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SS options in firecalc
Old 02-15-2003, 06:33 PM   #1
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SS options in firecalc

Well, today I got my SS Statement with the future income of $0 assumption, as I had requested via the SS web site. I was looking at the options for early, normal, and late payouts, and they were:
Code:

  Age 62 - $1264 a month
  Age 66 - $1676 a month
  Age 70 - $2212 a month
Ok, it looks like it is set up so that if you live longer, waiting for age 66 or 70 is better. Kind of what I have heard. Now I have to see what the payback periods are for some assumptions, and also think of running the different scenerios in Firecalc. I did Firecalc first, but here I am writing up the FV calculations first.

Assuming no discount rate, no inflation, the payout for waiting to age 66 catches up with the age 62 payout at age 78. And waiting to age 70 catches up with the age 66 payout at age 82. Kind of what I expected.

Then adding 3% inflation, and a discount rate (i.e. investment return rate) of 6%, I see the point where waiting to age 66 instead of 62 pays back move out to 82. ok, still good. Also the age 70 vs. age 66 point moves out to age 86. So, if you live past 86, waiting to age 70 is better.

Now I am 50 and run retirement calculations for 50 years. So I wondered what rate of return would be needed to push the payback period out to age 100. It turns out (still with 3% inflation) that setting the discount rate at 9.7% moves the payback for waiting to age 66 vs 62 out to age 100. The 70 vs 66 comparison payback moves to age 100 with a 9.2% rate.

9+% is kind of high to use for a rate of return assumption, so it seems that waiting is better if I am being conservative and planning to age 100. Now for Firecalc data!

I used 60k/yr, 800k portfolio, 50 yrs, withdrawal change of -38400 non inflation adjusted in year 0 (to model a fixed pension), 80% stocks, and defaults for the rest. I then looked for the 95% point max safe withdrawal returned by Firecalc. With SS as below, here are the max withdrawals:
Code:

   $15168 in year 12 (1264/mo at 62): $62880
   $20112 in year 16 (1676/mo at 66): $61680
   $26500 in year 20 (2212/mo at 70): $60560
Not quite what I expected! Any insight on this out there? This seems to indicate that the earlier payout at age 62 is the best!

Wayne
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Re: SS options in firecalc
Old 02-16-2003, 03:13 AM   #2
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Re: SS options in firecalc

Quote:
...It turns out (still with 3% inflation) that setting the discount rate at 9.7% moves the payback for waiting to age 66 vs 62 out to age 100. * *The 70 vs 66 comparison payback moves to age 100 with a 9.2% rate.

9+% is kind of high to use for a rate of return assumption, so it seems that waiting is better if I am being conservative and planning to age 100. *Now for Firecalc data!

I used 60k/yr, 800k portfolio, 50 yrs, withdrawal change of -38400 non inflation adjusted in year 0 (to model a fixed pension), 80% stocks, and defaults for the rest. *I then looked for the 95% point max safe withdrawal *returned by Firecalc. With SS as below, here are the max withdrawals:
Code:

 * * $15168 in year 12 (1264/mo at 62): $62880
 * * $20112 in year 16 (1676/mo at 66): $61680
 * * $26500 in year 20 (2212/mo at 70): $60560
Not quite what I expected! *Any insight on this out there? This seems to indicate that the earlier payout at age 62 is the best!

Wayne
This is a good illustration of the difference between the safe withdrawal concept (i.e., FIRECalc) and approaches that assume a lifelong rate of return, interest rate, and so forth.

Volatility is the killer when you're drawing down a portfolio. A few bad years early in the retirement combined with your withdrawals will seriously drain the nest egg, while as many bad years late in the retirement won't even show up in the safe rate data -- because then you're only reducing the estate you're leaving.

Now that only happens once in a while. The whole concept behind the safe withdrawal rate research as described by Intercst and as implemented in FIRECalc is to see just how often in history such an occurrance might have happened, and what it would have meant to you. By looking at the 95% "safe" level, you sought a withdrawal that would not deplete the portfolio before you died in 95% of the hundred or so starting years since records were available, and would have depleted the nest egg in 5% of them.

Let's apply this to the Social Security age question. The sooner you start taking Social Security, the sooner you insulate part of your withdrawals from adverse impacts of volatility.

What you have seen is that, given your variables and your decision to look at the 95% "safe" point, adverse volatility in the early years would have occurred often enough to make the earlier Social Security withdrawals more attractive.

I hope this makes sense...

Dory36
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Re: SS options in firecalc
Old 02-16-2003, 03:57 AM   #3
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Re: SS options in firecalc

I really enjoyed playing with FIRECALC once I
tried it, much to my surprise. But, I didn't need it to convince
me to start drawing SS at 62. That was a
no-brainer. There are a whole lot of people
alive at this moment who will be gone by the end of the day, many of them younger than the good folks reading these words. So, it's okay to consider the financial
consequences of living to (insert your own number here). Just don't count on it.
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Re: SS options in firecalc
Old 02-16-2003, 06:43 AM   #4
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Re: SS options in firecalc

Social Security payouts are basically an "immediate annuity," but in the past have been better than private annuities in two important respects: (1) Payments have risen with inflation and (2) Payments have not been taxed as heavily.

The possibility of not living long enough to receive any Social Security benefits, much less to maximize those benefits, is an important argument for receiving benefits as soon as possible. Other considerations that favor this strategy are (1) the likelihood that Social Security benefits will not be increased as fast as overall inflation in the future, and (2) the possibility that Social Security benefits will be more heavily taxed in the future, especially for people who have substantial income from other sources. So I fully agree with the strategy for most retirees to withdraw their benefits as early as possible.
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Re: SS options in firecalc
Old 02-16-2003, 10:46 AM   #5
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Re: SS options in firecalc

I agree with the sentiment for early withdrawal. I had expected that the safe thing to do would be to defer payout, which would make more money overall available and allow higher safe withdrawals of other funds earlier.

However, as Dory points out, the reduced exposure to market volitility seems to be the controlling factor. In any case, the difference seems to be small enough to allow one to base the decision on other factors if they wish. I'm pleased to see that the 'safe' withdrawal strategy is also the early one...

Wayne
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