Social Security take-back -- RIP

[RonBoyd]

Quote:

Originally Posted by Zero If 80 were my own guess, I would definitely take it at 62 because I like the bird-in-hand feeling. I don't trust the gov't to keep hands off and what would we as ordinary folks do if in 2020 we get told that SS is nearing collapse and a means test is going to be applied. Well, I at least have 8 years in the bank, instead of being give a "Sorry to inform you" letter.

Okay, I'm on board so far.

[Zero]

Quote:

Originally Posted by jdw_fire and what if you wanted additional income for life? well then again you need to take SS at age 70. you liquidate $263,520 of your portfolio and put it in that account that keeps up with inflation which you will use $32940/yr of each year between age 62 and 70 (after age 70 SS provides this amount for the rest of your life). you then take 4% of the remaining portfolio ($589,580) resulting in $23583.20/ yr. adding these 2 yearly amounts together we get $56,523.20/yr for the 30 yr plan (which is $3583.20 more for the 30 yr plan that the 30 yr plan that has you starting SS at age 62). it is just a question of when you want to spend it.

Excellent example, thanks.

[Zero]

Quote:

Originally Posted by RonBoyd Okay, I'm on board so far.

jwd_fire has an nice example of the 62 versus 70 scenario factoring in the effects on the overall SS, saving, portfolio.

Hypothetical bottom line was taking it at 70 would allow for $3,500 addition per month on a $52,940 income over the 30 year retirement. I just don't see that as a deal breaker for me. I'd rather have the 8 years of bird-in-hand cold hard cash. With no access to it by the SS admins.

[clifp]

Quote:

Originally Posted by haha Yesterday I got a statement from SS telling me what my monthly benefit will be at age 70. Funny that they sent it, as previously I hadn't received one since I started Medicare. Anyway, it is only about $4 off from what I projected when I was considering the re-do. $4 less that is! I feel quite good about the transaction, the biggest flaw is that a private annuity would be less likely to be yanked from me when federal budget pressures get even more acute. They only strategy I can imagine that would not precipitate massive political fallout is some sort of divide and conquer. So that is what I expect. Ha

Before this thread goes further into the spreadsheet weeds....

I wanted to congratulate HaHa on being one of the last people in the country to take advantage of this terrific offer by the Social Security Dept.

Well done sir well done.

[FIRE'd@51]

In my opinion, taking SS at 62 and considering the "repay and restart" at a later age was the optimal choice since it included a free option. Now that it's gone, we can argue (and have argued) the 62 vs 70 thing "until the cows come home". Wealth-maximizers will argue for taking SS at 62, and spending-maximizers will argue for delaying until 70. Then there are all the marginal effects - spouses, taxes, means-testing, etc, etc. which makes the "optimal" solution elusive.

I prefer to think of it in a more basic way. How does it affect one's SWR? According to FIRECALC the 4% SWR guideline has about a 5% chance of failure over 30 years. Take the simple example of a 62 year-old with a $1.5 million portfolio and no pension or other source of income. Assume his expenses are 60K per year (a 4% SWR). Does he want to take a 1 in 20 chance of running out of money over the next 30 years? There is no redo if he happens to be one of the unlucky 5%. If his annual SS at age 62 were $15K ($1250 per month), he can lower his SWR to 3% by taking SS at 62. According to FIRECALC, a 3% SWR is 100% safe, even for a 100% equity portfolio (or a 20% equity portfolio, for that matter). At a 3% SWR, a 75/25 equity/bond portfolio will have a mean terminal value (in today's $) of about $3.8 million, with a range of $0.82 - $9.8 million.

If one can bring his/her SWR into the 100% safe range by taking SS at 62, it would seem prudent to do so. I suspect this is why FIRECALC seems to favor taking SS early, especially since the failures seem to be triggered by bad markets early into one's retirement. If your retirement portfolio is large enough that you are already well into the 100% safe SWR region, delaying may be the better choice, depending upon your utility function. IMO, the "take it early" argument is most relevant for those right around the 4% SWR cusp.

[growing_older]

Alternatively, if there is enough portfolio value to support the desired spending at 4% SWR, your example person could wait and not take SS at 62. At some point between 62 and 70 either markets tank and the potential 5% failure becomes more likely, or it does not. If not, wait until 70. If it does, then the hypothetical retiree can take SS then, at whatever higher value it has reached. They still enjoy the "insurance" of being able to call in SS when needed, but do so at the higher payout.

[jdw_fire]

Quote:

Originally Posted by FIRE'd@51 I prefer to think of it in a more basic way. How does it affect one's SWR? According to FIRECALC the 4% SWR guideline has about a 5% chance of failure over 30 years. Take the simple example of a 62 year-old with a $1.5 million portfolio and no pension or other source of income. Assume his expenses are 60K per year (a 4% SWR). Does he want to take a 1 in 20 chance of running out of money over the next 30 years? There is no redo if he happens to be one of the unlucky 5%. If his annual SS at age 62 were $15K ($1250 per month), he can lower his SWR to 3% by taking SS at 62. According to FIRECALC, a 3% SWR is 100% safe, even for a 100% equity portfolio (or a 20% equity portfolio, for that matter). At a 3% SWR, a 75/25 equity/bond portfolio will have a mean terminal value (in today's $) of about $3.8 million, with a range of $0.82 - $9.8 million. If one can bring his/her SWR into the 100% safe range by taking SS at 62, it would seem prudent to do so. I suspect this is why FIRECALC seems to favor taking SS early, especially since the failures seem to be triggered by bad markets early into one's retirement. If your retirement portfolio is large enough that you are already well into the 100% safe SWR region, delaying may be the better choice, depending upon your utility function. IMO, the "take it early" argument is most relevant for those right around the 4% SWR cusp.

did you look at my 2nd example closely? using the SAME portfolio WR, taking SS at 70 instead of 62 allows you to spend more money!

[FIRE'd@51]

Quote:

Originally Posted by jdw_fire did you look at my 2nd example closely? using the SAME portfolio WR, taking SS at 70 instead of 62 allows you to spend more money!

Which of your 16 posts on this thread is your "second example"?

My example was not to increase spending, but to avoid running out of money by having a SWR which never failed historically according to FIRECALC.

[jdw_fire]

Quote:

Originally Posted by FIRE'd@51 Which of your 16 posts on this thread is your "second example"?

here it is

Quote:

Originally Posted by jdw_fire and what if you wanted additional income for life? well then again you need to take SS at age 70. you liquidate $263,520 of your portfolio and put it in that account that keeps up with inflation which you will use $32940/yr of each year between age 62 and 70 (after age 70 SS provides this amount for the rest of your life). you then take 4% of the remaining portfolio ($589,580) resulting in $23583.20/ yr. adding these 2 yearly amounts together we get $56,523.20/yr for the 30 yr plan (which is $3583.20 more for the 30 yr plan that the 30 yr plan that has you starting SS at age 62). it is just a question of when you want to spend it.

Quote:

Originally Posted by FIRE'd@51 My example was not to increase spending, but to avoid running out of money by having a SWR which never failed historically according to FIRECALC.

but doesnt it stand to reason that if you can get higher spending with the same portfolio WR by waiting to start SS until 70, that you could get the same spending with a lower WR by doing the same?

[FIRE'd@51]

Quote:

Originally Posted by jdw_fire but doesnt it stand to reason that if you can get higher spending with the same portfolio WR by waiting to start SS until 70, that you could get the same spending with a lower WR by doing the same?

What if you are on one of the 5% paths (for a 4% SWR) which is a FIRECALC failure?

[jdw_fire]

Quote:

Originally Posted by FIRE'd@51 Quote: Originally Posted by jdw_fire but doesnt it stand to reason that if you can get higher spending with the same portfolio WR by waiting to start SS until 70, that you could get the same spending with a lower WR by doing the same? What if you are on one of the 5% paths (for a 4% SWR) which is a FIRECALC failure?

for the same amount of spending dollars, if you were "on one of the 5% paths" using a smaller WR by delaying SS till 70 then you would also be "on one of the 5% paths" ( the same 1) using a larger WR cus you took SS at age 62. but the converse doesnt necessarily hold i.e. you may be "on one of the 5% paths" using a larger WR cus you took SS at age 62 but that path may not be a failure with the lower WR you could have taken by delaying SS till 70. you said it yourself, a lower WR is safer.

btw, using my example but holding the amount of spending dollars constant for the 2 different SS start dates, starting at age 62 requires a 4% WR whereas to get the same dollars, if you wait till 70 to start SS you only use a 3.4% WR.

[bamsphd]

Quote:

Originally Posted by Zero I don't trust the gov't to keep hands off and what would we as ordinary folks do if in 2020 we get told that SS is nearing collapse and a means test is going to be applied. Well, I at least have 8 years in the bank, instead of being give a "Sorry to inform you" letter.

So redo your spreadsheet comparing the person who takes it at 62 and accumulates enough that means testing says they don't get anything after 70, with the person who blows their portfolio between 62 and 70, then passes the means test at 70 and thus receives SS for life!

More seriously. In the general case being discussed, I'm under the impression that one should wait. I would add the footnote that if your portfolio crashes during the early years in retirement, then changing your mind and taking SS earlier to save the portfolio is a reasonable choice. Basically, I think everyone needs longevity insurance, and SS appears to be the cheapest longevity insurance available. Yes, our dear uncle might start means testing it, but in the scenario where my portfolio is large enough to fail the means test, I can survive without the longevity insurance. I need the insurance for the black-swan or Alzheimer's induced portfolio crash scenarios. Delaying may also make it easier to catch a much younger spouse in your later years.

I've enjoyed the discussion so far. Though in my own case, I think my much younger wife will make my decision obvious. Though they will probably change some of the rules before I turn 70.

[NW-Bound]

Quote:

Originally Posted by RonBoyd I'm getting a headache.

Now I know another reason I keep working. It's easier money than figuring out this SS stuff.

Oh wait! I am not eligible yet anyhow.

[FIRE'd@51]

Quote:

Originally Posted by jdw_fire for the same amount of spending dollars, if you were "on one of the 5% paths" using a smaller WR by delaying SS till 70 then you would also be "on one of the 5% paths" ( the same 1) using a larger WR cus you took SS at age 62. but the converse doesnt necessarily hold i.e. you may be "on one of the 5% paths" using a larger WR cus you took SS at age 62 but that path may not be a failure with the lower WR you could have taken by delaying SS till 70. you said it yourself, a lower WR is safer. btw, using my example but holding the amount of spending dollars constant for the 2 different SS start dates, starting at age 62 requires a 4% WR whereas to get the same dollars, if you wait till 70 to start SS you only use a 3.4% WR.

If you delay SS you are raising your WR initially, and lowering it at age 70 when the higher SS kicks in (assuming constant spending in age-62 dollars). All I know is that a 3% SWR has never experienced a FIRECALC failure. Whether one can start at 4% (which has failed 5% of the time) and make that up by reducing the WR starting at age 70, I believe, is highly path-dependent.

IOW, since the age-70 SS is 75% more than the age 62 SS, the SWR reduction would be 1.75 percentage points at age 70 rather than one percentage point at age 62, so if the portfolio (at age 70) still had a value of $1.5 million (my example) in age-62 dollars, the SWR would be 2.25%, which we know is 100% safe using FIRECALC runs of 30 years (let alone 22 years). The question then becomes what will the value of the portfolio be at age 70 in age-62 dollars? This is where the path dependence comes in. One could run FIRECALC for 22 years and see what the maximum 100% successful SWR for 22 years is, and calculate what minimum portfolio value this would require. So long as the portfolio is above that value at age 70, things should work out as you claim. But I don't see how you can know that that will be the case.

[jdw_fire]

Quote:

Originally Posted by FIRE'd@51 If you delay SS you are raising your WR initially, and lowering it at age 70 when the higher SS kicks in (assuming constant spending in age-62 dollars). All I know is that a 3% SWR has never experienced a FIRECALC failure. Whether one can start at 4% (which has failed 5% of the time) and make that up by reducing the WR starting at age 70, I believe, is highly path-dependent. IOW, since the age-70 SS is 75% more than the age 62 SS, the SWR reduction would be 1.75 percentage points at age 70 rather than one percentage point at age 62, so if the portfolio (at age 70) still had a value of $1.5 million (my example) in age-62 dollars, the SWR would be 2.25%, which we know is 100% safe using FIRECALC runs of 30 years (let alone 22 years). The question then becomes what will the value of the portfolio be at age 70 in age-62 dollars? This is where the path dependence comes in. One could run FIRECALC for 22 years and see what the maximum 100% successful SWR for 22 years is, and calculate what minimum portfolio value this would require. So long as the portfolio is above that value at age 70, things should work out as you claim. But I don't see how you can know that that will be the case.

apparently i am still not making myself understood. what i was talking about in my previous post (that there would be a 3.4% portfolio WR) must be confusing so let me try again, with the same example, just described a little differently. i am going to use zero's SS numbers

Quote:

Actuals from SS form: SS est at 62 = $1568 or $18,816 SS est at 70 = $2745 or $32,940

the assumptions:
1) a single person at the age of 61.75 yoa is deciding whether to take his/her SS at age 62 or age 70. his/her SS numbers are given above.
2) this single person has determined that s/he needs $52,940/yr to live on for the rest of his/her life but would like to minimize his/her portfolio WR
3) this single person has a portfolio of $853,100, all in a tax defered account.
4) this single person has access to an account (bank, S&L, CU, MM) that pays interest that keeps up with inflation inside his/her tax defered account.
5) since everything i will talk about is adjusted for inflation i will assume, for ease of computation, inflation = 0%

now i will examine 2 cases, starting to take SS at 2 ages:62 and 70.


a) taking SS at age 62:
required income = $52,940
SS income = $18,816
portfolio income per 4% rule = $853,100*4% = $34,124
total income = $18,816 + $34,124 = $52,940

therefore, in this example, this single person has just enough SS income and portfolio size to provide the $52,940 required to live but this person has an initial portfolio WR of 4%, a little risky as it has only a 95% success rate for 30 yrs.

b) taking SS at age 70:
to address this case i will break this person's assets into 3 pieces: 1) the life time, inflation adjusted income provided by SS starting at age 70 ($32,940), 2) a virtual annuity to cover $32,940/yr for the 8 years before s/he starts SS. this virtual annuity will require the liquidation of ($32,940/yr * 8 yrs) $263,520 worth of his/her portfolio. from here on this is refered to as the virtual annuity and is no longer a part of his/her portfolio. this $263,520 is put in the account that keeps up with inflation, making the yearly virtual annuity payments (WDs from this account) inflation adjusted. these 2 pieces provide an inflation adjusted $32,940/yr for this person's full lifetime. and now for 3) which is the remaining portfolio after the liquidation (creation of the virtual annuity) above. the new portfolio size will be = $853,100 - $263,520 = $589,580. now to achieve the required spending this portfolio needs to throw off
$52,940/yr - $32,940/yr = $20,000/yr.
this results in an initial portfolio WR of $20,000/$589,580 = 3.392% and this is inflation adjusted also. given the low WR this probably has a 100% success rate for longer than 30 yrs.

so in conclusion, to achieve the required spending amount taking SS at age 62 requires an initial portfolio WR of 4%. but to achieve the same required spending amount if this person puts off taking SS till age 70 s/he can reduce his/her initial portfolio WR to 3.392%. and 3.392% is considerably safer than a 4% WR. therefore, this example shows how it is safer for your portfolio survival to start SS at age 70 instead of age 62.

[FIRE'd@51]

jdw_fire

This clarifies your example, and I understand your argument. But you have not eliminated all of the risk. You have transferred inflation risk to the "virtual annuity", which you have posited. This virtual annuity is essentially an 8-year TIPS with the maturity payment stripped off, something which doesn't exist for purchase in the marketplace, and if it did, it's not clear that you could purchase it for $263,520.

[DeborahB]

Quote:

Originally Posted by Zero In case I, the person would have a sizeable portfolio left left at age 70 if only withdrawing 4% per year. In you case 2, the person would have no portfolio at age 70. But I guess they partied hard in their 60's.

...or in THE 60's!

[Zero]

Quote:

Originally Posted by thinker25 ...or in THE 60's!

Person taking SS at 62: "Hey man, what's your bag?"
Person taking SS at 70: "Just doing my own thing man!"
Person taking SS at 62: "Far out dude, what ya holdin man?"
Person taking SS at 70: "Couple of ludes and a tab."
Person taking SS at 62: "Wow, wanna hit of this chit man?"
Person taking SS at 70: "Nah, I'm still trying to come down man."
Person taking SS at 62: "Hey man, I'm tripping bad, are you puttin anything away for your retirement?"
Person taking SS at 70: "Yeah, all my roaches are right there man, in my stash."
Person taking SS at 62: "Man I was talking about money for living on in the future."
Person taking SS at 70: "That's too heavy man, your bringin me down."



I swear I had that conversation at least 100 times.

[jdw_fire]

Quote:

Originally Posted by FIRE'd@51 jdw_fire This clarifies your example, and I understand your argument. But you have not eliminated all of the risk. You have transferred inflation risk to the "virtual annuity", which you have posited. This virtual annuity is essentially an 8-year TIPS with the maturity payment stripped off, something which doesn't exist for purchase in the marketplace, and if it did, it's not clear that you could purchase it for $263,520.

the "transferred inflationary risk" isnt very risky at all. 1st: it is only 7 yrs of inflation where the current inflation environment is very low. 2nd: usually a money market fund will keep up with inflation before taxes (but since all the money is in a tax deferred account i dont need it to keep up with taxes while it is keeping up with inflation). i think CDs and high interest checking accounts would keep up also. you could also keep up with inflation using TIPS. you could buy, on the secondary market, 7 individual TIPS bonds priced at approximately $32,940 each but each maturing in a different year over the next 7 years. (the 8th $32,940 is for the year coming up so you dont inflation protect it.) all you would need for a return over inflation on these bonds is 0% and this would work.

most of the inflationary risk is borne by SS and the portfolio that is producing inflation adjusted $20,000 every year starting at an initial WR of 3.392%, a pretty safe initial WR for an inflation adjusted WD from a portfolio.

[DeborahB]

Quote:

Originally Posted by Zero I swear I had that conversation at least 100 times.

And, the 1960s parties live on...