Social Security Math

[imoldernu]

We took SS @ age 62... in 1997. DW and I, with income based on my earnings.
Income was max at the time. We have collected $450K inflation adjusted, not too far off the numbers in chart 1.

 

[hnzw_rui]

The great majority of my savings is in tax deferred. My marginal tax is in the 25% range and may bump into 28% with RMDs. Not much I can do at this point. The lesson learned for younger folks is to put some of your nest egg in taxable savings and Roths so you have a more flexible approach to income when the time comes.

This is a valid concern here and on Bogleheads. I doubt majority of Americans will be saving enough to make RMDs a problem.

Personally, I choose account type (mostly traditional vs Roth) based on the consequences.

Option 1: Prioritize traditional over Roth
Good Returns: Large RMDs and higher tax bracket due to too much money.
Bad/Low Returns: IRS shares some of the pain by way of lower taxes.
Thoughts: If working while in high income tax state (e.g. CA), can move to no income tax state (e.g. FL) to help reduce tax burden upon retirement. Can also use IRA Qualified Charitable Distributions for RMDs in excess of necessary expenditures.

Option 2: Prioritize Roth over traditional
Good Returns: No taxes on growth.
Bad/Low Returns: Might not have enough money to live on or might need to cut spending because of prepaying taxes at possibly higher marginal tax rate.

 

[ivinsfan]

What about the potential ACA factors in taking SS at 62 instead of 65-66? If your income without SS gives you an ACA tax credit taking an SS payment might nullify the credit completely. I have health insurance for myself at 62 through our business, but we might be changing to an ACA plan for 2017 at age 63 for me. Our small business just can't afford the cost of employee insurance anymore. MY DH is 67 and we won't claim any SS money until we figure out how this is going to affect our ACA enrollment.

 

[Hermit]

For married couples deciding whether to delay can be complicated by the dual mortality and any differences between SS payments. However, if you are single, it's quite simple. If you believe that you will live well past your expected mortality age then defer, otherwise take the money as soon as you can. A single male would have to live into his mid 80s to see any benefit from deferring....that assumes 3% inflation adjustments and that you just spend the money. Deferring clearly becomes the better choice, if amount of lifetime benefits is the criterion, if he lives into his late 80s. But factors like need for income will also be a factor.

Even if you are single it can be complicated by your circumstances. If I take my SS before 70, I would get more now, but I would give up the smaller income stream I currently have from the late DWs SS account. It makes more sense in my case to treat my SS as longevity insurance. I withdraw $20k - $24k per year to help smooth the bump I will get when my SS starts at 70.

 

[Hermit]

this is very important . as kitces demonstrated taking an extra 1k in taxable distributions if it puts you over the limit for getting ss taxed can see as much as 47% of that extra 1k vanish in taxes .

I agree that it is important but only if your circumstances meet the criteria. If you have non-taxable funds you can draw on to meet your spending needs, and any fixed income puts you below the bands for limiting the amount of SS benefits that are taxed, then you can limit withdrawals from tax deferred accounts to minimize taxes on your SS.

Again, my point is that once you move past that break point, all additional taxable income is not taxed at 47%. I looked into my numbers again and in my case, my non-discretionary income puts me just above the 85% taxable threshold before I even start thinking about the impact of discretionary withdrawals from tax deferred accounts.

 

[youbet]

it is not a given you will get a steady 6% real....

Couldn't agree with that more! Sounds like your coming on board with OP's initial observation, followed by mine, that 6% real is one of the possible outcomes that could result from investing early SS dollars in the equity market.

 

[youbet]

While taking SS early is great for some, delaying it is advantageous for several reasons. They are not always obvious in the math.

Actually, I think you mean these issues would make delaying SS advantageous for you. Others, with their own circumstances, might find these issues to be a huge disadvantage.

LTC policy. Most LTC policies only cover ~$200 a day. No COLA. Waiting on SS can get you close to that amount, and combined with LTC premium savings it will help pay the LTC for a long time. Maybe long enough.

Depending on your investment success with your early SS dollars, you may wind up in better shape to be able to afford LTC by taking SS early instead of delaying since you'd have more resources.

Spousal protection. If the person who collects at 70 is the one likely to die first, and has a higher SS payment, the surviving spouse can use that amount.

This definitely isn't always true. For example, when a spouse is impacted by GPO which is the case at our house.

Longevity Insurance. If you do not allocate your investments well, and screw it up, the SS will be a welcome addition at 70.

Of course, if you do allocate your investments well and don't screw it up, you'll have more at 70 by starting early. There's no sure fire way to predict this. If you're really afraid of poor market conditions and screwing your investments up, you should probably withdraw from the market altogether.

Of course, if you cannot live without it at 62, take it or continue to work longer.

Obviously.

For those who have a choice due to not needing to start SS at 62 and who have basic investment common sense, the decision to start or delay is interesting and the final outcome can't be predicted ahead of time. To me, that's just another one of the facinating aspects of FIRE and why I'm not a likely candidate to purchase annuities.

 

[sengsational]

It looks like you didn't take into account that SS payments will rise with inflation.

I'm still trying to understand how inflation plays into this... I assumed that it impacted each one the same (so I assumed it was a wash, since inflation affects all dollars across all timelines indiscriminately), but maybe I'm missing something there. Does COLA lag behind inflation? If so, that would give more of an advantage to waiting... if the 70 number would be higher proportionately to the 62 number after COLA/inflation was factored in.

I think you did it about as right as you could do it (all with today's dollars and real investment return rates). What you can buy with your money should be matched to the CPI that inflates SS checks. Some will argue (me included), that they're going to weasel a few tenths per year, which doesn't sound like much, but adds-up when it compounds on itself.

I'm only 33 (well turning 34 this week), so long way out for me. I'm just curious to run these numbers as an abstract scenario. I'm sure the rules and game will change significantly in the next three decades, for me...

You are so far ahead of where I was. I never even LOOKED at post earning phase until a few years before pulling the plug. 20 years ahead of you, I still don't fret over these SS things because the smallish differences in these scenarios with their pile of assumptions could be changed significantly by the stroke of a pen. Kind of reminds me of the Roth conversion thing...I could save 10 times what that would do for me if I moved a few miles south. But that's not to say I didn't appreciate your analysis. I recall making the point in some other thread that everybody thinks 70 is best because, of course, they'll live a very, very long time

 

[RunningBum]

I think you did it about as right as you could do it (all with today's dollars and real investment return rates). What you can buy with your money should be matched to the CPI that inflates SS checks. Some will argue (me included), that they're going to weasel a few tenths per year, which doesn't sound like much, but adds-up when it compounds on itself.

My point is that the inflation indexing affects the larger, delayed SS check more than the smaller check that comes at 62. It's not a simple match that you can call a wash.

You are so far ahead of where I was. I never even LOOKED at post earning phase until a few years before pulling the plug. 20 years ahead of you, I still don't fret over these SS things because the smallish differences in these scenarios with their pile of assumptions could be changed significantly by the stroke of a pen. Kind of reminds me of the Roth conversion thing...I could save 10 times what that would do for me if I moved a few miles south. But that's not to say I didn't appreciate your analysis. I recall making the point in some other thread that everybody thinks 70 is best because, of course, they'll live a very, very long time

Not because I'll live a very, very, long time, but in case I do.

If I die before the break even point, I'm certain I'll have not been short of money to live how I expect to. So even though I would've been better off taking SS at 62 because I died early, it wasn't an issue for me. I'll leave a little less for my heirs, which does mean something to me. It may mean a lot for some, and nothing to others.

But if I do happen to live a lot longer, I run a greater risk of not having enough to live how I'd like to. Maybe I'll be spending less in my advanced age, or maybe I'll have needs where extra money would be nice, like, maybe a private nurse will keep me out of a nursing home longer, if that's what I want.

The point is, I want to insure against longevity, rather than just trying to beat the system based on when I might die, early or late.

I like these discussions because it does show that taking SS at 70 isn't necessarily the best plan even if I do live long. Good returns, especially while I'm taking less from my investments if I start SS early, could move the breakeven point beyond any realistic life expectation. Obviously you have to make estimates on inflation and returns, but I think you have to accurately show the uneven impact of inflation adjustments to the various SS payments based on start age. Ignoring that as a wash is wrong as I believe it moves the line a number of years. If I'm wrong about that, show me where.

My current plan, barring any health issues or changes to the system, is that starting at age 62 I'll consider taking SS if the market is down and seems poised for a good recovery (market timing, I know). If not, I'll delay, and revisit that decision after any market drops. My challenge will be in deciding what constitutes enough of a down market for me to take it.

 

[Senator]

For those who have a choice due to not needing to start SS at 62 and who have basic investment common sense, the decision to start or delay is interesting and the final outcome can't be predicted ahead of time. To me, that's just another one of the facinating aspects of FIRE and why I'm not a likely candidate to purchase annuities.

100% true. Delaying it gives the advantage of having more guaranteed income later - if you make it that far.

The one thing you have in your favor is knowing your health situation. It's insider information that the SS actuaries do not have.

 

[youbet]

100% true. Delaying it gives the advantage of having more guaranteed income later - if you make it that far.

Not necessarily. If you start SS early, it's dependent on how your investments work out between age 62 and 70. You may (or may not) have accumulated enough to more than cover the difference between early and late SS at 70. Roll those dice!

The one thing you have in your favor is knowing your health situation. It's insider information that the SS actuaries do not have.

Yes, healthy folks with good longevity genes frequently live longer.......... unless they don't.

Every strategy has its pros and cons and none are guaranteed. The healthy guy with good longevity genes can die early in an accident. The well informed and knowledgeable investor can lose his ass in a market crash. The spouse you were trying to protect by delaying your SS can die before you. Etc., etc.

There seem to be few or no "rules of thumb" about the "when to take SS" decision that apply to everyone.

We all pay our money and take our chances........ The important thing is to pick a strategy that you're comfortable with even if plans go against you.

 

[sengsational]

Does Expanding the Scope Pull Toward a Bird in the Hand?

When it comes to modeling when to take SS, one must make some assumptions and simplifications. This usually leaves out the possibility of the rules changing at all. One option for making the model more realistic would be to do the calculation, as normal, with nothing changing from the expected payouts using today's rules. Then do another calculation with payouts under an alternate scenario, such as reduced benefits cutting in at a certain point (or with multiple models, points). So you might think the "today's rules" value of SS is 85% likely, "rules B" is 10% likely and "rules C" is 5% likely. So the expected result is .85*A + .1*B + .05*C. The more weight taken away from today's rules, the less delaying taking SS makes sense (because nobody thinks they'll be enhancing benefits in the future).

Also, one part of today's rules that usually gets simplified out of a model is the effect of locking-in Medicare premiums. For those who could take social security but have delayed it might be opening themselves up to spending more on Medicare premiums. I'm no expert in this, but apparently, for most retirees currently collecting SS, they are shielded from larger increases in Medicare premiums. In other words, increases in Medicare part B premiums can't result in a "pay cut". By ignoring this protection, I believe you are modeling that Medicare premiums will rise no faster than inflation. Hmmm.

I've got over 1800 days to think about it, so, like I said, by the time I get there, things will be different. But when the time comes, I'll be modeling A, B, C, and more, assigning probabilities, and I have a feeling that a bird in the hand will win.

 

[EvrClrx311]

I am going in with the assumption that my 'required' contribution towards the solvency of the system will be to watch the rules (mean testing) lead to smaller checks for me; the fact that I used IRA and my 401K to secure my financial future, an order of magnitude above that SSA will provide. If I do actually get the benefits projected, I'll consider it a bonus

Still I'm fascinated by this whole thing. I can't help but think... what I'd be able to do with all those (6.2% + employer 6.2%) payments had I been given the opportunity to invest it into a board index fund. Sigh...

Appreciate everyone comments and thoughts expressed in this thread.

 

[Senator]

Every strategy has its pros and cons and none are guaranteed. The healthy guy with good longevity genes can die early in an accident. The well informed and knowledgeable investor can lose his ass in a market crash. The spouse you were trying to protect by delaying your SS can die before you. Etc., etc.

There seem to be few or no "rules of thumb" about the "when to take SS" decision that apply to everyone.

We all pay our money and take our chances........ The important thing is to pick a strategy that you're comfortable with even if plans go against you.

All true. SS is actuarially neutral, no matter when you collect. It is based on a traditional life expectancy. I am not sure if it is based on a child born today, or a 62 year old person. It does not take gender, smoking or drinking habits, blood pressure or heart disease, or any condition a life insurance policy would have you declined.

A person should know their gender, at a minimum. Or at least a close guess. If you are female, you can add a few bonus points. Non-smoker, a few more. A crazy guy that smarts off to the cops, deduct a few.

People go to casinos all the time and, with some schemes, can get a 51% chance of winning. They think that is a huge advantage. Card counters being one type. Blackjack strategy players, etc. Having a good health puts you in the 51% chance of success category.

Most people at 62, tend to gravitate to lower risk investments. To get the same match as SS, with 100% guaranteed return, you are looking at Bond funds, not the stock market. I am not sure what return you need, but to find an inflation protected investment equivalent to SS, might be hard to find. Of course, at the end, your unused money is generally 'lost'.

Of course, most people want security, and take SS at 62...

 

[Senator]

i don't know how many policy's cap you at 200 a day . i know none we looked at do . you take as much a day as you want . we took 400 inflation adjusted by 5% a year since homes in our area are 400-500 a day .

What is your monthly premium for a $400 per day inflation-protected policy?

I know you can buy as much insurance as you want. Some policies are $100 a day, some higher. All typically have a maximum amount you can collect.

If you go into a nursing home early, you will likely get better. Your health insurance, or Medicare, will likely cover it as long as you are showing improvement.

If you are 100% incapacitated, it doesn't mater where you stay. You do not need a private room, or a real nice place. Some people even go to a place like Costa Rica to get cheaper care.

The Odds of a Long Nursing Facility Stay
Most people will not spend years and years in a nursing facility.

• Two-thirds of all men, and one-third of all women, age 65 and older will never spend a day in a nursing facility.
• Most nursing facility stays are brief -- only about 10% of men and 25% of women age 65 and older spend more than a year in a nursing facility.
• Only 10% of all nursing facility residents will stay longer than three years.
• More than half of all nursing facility stays last six months or less. The average stay of those who enter a custodial care facility is about 18 to 20 months.

Long-Term Care Insurance: The Risks and Benefits | Nolo.com

 

[Cut-Throat]

I understand that a lot of factors can influence the math (some are addressed below and if any are missing please chime in), but from a strictly cash-flow perspective here was my analysis of when to collect...

You are focusing on How much Money you can 'Pile Up' instead of Focusing on How much you get to Spend. A common misunderstanding for someone your age because you are currently Piling up Money. When you are retired however, you are now spending money and it takes a slightly different thought process. No one knows when they are going to die or how much returns on investment or inflation will be in the future, so these calculations are pretty futile.

************************************************** *****
You can actually Spend more money in your 60s by Delaying SS to age 70.

Here is a pretty simple calculation for those that wish to spend more money in retirement and do not care about leaving an estate. For those that have a Big enough Portfolio and can afford to wait until 70 to take SS, you'll have more to spend every year of retirement.

Let's Say you retire this year at age 62 with the $1 Million Portfolio and decide to take a 4% SWR. You get Social Security of $19,476 per year at age 62 and delaying to age 70 would get you $34,092 per year. Let's assume no inflation for ease of calculations.

Scenario age 62. Your SWR is $40K per year and Social Security of $19,476 gets you a Spending total of $59,476 for each year of your retirement period.

Scenario age 70. You stash 8 years of $34,092 from your portfolio into a savings account for a total of $272,736. Your portfolio is now down to $727,264. Your 4% SWR is now $29,090 per year and you remove $34,092 from your savings account giving you a total of $63,182 to spend each year for the rest of your 30 year retirement period.

The Delay to age 70 gives you $3,706 more every year starting at age 62 with no more increased risk.

No need for any 'break even analysis'.

If your WR is more conservative, such as a majority of the people here and myself, the results are even more compelling. At a 3% WR plus SS at age 62 scenario is a total of $49,476 and the age 70 scenario is $55,910. The delay of SS to age 70 now increases your annual spending by $6,434.

************************************************** ******

For a complete discussion on this Topic including inflation ramifications visit this link

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=102609&hilit=Social+Security

 

[sengsational]

You can actually Spend more money in your 60s by Delaying SS to age 70.

Well, again, if you presume that Medicare Part B premiums don't shoot up faster than inflation. This is discussed on this boggleheads thread which, at the end, points to another 'consolidated' thread. I have not read those completely, but just searched for after reading part of the 2013 thread which you referenced. The OP of the boggleheads thread points to this paragraph which says in the long run part B premiums are supposed to be about 5%, which wouldn't be bad if inflation were also 5% over that same "long run". This is kind of "old news" because they were all talking about the 2016 increase. My speculation is that if there was a kerfuffle over a 2016 increase, then there will probably be continuing kerfuffles and if you get your part B taken out of SS and you're jointly making less than $170K, you've got your part b premiums capped.

MEDICARE PREMIUMS SPIKE?
Some beneficiaries may face steep premium increases for Medicare Part B, which provides coverage for outpatient services.
For about 70 percent of beneficiaries, premium increases cannot exceed the dollar amount of their Social Security cost-of-living adjustment. Because no COLA is currently expected for 2016, increased costs of outpatient coverage would have to be spread among the remaining 30 percent.
That would result in an increase of about $54 in the base premium, bringing it to $159.30 a month. It works out to paying 52 percent more.
Those who would feel the impact include 2.8 million new beneficiaries, 1.6 million who pay the premium directly instead of having it deducted from their Social Security, and 3.1 million upper income beneficiaries, those making at least $85,000 for an individual and $170,000 for a married couple.
The increases for upper-income beneficiaries would be higher, up to $174 a month for those in the highest bracket.
State budgets would also take a hit, because states pay the Part B premium for low-income beneficiaries who have dual Medicare and Medicaid coverage.
Health and Human Services Secretary Sylvia M. Burwell said no final decision has been made, and that premium increases are expected to average less than 5 percent a year over the long run.

 

[nun]

If people are deferring SS, why aren't they also buying annuities?

For people with only SS as guaranteed income (ie no annuity or pension) it's probably best to defer. Of course the fine structure and general trend of investment return and inflation and your life expectancy are going to determine if SS at 62 is better or worse than taking it at 70.

 

[Cut-Throat]

If people are deferring SS and betting they'll live longer than expected why aren't they also buying annuities?

Who says they're not!


Also, if you could buy an annuity as cheap and inflation protected with Spousal Survivor-ship, like delaying S.S. to age 70 provides, they would be selling countless more annuities.

 

[nun]

Who says they're not!


Also, if you could buy an annuity as cheap and inflation protected with Spousal Survivor-ship, like delaying S.S. to age 70 provides, they would be selling countless more annuities.

The insurance companies.....but the resistance to buying annuities is a well known issue which has been compounded by the 401k and SWR studies. If we look at the larger picture the UK has just changed their retirement rules and removed the requirement for many to buy an annuity to fund retirement.

 

[Senator]

If people are deferring SS, why aren't they also buying annuities?

They are expensive
There is insurance company risk
It is money out of pocket now, not just a delayed payment

 

[nun]

They are expensive
There is insurance company risk
It is money out of pocket now, not just a delayed payment

SS risk gets into politics.
Not taking SS at 62 is "money out of pocket now" too.

SS maths and the choice of when to take it depends on individual circumstances and how factors are emphasized. How important is current income, longevity insurance, total lifetime benefit, maximizing inheritance etc. are you fit and health?

 

[RunningBum]

If people are deferring SS, why aren't they also buying annuities?

If I'm not mistaken, deferring SS is a cheaper annuity than what insurance companies sell, is it not?

If I need/want an annuity, I'll defer SS first. If I need more, I'll also buy an SPIA. If deferred SS is enough, I won't.

Isn't it that obvious? I mean, just because I (might) want to defer SS as an annuity type decision doesn't mean I want to go all-in to annuities.

 

[starry night]

Effect on portfolio

"Scenario age 70.[/U] You stash 8 years of $34,092 from your portfolio into a savings account for a total of $272,736. Your portfolio is now down to $727,264. Your 4% SWR is now $29,090 per year and you remove $34,092 from your savings account giving you a total of $63,182 to spend each year for the rest of your 30 year retirement period."
.....
Moving 8 years' worth of future benefits from portfolio to savings ($270K+) will cause a taxable event, won't it? If taken from a taxable portfolio, it will be at cap gains rates. If from a qualified account, you're looking at paying regular income tax rates. Ouch!

 

[Cut-Throat]

"Scenario age 70.[/U] You stash 8 years of $34,092 from your portfolio into a savings account for a total of $272,736. Your portfolio is now down to $727,264. Your 4% SWR is now $29,090 per year and you remove $34,092 from your savings account giving you a total of $63,182 to spend each year for the rest of your 30 year retirement period."
.....
Moving 8 years' worth of future benefits from portfolio to savings ($270K+) will cause a taxable event, won't it? If taken from a taxable portfolio, it will be at cap gains rates. If from a qualified account, you're looking at paying regular income tax rates. Ouch!

Not for me, I stashed plenty of Cash in my Taxable Accounts. Zero Taxable Event.