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Stupid(?) variation on the SS break-even point
Old 10-12-2011, 11:54 AM   #1
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Stupid(?) variation on the SS break-even point

I know this is a very well-worn topic, so bear with me.
If someone is considering delaying (beyond age 62) their Social Security, then by definition they don't need the money. So, why not take the money at age 62 and just bank the whole thing?
Even at today's low interest rates the funds will grow. Then, when the person hits whetever the target age is (e.g., 78 or whatever the official break-even age is), the person takes a monthly portion out of the banked SS checks to supplement the SS monthly check.
Is this how the break-even age is determined? or, would the person come out ahead doing this approach? Or have I made this more complicated -or simplistic - than it is?
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Old 10-12-2011, 12:05 PM   #2
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Quote:
Originally Posted by mystang52 View Post
I know this is a very well-worn topic, so bear with me.
If someone is considering delaying (beyond age 62) their Social Security, then by definition they don't need the money. So, why not take the money at age 62 and just bank the whole thing?
Even at today's low interest rates the funds will grow. Then, when the person hits whetever the target age is (e.g., 78 or whatever the official break-even age is), the person takes a monthly portion out of the banked SS checks to supplement the SS monthly check.
Is this how the break-even age is determined? or, would the person come out ahead doing this approach? Or have I made this more complicated -or simplistic - than it is?
Except for extra taxes on SS income, spousal benefits, and survivor benefits, the average Joe will come out the same. SS is designed to be actuarially equivalent no matter when you take it. This assumes that you have already put the full 35 years into the system of which they calculate benefits from.

- Your mileage may vary though.
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Old 10-12-2011, 12:07 PM   #3
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Depends on how much growth you assume for the saved SS dollars and how much inflation you get with it. Most break-even calcs I've seen seem to assume 0% growth and inflation, which is easy to calc but not realistic. On the other hand, anything else is just an estimate.
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Old 10-12-2011, 12:14 PM   #4
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Originally Posted by mystang52 View Post
I know this is a very well-worn topic, so bear with me.
If someone is considering delaying (beyond age 62) their Social Security, then by definition they don't need the money. So, why not take the money at age 62 and just bank the whole thing?
You can, if that is what you wish to do.

Some considerations:

1. You may have to pay FIT on your payments (depending on your situation), and it may bump you into another tax bracket, depending on your other income.

2. You need to invest in something (IMHO) "safe", to equal one of the benfits of SS. Something such as a MM (as an example) earns little, today.

3. If you delay FRA (age 66, for early boomers - as I am), you will get an 8% adjustment between the ages of 66-69 (four years), in addition to any COLA that is awarded during those years. I doubt if you could invest in a safe way to ensure such a return, in today's interest environment.

Just some things to think about. IMHO, claiming SS early or late is not only a financial computation, but also an emotional one.

As far as emotional? - my situation. I've chosen to delay my SS till age 70 for the benefit of my DW. OTOH, I'm not "giving it up" at all, since I'll be claiming 50% of her benefit (in just over two years) just for meeing two criteria - that is that I'm her spouse , and I'm able to financially delay my claim.

No situation is the same. You need to figure out what is best for you in your situation. If you wish to claim at age 62 and bank/invest the proceeds, great. However, that is not the only (or automatic) decision to make.

It all depends...
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Old 10-12-2011, 12:23 PM   #5
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Thanks, all. I just turned 59, plan to work 1 or at most 2 years and always presumed I'd take SS at 62. At least I have time to come to a decision that's right for me (incidentally, that "emotional" aspect is right on, and why I'm leaning to taking at age 62).
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Old 10-12-2011, 12:54 PM   #6
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I don't know how else to guarantee an ~8%/yr gain tax-free. Someone let me know if they do, please. If one has a job past age 62, why would one need it?
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Old 10-12-2011, 03:56 PM   #7
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It's not a "stupid variation" on the topic. It's a pretty common way to evaluate it....at least, pretty common among those who think about it a little deeper than most of the (naive, simplistic) comparisons. Maybe I should say it's a "dirty little secret", because it's probably mentioned in less than 1% of the magazine, newspaper, and online articles I've read about SS.

Here is my SS early-or-late spreadsheet
https://spreadsheets.google.com/ccc?...0d19pTnc&hl=en which will compute the break-even point of your "suppliment" method. Plug in your own assumptions of earnings rates.

The thing that drives me crazy about so many people commenting on this subject is that they completely ignore the time value of money. They talk about the fact that your monthly check will be larger if you wait until 70, but ignore those 8 years of no payments.
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Old 10-12-2011, 04:26 PM   #8
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I don't know how else to guarantee an ~8%/yr gain tax-free. Someone let me know if they do, please. If one has a job past age 62, why would one need it?
I used to think in those terms, but I've decided that's not quite correct. It's not like you have a savings account where you put in $100,000 and a year later you have $108,000. There's a MORTALITY component to that 8% since SSA will be paying you for exactly 12 fewer months if you delay a year.

And if you have a fun JOB past age 62, you're obviously not gunna start taking SS, so that's a separate issue...
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Old 10-12-2011, 04:50 PM   #9
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I used to think in those terms, but I've decided that's not quite correct. It's not like you have a savings account where you put in $100,000 and a year later you have $108,000. There's a MORTALITY component to that 8% since SSA will be paying you for exactly 12 fewer months if you delay a year.
Agree on the mortality thing, but if that comes into play you don't need it anyway. So I intend to ignore it as long as my/our health is good. Delay is better security against the upside of long-time survival.
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Old 10-12-2011, 04:52 PM   #10
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Delay is better security against the upside of long-time survival.
Better than what and in what circumstances?
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Old 10-12-2011, 04:55 PM   #11
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Agree on the mortality thing, but if that comes into play you don't need it anyway. So I intend to ignore it as long as my/our health is good. Delay is better security against the upside of long-time survival.
This is how I see it also. IMO, figuring out rate of return of waiting, breakeven periods, etc. are very good answers to the wrong question.

To me the only important challenge to waiting (other than known bad health) comes from political doubts, and that situation is hard to handicap.

Ha
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Old 10-12-2011, 05:02 PM   #12
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Originally Posted by gerntz
Agree on the mortality thing, but if that comes into play you don't need it anyway. So I intend to ignore it as long as my/our health is good. Delay is better security against the upside of long-time survival.
I certainly understand the logic and reason for delaying. But if everyone lived to their expected date of demise of around 90 as many seem to plan for, the SS system would definitely go broke! As I get older I tend to scan the local newspaper obituary. It is very surprising how many are in their 50's and 60's when they pass on.
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Old 10-12-2011, 05:17 PM   #13
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To me the only important challenge to waiting (other than known bad health) comers from political doubts, and that situation is hard to handicap.

Ha
Well...... There's also WEP and GPO. When one member of a married couple is affected by these, taking SS early has important merits for the non-SS spouse.
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Old 10-12-2011, 05:30 PM   #14
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Well...... There's also WEP and GPO. When one member of a married couple is affected by these, taking SS early has important merits for the non-SS spouse.
Yes; I am not familiar with these, though I have heard about them, but I forgot to mention them. Thanks for correcting the omission.

Ha
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Old 10-12-2011, 06:02 PM   #15
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I certainly understand the logic and reason for delaying. But if everyone lived to their expected date of demise of around 90 as many seem to plan for, the SS system would definitely go broke! As I get older I tend to scan the local newspaper obituary. It is very surprising how many are in their 50's and 60's when they pass on.
But as haha says, it is the answer to the wrong question.

Averages don't matter much to an individual on critical issues. An individual has to plan for the worst case, or at least the 'very bad case'.

An analogy - if it is absolutely crucial for you to be somewhere at 5:00, and the average travel time is one hour, do you leave at 4:00? No, you want to know what the extremes of travel time are - is traffic bad at that time, is there construction, what about an accident or other unpredictable variation? You plan worst case (within reason), not average, and probably pad that if you can.

Vanguard has a calculator, you can see your % chance of reaching a specific age. Much better info than average life expectancy (50%).

-ERD50
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Old 10-12-2011, 06:36 PM   #16
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Agree on the mortality thing, but if that comes into play you don't need it anyway. So I intend to ignore it as long as my/our health is good. Delay is better security against the upside of long-time survival.
The "mortality thing" does NOT mean the chances of passing away during the 12 months you postpone taking SS.
I'll give an over-simplified example. Let's say the SSA has $500,000 with your name on it that they intend to parcel out to you month by month until your death at age 82.
So that's a 20-year payout if you start at age 62.
But if you delay a year, then the SSA has only 19 years to pay all that cash to you before you croak, so they up the amount by some percentage...
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Old 10-14-2011, 10:16 AM   #17
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Now I'm confused about SS again! I'm just recently turned 62, still working, but not full time beginning Jan 1. We have adequate income to maintain our present life style, with no work income, for another 7+ years; we have a well collateralized quarterly payment from something we sold and rent. The dangers are the commercial tentant could walk or the payments could stop, but those aren't very likely. SS gets taxed, I think, based on earned and unearned income, so we would exceed whatever those limits are with unearned income for the next 7 years at least. Since my wife is 5 years younger and likely to live for a long time, I have thought it would be wise to postpone SS, although I know it will likely be too tempting to have free money before I get to 70.

Now I have to re-think a bit. It would still be imprudent, I think, to take while earning any income, but after that I'm going to look at as an annuity for the life of the last of us to die. I think we need to look at whether the extra 8% per year is a better deal than taking 8% (or 16% or 24%) lower payments as opposed to getting the money earlier and investing the principal. Or spending it. Much to think about, which is good, because work isn't any fun today.
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Old 10-14-2011, 01:57 PM   #18
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Hmmm, if you are still working, it probably doesn't make sense to take SS early. IIRC, you'll get a reduced amount (if you earn more than $X) & extra income tax, plus you'll also be paying FICA.

I think all these discussions assume the "retired early" bit.
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