Social Security - When to start benefits..

[rescueme]

Actually, this only guarantees a minimum IRR. The actual realized IRR will still depend upon when the latter of you passes, should one of you live beyond the guaranteed period.

True, but then the total realized return would be greater than what we were willing to accept under the original contract terms. Why would one disagree with that outcome?

However, I'm sure the insurance company knows more about average life spans (as related to computing payouts to profits) and if anything, we will not exceed the contract (in our lifetime).

We can live with a "minimum IRR". Isn't that the fear of most folks as related to an annuity? That's why we're getting a few less dollars each month to pay for additional "insurance" of a computed life policy, and ignore the oft quoted "if you pay your premium and die tomorrow, the insurance company gets all your money"...

 

[misty57]

I hate to break up the discussion, but I have a question.

DH will be taking ER this year. He's 55 and I'll be 55 in the summer, which means that we are at least 6+ years from having to make any decision about SS. I am almost 100% sure that some of these rules will change between now and then.

I am reading corporate SDPs related to his pension, retiree medical, etc. and researching other things such as ISWRs and the distribution stage of retirement, Roth IRA conversions, etc. Is there any reason why I shouldn't put the time and effort to research SS, at this time, on the back burner? Is there any reason to make any decisions about SS at this time?

 

[jclarksnakes]

I hate to break up the discussion, but I have a question.

DH will be taking ER this year. He's 55 and I'll be 55 in the summer, which means that we are at least 6+ years from having to make any decision about SS. I am almost 100% sure that some of these rules will change between now and then.

I am reading corporate SDPs related to his pension, retiree medical, etc. and researching other things such as ISWRs and the distribution stage of retirement, Roth IRA conversions, etc. Is there any reason why I shouldn't put the time and effort to research SS, at this time, on the back burner? Is there any reason to make any decisions about SS at this time?

No reason for you to make any decisions about SS at this time but it is a good idea for you to make an educated guesstimate of what your SS will be and use that information in your other financial planning. For example if the pension and a safe withdrawal rate from your portfolio and SS will provide substantially more money than you will need you could make a better decision on how early to retire. You probably already knew that though.

 

[Lsbcal]

...(snip)...
I am reading corporate SDPs related to his pension, retiree medical, etc. and researching other things such as ISWRs and the distribution stage of retirement, Roth IRA conversions, etc. Is there any reason why I shouldn't put the time and effort to research SS, at this time, on the back burner? Is there any reason to make any decisions about SS at this time?

Hi Misty, SS is an income stream when running FIRECalc so you would use it there with some reasonable assumptions. For Roth conversions, SS could come into the tax picture to reduce or eliminate that conversion process because of higher marginal rates (but not before SS kicks in). If you are planning on making your own spreadsheet, you will want your own SS numbers in that.

What I've done in the past is to note the pros/cons for taking SS early versus later. Thus you can record good arguments people use and will see the same ones come up now and then. Eventually you will form your own opinion. Probably you can avoid getting caught up in too many details at this time but it really depends on your individual circumstances and particularly if you fall into the group that really must draw it early.

 

[misty57]

No reason for you to make any decisions about SS at this time but it is a good idea for you to make an educated guesstimate of what your SS will be and use that information in your other financial planning. For example if the pension and a safe withdrawal rate from your portfolio and SS will provide substantially more money than you will need you could make a better decision on how early to retire. You probably already knew that though.

Yep, I did know that; but I might not have, so thank you.

I already know what SS will be if it is taken at FRA and if we wait until age 70. We won't need it before then, but the government may encourage us to take it earlier.

 

[misty57]

Hi Misty, SS is an income stream when running FIRECalc so you would use it there with some reasonable assumptions. For Roth conversions, SS could come into the tax picture to reduce or eliminate that conversion process because of higher marginal rates (but not before SS kicks in). If you are planning on making your own spreadsheet, you will want your own SS numbers in that.

What I've done in the past is to note the pros/cons for taking SS early versus later. Thus you can record good arguments people use and will see the same ones come up now and then. Eventually you will form your own opinion. Probably you can avoid getting caught up in too many details at this time but it really depends on your individual circumstances and particularly if you fall into the group that really must draw it early.

I've already run FIRECalc including and not including SS. Just as you suggested, we are in the camp that plans to delay in order to increase the number of years for Roth conversions.

 

[Lsbcal]

I've already run FIRECalc including and not including SS. Just as you suggested, we are in the camp that plans to delay in order to increase the number of years for Roth conversions.

Good idea. You might also try the retirement optimizer at: Optimal Retirement Calculator and Retirement Decision Support System
Might give you some hints as to when to start actually using those Roth $'s although so much depends on future tax policy.

For us, I was squirreling away the Roth $'s but then realized it was really time to start taking all income streams in parallel. We don't need to be 100% certain of having too much money at age 83 -- would rather have fun now! There is always a Plan B in the wings too.

 

[rescueme]

For us, I was squirreling away the Roth $'s but then realized it was really time to start taking all income streams in parallel.

Exactly. Not all forms of retirement investments need to be consolidated into one type, IMHO.

We have Traditional, Non-Deductable, and Roth IRA's and are/intend to use them that not only make sense today but also allows us to be flexible in our future withdrawls - depending on then current tax laws.

The same old story - "it all depends"...

 

[heirloom]

Heirloom, would you mind posting a link to the SS where they only guarantee 20 years of payments?

Michael,

It was in the May 13 press release on the SS site. It isn't quite 20 yrs yet, it's 24 yrs. But if they keep cutting back the yrs., it will soon be 20 yrs.


Social Security Press Office: Social Security Board of Trusteesrojected Trust Fund Exhaustion One Year Sooner

 

[Sirka]

I have the perfect way to merge the two most contentious topics on these boards, when to take SS and whether to pay off the mortgage.

Simply, keep the 4% 30 yr FRM, take SS as soon as you retire, and set up automatic bill-pay to direct the SS check to the mortgage payment.

Perfect

 

[Sirka]

... plans to delay in order to increase the number of years for Roth conversions.

This is an interesting idea. I am still converting to Roth, but will stop next year, because of SS income will push us into higher bracket (and tax changes, also). Did anyone run some numbers on this?

 

[Lsbcal]

This is an interesting idea. I am still converting to Roth, but will stop next year, because of SS income will push us into higher bracket (and tax changes, also). Did anyone run some numbers on this?

Probably this has been discussed in another thread, when taking SS it may be advantageous to take a high IRA distribution in one year and then a lower one the next. This gets you over the SS bump up in marginal rates in year #1, then in year #2 you can get the lower marginal rate by spending the excess distribution from year #1.

One should run Turbo Tax on their situation to see if this is feasible.

 

[Cut-Throat]

It appears that your 10 years of study did not result in your understanding how to properly calculate the return on an annuity.

The 8% is an increased withdrawal rate, not a guaranteed return.

Not sure why you're splitting hairs here....... I said return, because I was comparing the Withdrawal rate to the returns you would have to get in the market to keep up with the increase in the withdrawal rate.......That's what I meant and for that matter they are basically the same thing.

Example Say you had the $1 Million Portfolio and you got an 8% return every year.

Year 1 .... 1,000,000
Year 2..... 1,080,000
Year 3......1,166,400
Year 4......1,258,712
Year 5......1,360,489
Year 6......1,469,328
Year 7......1,586,874
Year 8......1,713,824

A 4% withdrawal rate on $1,713,824 would equal $68,552

Now let's say your are increasing your Withdrawal Rate, starting at 4% and increasing it by 8% every year...

Year 1 .... 40,000
Year 2..... 43,200
Year 3......46,656
Year 4......50,388
Year 5......54,419
Year 6......58,773
Year 7......63,474
Year 8......68,552

You end with the same amount of $68,552 either way...And yes I ignored the taxes you would have to pay, just to keep it simple.
But, you get the basic idea.

 

[Sirka]

convert more IRA to Roth

This gets you over the SS bump up in marginal rates in year #1, then in year #2 you can get the lower marginal rate by spending the excess distribution from year #1.

One should run Turbo Tax on their situation to see if this is feasible.

Thanks, I will run it in TT this year - I usually use Taxact.
I am not sure if it's worth it to delay SS until 66, so I can convert more IRA to Roth.

 

[Lsbcal]

Thanks, I will run it in TT this year - I usually use Taxact.
I am not sure if it's worth it to delay SS until 66, so I can convert more IRA to Roth.

Any tax program will work. The table I make has:
1) withdrawal from IRA (major source of taxed income)
2) taxed part of SS (up to 85% of SS)
3) Fed tax
4) State tax
5) Total tax (items 2 + 3)
6) Marginal rate for every $10k or so withdrawn from IRA

You see the taxed part of SS going up and that's where the marginal rate gets nasty. Then you get to the max (85% of SS taxed) and marginal rates decline perhaps before rising again as you push into higher brackets.

I'm just detailing this in case others might benefit from this approach.

 

[rescueme]

Just to add some more reference material on the subject, the following was just published this week:
How to Outsmart Social Security - SmartMoney.com

And relates to the idea of considering taking SS only when we are at a higher interest rate environment. IOW, in today's world, you would be better off delaying. I'll let you read the contents of the article to consider that theory.

It also has refrence to "present value"; something also discussed in this thread.

Just more fuel to put on the fire - but still no "best way" to proceed for most. As always, "it all depends"...

 

[bld999]

"all of this seems menacingly complex, it's because it is. And most retirees don't seem to maximize the present value of their benefits." [from the article]

My understanding of pv is that a crux value is the "discount rate", which tries to capture a person's wish to spend soon than to defer till later. How do the named researchers make the above claim without knowing that? My discount rate sometimes changes hourly when things look dodgy, which just reinforces "it all depends"

 

[Finance Dave]

"all of this seems menacingly complex, it's because it is. And most retirees don't seem to maximize the present value of their benefits." [from the article]

My understanding of pv is that a crux value is the "discount rate", which tries to capture a person's wish to spend soon than to defer till later. How do the named researchers make the above claim without knowing that? My discount rate sometimes changes hourly when things look dodgy, which just reinforces "it all depends"

They do it based on the "real rate" of a safe return, which takes into account both the discount rate and inflation in one fell swoop.

 

[bld999]

They do it based on the "real rate" of a safe return, which takes into account both the discount rate and inflation in one fell swoop.

Is it not fairly described here?:


Time preference - Wikipedia, the free encyclopedia

"In economics, time preference (or "discounting") pertains to how large a premium a consumer places on enjoyment nearer in time over more remote enjoyment....Time preferences are captured mathematically in the discount function. The higher the time preference, the higher the discount placed on returns receivable or costs payable in the future."

I always thought when it came to individuals, a broader view of preference was considered.

 

[Finance Dave]

Is it not fairly described here?:


Time preference - Wikipedia, the free encyclopedia

"In economics, time preference (or "discounting") pertains to how large a premium a consumer places on enjoyment nearer in time over more remote enjoyment....Time preferences are captured mathematically in the discount function. The higher the time preference, the higher the discount placed on returns receivable or costs payable in the future."

I always thought when it came to individuals, a broader view of preference was considered.

That says nothing about inflation though. Maybe I'm missing your point.

 

[jennypenny]

A new paper was published this week at NBER. Here's the pertinent text:
Social Security benefits may be commenced at any time between age 62 and age 70. As individuals who claim later can, on average, expect to receive benefits for a shorter period, an actuarial adjustment is made to the monthly benefit amount to reflect the age at which benefits are claimed. We investigate the actuarial fairness of this adjustment. Our simulations suggest that delaying is actuarially advantageous for a large subset of people, particularly for real interest rates of 3.5 percent or below. The gains from delaying are greater at lower interest rates, for married couples relative to singles, for single women relative to single men, and for two-earner couples relative to one-earner couples. In a two-earner couple, the gains from deferring the primary earner’s benefit are greater than the gains from deferring the secondary earner’s benefit. We then use panel data from the Health and Retirement Study to investigate whether individuals’ actual claiming behavior appears to be influenced by the degree of actuarial advantage to delaying. We find no evidence of a consistent relationship between claiming behavior and factors that influence the actuarial advantage of delay, including gender and marital status, interest rates, subjective discount rates, or subjective assessments of life expectancy.

The highlighting is mine. If you plan to retire/claim in 10 years interest rates might be much higher and therefore the accepted recommendations about when to apply might change. I guess the best retirement plan allows for a lot of flexibility. The report is here: The Decision to Delay Social Security Benefits: Theory and Evidence

 

[Independent]

A new paper was published this week at NBER. Here's the pertinent text:
Social Security benefits may be commenced at any time between age 62 and age 70. As individuals who claim later can, on average, expect to receive benefits for a shorter period, an actuarial adjustment is made to the monthly benefit amount to reflect the age at which benefits are claimed. We investigate the actuarial fairness of this adjustment. Our simulations suggest that delaying is actuarially advantageous for a large subset of people, particularly for real interest rates of 3.5 percent or below. The gains from delaying are greater at lower interest rates, for married couples relative to singles, for single women relative to single men, and for two-earner couples relative to one-earner couples. In a two-earner couple, the gains from deferring the primary earner’s benefit are greater than the gains from deferring the secondary earner’s benefit.

We then use panel data from the Health and Retirement Study to investigate whether individuals’ actual claiming behavior appears to be influenced by the degree of actuarial advantage to delaying. We find no evidence of a consistent relationship between claiming behavior and factors that influence the actuarial advantage of delay, including gender and marital status, interest rates, subjective discount rates, or subjective assessments of life expectancy.

The highlighting is mine. If you plan to retire in 10 years interest rates might be much higher and therefore the accepted recommendations about when to apply might change. I guess the best retirement plan allows for a lot of flexibility. The report is here: The Decision to Delay Social Security Benefits: Theory and Evidence

The first part agrees with things that I see posted here.
The "We then use panel data ...." is interesting. It says that real people aren't making decisions based on those differences.

 

[Animorph]

I assume that means that if we can invest our early-SS income at a real return of >3.5% then we'd be ahead taking it early. Not just an "inerest rate" but a personal rate of return. And probably close to or larger than many conservative investors here are planning for.

 

[BigNick]

Money isn't milk - it doesn't go off. Unless the actuarial difference is visible from space, I'd take it early every time. For one thing, there's a 10% or so chance that a 62 year old won't make it to 70 at all.

 

[jennypenny]

Money isn't milk - it doesn't go off. Unless the actuarial difference is visible from space, I'd take it early every time. For one thing, there's a 10% or so chance that a 62 year old won't make it to 70 at all.

I hear you. Neither of my parents lived long enough to collect SS. If I'm still around I will definitely be the first on line the day I'm eligible to collect.