Opinois needed: I delayed SS, now 63 = Mistake?

[haha]

EMF in his post above points to an analysis that IMO simplifies and clarifies this issue very well.

Forget all the fancy stuff-assume you are at FRA of 66 and you are trying to decide to take it or wait another year. All figures are real, and we assume you get a real after tax return of 2.5% on the first year’s payments if you elect to take the payments now. Since those payments come in monthly, you get this rate for 6 months, not a full year. Also note that in the real world you are going to get this ROR before tax- taxes will further reduce it. At year end you plan to add this to your regular allocation and assume you can safely withdraw 4% pa on it.

For illustration we set the annual SS payment at $12,000. In year 2 you get this $12,000 again, plus $12,000 *1.0125*0.04= $486. So in year 2 you have available to spend $12,486 in real year-1 dollars.

Now look at the case where you hold off a year. Year 2=$12,000*1.08= $12, 960, because for those whose FRA is 66 years, each year beyond FRA that you begin gets you an extra 8%, also in real dollars. So merely by waiting one year, your annual spendable income goes up $474, or approximately 4%. What's not to like about this? And it goes on-you get to make this decision each year until you are 69, because at age 70 this game is over.

Other than dire need for the money right now or a terminal illness I can't imagine why one would not wait. You get more money, at less risk. Now if your main motivation is not spendable money, but to be sure that you don't die without finally getting to spend some of the money the government stole from you then this analysis is irrelevant because it does depend on economically rational motivation to maximize consumption for a living person.

Ha

[FIRE'd@51]

Originally Posted by haha

EMF in his post above points to an analysis that IMO simplifies and clarifies this issue very well.

Forget all the fancy stuff-assume you are at FRA of 66 and you are trying to decide to take it or wait another year. All figures are real, and we assume you get a real after tax return of 2.5% on the first year’s payments if you elect to take the payments now. Since those payments come in monthly, you get this rate for 6 months, not a full year. Also note that in the real world you are going to get this ROR before tax- taxes will further reduce it. At year end you plan to add this to your regular allocation and assume you can safely withdraw 4% pa on it.

For illustration we set the annual SS payment at $12,000. In year 2 you get this $12,000 again, plus $12,000 *1.0125*0.04= $486. So in year 2 you have available to spend $12,486 in real year-1 dollars.

Now look at the case where you hold off a year. Year 2=$12,000*1.08= $12, 960, because for those whose FRA is 66 years, each year beyond FRA that you begin gets you an extra 8%, also in real dollars. So merely by waiting one year, your annual spendable income goes up $474, or approximately 4%. What's not to like about this? And it goes on-you get to make this decision each year until you are 69, because at age 70 this game is over.

Other than dire need for the money right now or a terminal illness I can't imagine why one would not wait. You get more money, at less risk. Now if your main motivation is not spendable money, but to be sure that you don't die without finally getting to spend some of the money the government stole from you then this analysis is irrelevant because it does depend on economically rational motivation to maximize consumption for a living person.

Ha

Wouldn't C-T simply argue that by delaying one year, you could spend $24,000 (960x25) from your nest egg for a total of 96K over four years?

[FIRE'd@51]

Originally Posted by haha

For illustration we set the annual SS payment at $12,000. In year 2 you get this $12,000 again, plus $12,000 *1.0125*0.04= $486. So in year 2 you have available to spend $12,486 in real year-1 dollars.

Now look at the case where you hold off a year. Year 2=$12,000*1.08= $12, 960, because for those whose FRA is 66 years, each year beyond FRA that you begin gets you an extra 8%, also in real dollars. So merely by waiting one year, your annual spendable income goes up $474, or approximately 4%. What's not to like about this? And it goes on-you get to make this decision each year until you are 69, because at age 70 this game is over.

Other than dire need for the money right now or a terminal illness I can't imagine why one would not wait. You get more money, at less risk.

I'm not sure this example is as obvious as you imply.

Wouldn't you still be able to spend down part of the previous year's 12K to supplement the next year's SS payment, making your total draw 12,960? Wouldn't this lead us back into a break-even analysis which would depend upon life expectancy?

[Orchidflower]

I guess that is what I was worried most about: a break-even situation.
However, I have just decided to screw the Dept. of Social Security over by living until I am 90. So there!!!!

[haha]

Originally Posted by FIRE'd@51

Wouldn't you still be able to spend down part of the previous year's 12K to supplement the next year's SS payment, making your total draw 12,960? Wouldn't this lead us back into a break-even analysis which would depend upon life expectancy?

I am not sure I understand what you mean. This stuff can twist me poor head up. So if you can explain where you think the mistake is, I am all eyes!

Ha

[MasterBlaster]

Ha:

If you hold off taking SS for a year you have foregone one years payments. That principal from that years payments need to be amortized over your remaining lifespan for a fair comparison.

So a fair comparison would take the higher SS payment (due to delaying one year) and subtract off the amortized amount that you have foregone.

[haha]

Originally Posted by MasterBlaster

Ha:

If you hold off taking SS for a year you have foregone one years payments. That principal from that years payments need to be amortized over your remaining lifespan for a fair comparison.

So a fair comparison would take the higher SS payment (due to delaying one year) and subtract off the amortized amount that you have foregone.

I think we did that. Case 1, take it now, assumes that the payments are collected for one year, with interest, and then "amoritized" over the the expected retirement horizon by subjecting that amount to the 4% WR that we assume for most other purposes. There might be other ways, but since we are trying to comapare to a real income stream we might have to pick some time period- say 35 years and self annuitize TIPS over that period. Since there is no such animal as a 30 year TIPS, this would create lots of guesses.

It is my opinion that a 4% withdrawal rate is likely to be fully amortizing over 35 years anyway!

Ha

[aenlighten]

At 66, median life expectancy is 20 years, or age 86. SS is designed to provide the same payout regardless of starting date for someone with a median life expectancy using a 4% real return. Other things being equal, longevity does suggest delaying benefits, just be aware it can be riskier than taking it early as the penalty for being wrong and benefit for being right are both greater. On the other hand, if you don't mind more market risk and take it early and invest it, if you receive a 6% real return on your investments, breakeven is pushed out to about age 95, at 7% age 105, and at 8% you can never make up for the delay. Take your risks and make your choices.

[FIRE'd@51]

Originally Posted by haha

I am not sure I understand what you mean. This stuff can twist me poor head up. So if you can explain where you think the mistake is, I am all eyes!

I'm not saying you made a mistake - just that there is a break-even point.

I plugged your numbers into my HP12C calculator as follows:

PV = 12,000

FV = 0

PMT = 960

I = 2.5%

I solved for N and got 16 years, so this would be the break-even point if you delayed one year.

[EngineeringMyFinances]

got 16 years, so this would be the break-even point if you delayed one year

I'm trying to decide where the break-even point comes in. After all, the retiree is spending more money. If there is a break-even point, it would be for the heirs. If the retiree delayed SS benefits, by one year, and got hit by the proverbial bus on the way to the SSA office to start his payments, then his heir get $12,000 less.

But will the heir ever "break-even"? Since the retiree is spending more money every year after having delayed SS benefits.

[haha]

Originally Posted by EngineeringMyFinances

I'm trying to decide where the break-even point comes in. After all, the retiree is spending more money. If there is a break-even point, it would be for the heirs.

This is how I see it. Break-even schmake-even, who cares? You are either going to be spending more money, or pushing up daisies with no more need for money. I would like to leave money for heirs but it is a less important goal than having a better life now.

Ha

[chinaco]

EMF had a good point on his comment that delaying SS impacts heirs.

One of my thoughts about delaying my SS (which is larger than DW) is that she will have a higher Cola'd annuity if I die before her. Statistically one of us will hit the break-even point.

We will probably take DW SS at 62.

We will likely take mine at either at 66.x or 70.

IMHO - I do not believe that SS is going to go away. However, it might be taxed more heavily if one has other income sources. Still it provides a basic foundation for income if all else fails. My way of looking at it is that there is nothing else that I have access to that is as secure as that promise despite all of the rhetoric flying around.

[Want2retire]

Originally Posted by chinaco

IMHO - I do not believe that SS is going to go away. However, it might be taxed more heavily if one has other income sources. Still it provides a basic foundation for income if all else fails. My way of looking at it is that there is nothing else that I have access to that is as secure as that promise despite all of the rhetoric flying around.

That's for sure.

I also expect that SS cost of living increases might be reduced in comparison with the inflation rate. Alternately, they could fiddle with the multipliers for each year's income that are used to calculate your basic retirement benefit in the first place.

Still, as you point out, SS will provide a basic foundation for income that is not likely to go away. I am not counting on SS but it will be providing about 35% of my ER income, which is not a negligible amount. If it does go away, the impact on my budget would be pretty serious.

But as you imply, nothing is absolutely certain except death and taxes. Personally I am trying to arrange my ER budget so that I get my income from a number of sources (SS, small pension, investments, a small amount of CD interest, a small fixed lifetime immediate annuity, did I miss anything? LOL). Hopefully through diversification of TYPES of income sources (as well as diversification in my investments), I can deal with the disappearance of some of these income sources if that should happen.

[FIRE'd@51]

Originally Posted by EngineeringMyFinances

I'm trying to decide where the break-even point comes in. After all, the retiree is spending more money. If there is a break-even point, it would be for the heirs. If the retiree delayed SS benefits, by one year, and got hit by the proverbial bus on the way to the SSA office to start his payments, then his heir get $12,000 less.

But will the heir ever "break-even"? Since the retiree is spending more money every year after having delayed SS benefits.

Retiree 1 takes SS of 12,000 per year at age 66

Retiree 2 takes SS of 12,960 per year one year later (at age 67)

Retiree 1 invests the 12,000 he gets the first year at 2.5% real and draws 960 per year from it

Both retirees have 12,960 in spendable income until Retiree 1's 12K fund runs out (amortizes to zero) sometime in year 16 (the break-even point), after-which Retiree 2 will have spendable income of 960 more per year as long as he lives