Stern Advice: New services help boomers max out Social Security

[growing_older]

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Originally Posted by pb4uski While I agree that SS is insurance, the decision whether to take at 62, FRA or 70 is more similar to an investment decision - what matters is expected present value of the cash flows of each alternative decision.

I don't think this is a fully accurate way to look at the question. If you had a large community of potential recipients, and they all planned to share whatever they received, then perhaps this analysis would make sense, but most people are not in that situation. Even those who plan to leave some legacy generally do not value money they intend to leave behind equally to money they plan to use for themselves.

For me, the key consideration is the cost/benefit analysis of the various scenarios. For example, if I take my SS early, but then I die early, I have a small benefit of receiving at least something, but it is very small since I had more than enough money saved in anticipation of a long retirement that didn't happen. If I plan to take my SS late but I end up dying early, then I have a small loss of not getting as much SS, but since I had enough to live on from my savings and am dead, I don't miss the loss. If I take my SS early and end up living a long long time, then I have put myself in a position where I could run low of funds and my SS is less than it could have been. Potentially a large cost. If I take my SS late and I end up living a long long time, then I am getting the max benefit that I could in the situation where I might need the max benefit, potentially a large advantage.

What this tells me is that I avoid a large cost and gain a large advantage in the scenarios where I take SS late. In the scenarios where I take SS early I risk incurring the large cost and have potential for a small gain, but the only benefit of that (small) gain is to heirs since I have to die to get it. Consideration of each specific scenario and cost/benefit of each matters because I care more about results when I am living than I do about results where I am dead. The absolute size of the dollars received is outweighed by the utility of those dollars in each of the scenarios.

[rescueme]

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Originally Posted by growing_older (snip)...I care more about results when I am living than I do about results where I am dead.

+1

For me/DW, that's the most important artifact of the decision on when to file, with our personal situation.

[pb4uski]

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Originally Posted by Khufu Not correct. What matters is can you afford to take the risk? That's why it remains an insurance question like, "Can I afford to replace my house if it burns down and I don't have fire insurance?" It's always cheaper not to buy insurance at least in the short term, but if you cannot afford to self-insure (and most retirees cannot) then it is not a prudent decision. ......

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Originally Posted by growing_older I don't think this is a fully accurate way to look at the question. ......

I suppose we'll just agree to disagree.

BTW, I plan to take SS at age 70 since there is longevity in my family. As a result of that longevity, taking SS at age 70 results in the highest expected present value for me (compared to taking SS at 62 or FRA). If my health was poor or my family longevity was poor, I would take SS earlier because that would have a higher expected present value than taking SS at 70.

[growing_older]

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If my health was poor or my family longevity was poor, I would take SS earlier

Agreement!

[pb4uski]

Just curious - why did you leave the

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because that would have a higher expected present value than taking SS at 70

off?

[Huston55]

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Originally Posted by growing_older I don't think this is a fully accurate way to look at the question. If you had a large community of potential recipients, and they all planned to share whatever they received, then perhaps this analysis would make sense, but most people are not in that situation. Even those who plan to leave some legacy generally do not value money they intend to leave behind equally to money they plan to use for themselves. For me, the key consideration is the cost/benefit analysis of the various scenarios. For example, if I take my SS early, but then I die early, I have a small benefit of receiving at least something, but it is very small since I had more than enough money saved in anticipation of a long retirement that didn't happen. If I plan to take my SS late but I end up dying early, then I have a small loss of not getting as much SS, but since I had enough to live on from my savings and am dead, I don't miss the loss. If I take my SS early and end up living a long long time, then I have put myself in a position where I could run low of funds and my SS is less than it could have been. Potentially a large cost. If I take my SS late and I end up living a long long time, then I am getting the max benefit that I could in the situation where I might need the max benefit, potentially a large advantage. What this tells me is that I avoid a large cost and gain a large advantage in the scenarios where I take SS late. In the scenarios where I take SS early I risk incurring the large cost and have potential for a small gain, but the only benefit of that (small) gain is to heirs since I have to die to get it. Consideration of each specific scenario and cost/benefit of each matters because I care more about results when I am living than I do about results where I am dead. The absolute size of the dollars received is outweighed by the utility of those dollars in each of the scenarios.

This is very well put, and the first time I've seen the argument structured this way. The relative value of each scenario to the individual (or couple) is what should guide the choice.

[youbet]

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Originally Posted by mathjak107 the truth is like any insurance if you have a choice the only couples that should take it early are those that can really self-insure in case one of them beats methuslas record. .

That's definitely not true. Couples where one is impacted by WEP likely will be better off (have more protection for a surviving, non SS, spouse) by having the SS spouse begin payments at 62.

Bold in quote is mine.

[youbet]

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Originally Posted by pb4uski I suppose we'll just agree to disagree. BTW, I plan to take SS at age 70 since there is longevity in my family. As a result of that longevity, taking SS at age 70 results in the highest expected present value for me (compared to taking SS at 62 or FRA). If my health was poor or my family longevity was poor, I would take SS earlier because that would have a higher expected present value than taking SS at 70.

pb4uski....

I understand how to calculate the present value of the cash flow from the 62 SS and the 70 SS. But, how are you calculating the present value of the investment and investment return obtained by collecting SS at 62 and investing it monthly for the years 62 to 70? What assumptions do you make about those investments and returns?

That seems to be the unknown. What is the value, in today's dollars, of the 8 yrs of SS payments collected and invested as they are paid until you are 70. Depending on the assumptions I make regarding investment returns, inflation and taxes over the 8 yr period, I can make either an age 62 start or an age 70 start look better for a single. Of course for a couple, not impacted by WEP, it becomes even more complicated.

[pb4uski]

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Originally Posted by youbet pb4uski.... I understand how to calculate the present value of the cash flow from the 62 SS and the 70 SS. But, how are you calculating the present value of the investment and investment return obtained by collecting SS at 62 and investing it monthly for the years 62 to 70? What assumptions do you make about those investments and returns? That seems to be the unknown. What is the value, in today's dollars, of the 8 yrs of SS payments collected and invested as they are paid until you are 70. Depending on the assumptions I make regarding investment returns, inflation and taxes over the 8 yr period, I can make either an age 62 start or an age 70 start look better for a single. Of course for a couple, not impacted by WEP, it becomes even more complicated.

From what you describe, you are calculating future values (from 62 or FRA or 70 to some future age greater than 70) rather than present value which is the inverse (from some future age back to 62 for all alternatives).

In my case, the PV at age 62 is about the same for starting SS at 62, FRA or 70 if I live to be 87 - so if I live until I am 87 it doesn't matter what age I begin SS - they are all economically equivalent. If I live past 87 then starting SS at age 70 is best. If I die before age 87 then starting SS at age 62 is best. Mom is 82 and still going strong despite smoking and drinking, Dad passed at 75 but Gram lived to be 99 and I am currently in very good health so at this point I am leaning towards waiting until age 70 (but since I'm only 57 now I still have about 5 years to make up my mind).

[Khufu]

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Originally Posted by pb4uski I suppose we'll just agree to disagree. BTW, I plan to take SS at age 70 since there is longevity in my family. As a result of that longevity, taking SS at age 70 results in the highest expected present value for me (compared to taking SS at 62 or FRA). If my health was poor or my family longevity was poor, I would take SS earlier because that would have a higher expected present value than taking SS at 70.

This is what is known as "assuming away the problem." You are making an assumption that you will live a long time from which it follows as a matter of arithmetic that you will come out ahead by delaying SS. Despite the longevity in your family (which is probably only 30% heritable) you don't know what your life span will be. You could certainly die at or before age 69 and end up collecting nothing from the SSA. The beauty of viewing the problem from the insurance perspective is that you don't have to start making bets on probabilities which in fact you can't know even if you can make a guess that sounds plausible to yourself. From the insurance point of view you get an immediate benefit by delaying even if you do die young: you are relieved of the obligation of saving to provide for the chance that you will live very long. So, you can increase your consumption at least somewhat because the back end is covered.

So, I don't agree with your reasoning at all. I think you misunderstand the essential aspect of the problem, but since we both intend to delay until 70 we do agree, let us say, "operationally."

[youbet]

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Originally Posted by pb4uski From what you describe, you are calculating future values (from 62 or FRA or 70 to some future age greater than 70) rather than present value which is the inverse (from some future age back to 62 for all alternatives). In my case, the PV at age 62 is about the same for starting SS at 62, FRA or 70 if I live to be 87 - so if I live until I am 87 it doesn't matter what age I begin SS - they are all economically equivalent. If I live past 87 then starting SS at age 70 is best. If I die before age 87 then starting SS at age 62 is best. Mom is 82 and still going strong despite smoking and drinking, Dad passed at 75 but Gram lived to be 99 and I am currently in very good health so at this point I am leaning towards waiting until age 70 (but since I'm only 57 now I still have about 5 years to make up my mind).

How do you handle the value of the investment returns on the 8 yrs of SS payments between 62 and 70? What do you assume the ROR's are?

[pb4uski]

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Originally Posted by youbet How do you handle the value of the investment returns on the 8 yrs of SS payments between 62 and 70? What do you assume the ROR's are?

The investment returns are implicit in the discount rate. I use the same real rate of return on investments that I use for my other retirement planning projections. Since I have sufficient retirement savings to fund my lifestyle whether I take SS at 62 or FRA or 70, my lifestyle, activities and living expenses will be no different if I take SS at 62 or FRA or 70 - which is why it is solely a cash flow optimization exercise for me and is not insurance. However, if I take SS later I will be drawing from my investments more and the discount rate takes into account the time value of money.

BTW, on the prior post I erroneously used the nominal rate of return assumption. Since SS payments increase with inflation I should have used real rate of return assumptions. This moves the crossover age from 87 to 82 1/2.

[pb4uski]

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Originally Posted by Khufu This is what is known as "assuming away the problem." You are making an assumption that you will live a long time from which it follows as a matter of arithmetic that you will come out ahead by delaying SS. Despite the longevity in your family (which is probably only 30% heritable) you don't know what your life span will be. You could certainly die at or before age 69 and end up collecting nothing from the SSA. The beauty of viewing the problem from the insurance perspective is that you don't have to start making bets on probabilities which in fact you can't know even if you can make a guess that sounds plausible to yourself. From the insurance point of view you get an immediate benefit by delaying even if you do die young: you are relieved of the obligation of saving to provide for the chance that you will live very long. So, you can increase your consumption at least somewhat because the back end is covered. So, I don't agree with your reasoning at all. I think you misunderstand the essential aspect of the problem, but since we both intend to delay until 70 we do agree, let us say, "operationally."

(emphasis added)

Actually, I don't give a flying damn whether you agree or not.

I don't view it as insurance because I have more than sufficient assets to fund my lifestyle whether I take SS at 62 or FRA or 70, so for me it is just a cash flow optimization exercise. Also, since I'm married, it is really our joint longevity that applies so the probability of our joint survival to 82 1/2 is pretty high given the longevity in my and DW's families. If I do a what-if analysis in Quicken Lifetime Planner of SS at 62 vs 70 with all other assumptions the same the remaining nesteggs are different but not hugely so - so I'm making an educated guess and playing the odds.

But even if I do view it as insurance waiting until 70 is still optimal for me. I looked at the price of a joint life SPIA with a monthly payment equal to my projected SS payments starting at ages 62, 66 (about my FRA) and 70 and then PV'd each single premium amount to age 62 (using 4%) to try to estimate the premium for a deferred SPIA beginning at ages 62, 66 or 70. Age 70 had the highest premium payment at age 62, suggesting that the annuity cash flows were most valuable for beginning at age 70. This approach would add mortality to time value and would approximate an expected present value.

[Brett_Cameron]

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Originally Posted by pb4uski The investment returns are implicit in the discount rate. I use the same real rate of return on investments that I use for my other retirement planning projections. Since I have sufficient retirement savings to fund my lifestyle whether I take SS at 62 or FRA or 70, my lifestyle, activities and living expenses will be no different if I take SS at 62 or FRA or 70 - which is why it is solely a cash flow optimization exercise for me and is not insurance. However, if I take SS later I will be drawing from my investments more and the discount rate takes into account the time value of money. BTW, on the prior post I erroneously used the nominal rate of return assumption. Since SS payments increase with inflation I should have used real rate of return assumptions. This moves the crossover age from 87 to 82 1/2.

Exactly my situation even to the crossover age.

[Finance Dave]

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Originally Posted by pb4uski I suppose we'll just agree to disagree. BTW, I plan to take SS at age 70 since there is longevity in my family. As a result of that longevity, taking SS at age 70 results in the highest expected present value for me (compared to taking SS at 62 or FRA). If my health was poor or my family longevity was poor, I would take SS earlier because that would have a higher expected present value than taking SS at 70.

I tend to look at this more like you, but at the same time I fully understand that others have different circumstances that may make them choose a different approach.

[dtbach]

I've done the work once and don't plan on doing it again. Just make up your mind and do it. My parents are both in their 90's so it's a no brainer for me to take at 70 and have my wife take mine at 65 until I turn 70.

Part of it is financial. We have plenty to pull on before I turn 70 so that makes the math pretty simple. Plus just in case I check out early, my DW is in better shape.

[Khufu]

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Originally Posted by pb4uski (emphasis added) Actually, I don't give a flying damn whether you agree or not. I don't view it as insurance because I have more than sufficient assets to fund my lifestyle whether I take SS at 62 or FRA or 70, so for me it is just a cash flow optimization exercise. Also, since I'm married, it is really our joint longevity that applies so the probability of our joint survival to 82 1/2 is pretty high given the longevity in my and DW's families. If I do a what-if analysis in Quicken Lifetime Planner of SS at 62 vs 70 with all other assumptions the same the remaining nesteggs are different but not hugely so - so I'm making an educated guess and playing the odds. But even if I do view it as insurance waiting until 70 is still optimal for me. I looked at the price of a joint life SPIA with a monthly payment equal to my projected SS payments starting at ages 62, 66 (about my FRA) and 70 and then PV'd each single premium amount to age 62 (using 4%) to try to estimate the premium for a deferred SPIA beginning at ages 62, 66 or 70. Age 70 had the highest premium payment at age 62, suggesting that the annuity cash flows were most valuable for beginning at age 70. This approach would add mortality to time value and would approximate an expected present value.

Now, now. No need to get huffy just because someone disagrees with you.

If you can self-fund your old age without the SS DRCs, why didn't you say so in the first place? In that case you don't need the insurance and you might well view it as an investment. However, SS is still an insurance program whether you need it or not. Since many people who cannot afford to self-insure old age costs are confused on that point, it would seem to be isservice to them not to make your special circumstances clear.

[pb4uski]

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Originally Posted by Khufu Now, now. No need to get huffy just because someone disagrees with you. If you can self-fund your old age without the SS DRCs, why didn't you say so in the first place? In that case you don't need the insurance and you might well view it as an investment. However, SS is still an insurance program whether you need it or not. Since many people who cannot afford to self-insure old age costs are confused on that point, it would seem to be isservice to them not to make your special circumstances clear.

I didn't object to your disagreeing with me - I objected to your rude insistence that you were right and I was wrong even after I suggested that we could agree to disagree.

On the second part, fair enough, but I don't think my situation is all that unusual of posters on these boards - my guess is that for many posters that portfolio survival is very high whether they take SS at 62 or FRA or 70 given their LBYM lifestyle - this seems to be a pretty conservative bunch to me.

[Tekward]

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Originally Posted by gerntz Just went to local SS office earlier in week to discuss options. DW is 65.5 & will start to take her benefits (well lower than mine) for Dec this year (Actually comes in Jan so counts as 2013 income) . Meanwhile, when I hit FRA (after her), I'll start taking spousal benefits from her (Was told I can't do earlier b/c my own benefit is larger) till I decide to take my benefit. Right now my plan is to wait till 70, but that could change. She'll then switch over to 1/2 my FRA which is aobut $100 more than her benefit.

That is different from the advice from the free AARP web site in the OP. My wife's benefits are also well lower then mine. It suggests:
1. When you are 68 and 7 months (2026), apply for Social Security benefits and then request to have payments suspended.
2. When your wife is 66 and 10 months (2026), she applies for spousal benefit, which provides about $XXX per month.
3. When you are 70 (2027), resume your own Social Security benefits, which provide about $YYY per month.

Disclaimers:
Yes, the AARP advice is worth every penny.
Yes, it is a simplification.

[Tekward]

From the SS.gov site:
If you have reached full retirement age, but are not yet age 70, you can ask us to suspend retirement benefit payments.

• If you apply for benefits and we have not yet made a determination that you are entitled, you may voluntarily suspend benefits for any month for which you have not received a payment. Your request to suspend benefits may include any retroactive benefits that might be due.
• If you and your current spouse are full retirement age, one of you can apply for retirement benefits now and have the payments suspended, while the other applies only for spouse’s benefits. This strategy allows both of you to delay receiving retirement benefits on your own records so you can get delayed retirement credits.