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Old 04-04-2014, 01:49 PM   #21
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Originally Posted by rayvt View Post
Some simple math:
8 yrs * $7500 = $60,000
$60,000 / $5700 = 10.5 years to break even.

But if you can afford to not collect SS for those 8 years, then by definition you didn't need the $7,500 to live on. Yet you are so financially clueless that you just stuck the money into an account earning 0%.

If instead you invested it in, say, bonds earning 5% it would have built up to $76,200.
$76,200 / $5700 = 13.3 years.

But of course you'd really be drawing down at the rate of $5700/yr and the rest would still be earning 5%.
That requires a calculator rather than a simple division. The retirement calculator I used shows that this will take 21.6 years to exhaust the account.

So now the actual break-even age is 92 years old.

Pfau surely knows how to compute compounded growth and compounded drawdown, so why didn't he?

Perhaps 5% is too optimistic. Refigure at 3%.
Grows to $68,700.
Lasts 15 years.
So the breakeven age is 85.
He did. It looks to me like your numbers agree with his.

Looking at his table, if I earn a constant 5%, my breakeven is between 89 and 90.
If I earn a constant 3%, breakeven is between 83 and 84.
If I earn 0%, breakeven is between 79 and 80.

He breaks even a little sooner than you. That may be monthly vs. annual calculations or beginning vs. ending cash flows.

Note that all these percents are "real" not "nominal", so the 5% means "CPI + 5%". I think any US retiree would be hard pressed to get CPI + 3% today. Ten year TIPS are yielding about CPI + 0.6% and 30 year are around CPI + 1.3%
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Old 04-04-2014, 04:12 PM   #22
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Rather than specifying an interest rate and telling you how long your payments will last, Dr Pfau's chart specifies the age you survive to and tells you the interest rate required to make those payments last your lifetime
.

Ahhh! Now I understand his table. Either he didn't explain it very well, or I just miscomprehended what he was saying.

Indeed my calculations just about equal his.
Re-reading his table with an eye to how you explained it, we agree.
At 0% earnings rate, the breakeven age is 80.
At 3%, age 85.
At 5%, age 91.
At 6.5%, age 105.
At 5.3%, age 92.
All net of inflation.

Vanguard says that the average return (1926-2013) of a 50/50 balanced portfolio was 8.3%. If you subtract 3% inflation and use 5.3% earnings and add 3% SS COLA, it just about cancels out and the breakeven age is 92 1/2.

So there's the thing, and everybody who does the math right comes up with pretty much the same answer.
No earnngs, breakeven is 10 years
3% (after inflation) the breakeven is 15 years.

What is different is which aspect of the situation is given the emphasis.

One camp says, "If you live to 90, you'll get more SS if you delay."

The other camp says, "If I earn nothing, I'll be 80 before I break even. If I save or invest and earn 4% (after inflation) I'll be 84 when I break even."
It is worth noting that the SSA reports life expectancy is 84 years old. So on average the break-even date is just about the same as the date of death.

The reason the debate sometimes gets so heated is that there is really no difference financially. The only difference is in which aspect is more important to you.

I am in the second camp, but acknowledge that many reasonable people are in the first camp. My thinking is that I would continue to use the same investment skills that got me to early retirement in the first place, and apply those skills to the early SS money. So even a low-risk 50/50 investment would easily push the breakeven date to long after my life expectancy. And if I went with a riskier 80/20 investment there is NEVER a breakeven.
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Old 04-04-2014, 04:35 PM   #23
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I'll wait because:
it's a form of longevity insurance
allows me to spend down IRA, lower RMDs, possibly lower taxes
A guaranteed increase of ~8%/yrincrease payouts, with a COLA...

BUT, if things change like how they calculate the COLA, or possible cutting of SS benefits, I take it at 62
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Old 04-05-2014, 10:44 AM   #24
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Originally Posted by rayvt View Post
.
The reason the debate sometimes gets so heated is that there is really no difference financially. The only difference is in which aspect is more important to you.

I am in the second camp, but acknowledge that many reasonable people are in the first camp. My thinking is that I would continue to use the same investment skills that got me to early retirement in the first place, and apply those skills to the early SS money. So even a low-risk 50/50 investment would easily push the breakeven date to long after my life expectancy. And if I went with a riskier 80/20 investment there is NEVER a breakeven.
I agree with the first paragraph above. The mathematical difference between the two is so slight that it's easy for different people with slightly different priorities to be on opposite sides.
Hence, there is no "right" answer.

I'll complicate this anyway by looking at the other part of my retirement plan, my regular withdrawals from my investment portfolio.

I note that a low-risk 50/50 investment allocation has historically earned inflation + 5.3%. I also note that if I'm starting at 62, 30 gets me to age 92, which is long after my life expectancy.

So, if I have a $1 million portfolio, I should be able to make withdrawals that start at $63,000 and increase with inflation. I can do the math and show that such a plan leaves me with $66,000 after 30 years.

But, people here don't start their retirement withdrawals at 6.3%. Somehow, that calculation isn't convincing when they are looking for a "safe" withdrawal plan.

I'm not saying that people should use a 6.3% rate, or they should approach SS differently than your calculation. I do feel like I should have some consistency between my approaches for the two decisions, or at least I should be able to explain why I approach them differently.

(Of course, many people here get that consistency by doing integrated calculations in FireCalc or some similar system.)
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Old 04-05-2014, 12:44 PM   #25
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i was listening to an interview with jason zweig on this topic. he brought up a very important point.

social security is an income stream that really can be converted to an asset and what he means is this:

if you take your ss and muliply by 30x it is a very rough idea of the equivalent in bonds it would take to generate that income.

if you are getting 1k a month in ss that is 12k a year. as a very rough rule of thumb ,you have an income stream coming in that would be like having 350k in bonds to duplicate.

so if you get 22k at 62 and 40k at 70 like i would that represents having 660k in bonds vs having the equivalent of 1.2 million in bonds.

having the equivalent of 1.2 million in bonds lets you actually cut back on your fixed income holdings and put much more in to equities than only 350k in bonds would allow.

the end result is the higher level of aggressiveness allowed can refill savings much faster than just looking at how long the additional ss stream alone would bring you to break even.
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