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Old 02-25-2012, 11:35 PM   #121
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In the big picture, there's not much difference between $57k and $53K. One is a slightly better than most households and the other is a teeny bit better.
Once again, I agree with your post, but I would like to quibble: The difference between a $57k annual income and a $53k annual income is 7.5% better every year for the rest of your life.

That's huge.

It's better than you are likely to get in stocks. And it's safer.

This is why planning decisions, such as when to take SS, are usually more important than investment decisions and deserve more of our time.
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Old 02-25-2012, 11:36 PM   #122
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If you take SS at 62 your lifelong monthly benefit would be about 75% of the FRA amount. If you wait until 70, it would be 132% percent. That is indeed roughly a 7% real rate of return...
It's not a "rate of return". You can easily demonstrate that isn't by asking yourself, "7% of what?"
It's a higher monthly benefit, which is a completely different thing than a rate of return.

And this completely ignores something that you can't ignore -- the time value of money. You can't compare $750 today against $1320 eight years from now. You have to compute the Present Value of each, which means you have to discount the $1320 to get it's PV.

In fact, if you discount $1320 at 7.25% rate for 8 years you get the PV of $754. But that's not a 7.25% return, it's the discount rate. Of course, that is a very generous discount rate. A more realistic one is 4%, which gets a PV of $965. Granted, $965 is more than $750, but it's not a life-changing amount.

----------
And do I think that I can beat 4% growth? Yes.
I think I can easily get 7% with just bonds & preferred stocks.

And don't forget the 8 year head start. That's a biggie.
From my spreadsheet (using the COLA-adjusted age 70 benefit amount) the break-even age is 87.4 years. Which is 3.4 years beyond the life-expectancy of a 70 year old.
If I can get 8%, the BE gets pushed out to age 91.
9% is age 100.
10% (the long-term S&P500 average) the BE is never.
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Old 02-26-2012, 12:13 AM   #123
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but I would like to quibble: The difference between a $57k annual income and a $53k annual income is 7.5% better every year for the rest of your life
Yes it is. Agreed.
But when I say "essentially the same", what I mean is that the difference between a $53K lifestyle and a $57k lifestyle is negligible.
7.5% is a handsome percentage more, but it's $333/mo and that's not a huge amount extra -- especially since you had to pass up $1100/mo for 8 years in order to get that $333.

What can you do on 57k that you can't do on 53k?
Buy a BMW convertible sports car? No. You could lease one, though.
Take 3 cruises a year instead of 2.
Fly out to visit the kids at Christmas instead of drive.
Eat prime rib every week instead of every other week.

It comes down to a matter of personal preference. And that's the good thing about this discussion. To me, at least, this clarified in my mind what the different outcomes are, and that they are not hugely different. From that, we can each decide which we prefer. Whichever way you decide, it's not going to make a huge difference in your lifestyle.

In fact, it clearly demonstrates the value of having a large net worth when you retire, so that SS is just a small part of your retirement income. Makes me even more stongly want to try to get my net worth up to 2 mill.
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Old 02-26-2012, 12:28 AM   #124
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It's not a "rate of return". You can easily demonstrate that isn't by asking yourself, "7% of what?"
It's a higher monthly benefit, which is a completely different thing than a rate of return.

And this completely ignores something that you can't ignore -- the time value of money. You can't compare $750 today against $1320 eight years from now. You have to compute the Present Value of each, which means you have to discount the $1320 to get it's PV.

In fact, if you discount $1320 at 7.25% rate for 8 years you get the PV of $754. But that's not a 7.25% return, it's the discount rate. Of course, that is a very generous discount rate. A more realistic one is 4%, which gets a PV of $965. Granted, $965 is more than $750, but it's not a life-changing amount.

----------
And do I think that I can beat 4% growth? Yes.
I think I can easily get 7% with just bonds & preferred stocks.

And don't forget the 8 year head start. That's a biggie.
From my spreadsheet (using the COLA-adjusted age 70 benefit amount) the break-even age is 87.4 years. Which is 3.4 years beyond the life-expectancy of a 70 year old.
If I can get 8%, the BE gets pushed out to age 91.
9% is age 100.
10% (the long-term S&P500 average) the BE is never.
The life expectancy of a 70 year old white male in the US. is 13.8 years, not the difference between life expectancy at birth and 70. But the relevant life expectancy estimate should probably be at age 62, when the decision to defer would be made. That figure is about 21 years (using the CDC tables here:
FASTSTATS - Life Expectancy )

But using the actuarial life expectancy means that you have a 50% chance of living longer, not a probability that should be ignored, even if we are talking about investment and not insurance. Which means that the PV calc has 50% chance of being understated.

From an investment point of view the return on delaying SS is a return on an investment equal to the payments foregone. So, if I am 62 with a current PIA of $1400/month and I delay one year I am investing $14,400 to buy an annuity that begins a year later. My median lifespan is 21 years at 62 or 20 years at 63 approximately. The PV of the current PIA for 21 years discounted at the 2% safe rate of 10 year Treasuries is $276,743.65. The PV of the PIA with one year of delayed retirement credits is $296,115.70. But that is in real dollars. And my chance of doing better is 50%. Since I have no market risk, the return can only be compared to govt bonds.

Do you really believe that you will get a 7% real rate of return on bonds and preferred stocks?
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Old 02-26-2012, 12:35 AM   #125
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Yes it is. Agreed.
But when I say "essentially the same", what I mean is that the difference between a $53K lifestyle and a $57k lifestyle is negligible.
7.5% is a handsome percentage more, but it's $333/mo and that's not a huge amount extra -- especially since you had to pass up $1100/mo for 8 years in order to get that $333.

What can you do on 57k that you can't do on 53k?
Buy a BMW convertible sports car? No. You could lease one, though.
Take 3 cruises a year instead of 2.
Fly out to visit the kids at Christmas instead of drive.
Eat prime rib every week instead of every other week.

It comes down to a matter of personal preference. And that's the good thing about this discussion. To me, at least, this clarified in my mind what the different outcomes are, and that they are not hugely different. From that, we can each decide which we prefer. Whichever way you decide, it's not going to make a huge difference in your lifestyle.

In fact, it clearly demonstrates the value of having a large net worth when you retire, so that SS is just a small part of your retirement income. Makes me even more stongly want to try to get my net worth up to 2 mill.
Your response is distorted by the fact that you do not live on $53k per year. Well, neither do I. However, if you were to ask some who does, that person is likely to regard it as huge. For instance, it is the difference between taking a nice annual vacation each year for life and never having a vacation at all. Or it might be the difference between having health insurance or not. Huge in either case.
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Old 02-26-2012, 08:13 AM   #126
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I love these SS discussions ...

Really, there is no "correct" answer for the masses. It's not only a financial decision based upon SS marriage rules, an indivudials health - both physically and also financially, but often more of an emotional one (as is the case for DW/me, in our situation).

My/our only comments:

- Money is for the living, not the dead. We're not concerned with "break even", regardless of how you want to compute it. And as far as investing the proceeds trying to beat the longevity credits, if we take it early? No thanks, we have enough of a challange with our joint portfolio; we're retired (well, I am, DW will be next month) and don't need the hassle.

- We would rather die with money, than live without it. Thus, we chose to delay SS in our case.

And maybe it's just due to our age (both 64), but we have no fears of SS being eliminated in the future. Taxed more? Sure. Qualifications based on income? Sure. However, if we're lucky enough to have the money, we don't have a problem with paying the tax or qualifying (how those taxes get used, is another discussion )...

Just our simple POV.
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Old 02-26-2012, 09:42 AM   #127
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Originally Posted by rayvt
What can you do on 57k that you can't do on 53k?
.
Vacation in Hawaii.

------------

Not outliving your money and having friends and family say "You see, he shouldn't have retired early": Priceless.
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Old 02-26-2012, 11:22 AM   #128
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I love these SS discussions ...

Really, there is no "correct" answer for the masses. It's not only a financial decision based upon SS marriage rules, an indivudials health - both physically and also financially, but often more of an emotional one (as is the case for DW/me, in our situation).

My/our only comments:

- Money is for the living, not the dead. We're not concerned with "break even", regardless of how you want to compute it. And as far as investing the proceeds trying to beat the longevity credits, if we take it early? No thanks, we have enough of a challange with our joint portfolio; we're retired (well, I am, DW will be next month) and don't need the hassle.

- We would rather die with money, than live without it. Thus, we chose to delay SS in our case.

And maybe it's just due to our age (both 64), but we have no fears of SS being eliminated in the future. Taxed more? Sure. Qualifications based on income? Sure. However, if we're lucky enough to have the money, we don't have a problem with paying the tax or qualifying (how those taxes get used, is another discussion )...

Just our simple POV.
+1. Everyone is different. This discussion is somewhat like the mortgage one that is currently running. I learn from these threads taking a bit from the varied opinions. Before this thread started I had never really looked closely at SS. At age 59 I know it was getting time to think about the choices. For us the take one early and delay the other and take the spousal benefit in the middle seems right. It does seem that some people have an attitude that what works for themselves has to be the right answer for everyone. I can certainly understand that attitude. They probably did not get to FI by being stupid. They made smart financial decisions (LBYM for example) while all around them they saw friends and aquaintances making seemingly poor decisions. Most of those people making the poor decisions never even had the good sense to ask for advice. Now they (we) are on a board where people actually ask each other about financial decisions.
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Old 02-26-2012, 01:18 PM   #129
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It's not a "rate of return". You can easily demonstrate that isn't by asking yourself, "7% of what?"
It's a higher monthly benefit, which is a completely different thing than a rate of return.

And this completely ignores something that you can't ignore -- the time value of money. You can't compare $750 today against $1320 eight years from now. You have to compute the Present Value of each, which means you have to discount the $1320 to get it's PV.

In fact, if you discount $1320 at 7.25% rate for 8 years you get the PV of $754. But that's not a 7.25% return, it's the discount rate. Of course, that is a very generous discount rate. A more realistic one is 4%, which gets a PV of $965. Granted, $965 is more than $750, but it's not a life-changing amount.

----------
And do I think that I can beat 4% growth? Yes.
I think I can easily get 7% with just bonds & preferred stocks.

And don't forget the 8 year head start. That's a biggie.
From my spreadsheet (using the COLA-adjusted age 70 benefit amount) the break-even age is 87.4 years. Which is 3.4 years beyond the life-expectancy of a 70 year old.
If I can get 8%, the BE gets pushed out to age 91.
9% is age 100.
10% (the long-term S&P500 average) the BE is never.
I think you and I are the only ones who look at SS in the manner of an overall stream of income. Money you get today is worth more than money you get tomorrow. I'm not as fluent in money as some, but not even considering the time value of money, my break even point between taking it at 62 versus 66 is 78 years old. and like you say, even a modest 4% return on current money, pushed the break even back into our late 80's.
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Old 02-26-2012, 01:21 PM   #130
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I am really struggling to understand what the best course to take with this should be. The question that runs through my mind is:
60 year old man
375,000 in savings
Plans on one of two scenarios:

Scenario 1: Work until age 62 increasing savings to a little over 400K and take social security of 20K plus 4% withdrawal of savings for another 16K giving his needed 36K per year of income.

Scenario 2: Retire today at age 60 placing all $375,000 in treasury bills and living on 36K per year for 10 years and then take social security at age 70 @ 37K per year with only a minimal savings plan remaining.

There is no doubt Scenario 2 provides a plan for the most time in retirement and with very few financial decisions to be made, but can one be comfortable in placing trust in the government? I question whether this is really a safer or more sure plan than scenario 1??
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Old 02-26-2012, 01:39 PM   #131
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I think you and I are the only ones who look at SS in the manner of an overall stream of income. Money you get today is worth more than money you get tomorrow.
Only true if your assumed discount rate is higher then the experienced inflation COLA. If you assume a higher discount rate, you are implicitly saying that your portfolion will beat inflation, with risk no worse that that of SS payments.

Since there really are no risk => SS investments available other than TIPS, which give a guaranteed real loss, I don't know how you can do this.

You position is not from your superior understanding.

Ha
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Old 02-26-2012, 01:44 PM   #132
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$375K at age 60 is not really enough to retire early -- unless your living expenses are really really low.

I doubt you'll get $20K of SS at 62, either. According to this: U.S. Social Security Retirement - Estimated Monthly Payments Chart the maximum would be 20K, but that's for somebody who has been pulling down a salary of $150K. And if you've been making 150K then you should have a lot more than $375k in savings at 60.
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Old 02-26-2012, 02:02 PM   #133
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I am really struggling to understand what the best course to take with this should be. The question that runs through my mind is:
60 year old man
375,000 in savings
Plans on one of two scenarios:

Scenario 1: Work until age 62 increasing savings to a little over 400K and take social security of 20K plus 4% withdrawal of savings for another 16K giving his needed 36K per year of income.

Scenario 2: Retire today at age 60 placing all $375,000 in treasury bills and living on 36K per year for 10 years and then take social security at age 70 @ 37K per year with only a minimal savings plan remaining.

There is no doubt Scenario 2 provides a plan for the most time in retirement and with very few financial decisions to be made, but can one be comfortable in placing trust in the government? I question whether this is really a safer or more sure plan than scenario 1??
Are there seperate savings for emergencies or large unplanned expenses, and is health care covered?

Scenario 2 will for sure result in a loss of purchasing power for the savings because inlation is running 1-2% ahead of interest rates. Some risk assets have to be included in the portfolio to avoid this.

Scenario 1 has the advantage of building the savings but still letting you defer SS, but at the expense or working longer.
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Old 02-26-2012, 05:27 PM   #134
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Originally Posted by Running_Man View Post
I am really struggling to understand what the best course to take with this should be. The question that runs through my mind is:
60 year old man
375,000 in savings
Plans on one of two scenarios:

Scenario 1: Work until age 62 increasing savings to a little over 400K and take social security of 20K plus 4% withdrawal of savings for another 16K giving his needed 36K per year of income.

Scenario 2: Retire today at age 60 placing all $375,000 in treasury bills and living on 36K per year for 10 years and then take social security at age 70 @ 37K per year with only a minimal savings plan remaining.

There is no doubt Scenario 2 provides a plan for the most time in retirement and with very few financial decisions to be made, but can one be comfortable in placing trust in the government? I question whether this is really a safer or more sure plan than scenario 1??
$375k wouldn't seem to be enough to retire on. If it's the case that you cannot keep working for some reason, then you should investigate annuitizing much of your assets since you are not in the position to self-insure against outliving your money. You would then have the problem of finding a place where you could live on your SS and annuity income. Could be some tough choices there.
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Old 02-26-2012, 05:50 PM   #135
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Originally Posted by Running_Man View Post
I am really struggling to understand what the best course to take with this should be. The question that runs through my mind is:
60 year old man
375,000 in savings
Plans on one of two scenarios:

Scenario 1: Work until age 62 increasing savings to a little over 400K and take social security of 20K plus 4% withdrawal of savings for another 16K giving his needed 36K per year of income.

Scenario 2: Retire today at age 60 placing all $375,000 in treasury bills and living on 36K per year for 10 years and then take social security at age 70 @ 37K per year with only a minimal savings plan remaining.

There is no doubt Scenario 2 provides a plan for the most time in retirement and with very few financial decisions to be made, but can one be comfortable in placing trust in the government? I question whether this is really a safer or more sure plan than scenario 1??
I think I would be much more concerned about inflation torpedoing either of these two scenarios than whether SS will be around or dramatically changed in the next 10 years (especially for someone who has limited funds - i.e., little chance of being means test out of SS payments).

As others have suggested, it could be wise to w*rk a little longer to add some insurance to the plan (assuming w*rk is an option for you). For me, belt-and-suspenders guy that I am, I would not contemplate ER just yet - but that's just me. Good luck! YMMV
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Old 02-26-2012, 06:31 PM   #136
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$375k wouldn't seem to be enough to retire on. If it's the case that you cannot keep working for some reason, then you should investigate annuitizing much of your assets since you are not in the position to self-insure against outliving your money. You would then have the problem of finding a place where you could live on your SS and annuity income. Could be some tough choices there.
This is not my scenario, yes my savings are considerably higher than $375,000 but this is a dual scenario I am grappling with to highlight Social Security issue for me in trying to decide what my strategy for this portion of my income needs will be in timing when to take Social Security. I have isolated it from the remainder of my portfolio and I view the issue as consuming $375,000 of my portfolio in order to defer the social security until age 70.

The portion of my retirement this portion of my strategy is to fund is 36K and I have to ask myself if this deferral is worth the value. In my mind then I ask myself if a 60 year old with $375,000 and 36K in annual expenses would be able to retire best on the scenario 1 or scenario 2 as a retirement strategy?
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Old 02-27-2012, 06:56 AM   #137
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Only true if your assumed discount rate is higher then the experienced inflation COLA. If you assume a higher discount rate, you are implicitly saying that your portfolion will beat inflation, with risk no worse that that of SS payments.

Since there really are no risk => SS investments available other than TIPS, which give a guaranteed real loss, I don't know how you can do this.

You position is not from your superior understanding.

Ha
So your saying I should give up $172,000 of income (1,800/month from 62 to 70 years old) and that is superior to waiting till I'm 70 to start collecting $3300/month? What is the value of that 172,000? Even at a modest 4% return, that 172,000 is probably worth $205,000 when I turn 70. So that is a stream of income of $683/month plus I still have the 205,00 in the bank. I am not trying to be thick headed, but I can't see what I'm missing that makes waiting till 70 better financial sense?
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Old 02-27-2012, 09:12 AM   #138
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I looked at two scenarios, either at 62 or at 70. I modeled it as if I would invest 100% of my checks in S&P500. The criteria was "At what age would the accumulated amounts be greater?".

I used the S&P 500 and CPI data that Prof Shiller publishes and ran 30-40 cases.

Results showed that "when" you start taking it, e.g., 1928 vs 1990, dwarfs any other factor.

A person taking his/her SS at 62 in 1990 made out like a bandit, but that person would have lost bigtime had they taken it at 62 in 1930.
Agree on the 1930 thing since SS didn't start payments till 1940.
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Old 02-27-2012, 09:15 AM   #139
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Agree on the 1930 thing since SS didn't start payments till 1940.
Yeah, but I needed at least one market disaster.

BTW, I deleted the message, I'm not even gonna get started on this topic, too much BP potential.
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Old 02-27-2012, 10:42 AM   #140
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I am really struggling to understand what the best course to take with this should be. The question that runs through my mind is:
60 year old man
375,000 in savings
Plans on one of two scenarios:

Scenario 1: Work until age 62 increasing savings to a little over 400K and take social security of 20K plus 4% withdrawal of savings for another 16K giving his needed 36K per year of income.

Scenario 2: Retire today at age 60 placing all $375,000 in treasury bills and living on 36K per year for 10 years and then take social security at age 70 @ 37K per year with only a minimal savings plan remaining.

There is no doubt Scenario 2 provides a plan for the most time in retirement and with very few financial decisions to be made, but can one be comfortable in placing trust in the government? I question whether this is really a safer or more sure plan than scenario 1??
quite some time ago i pointed out that by delaying SS to 70 any given 62 yo single retiree could increase his/her spending in the 8 yrs up to age 70 (that was back when MM interest rates were equal to or greater than the inflation rate) Social Security at 62, 66 or 70? . (as an aside, your use of a 4% WDR makes the WD from your portfolio more risky than your SS payment. if you want the same amout of risk in both scenerios your WDR should be much lower, eg. to get a 100% result out of FIRECalc your WDR would be about 3.59% and even that has stock and bond components that make it more risky than SS.)

your example is a little different though because in your 2 options the person is retiring at a different age. i am also a little wary of your SS numbers since when doing the above example i noticed that the multiplication factor to get from the SS payout number at 62 to the number at age 70 is about 1.76 and your numbers dont have that relationship. however, bottom line answer to your questions is scenerio 2 lets you retire 2 years earlier with the same spending ability as scenerio 1 so scenerio 2 is better. right now "īnvestments" in the US government (i.e. treasuries) are considered the safest available so of course it is safer than scenerio 1.

but i feel that answer is too short, so lets explore it a little more. first, a few facts about the analysis 1) i will use the 1.76 factor to get the SS payout at age 70. 2) i will use a WR that is more safe and taking a que from this board (when it comes to SWRs) i will use a 3% WR. and, just to make it clear, 3) i am going to do this analysis using real (inflation adjusted) numbers so i dont have to guesstimate inflation (SS payouts and SWR are inflation adjusted). so, using 1) if SS starting at age 62 is $20k then SS starting at age 70 would be $35.2k. and now applying 2) to the spending rate required from the portfolio at age 62 in scenerio 1 ($16k) i get a required portfolio at age 62 of $533,333. and since this person saved $25k in the 2 yrs prior to age 62 the new starting parameters are:

60 year old man
508,333 in savings

Scenario 1: Work until age 62 increasing savings to a little over 533K and take social security of 20K plus 3% withdrawal of savings for another 16K giving his needed 36K per year of income.


Scenario 2: Retire today at age 60 placing $352,000 in treasury bills and living on 35.2K per year for 10 years and then take social security at age 70 @ 35.2K per year and for his whole life take a 3% WD from $33,333 of his remaining portfolio, providing another $1k/yr to spend. this makes the amount availible to spend equal to (actually a little greater than) scenerio 1 but it leaves $148k of portfolio unspent/unencumbered for an emergency fund, splurging, leave to kids OR to increase his lifetime spending by almost $4.5k/yr, whatever suits him.

so again i will say that scenerio 2 is the way to go for someone that wants to maximize safe spending for his entire lifetime at a lower risk. the only risky years in scenerio 2 are the 1st 10 and unlike scenerio 1, they arent that risky because the $352k isnt in the stock market. however in scenerio 1 $16k/yr is at higher risk because it is invested in the market.
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When do Social Security payments start? Retiredtwice Other topics 3 11-18-2005 11:29 AM
Social Security Benefits Cut For Early Retirees Michael Other topics 12 01-05-2005 01:45 PM

 

 
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