Social Security - When to start benefits..

[rescueme]

Are you single? I'm talking stratagy for married folks.

That's where a lot of the conflict comes in with discussions on this subject IMHO.

While DW/me will take the "extended route", I understand where a single person may be justified in going the early route, if they prefer.

Planning for two, including increased average lifespan for one, along with the desire to max out benefits for that person often trumps out just the view from a simple math solution.

Also, you don't have to understand the different options, based upon joint SS benefits as related to file/suspend options (for those spouses that will get less than a 50% matching benefit, on their own), along with the 50% spousal benefit that (depending on age) will allow one person to get SS while delaying their own claim, earning additional DRC's and an 8% annual (plus possible COLA's) for age 66-69, as I will get - starting in two years, BTW.

And most "math solutions" don't touch upon the possibility of excess RMD's (excess meaning having to take out and pay tax on tax-deferred portfolios for money you really don't need for on-going expenses) and using the draw-down of the portfolio rather than use early SS for income - or for further buildup of the portfolio. Remember, there's no RMD's on SS.

 

[LRDave]

To the OP: Thanks for the link. This is an interesting thread.

My YOB = 1958 and DW's is 1960. I have always felt a bit uneasy in terms of being on the cusp of those that will be grandfathered in and those that won't.

For now, we are saving all we can and watching the macro-uncertainties: SS plan revisions, inflation and taxation.

Pensions and SS are big part of our RE plans. Only SS has any COLA provisions for us and I can see that trumping PV calculation results.....

 

[Dave J]

If Bob and Carol both started at 62 taking the reduced benefits and put the money under their mattress, they would have 130K at 66. I believe all these strategies aren't as dramatically different when the you consider what the money can be doing for you now. Like you said, you have the money to live on, but using that money really has to work into your equation. I do agree if you have dramatic age differences between you and your wife, or a child on SS, waiting later can help them.

Remember, in this example, Carol does begin at 62.

 

[jeffmete]

Remember, in this example, Carol does begin at 62.

Correct, if we leave Carol out of this, Bob gives up 1500/month from 62-66, then he gives up 700 per month by taking his spousal till 70. This still adds up to $105K he's given up. Then at 70 he takes 2640/month and is gaining 1140 per month till he dies. Which means even if that 105K is under the mattress with zero interest, it'll take him 92 months just to break even, which is the magic 78 years old (which seems to be the break even number for all of social security). If he invests that 105K, it could easily push the break even point into his mid 80's. Everything is a gamble. As you can tell from my posts, I'm a little bit of a bird in the hand is worth two in the bush kind of guy. My wife and I are both the same age, but my worry is I do have a handicapped daughter, so I may try to maximize her SS, rather than mine.

 

[Finance Dave]

I read all these strategies than entail waiting till 70 to get SS, then as I was reading the obituaries this morning, I realized most of the people passing are in their 50's-60's and 70's. We all would like to think we're living till 90, but stuff happens and life can change pretty fast. I'll bet SS has figured out that on average, all these methods work out the same. For every person that chooses to delay and lives to 100, there are those that don't make it.

Actually Jeff you are correct. The various amounts are stated somewhere (can't recall where I read it) to be "actuarially equivalent". IMO one key is to determine whether you will live longer or shorter than those averages.

 

[Lsbcal]

Yes, for some reason I frankly do not understand all of these threads of SS at 62 vs 70 (and there have been many) simply ignore the time value of your nest egg that remains invested (i.e. monies you did not take out from your investments to live on)when you start taking SS at 62. When I run the calculations for my own situation, the increase of the next egg vastly exceeds the additional SS payments starting at age 70 as long as the rate of return in you investments exceeds about 5% and inflation remains at about 3%. My own rate of return over many years has been about 7.5% so I'm taking SS at 62

Here is the arithmetic as I understand it if you delay from 62 to 66:

added benefit = (100%/75%)^(1/4) = 1.075

So by delaying to get 100% instead of 75% at 62, you get a boost each year of 7.5%. But note that is a real return of 7.5% not a nominal return. Also this is a government guaranteed return. Very tough to beat this sort of return in a guaranteed fashion especially given today's low bond real rates. Here is the government table which shows an 8% credit per year for people in my age group: Early or delayed retirement So maybe my 7.5% implied return calculation is too conservative above?

Also taxes raise their ugly head here. Tough to generalize on this one.

BTW, took a peek at your spreadsheet Ejman and it looked reasonable.

 

[jeffmete]

Lsbcal
it's not a government guaranteed return, because it's not a savings account. If you delay taking it till 66 and die at 64, your rate of return is pretty darn small. Most calculations show you have to be 78 to break even (and this is without putting any value on current money), which means more likely break even is in your 80's. Everything about when to take SS is a gamble based on one assumption. How long are you gonna live. And if I knew that.......

 

[Dave J]

Correct, if we leave Carol out of this, Bob gives up 1500/month from 62-66, then he gives up 700 per month by taking his spousal till 70. This still adds up to $105K he's given up. Then at 70 he takes 2640/month and is gaining 1140 per month till he dies. Which means even if that 105K is under the mattress with zero interest, it'll take him 92 months just to break even, which is the magic 78 years old (which seems to be the break even number for all of social security). If he invests that 105K, it could easily push the break even point into his mid 80's. Everything is a gamble. As you can tell from my posts, I'm a little bit of a bird in the hand is worth two in the bush kind of guy. My wife and I are both the same age, but my worry is I do have a handicapped daughter, so I may try to maximize her SS, rather than mine.

But we can't leave Carol out, because this is an example for a couple, not a single. That is a very different scenario.remember, after Bob dies, Carol gets an additional $12000 per year for 11 years(she is 4 years younger).
I'm after later years money more than early years money.

 

[Lsbcal]

Lsbcal
it's not a government guaranteed return, because it's not a savings account. If you delay taking it till 66 and die at 64, your rate of return is pretty darn small. Most calculations show you have to be 78 to break even (and this is without putting any value on current money), which means more likely break even is in your 80's. Everything about when to take SS is a gamble based on one assumption. How long are you gonna live. And if I knew that.......

I just wanted to get the numbers out there and into this thread.

I agree that it's a bit of a crap shoot, the year you die in is indeed unknown. If one does not have to draw SS early to make ends meet then run FIRECalc with the different numbers and take your pick. You could just spend more as a percent of your nest egg until SS kicks in. Right now I'm planning on taking it at 66 although I realize the data says that the argument to delay is the same up until 70. My parents died in their late 60's but I'm not planning on doing that. Still will probably "cut the baby in half" and pull the trigger at 66. If stocks take off like gang busters in the next few years, I could always delay a bit longer.

 

[Alan]

Pensions and SS are big part of our RE plans. Only SS has any COLA provisions for us and I can see that trumping PV calculation results.....

Remember also that while you are delaying SS it is rising not with COLA, but against the wage index, and the wage index has historically risen faster than COLA. Once you start drawing SS it is COLA'ed.

 

[Dave J]

Remember also that while you are delaying SS it is rising not with COLA, but against the wage index, and the wage index has historically risen faster than COLA. Once you start drawing SS it is COLA'ed.

Thanks. I did not know that.

 

[Lsbcal]

Remember also that while you are delaying SS it is rising not with COLA, but against the wage index, and the wage index has historically risen faster than COLA. Once you start drawing SS it is COLA'ed.

This is a new one for me. I looked up the differences and they are much bigger then I would have thought, see Cost-of-Living and Average Wage Index Assumptions . Table reproduced here:

Then I looked at my statements from SS that showed my age 66 benefit increases:

Dec 2009 paper statement: increase of +2.8% from late 2008 statement
Dec 2010 paper statement: increase of 0.0% from late 2009 statement
SS on-line calculator, Feb 2012: +3.6% from the late 2010 statement

It does seem like the increases are reasonable in keeping up with inflation.

 

[Alan]

Lsbcal,
I did give some false information there which you have corrected - thanks .

The wage indexing only applies up to 2 years before age 62, or 60 as you point out.

Between 62 and 70 it is COLA'ed.


National Average Wage Index

When indexing an individual's earnings for benefit computation purposes, we must first determine the year of first eligibility for benefits. For retirement, eligibility is at age 62. If a person reaches age 62 in 2012, for example, then 2012 is the person's year of eligibility. We always index an individual's earnings to the average wage level two years prior to the year of first eligibility. Thus, for a person retiring at age 62 in 2012, we would index the person's earnings to the average wage index for 2010, or 41,673.83. We would multiply earnings in a year before 2010 by the ratio of 41,673.83 to the average wage index for that year; we would take earnings in 2010 or later at face value.

 

[wolfbay]

I'm considering taking SS at 62 but frankly I don't understand the tax consequences. Neither of us work at all and we are not yet drawing from our SEP IRA for living expenses. We have been converting about 60000 from SEP to a Roth each year and staying in the 15 % bracket. I am going to run it by our CPA but would like some kind of idea what the situation is. Anyone willing to take a stab at it? Thanks.

 

[Lsbcal]

I'm considering taking SS at 62 but frankly I don't understand the tax consequences. Neither of us work at all and we are not yet drawing from our SEP IRA for living expenses. We have been converting about 60000 from SEP to a Roth each year and staying in the 15 % bracket. I am going to run it by our CPA but would like some kind of idea what the situation is. Anyone willing to take a stab at it? Thanks.

I'm not a CPA but your problem is to somehow optimize the income streams and tax consequences for (1) taxable income, (2) IRA's and RMD's at age 70.5, (3) Roths, and (4) SS. You're CPA may be able to run some planning software (or suggest a source). This tool may help a bit but the tax issues are probably not fully explored: Optimal Retirement Calculator and Retirement Decision Support System

 

[rayvt]

The various amounts are stated somewhere (can't recall where I read it) to be "actuarially equivalent".

It's right there on the SSA web site, where they describe the early/late options.

IMO one key is to determine whether you will live longer or shorter than those averages.

Yeah, everything is easier if you know just when you are going to die. But nobody does, hence the use of actuary tables. Despite what age your grandparents lived to, all it takes is for one 18-wheeler to cross the centerline to mess up your calculations.

by delaying to get 100% instead of 75% at 62, you get a boost each year of 7.5%. But note that is a real return of 7.5% not a nominal return. Also this is a government guaranteed return.

First off, it's not a "return" at all, not real and not nominal. All it is is changing the timing of receiving the money. The present-value is the same. That's what "actuarially equivalent" means. You get the same total amount of money spread over fewer years, so of course the monthly amount is larger.
Second, it's not "guaranteed" at all. Congress can change it at any time -- as they have several times in the past. Anyway, it's already by law slated to be automatically cut by ~25% if/when SS collections run the trust fund dry.

I worked up a spreadsheet for early/late comparisons, using a couple of different methods. https://spreadsheets.google.com/ccc?key=0AlyWRtMroxvgdDI2MlY0UDR4WFRQRFE0Tkw0d19pTnc&hl=en
You can plug in your own assumptions & figures.

BTW, the SSA life-expectancy tables show an average age at death is about 83-84 years old. With the assumptions I used, 3% earnings rate and 2.8% COLA, the break-even age is 87. So, on average, you don't breakeven in your lifetime.
If you can earn 6%, the break-even age is 104.
A well-diversified portfolio of investment-grade bonds & preferred stocks can easily earn 6%. Mine is currently earning 7.4%.

 

[Dave J]

It's right there on the SSA web site, where they describe the early/late options.


Yeah, everything is easier if you know just when you are going to die. But nobody does, hence the use of actuary tables. Despite what age your grandparents lived to, all it takes is for one 18-wheeler to cross the centerline to mess up your calculations.


First off, it's not a "return" at all, not real and not nominal. All it is is changing the timing of receiving the money. The present-value is the same. That's what "actuarially equivalent" means. You get the same total amount of money spread over fewer years, so of course the monthly amount is larger.
Second, it's not "guaranteed" at all. Congress can change it at any time -- as they have several times in the past. Anyway, it's already by law slated to be automatically cut by ~25% if/when SS collections run the trust fund dry.

I worked up a spreadsheet for early/late comparisons, using a couple of different methods. https://spreadsheets.google.com/ccc?key=0AlyWRtMroxvgdDI2MlY0UDR4WFRQRFE0Tkw0d19pTnc&hl=en
You can plug in your own assumptions & figures.

BTW, the SSA life-expectancy tables show an average age at death is about 83-84 years old. With the assumptions I used, 3% earnings rate and 2.8% COLA, the break-even age is 87. So, on average, you don't breakeven in your lifetime.
If you can earn 6%, the break-even age is 104.
A well-diversified portfolio of investment-grade bonds & preferred stocks can easily earn 6%. Mine is currently earning 7.4%.

It would not let me change to my numbers.

 

[MichaelB]

First off, it's not a "return" at all, not real and not nominal. All it is is changing the timing of receiving the money. The present-value is the same. That's what "actuarially equivalent" means. You get the same total amount of money spread over fewer years, so of course the monthly amount is larger.
Second, it's not "guaranteed" at all. Congress can change it at any time -- as they have several times in the past. Anyway, it's already by law slated to be automatically cut by ~25% if/when SS collections run the trust fund dry.

I worked up a spreadsheet for early/late comparisons, using a couple of different methods. https://spreadsheets.google.com/ccc?key=0AlyWRtMroxvgdDI2MlY0UDR4WFRQRFE0Tkw0d19pTnc&hl=en
You can plug in your own assumptions & figures.

BTW, the SSA life-expectancy tables show an average age at death is about 83-84 years old. With the assumptions I used, 3% earnings rate and 2.8% COLA, the break-even age is 87. So, on average, you don't breakeven in your lifetime.
If you can earn 6%, the break-even age is 104.
A well-diversified portfolio of investment-grade bonds & preferred stocks can easily earn 6%. Mine is currently earning 7.4%.

Two comments. First, nothing is guaranteed, but a reduction in SS pension is a very low probability event. Second, the decision to delay is not to maximize return or break even but to minimize the risk of running out of money. That risk is real, and the value must be reflected in the choice.

 

[Lsbcal]

Maybe it is a good idea to think of SS as an annuity that will start at a higher monthly payout if you delay. Of course, you don't know if you will reach the break even point. Plus taxes and RMD's to some minor extent play into this. That is different depending on your income streams and tax profile. I think our tax situation is quite different from the average USA retiree.

My DW is one who falls into the "50% of higher earner" category so my delaying also would help her should she outlive me. Not a major consideration but a minor one.

BTW, I do not bill myself as an expert on when to take SS. Just trying to figure this stuff out for myself and throwing out some info in the process. I appreciate alternate views on this subject.

 

[Chuckanut]

SS as long life insurance... It's worth a thought.

 

[rayvt]

It would not let me change to my numbers.

Copy it, then you can change your copy. Naturally, it won't let you edit my original.

...a reduction in SS pension is a very low probability event./QUOTE] You're kidding, right? The are news stories & columns & articles all over that indicate that reduction is a high probability event.

the decision to delay is not to maximize return or break even but to minimize the risk of running out of money. That risk is real, and the value must be reflected in the choice.

Granted. And that's why you need to look at the figures and make you own assessment of your risk level.

I will point out that if a person delays to age 70, then they have enough assets that they did not need the SS money for those 8 years, and it's quite unlikely that they exhausted their own money and then need to switch to SS at 70. If you are (relatively) poor, you don't have the option of delaying, because you need the SS money as soon as you retire.

Also, nobody (voluntarily) retires at 62 unless they don't need the paycheck. Which means they have considerable assets, which means that they could easily delay receiving SS, which means that they don't need the SS benefit -- not at 62 and not at 70.

We're not really talking about a whole lot of money here, either. The average monthly benefit is about $1200. The maximum is $1900 (for age 62 start). That's for someone who has been a high earner all their life -- that is, someone who has has plenty of opportunity to accumulate a lot of money to retire on, who therefore doesn't really need the SS money.

It all gets very complicated, 'cause there are so many figures, growth, COLA, etc. to juggle. That's why I worked up that spreadsheet. The basic question I had was, "Okay, I don't need the money at 62, so how about if I take it and put in into a savings account. Then at 66 or 70 I switch gears and start spending the SS money and suppliment that with withdrawals from the savings account such that the total is equal to what the SS benefit would be if I had simply delayed collecting SS until that age." Now that I'm drawing down the account, when will it be depleted? At that point, the suppliment disappears, so all I get is what SS pays.

The question is: What is that age? At 0% interest and no SS COLA, that's about 77. That's a breakeven time of 15 years.
Each person must decide for themself whether that's acceptable or not. It's rather like an annuity, and you need to decide if you want your heirs to inherit any money if you die before you start collecting SS. Like someone said, if you delay until 70 but then die at 68, your rate of return is zero. Whereas if you start and save, they inherit the money in the account.

For some people, you can also toss in the complexity of claiming on a spouse, which is way to complex for me to figure.

 

[Cut-Throat]

...a reduction in SS pension is a very low probability event./QUOTE] You're kidding, right? The are news stories & columns & articles all over that indicate that reduction is a high probability event.

The Facts.......SS currently has a 2.3 Trillion Dollar Surplus......The money has been spent on Wars and other government programs. The debt is backed by Treasury Bonds which are the safest Investment in the world.
SS is still taking in more money that it pays out and will continue to do so for at least another 25 years.

Any statements that declare SS as 'In Danger', going Broke are purely political and are just trying to sucker the low informed voter.

 

[Lsbcal]

Here is a link to the government bipartisan commission (Simpson-Bowles) report on deficit reduction http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/CoChair_Draft.pdf

See the Social Security section starting at slide #42 in this PDF file. You'll notice that the changes contemplated are pretty modest, especially for those near or in retirement. Many of the changes would phase in over several years.

My conclusion: don't worry about SS. Changes will come (probably after the elections this year) but will not hurt.

 

[EvrClrx311]

If the rules didn't change so often, I'd be tempted to put together a website similar to firecalc to let people input their situation (variables) and have it output the impact (graphs, charts, etc...) on how early, mid late would effect things for them.

Maybe if I have some spare time this summer I'll look into that...

 

[Dave J]

If the rules didn't change so often, I'd be tempted to put together a website similar to firecalc to let people input their situation (variables) and have it output the impact (graphs, charts, etc...) on how early, mid late would effect things for them.

Maybe if I have some spare time this summer I'll look into that...

from Rayvt link above, it had a link to

Social Security calculator: retirement options for you and spouse.

which has some great calculators, similar to what you are talking about. Give it a look.