Social Security - When to start benefits..

[walkinwood]

I'm having a good reading day today. I just read this article in the Journal of Financial Planning (articles available only in current month)

Social Security: When to Start Benefits and How to Minimize Longevity Risk

It talks about different strategies to optimize the Present Value of SS payments as well as minimize Longevity Risk. I had no idea things were this complicated! On the other hand, it allows for many strategies dependent on your situation.

 

[Midpack]

Good read. We're planning both on taking SS at 62 and going the "do-over" route with each opportunity. Still the plan...

 

[metabasalt]

The question I always have about this is that it seems to assume you're getting your SS in a financial vacuum. So some people in order to have the better paid spouse hold off until 70 to take SS must spend money from elsewhere, perhaps their savings. It seems to me, and I admit not being a financial expert, that you'd really have to compare money gained from SS by holding off until 70 against money lost by spending money from your savings that would otherwise grow(well hopefully). To me this type of analysis only clearly works when you already have enough money to live on and don't need the SS. If you do need it to live on, for instance at age 63, then I think the costs of not taking it and instead depleting your investment savings ought to be taken into account.

 

[W2R]

This is great. I have read the many, many old discussions on when to take SS that exist on this board and on Bogleheads and many other sources. Even as a single, I find so much conflicting advice on when to take SS - - I cannot begin to imagine how married couples sort through this! I will be 62 this June and still hadn't decided when to claim SS.

Now this article assumes that there will be no legislative changes to SS that would affect me, and there is always that unknown.

Still, it says,

In data not shown, if we assume a 20-year life expectancy at age 62 for a male and a 23-year life expectancy for a female, a male can maximize the PV of benefits by beginning benefits at age 65, while the female maximizes the PV of benefits by beginning benefits at 68. However, we join Munnell, Golub-Sass, and Karamcheva (2009); Richardson (2008); Sass, Sun, and Webb (2008); and TIAA-CREF (2002) in emphasizing that the benefits are approximately the same no matter when benefits begin, assuming average life expectancy and no reduction in benefits resulting from the earnings test.

So, what I conclude from reading this paper is that if there are no legislative changes, the average single female should wait until age 68. But if she chickens out and takes it early, it isn't going to be a fatal error. The paper also mentions that SS can be delayed as almost a type of longevity insurance.

In my case, my life expectancy is possibly greater than average due to extreme longevity in the family. So, it looks like delaying until age 70 would be a good idea, assuming that no legislative changes will affect me.

Big assumption. But at least I know what I am dealing with, if this paper is correct.

 

[sailfish]

I am 64 and just filed with SS with first payment in July. I decided to split the difference. I can let my IRA's etc grow for another year or two to fully recover from the 2007-8 debacle. My wife wanted the money at 62. We decided to use the money to enjoy ourselves as we both retired last year. The next 10 years are when we will probably spend the most in traveling , etc. Waiting for maximum payments are for persons who really want insurance.

 

[freebird5825]

Excellent article.
My FRA is 66 yrs 8 mos, being a circa 1958 baby.

I tend to think in raw numbers and odds of me personally "fitting the average" person cited in these articles. I'm also a true cynic about SS existing in its present benefit model for my age group.
Here is my current thinking...

Plan A: If I decide to take SS at age 62...I can either invest all or some of that SS income and maybe get a decent fixed income return on it. Will the sum of the (reduced payments + ROI) ever equal the non-penalized payments as if I waited until FRA ? Who knows?
OR...
Plan B: I can assume my life expectancy is lower than the charts assume. I can improve my "right now" financial quality of life by taking SS at age 62 and enjoying the extra income while I am physically able to do so.

 

[Wally]

It seems to me, and I admit not being a financial expert, that you'd really have to compare money gained from SS by holding off until 70 against money lost by spending money from your savings that would otherwise grow(well hopefully). To me this type of analysis only clearly works when you already have enough money to live on and don't need the SS. If you do need it to live on, for instance at age 63, then I think the costs of not taking it and instead depleting your investment savings ought to be taken into account.

I encountered this issue when doing financial planning for my retirement. The way I viewed it was that, if I wanted to have about the same amount of money available each year, then I needed to use savings to replace "missing" SS during the years that I delayed taking it after age 62. Sure, SS will increase about 8% each year but accounting for the need to replace "missing" SS funds considerably mutes the effect. When I did the estimates, it turned out that my total income (SS + 4% SWR of investment savings) is only likely to increase about 1% for each year that SS was delayed. My current plan is not to worry too much about this, but look at my savings and investments each year, and start SS when I start to get squeamish about the drain of replacing the SS income.

 

[Koolau]

Good 'ol Koolau (with his one-note song of converting as much Trad. IRA/401(k) money to Roths) is planning to wait as a tax strategy as well as for many reasons stated in the article and many other places. I realize that SS is taxed differently, but I have the problem (a good one as problems go) of too much of my stash in tax-deferred vehicles. My RMDs could be a tax killer, so converting and even partially "living on" tax-deferred money makes sense if you believe (as I do) that tax rates can only go up. No telling how tax treatment of SS will change, but at least there is a 70 million person "lobby" of Baby Boomers who will pitch a fit with any, every, and all changes to SS.

As always, YMMV.

 

[BLS53]

I think one thing often missed in "when to take" SS discussions, is that the significance of SS benefits is an individual matter. For some here, it's just incidental money, that can be played with like gameboard tokens. Developing financial strategies according to filing age, and the often mentioned recieve now payback at age 70 plan.

For some of us on modest DB pensions, SS represents a 50% or more pay raise. There's no doubt as to when to apply. ASAP.

 

[rescueme]

I think one thing often missed in "when to take" SS discussions, is that the significance of SS benefits is an individual matter. For some here, it's just incidental money, that can be played with like gameboard tokens.

True. In our case, the plan is for my DW to take it at FRA (66), me to file against her at that time for 50% spousal benefit, and delay my SS till age 70 - primarily for her benefit since I will probably pass first (we're both currently 62).

Additionally, we need to "burn" a lot of our tax-deferred funds in ER to lower the impact of excess RMD's at age 70.5. It's projected that we will have to take out much more (and pay taxes) than we actually need to fund our projected expenses after that age.

As you said it is an indivudial matter - and an indivudial decision. Everybody's situation is different...

 

[rescueme]

...delayed taking it after age 62. Sure, SS will increase about 8% each year...

Not quite correct. It increases 8% (plus COLA, if any) from your FRA - not early SS drawn before that age, till age 70, due to mortality credits.

Per SS:

"Also, your benefit will increase automatically by a certain percentage from the time you reach your full retirement age until you start receiving your benefits or until you reach age 70. The percentage varies depending on your year of birth. For example, if you were born in 1943 or later, we will add 8 percent per year to your benefit for each year that you delay signing up for Social Security beyond your full retirement age."

Reference:

Retirement Benefits

 

[donheff]

I have read about starting early vs starting late (the "average" person breaks even on an actuarial basis; long life wins, short life looses). Starting late - same as above. Starting early and buying back the difference later on (same as above, but you have more knowledge about health to decide on whether to reapply slightly upping the odds that you are a long liver).

I haven't read any discussion about starting at 62 but investing the proceeds until 70 and then using that nest egg to supplement SS after 70. Sounds like that might provide some longevity insurance but assures that the money is not lost if you die early. In any event, assuming tax implication are the same, if you already plan to wait until after 62 to pull SS it sounds like taking the SS, investing the proceeds, and evaluating whether to reapply or just keep the money is the most sensible way to go.

 

[walkinwood]

....t seems to me, and I admit not being a financial expert, that you'd really have to compare money gained from SS by holding off until 70 against money lost by spending money from your savings that would otherwise grow(well hopefully).... .

Metabasalt, the authors do address this in the article. They also show that the advantage of waiting to collect SS is dependent on the size of your household assets. The larger the assets, the less the advantage of waiting to collect SS.

In the article, refer to Fig 1 and the text immediately below it.

 

[ziggy29]

There's also political risk -- the risk that the longer you wait, the more likely future reforms will negatively impact you. I think it's likely that future SS reform that makes it a worse deal will not affect people already in the program, so to me personally that would be a factor in taking it ASAP -- I'd more likely be grandfathered out of a worse deal.

Also, higher payouts at 70 could combine with RMDs at 70.5 to make 85% of SS income taxable instead of 50% or even not at all.

 

[molly]

FUTURE TAXES! That is the issue that never seems to be addressed in these calculations. There is no doubt that Congress will be on the hunt for new tax revenue in the future. While I believe that they will leave SS in place as is ---- for those now over 55, that isn't the whole story.

I think that SS is going to be more heavily taxed as time rolls on --- sooner rather than later. As the tax rates rise, so will the rates on 401K withdrawals and larger SS payments. If a person has a DB to go along with all this, they can depend that what they have currently planned for tax rates will be a myth in the future.

If you had a crystal ball - would you be better off sheltering all your 401k/IRA funds and hoping that they grow a bit faster than tax rates and taking SS early at the current tax rate- while letting your investments grow?

Note: People who delayed SS have already fallen into higher medicare rates than those who filed early.

I believe that taxes are going to have a huge impact on total retirement funds. If you wait until 70 to collect SS --- will you have lost all the benefit of "waiting" only to give those funds back to the government in taxes?

 

[Animorph]

The article is using very low discount rates for their present value calculations. They are assuming you would invest in inflation-linked Treasury bonds in the simple case. They are assuming a 5% rate of return with 3% inflation (I'm pretty sure they mean a 2% real return in this case) for the Figure 1 chart in walkinwood's post.

If you assume a higher investment return the results would tilt toward taking SS earlier. I use a 6% real rate of return in my baseline calculations and always show a slight increase in income by taking SS as early as possible. On the other hand, it is not a gigantic difference. I'll probably still delay my SS for a little longevity insurance, given I'm in good health.

 

[youbet]

I haven't read any discussion about starting at 62 but investing the proceeds until 70 and then using that nest egg to supplement SS after 70. Sounds like that might provide some longevity insurance but assures that the money is not lost if you die early. In any event, assuming tax implication are the same, if you already plan to wait until after 62 to pull SS it sounds like taking the SS, investing the proceeds, and evaluating whether to reapply or just keep the money is the most sensible way to go.

That's what I'm doing here, but primarily for a different reason.

We are in the small group where one spouse (DW in our case) cannot collect the other's SS as survivor due to the GPO. To protect her, I started SS at 62 and reduced portfolio withdrawals by the same amount. If I die first, and before the PV breakeven age, she will be left with a larger portfolio than had I decided to delay SS and continue the larger portfolio withdrawals.

For folks like us, married but one spouse cannot collect the other's SS as a survivor, collecting early seemed to be the only way to protect the non-SS spouse. I'd appreciate comments from others if I've overlooked another avenue.

If DW was to die or to contract a terminal illness before I'm 70, I'll consider paying back SS and restarting higher payments as longevity insurance for myself. But as long as she's likely to outlive me, I'm collecting SS and setting it aside for her.

 

[metabasalt]

Metabasalt, the authors do address this in the article. They also show that the advantage of waiting to collect SS is dependent on the size of your household assets. The larger the assets, the less the advantage of waiting to collect SS.

In the article, refer to Fig 1 and the text immediately below it.

Thanks walkinwood, I'll missed that and will take a closer look.

 

[donheff]

That's what I'm doing here, but primarily for a different reason.

We are in the small group where one spouse (DW in our case) cannot collect the other's SS as survivor due to the GPO. To protect her, I started SS at 62 and reduced portfolio withdrawals by the same amount. If I die first, and before the PV breakeven age, she will be left with a larger portfolio than had I decided to delay SS and continue the larger portfolio withdrawals.

We are in a similar situation. I have a Federal pension with a survivor annuity but I don't qualify for survivor coverage under DW's SS so the same considerations apply.

 

[chinaco]

We are planning that DW takes SS at 62, and I will take mine at 66.x or 70. But we will probably review our situation each year and determine if we need to alter the plan.

As far as govt changes go, it is anybody's guess?? But I suspect they would not take the approach of reducing anyone's SS payment directly (political suicide). They will increase taxes and get the money based on income level and number of dependents (including SS).

 

[mickeyd]

Assuming that health is not an issue, it is not with me, my SS strategy has always been to delay SS until I need the income stream to live my life as I wish to live it or age 70, whichever comes first. I can not see beginning the cash flow just so I can stick the cash into my MMF and get 0.01% Yield.

 

[donheff]

Assuming that health is not an issue, it is not with me, my SS strategy has always been to delay SS until I need the income stream to live my life as I wish to live it or age 70, whichever comes first. I can not see beginning the cash flow just so I can stick the cash into my MMF and get 0.01% Yield.

.01% yield would still let you buy back the higher SS payment at 70 and if you died in the meantime your heirs could keep the money. Sounds like a win/win for you without question.

 

[chinaco]

I think there are three key questions:

1. Can you wait (do you have enough bridge assets to delay)
2. Do you want/need to mitigate longevity risk
3. Do you have a goal of trying to maximize your estate

In our situation, the answers are

1. Yes
2. Yes
3. No

BTW - other than normal prudent behavior... I do not understand the motivation for #3.... although I am sure some people can come up with good reasons. I always liked those bumper stickers on RVs that state: I am spending my kids' inheritance

 

[youbet]

I think there are three key questions:

1. Can you wait (do you have enough bridge assets to delay)
2. Do you want/need to mitigate longevity risk
3. Do you have a goal of trying to maximize your estate

In our situation, the answers are

1. Yes
2. Yes
3. No

BTW - other than normal prudent behavior... I do not understand the motivation for #3.... although I am sure some people can come up with good reasons. I always liked those bumper stickers on RVs that state: I am spending my kids' inheritance

I think you meant to say that those are the three key questions for you and your situation. But other people with different situations have different questions to consider, goals to target and missions to accomplish. For example, the situation that Don and I post about above regarding being married with one spouse having no SS and subject to the GPO provision.

 

[jdw_fire]

a few years ago the idea that delaying SS till the age of 70 could actually allow the retiree to spend more money between the ages of 62 and 70 while leaving his/her spending the same after age 70 was discussed here. here is a post i made showing an example proving that idea http://www.early-retirement.org/forums/f28/when-to-delay-pension-or-ss-27925-6.html#post471145

CFB and all who agree with him seem to me to not be understanding CT's example so let me try a different one, I’ll use CFB’s numbers.

The first thing I need to state is that CT example is looking at someone who is almost 62 yo making the decision to take SS at 62 or wait. So using CFB’s numbers the decision is between taking $2290/mo ($27480/yr) now or delay to 70 when the number would be 76% larger ($48365/yr using the same year dollars). Now let’s say this person needs the $48365/yr now for their retirement. If s/he takes SS at 62 s/he needs a portfolio to make up the difference of $20885/yr which by CT calculations would be 25 * $20885 = $522,125.

However if s/he retires at 62 but waits till 70 to start taking SS s/he can totally spend that $522,125 between now and age 70 because SS will cover his/her income needs at age 70. So how much can s/he spend per year between now and age 70? Try $522,125/8 = $65266/year! If we assume the $522,125 is invested in a tax deferred account that has a rate of return that just meets inflation, his/her yearly WD will even be inflation adjusted.

Now I think the point CT is making is that $65266 is much greater than $48365 and this fact has nothing to do with CT’s personal financial picture, it is always true.

BTW CT if this is not your point please let me know.

as i look back on this post i see that it is also possible to increase the inflation adjusted WD for the retiree's entire life instead of just for the years between the ages of 62 and 70 by delaying taking SS till the age of 70. in this example, if the retiree wanted a higher lifetime inflation adjusted WD instead of just for the years between 62 and 70 the WD would be $48365 + $5408 = $53773. i arrive at this by taking the $522125 portfolio and split it into 2 parts. part 1 provides the $48365 (inflation adjusted)/yr for the 8 years between 62 & 70 and is equal to $386,920. part 2 is $522,125 - $386,920 = $135,205 which is used to provide $5408/yr from age 62 till death based on the 4% rule. (btw, if a lower SWR is used thruout this analsys a larger increase will result). of course all of this analysis assumes no change in the way SS payments are calculated.