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Interesting observation in SS calculations for Retirement planning
Old 11-18-2014, 03:33 PM   #1
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Interesting observation in SS calculations for Retirement planning

I run a lot of Retirement calculators trying to imagine various scenarios and what would happen to a given bucket of money under those circumstances. For my personal plans I generally ignore SS. But for kicks I ran some scenarios to see what delaying SS would mean since so many of the pundits tell you to wait because you get more $$ if you wait. What I found with 2 different calculators was interesting I thought and wanted to run it passed this group to see if it passes the stink test

Portfolio - $3M split 60stocks/30bonds/10cash (where possible to adjust), 1% expense ratio, 50 year retirement, $120K withdrawls/yrs (all numbers in todays $)
Calculators Cfiresim and Flexible Retirement planner both gave similar results
Cfiresime results shown
Take SS at 62 - $20K a year 65% success
Take SS at 65 - $25K a year 66% success
Take SS at 70 - $31K a year 64% success

I realize that this is still a lot of fails and the expenses is too high but it suggests at least at this level that there is very little difference as to when you take it and if there is a difference it seems that 65 is the best condition. I ran a number of combinations and pretty much got the same results every time.

Did I miss something or does this make sense?
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Old 11-18-2014, 03:45 PM   #2
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cfiresim (and perhaps Fido's RIP) and firecalc give less accurate results when you put in longer retirements. That's because they have fewer samples with really bad years of inflation or market downturns.

I would be more interested in seeing the same experiment run with a 30 year term.
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Old 11-18-2014, 03:52 PM   #3
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I got similar results in Flexible Retirement Planner which is a MC sim only (no historical data). Every year is 10000 simulations based on the return rate/std dev and inflation/std dev

I could do 30 years but it was also for my education on when to take it and I'm guessing that I will beat 30 years...and if I don't I'll be leaving $$ on the table anyways so then it wouldn't matter...however
with 30yr numbers the earlier the better it seems
62 - 90% success
65 - 89%
70 - 86%
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Old 11-18-2014, 03:52 PM   #4
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If you have a 35% chance of failure under which scenario would you wish to have retired? Social Security will continue when the portfolio does not.
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Old 11-18-2014, 04:32 PM   #5
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Unless you are stuck in a crappy deferred account, you should be able to get your expense ration well below 20bps without trying hard.
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Old 11-18-2014, 05:04 PM   #6
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As a fan of variable withdrawals in retirement (VPW), I am also a fan of maximizing (thus delaying) the basic income floor provided by Social Security, combined with a CD or TIPS ladder to provide this floor between retirement and the start of payments.
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Old 11-18-2014, 05:23 PM   #7
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Originally Posted by jebmke View Post
Unless you are stuck in a crappy deferred account, you should be able to get your expense ration well below 20bps without trying hard.
I was struck by this too. A 1% expense ratio seems high. With a similar asset allocation, my total ER is 0.21%.
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Old 11-18-2014, 05:26 PM   #8
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It makes sense to me, the longer you delay SS the more years you will need to use your savings. So greater chance savings will deplete to 0.
However the greater delay in SS means you will have greater income for the rest of your life.
So it passes the stink test to me, but seems misleading until you think about what is life like after the failure.
Obviously the answer is to lower your expense % as that is really high, and only take out 110K/yr. (estimate).
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Old 11-18-2014, 05:34 PM   #9
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It makes sense to me, the longer you delay SS the more years you will need to use your savings. So greater chance savings will deplete to 0.
I didn't come up with a reason for the results, but it looks like you hit the answer!

Of course what would really happen is you'd see the line heading lower and lower over the years, and decide...I think it's time I paid a visit to the SS office! So the model isn't doing what a rational person would do.
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Old 11-18-2014, 06:04 PM   #10
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Originally Posted by nuke_diver View Post
I could do 30 years but it was also for my education on when to take it and I'm guessing that I will beat 30 years...and if I don't I'll be leaving $$ on the table anyways so then it wouldn't matter...however
with 30yr numbers the earlier the better it seems
62 - 90% success
65 - 89%
70 - 86%
This is similar to what I get.
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Old 11-18-2014, 06:11 PM   #11
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I view SS as basic income insurance. Increasing this income by delaying SS increases its cost. The cost is: leaving a smaller inheritance behind.
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Old 11-18-2014, 06:13 PM   #12
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Quote:
Originally Posted by nuke_diver View Post
Portfolio - $3M split 60stocks/30bonds/10cash (where possible to adjust), 1% expense ratio, 50 year retirement, $120K withdrawls/yrs (all numbers in todays $)
Calculators Cfiresim and Flexible Retirement planner both gave similar results
Cfiresime results shown
Take SS at 62 - $20K a year 65% success
Take SS at 65 - $25K a year 66% success
Take SS at 70 - $31K a year 64% success
I wouldn't base it on just the success rate. When you fail, how miserably you fail is the question. That leads to how much adjustment you need. If you only need to tweak $120k to $110k, that's one thing. If you have to go down to $40k that's quite another.
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Old 11-18-2014, 07:54 PM   #13
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The early retirement discount and delayed retirement credits baked into the SS system were intended to be neutral, based on historical interest rates. So it is not too surprising when you run simulators based on historical returns, it does not make much difference when you claim. However, current interest rates are lower than normal. This makes delayed claiming a better deal now than the system designers had intended. If you were to run a Monte Carlo simulator that allows you to specify low interest rates, delayed claiming would come out the clear winner.
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Old 11-19-2014, 12:05 AM   #14
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Originally Posted by nuke_diver View Post
I run a lot of Retirement calculators trying to imagine various scenarios and what would happen to a given bucket of money under those circumstances. For my personal plans I generally ignore SS. But for kicks I ran some scenarios to see what delaying SS would mean since so many of the pundits tell you to wait because you get more $$ if you wait. What I found with 2 different calculators was interesting I thought and wanted to run it passed this group to see if it passes the stink test

Portfolio - $3M split 60stocks/30bonds/10cash (where possible to adjust), 1% expense ratio, 50 year retirement, $120K withdrawls/yrs (all numbers in todays $)
Calculators Cfiresim and Flexible Retirement planner both gave similar results
Cfiresime results shown
Take SS at 62 - $20K a year 65% success
Take SS at 65 - $25K a year 66% success
Take SS at 70 - $31K a year 64% success

I realize that this is still a lot of fails and the expenses is too high but it suggests at least at this level that there is very little difference as to when you take it and if there is a difference it seems that 65 is the best condition. I ran a number of combinations and pretty much got the same results every time.

Did I miss something or does this make sense?
Maybe my brain isn't working tonight, but I'm having trouble getting the SS benefits to make sense.

I don't know when you were born, so I'll just do an example for 1960 or later.

In that case, your Normal retirement age is 67.
The benefit, if you start at 67 is your PIA.
If you defer till 70, the benefit will be 124% of your PIA.
If you start benefits at age 62, the benefit will be 70% of your PIA.

So the age 70 benefit would be 177% of the age 62 benefit. But, $31k is only 155% of $20k.

This doesn't make sense to me.

(The age 65 benefit looks okay. It should be 86.7% of the PIA, or 124% of the age 62 benefit. $25k/$20k is 125%. i.e. they are both consistent with a PIA of about $28,700.)
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Old 11-19-2014, 04:21 AM   #15
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However the greater delay in SS means you will have greater income for the rest of your life.
So it passes the stink test to me, but seems misleading until you think about what is life like after the failure.
There isn't anyplace where most of us can buy a lifetime inflation-adjusted annuity as cheaply as we can get it by delaying SS. I.e. it is the cheapest longevity insurance available to most of us. That doesn't necessarily make it a good deal in each case, but my present plan is to delay SS in order to "buy" it.
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Old 11-19-2014, 08:16 AM   #16
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Maybe my brain isn't working tonight, but I'm having trouble getting the SS benefits to make sense.

I don't know when you were born, so I'll just do an example for 1960 or later.

In that case, your Normal retirement age is 67.
The benefit, if you start at 67 is your PIA.
If you defer till 70, the benefit will be 124% of your PIA.
If you start benefits at age 62, the benefit will be 70% of your PIA.

So the age 70 benefit would be 177% of the age 62 benefit. But, $31k is only 155% of $20k.

This doesn't make sense to me.

(The age 65 benefit looks okay. It should be 86.7% of the PIA, or 124% of the age 62 benefit. $25k/$20k is 125%. i.e. they are both consistent with a PIA of about $28,700.)
+1 If one's FRA is 65 I think their age 70 benefit would be 140% of the FRA/age 65 benefit which would be $35k rather than $31k and I'm guessing that the $4k difference bridges the difference in success rates. Also, how do the minimum, maximum and average ending balances stack up for the different scenarios? That might be a better way of looking at it.

Even if one is single, I would think that the age 70 alternative would be preferable since for a 50 year retirement you will be well beyond any crossover point and outliving the pricing mortality so I suspect there is some data issue.
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Old 11-19-2014, 10:25 AM   #17
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Originally Posted by Running_Man View Post
If you have a 35% chance of failure under which scenario would you wish to have retired? Social Security will continue when the portfolio does not.
It needed to have failures to see what the impact of taking SS was. I generally model with SS==0 so it is not part of my plan but I am entitled to it so I was curious to see the impact of less money earlier or more money later

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Originally Posted by jebmke View Post
Unless you are stuck in a crappy deferred account, you should be able to get your expense ration well below 20bps without trying hard.
Again this is not my expense ratio but my modeled one. I prefer to be conservative and expense ratio's could change in the distance future

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If you were to run a Monte Carlo simulator that allows you to specify low interest rates, delayed claiming would come out the clear winner.
No I did run MC simulations (see above) FRP does 10000 simulations for each year. The output is different but it made less than one year difference in when money might start to run out

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Maybe my brain isn't working tonight, but I'm having trouble getting the SS benefits to make sense.
......
This doesn't make sense to me.
I did not work my whole career in the US so my working starts in 1990 so the numbers are (per the SS website) about correct for me
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Old 11-19-2014, 03:34 PM   #18
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I did not work my whole career in the US so my working starts in 1990 so the numbers are (per the SS website) about correct for me
This is an interesting angle. You're saying that the "Deferred Retirement Credit" rate is different for immigrants (or citizens who work abroad) than for the rest of us. I've never heard of that before.

I scanned this section of the law 20 CFR 404.313 - What are delayed retirement credits and how do they increase my old-age benefit amount? | LII / Legal Information Institute and couldn't find anything about this.
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Old 11-19-2014, 06:11 PM   #19
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I used the SSA Quick Calculator and there is a button to show the estimated earnings. For me they start at 1977 at 2000 but since I wasn't here until 1990 I zero'd out all the data from '77 to 90 to arrive at the number I got
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