes on my SS. I have a small pension from the place I work and it and my SS add up to the same thing I take home now. My wife just started SS and her SS will pay for our health insurance until we go on Medicare. I am actually working for under $100 a week if you consider what I take home and what I would make retired.

 

[Chuckanut]

I have been looking at all the taxes and things taken out of my paycheck. Retiring is not that big of a financial hit when one considers these deductions - SS, union dues, forced contributions to the pension plan etc. Of course, staying in the work force does increase the overall benefit each year, but at the cost of consuming a big percentage of the time I have left as a healthy individual.

Personally, I will retire early, but avoid taking SS until I am at least 66, and maybe a bit more if I can swing it. I do this just in case I end up living a lot longer than I figure I will.

 

[Chuckanut]

Timing SS is another factor in diversifying to reduce risk. By taking SS later, one decreases current income so as to ensure more income in later life. As I said above, that is my way of diviersifying just in case I live longer than I think I may.

 

[rescueme]

As I said above, that is my way of diviersifying just in case I live longer than I think I may.

Yes, it's easier to die with money than live without it ...