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Social Security Math
Old 03-07-2016, 02:02 PM   #1
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Social Security Math

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...

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...

Exploring three cases:

1) Social Security Is All You Have
Assuming you have absolutely nothing saved and are using the money, need it, as cash flow and it is spent when it is received. I suppose this is the normal. I mean who collects social security and saves/invests it? I suppose the super wealthy or FIRE types... I'll explore that a little lower as a comparison, because it does seem to change the math and answer to when it is best to collect.

Numbers make this easier so I'll use mine:
62 - $1,846
67 - $2,622
70 - $3,252

So obviously collecting at 62 is ideal if you plan to die anytime before a certain age at which the other two catch up. Example... if you waited till 70 and died just before collecting your first check you would have missed out on $177,000 in checks from 62-70 had you instead collected early at 62. So here are the break even points:

If you reached age 79, then collecting at full age (67) would have been better. If you reached 83, then collecting late (70) would have been better.

Hope the formatting of this table works out
HTML Code:
                   62	            67	           70
62	$1,846.00	$2,622.00	$3,252.00
			
63	$22,152.00		
64	$44,304.00		
65	$66,456.00		
66	$88,608.00		
67	$110,760.00		
68	$132,912.00	$31,464.00	
69	$155,064.00	$62,928.00	
70	$177,216.00	$94,392.00	
71	$199,368.00	$125,856.00	$39,024.00
72	$221,520.00	$157,320.00	$78,048.00
73	$243,672.00	$188,784.00	$117,072.00
74	$265,824.00	$220,248.00	$156,096.00
75	$287,976.00	$251,712.00	$195,120.00
76	$310,128.00	$283,176.00	$234,144.00
77	$332,280.00	$314,640.00	$273,168.00
78	$354,432.00	$346,104.00	$312,192.00
79	$376,584.00	$377,568.00	$351,216.00
80	$398,736.00	$409,032.00	$390,240.00
81	$420,888.00	$440,496.00	$429,264.00
82	$443,040.00	$471,960.00	$468,288.00
83	$465,192.00	$503,424.00	$507,312.00
84	$487,344.00	$534,888.00	$546,336.00
85	$509,496.00	$566,352.00	$585,360.00
86	$531,648.00	$597,816.00	$624,384.00
87	$553,800.00	$629,280.00	$663,408.00
88	$575,952.00	$660,744.00	$702,432.00
89	$598,104.00	$692,208.00	$741,456.00
90	$620,256.00	$723,672.00	$780,480.00
91	$642,408.00	$755,136.00	$819,504.00
92	$664,560.00	$786,600.00	$858,528.00
93	$686,712.00	$818,064.00	$897,552.00
94	$708,864.00	$849,528.00	$936,576.00
95	$731,016.00	$880,992.00	$975,600.00
96	$753,168.00	$912,456.00	$1,014,624.00
97	$775,320.00	$943,920.00	$1,053,648.00
98	$797,472.00	$975,384.00	$1,092,672.00
99	$819,624.00	$1,006,848.00	$1,131,696.00
100	$841,776.00	$1,038,312.00	$1,170,720.00
=======
2) Social Security Supplements Nest Egg
Now assuming you could save/invest this money... or more realistically, you could take less out of your nest egg because of the funds you'll receive from Social Security. Lets assume for this case that you are receiving a 4% real yield on your retirement savings. Essentially, collection of social security allows you to save the difference (what you collected) at a rate of 4% a year.

Here is how things change:

Now you'd have to reach age 85 before waiting till full age (67) made more sense and you'd have to reach age 89 before waiting till 70 to collect would make more sense.

HTML Code:
                   62	            67	           70
62	$1,846.00	$2,622.00	$3,252.00
			
63	$22,595.04		
64	$46,093.88		
65	$70,532.68		
66	$95,949.02		
67	$122,382.02		
68	$149,872.35	$32,093.28	
69	$178,462.28	$65,470.29	
70	$208,195.81	$100,182.38	
71	$239,118.68	$136,282.96	$39,804.48
72	$271,278.47	$173,827.56	$81,201.14
73	$304,724.65	$212,873.94	$124,253.66
74	$339,508.68	$253,482.18	$169,028.29
75	$375,684.06	$295,714.74	$215,593.90
76	$413,306.47	$339,636.61	$264,022.14
77	$452,433.76	$385,315.36	$314,387.50
78	$493,126.15	$432,821.25	$366,767.48
79	$535,446.24	$482,227.38	$421,242.66
80	$579,459.13	$533,609.76	$477,896.85
81	$625,232.54	$587,047.43	$536,817.20
82	$672,836.88	$642,622.60	$598,094.37
83	$722,345.39	$700,420.79	$661,822.63
84	$773,834.25	$760,530.90	$728,100.01
85	$827,382.66	$823,045.42	$797,028.49
86	$883,073.00	$888,060.51	$868,714.11
87	$940,990.96	$955,676.21	$943,267.16
88	$1,001,225.64	$1,025,996.54	$1,020,802.32
89	$1,063,869.71	$1,099,129.68	$1,101,438.90
90	$1,129,019.54	$1,175,188.15	$1,185,300.93
91	$1,196,775.36	$1,254,288.96	$1,272,517.45
92	$1,267,241.41	$1,336,553.80	$1,363,222.63
93	$1,340,526.11	$1,422,109.23	$1,457,556.01
94	$1,416,742.19	$1,511,086.88	$1,555,662.73
95	$1,496,006.92	$1,603,623.63	$1,657,693.72
96	$1,578,442.24	$1,699,861.86	$1,763,805.95
97	$1,664,174.97	$1,799,949.61	$1,874,162.67
98	$1,753,337.01	$1,904,040.88	$1,988,933.66
99	$1,846,065.53	$2,012,295.79	$2,108,295.48
100	$1,942,503.19	$2,124,880.90	$2,232,431.78
=======
3) Social Security Is Saved Entirely (Too Wealthy To Care)
If you also consider the case of someone who simply wanted to take their social security checks, invest them in equities, and built more wealth (say for an estate) lets look at a case where someone got a historical 6% real return on their checks and see how that affects things.

You'd have to reach late 90's for collecting after 62 to make more sense.

HTML Code:
                   62	            67	           70
62	$1,846.00	$2,622.00	$3,252.00
			
63	$22,816.56		
64	$47,002.11		
65	$72,638.80		
66	$99,813.69		
67	$128,619.07		
68	$159,152.77	$32,407.92	
69	$191,518.50	$66,760.32	
70	$225,826.17	$103,173.85	
71	$262,192.30	$141,772.21	$40,194.72
72	$300,740.40	$182,686.46	$82,801.12
73	$341,601.38	$226,055.57	$127,963.91
74	$384,914.03	$272,026.82	$175,836.47
75	$430,825.43	$320,756.35	$226,581.37
76	$479,491.51	$372,409.65	$280,370.98
77	$531,077.56	$427,162.15	$337,387.95
78	$585,758.78	$485,199.80	$397,825.95
79	$643,720.86	$546,719.70	$461,890.23
80	$705,160.68	$611,930.81	$529,798.36
81	$770,286.88	$681,054.58	$601,780.98
82	$839,320.65	$754,325.77	$678,082.56
83	$912,496.45	$831,993.24	$758,962.24
84	$990,062.79	$914,320.75	$844,694.69
85	$1,072,283.12	$1,001,587.92	$935,571.09
86	$1,159,436.67	$1,094,091.11	$1,031,900.08
87	$1,251,819.43	$1,192,144.50	$1,134,008.80
88	$1,349,745.16	$1,296,081.09	$1,242,244.05
89	$1,453,546.42	$1,406,253.87	$1,356,973.41
90	$1,563,575.77	$1,523,037.02	$1,478,586.54
91	$1,680,206.88	$1,646,827.17	$1,607,496.45
92	$1,803,835.85	$1,778,044.72	$1,744,140.96
93	$1,934,882.56	$1,917,135.32	$1,888,984.14
94	$2,073,792.07	$2,064,571.36	$2,042,517.90
95	$2,221,036.16	$2,220,853.56	$2,205,263.70
96	$2,377,114.89	$2,386,512.69	$2,377,774.24
97	$2,542,558.34	$2,562,111.37	$2,560,635.41
98	$2,717,928.40	$2,748,245.98	$2,754,468.26
99	$2,903,820.67	$2,945,548.66	$2,959,931.07
100	$3,100,866.47	$3,154,689.49	$3,177,721.66
=======

Personally I have a long way to go to worry about this. My hope is that Social Security is such a small piece of my retirement planning that it doesn't matter much at all by the time I get there. I hope I'm able to avoid this math at that point (being FI) and just take it as a bonus to enjoy life, or spoil my children and future grandchildren.
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Old 03-07-2016, 02:40 PM   #2
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Nice job. It's nice to see an analysis that brings the time value of money into consideration as well as longevity!

I started SS at 62.5 in early 2010 and have been DCA'ing into a low cost TSM fund. So far, it looks like the resulting accumulated amount (if the markets continue to do well for the next 1.5 years) will cover the difference between early and deferred SS. My case is similar to your example #3 (although I wouldn't describe myself as "too wealthy to care").

But when we're making the SS decision, we don't know longevity, future inflation rates or future market returns. And all our individual circumstances regarding martial status, GPO, minor children, health, etc. are different. At best, the decision is just a best guess crap shoot.

In actuality, I started SS early because my DW is impacted by GPO. I can offer her no financial protection by her collecting either spousal or widow benefits based on my earnings. So I started SS at 62 to preserve our savings for her in case I died early. As it turns out, I haven't died (yet) and the SS money has grown very nicely due to favorable market conditions (like example #3). I could have made the same decision and things could have worked out very differently.

You pay your money, your take your chances.
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Old 03-07-2016, 03:10 PM   #3
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Do you expect SS to remain as it is? How can you game the system when you know that the rules will inevitably change ?


Also, If you include the effects of SS "provisional income" taxation, the conclusions you draw may be very different. We have seen very different outcomes when taxation is included. Under SS taxation rules, some of your dollars are taxed at both their normal income tax rates but also cause equal numbers of SS dollars to now be taxed. The marginal rates can be eye popping. So don't exclude taxation from your analysis, it can be very misleading.



Federal taxation of SS up to 46%
<from https://www.kitces.com/blog/the-taxa...rate-increase/>
Harry is an individual with $36,000 of income but a hefty $22,000/year of Social Security benefits. His Social Security provisional income is $36,000 + $11,000 = $47,000, which is $13,000 over the upper threshold for individuals. As a result, $15,550 of his Social Security benefits are subject to taxation (which is 50% of the amount from $25,000 to $34,000, plus 85% of the excess of provisional income above the $34,000 threshold), which puts his AGI at $51,550. Even after a standard deduction and one personal exemption, Harry’s taxable income would be $51,550 – $6,100 – $3,900 = $41,550, which places him in the 25% tax bracket.
If Harry now takes an additional $1,000 from his IRA, his provisional income increases to $48,000, his taxable Social Security benefits increase to $16,400, and his AGI rises to $53,400. The net result: Harry’s AGI increased by $1,850 for “just” a $1,000 IRA withdrawal, and with a 25% tax bracket his liability will be $1,850 x 25% = $462.50, which equates to a whopping $462.50 / $1,000 = 46.25% marginal tax rate!
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Old 03-07-2016, 03:18 PM   #4
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In #1, what are you going to live on between 62 and 70 Not a realistic option with zero savings... unless you work those 8 years...


Also, a 6% REAL return? Might be a bit high.... also, we know that there is not a steady return on investments... IOW, tables make things look good, but the real world can be a cruel experience....
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Old 03-07-2016, 03:33 PM   #5
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You might factor in the tax savings issue by taking SS early. That is, if you have to withdraw $22K per year from your IRA there are full Fed and (often) State taxes.

Many times the Fed is reduced or non-existent and in many states they do not tax SS.

If you don't have to withdraw that $22K because SS is supplementing, your breakeven pushes out even a few more years. And that's not counting the market gains you can make on that $22K per year for 3 to 8 more years.
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Old 03-07-2016, 03:42 PM   #6
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Quote:
Originally Posted by Texas Proud View Post

Also, a 6% REAL return? Might be a bit high.... also, we know that there is not a steady return on investments... IOW, tables make things look good, but the real world can be a cruel experience....
Since early 2010 when I started SS at 62 through 2015, the annualized REAL return on the S and P 500 has been 11.23%. Of course, I sure wasn't counting on that! And counting on it in the future would be capricious at best.

From 1950 through 2009, it was 7.07% annualized.

Per moneychimp.
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Old 03-07-2016, 04:15 PM   #7
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Nice job and great info! Thanks for sharing


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Old 03-07-2016, 04:36 PM   #8
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It looks like you didn't take into account that SS payments will rise with inflation. The increase helps more on the deferred larger payments at 67 and 70, which bring the breakeven points in a few years. I ran my numbers, and if SS payments increase by 2% and my investments make 5%, waiting until 67 becomes a better choice if I make it to 82, and waiting til 70 beats 62 at 84, and becomes the best at 86. Are 2% and 5% reasonable? I don't know. I do know that I'm not going to be 100% in the S&P 500 when I start SS, since I'm way less aggressive at age 54.

marko says you didn't factor in the tax savings issue, but the tax issue is complex. A lot depends on where you are getting your funds for 62 to 67/70 from. If I have a large enough taxable account my tax hit may not be so big, and in fact taking SS early may mean you aren't able to convert as much of your tIRA to your Roth at a low rate. Or it may push more of my dividends into being taxable. Everyone's situation is going to be different.

Future SS changes are also not covered, and are impossible to cover. Will 62+ year olds be grandfathered in even if they have not yet started to collect SS? That would be the totally logical thing to do, so as not to punish people who chose to defer. But I get why many don't trust that to happen, and the longer the gov't waits to address the eventual SS shortfall, the more drastic and potentially unfair it may be.
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Old 03-07-2016, 04:56 PM   #9
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I do know that I'm not going to be 100% in the S&P 500 when I start SS, since I'm way less aggressive at age 54.
You don't have to have a 100% allocation of your entire portfolio to the S&P 500. You just have to increase your allocation by the amount of SS you collect early and invest. For example, My target AA was 50/45/5. Since I started DCAing my early SS into the market, I've allowed my AA to be 55.5/43/1.5.

It makes rebalancing a bit dicey, but WTF, it's all a crap shoot anyway.

Actually, my SS money is in a low cost TSM fund, but that's very similar to the S&P 500.
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Old 03-07-2016, 05:36 PM   #10
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Federal taxation of SS up to 46%
<from https://www.kitces.com/blog/the-taxa...rate-increase/>
Harry is an individual with $36,000 of income but a hefty $22,000/year of Social Security benefits. His Social Security provisional income is $36,000 + $11,000 = $47,000, which is $13,000 over the upper threshold for individuals. As a result, $15,550 of his Social Security benefits are subject to taxation (which is 50% of the amount from $25,000 to $34,000, plus 85% of the excess of provisional income above the $34,000 threshold), which puts his AGI at $51,550. Even after a standard deduction and one personal exemption, Harry’s taxable income would be $51,550 – $6,100 – $3,900 = $41,550, which places him in the 25% tax bracket.
If Harry now takes an additional $1,000 from his IRA, his provisional income increases to $48,000, his taxable Social Security benefits increase to $16,400, and his AGI rises to $53,400. The net result: Harry’s AGI increased by $1,850 for “just” a $1,000 IRA withdrawal, and with a 25% tax bracket his liability will be $1,850 x 25% = $462.50, which equates to a whopping $462.50 / $1,000 = 46.25% marginal tax rate!
Somehow, I think those numbers were set very carefully. My numbers this year are pretty close to those above. I took a $20k distribution. My taxes were not near 46.25% on that $20k. I think what Kitces is really demonstrating is that there are some shoulder areas to avoid.
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Old 03-07-2016, 06:00 PM   #11
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You don't have to have a 100% allocation of your entire portfolio to the S&P 500. You just have to increase your allocation by the amount of SS you collect early and invest. For example, My target AA was 50/45/5. Since I started DCAing my early SS into the market, I've allowed my AA to be 55.5/43/1.5.

It makes rebalancing a bit dicey, but WTF, it's all a crap shoot anyway.

Actually, my SS money is in a low cost TSM fund, but that's very similar to the S&P 500.
OK, though I don't think those are equal risk "investments". Taking SS at 62 you are taking some now, and investing in equities. Delaying SS to 70, one is essentially "investing" in an annuity. Sticking to a more balanced AA for that early SS money is what I'd do. Good for you for making your plan work though.
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Old 03-07-2016, 06:27 PM   #12
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You might factor in the tax savings issue by taking SS early. That is, if you have to withdraw $22K per year from your IRA there are full Fed and (often) State taxes.

Many times the Fed is reduced or non-existent and in many states they do not tax SS.

If you don't have to withdraw that $22K because SS is supplementing, your breakeven pushes out even a few more years. And that's not counting the market gains you can make on that $22K per year for 3 to 8 more years.
I am currently struggling with the SS and income tax issue. For example, if my ss is 33k per year and my taxable from my IRA adds another 30k my Federal Tax is approx $1750 ( married std ded). Raise the IRA withdrawal to 33k and my Federal Tax jumps to $2540. This makes the marginal tax rate on the extra 3k over 26%. The higher the amount, the higher the marginal tax rate, to a point.
Now this is still considerably less than the $5375 I would pay on $63k of IRA withdrawals alone. My goal is to find the sweet spot where I can minimize taxes while also generating enough cash flow. Then on top of that keep an eye on RMD's down the road.
Fortunately I've got a couple years to age 62, decent Roth accounts, and annual expenses under 60k.
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Old 03-07-2016, 06:27 PM   #13
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Your case 2) and 3) are really the same thing, so why do you increase the return rate by an extra 2%.

In case 3) the person would spend less of their savings since SS is paid to them, once you get to "not needing SS" then there is no difference if it you are "Too wealthy to Care".

Now had you said case 2) is where the person only needs 1/2 their SS (a true supplement) that would be different with different numbers.
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Old 03-07-2016, 06:42 PM   #14
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Somehow, I think those numbers were set very carefully. My numbers this year are pretty close to those above. I took a $20k distribution. My taxes were not near 46.25% on that $20k. I think what Kitces is really demonstrating is that there are some shoulder areas to avoid.
Hermit:

You need to understand the difference between average tax rates, and marginal tax rates. If those quoted numbers are close to yours then you likely pay very high income taxes on a marginal dollar taken out of your IRA/401k. For fun and adventure run your tax numbers through a "good" tax calculator with and without your $20k distribution. Then look at how much of that $20k you get to keep.

It has to do with paying tax on BOTH the marginal dollars, and those extra SS dollar (once tax free) that now becomes taxable because your income is marginally higher.

It's kind of criminal, the way this works. Nonetheless it's a real, and in your case a very painful effect.

Once again, When talking about SS distributions along with other income, you don't get the big picture unless you talk about ALL of the tax effects.
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Old 03-07-2016, 07:38 PM   #15
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OK, though I don't think those are equal risk "investments". Taking SS at 62 you are taking some now, and investing in equities. Delaying SS to 70, one is essentially "investing" in an annuity. Sticking to a more balanced AA for that early SS money is what I'd do.
Doing what you're comfortable with given the cards you're dealt is the important thing. For most folks on this board, there will be little difference in how you live your life whether you start SS at 62 or 70.
Quote:
Good for you for making your plan work though.
Thanks. I really didn't start out with a plan of having my invested early SS dollars grow so fruitfully. I started SS early to protect my DW because of GPO. Then I noticed the invested dollars have been doing very well since I started in 2010. It could have worked out very differently with little I could do about it.
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Old 03-07-2016, 08:51 PM   #16
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Since early 2010 when I started SS at 62 through 2015, the annualized REAL return on the S and P 500 has been 11.23%. Of course, I sure wasn't counting on that! And counting on it in the future would be capricious at best.

From 1950 through 2009, it was 7.07% annualized.

Per moneychimp.
But most people have a balanced investment... so I would discount that some... so maybe 6% is as good a guess as not....


I did look it up someplace else and here is the info...

The 60s, 70s and 00s were not that great... which is kinda my point, it is not a given you will get a steady 6% real....


The following table shows average annual results for each decade:
Price
Change &nbspividend
Dist. Rate Total
Return Inflation Real
Price Change Real
Total Return 1950's 13.2 % 5.4 % 19.3 % 2.2 % 10.7 % 16.7 % 1960's 4.4 % 3.3 % 7.8 % 2.5 % 1.8 % 5.2 % 1970's 1.6 % 4.3 % 5.8 % 7.4 % -5.4 % -1.4 % 1980's 12.6 % 4.6 % 17.3 % 5.1 % 7.1 % 11.6 % 1990's 15.3 % 2.7 % 18.1 % 2.9 % 12.0 % 14.7 % 2000's -2.7 % 1.8 % -1.0 % 2.5 % -5.1 % -3.4 % 1950-2009 7.2 % 3.6 % 11.0 % 3.8 % 3.3 % 7.0 %



Crap... table did not copy..... here is a link...

http://www.simplestockinvesting.com/...al-returns.htm
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Old 03-08-2016, 05:10 AM   #17
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according to michael kitces the break even figuring all checks and a 6% average return if you delay from 62 to 70 once spending down assets is included is 22 -23 years . but the real return kicks up big time after break even.

by age 90 you can see a 5% real return and by age 96 a 6% real return on what amounts to a gov't bond . that rivals the returns from a balanced portfolio . a couple has a pretty decent chance of 1 seeing 90 but singles not so great .



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Old 03-08-2016, 07:02 AM   #18
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Doing what you're comfortable with given the cards you're dealt is the important thing. For most folks on this board, there will be little difference in how you live your life whether you start SS at 62 or 70.
Agree. There is no "one size fits all" answer, and even in most individual cases there is no sure-fire answer. I've been in too many of these threads so I'm not going to re-hash my opinion, but I wanted to point out that the spreadsheet was misleading in that it didn't include the inflation adjustment of SS benefits.
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Old 03-08-2016, 07:30 AM   #19
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which over decades is a huge deal .

excellent look in to things by kitces

https://www.kitces.com/blog/how-dela...money-can-buy/
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Old 03-08-2016, 07:44 AM   #20
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While taking SS early is great for some, delaying it is advantageous for several reasons. They are not always obvious in the math.

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.

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.

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 cannot live without it at 62, take it or continue to work longer.
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