Tapping IRA to Postpone Social Security

[Independent]

There are good reasons for starting early and good reasons for deferring.

For most people, it's a close enough call that I'd say there is no "wrong" decision.

The only thing that bothers me is people, who have substantial assets, who think they can spend more money in the early years of retirement by starting SS sooner. That isn't true if you look at the numbers. It may be the right decision from an emotional perspective, but people need to call it what it is.

FTR, we started at 66 and 70 because the numbers say we have a slightly better chance of not running out of money this way. The survivor benefit is part of the numbers thing.

 

[samclem]

Nicely put. Either path can work out depending on personal circumstances and financial returns over the years involved. The important thing is to NOT assume you'll necessarily get "average" results from the decision you make.

This is my view. And also that it is useful to ask/answer the right question. For me (and, I think, most people), the "right" question is not "Which approach will likely give us the most absolute cumulative payout over our expected remaining life?" This is the question that most people seem to ask. The more important question is "Which approach maximizes the likeliness of greatest financial well being (or "has the greatest expected financial utility")?


Some possibilities:
1) DW and I both die earlier than average: For us, no significant difference between taking SS early or late. Heirs/charities get a lot of dough.

2) DW and I both live a long time and our investment returns are at/above expectations: For us, no significant difference in taking SS early or late. Each additional dollar of additional monthly "take" has relatively low utility (because we've got a lot of them).
3) DW or I live a long time and have poor investment results or unavoidable high expenses (medical, LTC, etc). The guaranteed, inflation-adjusted, can't-outlive-it attributes of our monthly SS check(s) will be very important. Every dollar of monthly income will have high utility (it's not "should we visit the Alps or go to the Riviera this year?" It's "can we afford to turn the thermostat up to 68 degrees this winter?). In this case, we'll be glad we waited to take SS in order to get that higher check.

For us, the "utility argument" appears to favor waiting to age 70 start our SS.

 

[braumeister]

One constant I see running through all these discussions is that everyone, no matter what they decide, believes they made the best choice.

 

[Chapter 3]

Yep, individual choice. I'm in the take it early camp to enjoy during what will likely be my more active years. Having it will psychologically help me to loosen the spending a little for nicer travel and other experiences during those years. I don't see it changing my situation later since I don't really NEED it anyway.

 

[Perryinva]

It also depends a lot on how the SS amount compares to your total income. SS of $1000/mo is not significant to someone with $20k/mo income. File early or late makes little to no difference. $2100/mo vs $3800/mo when your desired income is $10k/mo is quite a significant change, so choosing when is more important. All I can say is for me, no sooner than FRA, because of DW. After that, it will be a year by year evaluation.

 

[youbet]

For us, the "utility argument" appears to favor waiting to age 70 start our SS.

Yep, that sounds right........ for you and your circumstances.

For us, starting my SS at 62 was the clear choice and has worked out very well. DW cannot collect on my SS as a spousal benefit or as a survivor benefit due to GPO. If I delayed SS beyond 62 and died before I started to collect, neither of us would have ever collected a penny. And, importantly, I would have provided nothing from SS for DW to live on after my death.

By starting SS at 62 and investing 100% of the monthly checks into a TSM fund I provided a additional source of revenue for her should I predecease her. As it turns out, I'm alive at 71 and since the investment climate was so wonderful these past years, the "SS pot" has grown to where I'm actually money ahead. That is, my age 62 SS + a prudent WR from the accumulated SS pot exceeds what my age 70 SS would have been. Of course, you can't count on this happening since the Investment climate might have turned out to be crappy instead of wonderful.

So, starting SS at 62 provided the greatest utility for us. All these circumstances come into play.......

 

[youbet]

One constant I see running through all these discussions is that everyone, no matter what they decide, believes they made the best choice.

Well, they believe they made the correct choice given their individual circumstances. If I was single or if DW was not impacted by GPO, I'd likely have waited until FRA or maybe 70. But with DW impacted by GPO and with my desire to protect her as much as possible if I predecease her, going ahead and starting at 62 was clearly the answer. After that, thanks to luck and Mr. Market, it's turned out to not have been a financial negative.

 

[youbet]

The only thing that bothers me is people, who have substantial assets, who think they can spend more money in the early years of retirement by starting SS sooner. That isn't true if you look at the numbers. It may be the right decision from an emotional perspective, but people need to call it what it is.

.

Folks probably mean they'll feel comfortable spending more money if they start SS early despite a natural tendency to under-spend due to decades of frugal, LBYM living. It's an issue for many.

We hear the same arguments in regard to paying off the mortgage. People just "feel better" or "sleep better at night" or "etc." when in fact there might not be any financial advantage paying off a low interest loan early.

For many, including DW and I, the timing of paying off the mortgage or of starting SS really weren't all that critical in the overall survival of our ER. We paid off the mortgage when I got tired of writing the monthly check and I started SS early to protect GPO-burdened DW in the case I predecease her. There was no significant financial impact.

 

[sengsational]

This question comes up a lot and, like many "serial responders" to it, I usually say the same thing: i-orp. Not because it's perfect, but because, if you take your time with it, understand the inputs and the outputs, and change the inputs to see what happens, you can learn a lot. Usually it's about limiting Roth conversions, but it can also be about when to take SS. You've got things you CAN control, like when to take SS, how much to Roth convert, and there's things you CAN'T control, like when you die and when your spouse dies, whether SS will be fully funded, whether income tax will change, etc. The point is, if you're patient, you can use i-orp to get a feel for how these decisions and non-controlled eventualities can affect your life. The most interesting revelation about SS that I came up with is that if the market has it's historical return and at my proposed asset allocation, I can spend more every year for the "duration of the plan" if I take SS now. The surprising thing to me was that I'd end up taking less out of SS (if I lived long enough), AND I'd pay more income tax, but I'd have more to spend! So less of a burden on the treasury AND more money for me to spend. The idea of getting the most out of SS is the wrong goal if, by maximizing SS, you have less to spend.

 

[pb4uski]

Here's my thinking. The increase of deferring SS is less than my portfolio makes (https://www.ssa.gov/OACT/ProgData/ar_drc.html). Why use my tIRA when I can use the house's money and let mine accrue at a greater rate? Additionally, my tIRA withdrawals are 100% taxed as ordinary income whereas SS is taxed max at 85%.

Looking at the annual increase in benefits.... IIRC about ~6.25%+/- a year from 62 to FRA and 8% a year from FRA to 70... compared to portfolio return is a crazy way to look at it IMO.

Since benefits increase each year for both deferral and for inflation (benefits are COLA adjusted).... then you should be comparing real portfolio rates to the annual increase in benefits.

Where can you get a real return of ~6.25%+/- or 8%? Assuming only 2% for inflation, that is an AVERAGE nominal portfolio return of ~8.25%+/- to 10%!

 

[Lawrencewendall]

Looking at the annual increase in benefits.... IIRC about ~6.25%+/- a year from 62 to FRA and 8% a year from FRA to 70... compared to portfolio return is a crazy way to look at it IMO.

Since benefits increase each year for both deferral and for inflation (benefits are COLA adjusted).... then you should be comparing real portfolio rates to the annual increase in benefits.

Where can you get a real return of ~6.25%+/- or 8%? Assuming only 2% for inflation, that is an AVERAGE nominal portfolio return of ~8.25%+/- to 10%!

Small and Midcap index fund average annual return since 1990 is 11%. Increase by deferring SS is 5% for 62, 63 and 64, 6 3/8 for 65 and 66.

 

[pb4uski]

If your portfolio is 100% in small and mid-cap stocks then when to take social security is probably the least of your problems.

Good cherry picking though.

 

[googily]

As for the "playing with house money" notion, some of us are "lucky" enough to do both. I'll be taking my survivor benefit at 60 (house money!) while letting my own percolate until 70 (or whatever they've upped it to by the time I get there).

Um, yay?

 

[jimandthom]

Yep, that sounds right........ for you and your circumstances.

For us, starting my SS at 62 was the clear choice and has worked out very well. DW cannot collect on my SS as a spousal benefit or as a survivor benefit due to GPO. If I delayed SS beyond 62 and died before I started to collect, neither of us would have ever collected a penny. And, importantly, I would have provided nothing from SS for DW to live on after my death.

By starting SS at 62 and investing 100% of the monthly checks into a TSM fund I provided a additional source of revenue for her should I predecease her. As it turns out, I'm alive at 71 and since the investment climate was so wonderful these past years, the "SS pot" has grown to where I'm actually money ahead. That is, my age 62 SS + a prudent WR from the accumulated SS pot exceeds what my age 70 SS would have been. Of course, you can't count on this happening since the Investment climate might have turned out to be crappy instead of wonderful.

So, starting SS at 62 provided the greatest utility for us. All these circumstances come into play.......

This post has really hit home as recently(bit over 1 year) I have been battling a chronic illness.

Same circumstances as you mention. Really thinking about collecting now at 65 rather than waiting until 66. But was not going to go past 66 in any case.

CSRS + SS +private pension = 90% + of our spending. Even early the Firecalc % is still 100%. I can defer my private pension until 70 and spouse can collect that.

65 in May------ gonna give it some more thought

 

[LRDave]

Well, they believe they made the correct choice given their individual circumstances. If I was single or if DW was not impacted by GPO, I'd likely have waited until FRA or maybe 70. But with DW impacted by GPO and with my desire to protect her as much as possible if I predecease her, going ahead and starting at 62 was clearly the answer. After that, thanks to luck and Mr. Market, it's turned out to not have been a financial negative.

DW's SS is whacked by WEP & GPO, as with Youbet. I don't even think it's marginal or a toss-up - I'd be a dummy to defer, if my driving interest is to protect her as best I can.

 

[Perryinva]

Those are great points, illustrating how varied the circumstances are to make smart choices. Just one thing: the increases in SS per year can not be compared to a ROI, since by delaying, one is passing up on current payments. The only real ROI is the difference between the early collected amounts + earnings and the delayed amounts over time, including tax benefits. Delaying SS is directly comparable to purchasing a very desirable and excellently priced tax preferred and COLA annuity. Just like some people want the assurance of an annuity and others wouldn’t touch one with a 10 ft pole, there are very legitimate reasons for any selection.

And not everyone is happy with their SS filing date. Both my parents filed at 62, and while my mother was happy with her choice because she knew her chain smoking had caught up to her by that age. (She died from COPD complications at 69.), DF is still alive at 80, and wishes he had delayed filing, which he could have, at the time, at least until age 66. He is a non investor and sticks his unused income in a savings account.l, for “later”. Nothing I say or do will convince him otherwise, except I did get him to buy some CDs. It’s looking more and more like he will need some kind of assisted living arrangement and his $1400 SS check & $500k savings may not get him the kind he wants. Its the income that matters, more than the nest egg, if it is too small or ill invested to to generate adequate income. He actually says he was so sure he would never make it to 80, and now that he is there, its “not as old as I thought it would be”. His parents, no icons of health or smart living, lived to 92 & 94.

 

[joeea]

DF is still alive at 80, and wishes he had delayed filing, which he could have, at the time, at least until age 66. He is a non investor and sticks his unused income in a savings account.l, for “later”. Nothing I say or do will convince him otherwise, except I did get him to buy some CDs. It’s looking more and more like he will need some kind of assisted living arrangement and his $1400 SS check & $500k savings may not get him the kind he wants. Its the income that matters, more than the nest egg, if it is too small or ill invested to to generate adequate income. He actually says he was so sure he would never make it to 80, and now that he is there, its “not as old as I thought it would be”. His parents, no icons of health or smart living, lived to 92 & 94.

How sad.

Are you helping him find an assisted living facility? $500k at 80 years old should get him into a nice place.

 

[Bir48die]

I'm with the group that says this is unique to every individual. While there are many in the same basic situation there can be many nuances. I will never be in the lowest tax bracket. Our SS with always be fully (85%) taxed. We just cannot lower our tax deferred and pension income.

So, sometime around FRA I'll take a look and see where the wind's blowing and decide if it's 66.2 or a later date. Much will depend on how much we've dwindled our taxable money down where I have some discomfort in the amount. Good bad or indifferent we will just be paying mucho taxo.

 

[pb4uski]

Yup. We're screwed too. First-world problem

 

[jollystomper]

Yep, that sounds right........ for you and your circumstances.

By starting SS at 62 and investing 100% of the monthly checks into a TSM fund I provided a additional source of revenue for her should I predecease her.

Interesting. We recently attended a seminar where the FA stated the same thing - you should take SS as early as possible *IF* you were able to invest the proceeds, as the longer you lived the more likely your investment would be a better return than the delta gained waiting to take SS, and no one can predict how long they will live.

Right now I am looking at taking mine between 64 and 70, but no hard and fast decision yet. Taking it before FRA might keep me in a lower tax bracket when RMDs hit. DW wants to start her own SS next year, since her own SS is less than half of her spousal benefit and she just wants to get some SS money soon. We are not agonizing over the decision.

 

[samclem]

Interesting. We recently attended a seminar where the FA stated the same thing - you should take SS as early as possible *IF* you were able to invest the proceeds, as the longer you lived the more likely your investment would be a better return than the delta gained waiting to take SS, and no one can predict how long they will live.

I try to remember that an FA who works on a '% of assets under management" basis has a strong incentive to recommend that clients/potential clients start their SS early.

 

[jimandthom]

Add on question--medicare premium increase

We have started Medicare--spouse in March deducted from CSRS pension, mine begins May with the payment mailed already.

One item that may/would lead me to file before 66 and January 2020, is a Medicare premium increase when the COLA is smaller than the increase. I understand that the increase cannot exceed the COLA as long as the premium is deducted from your annuity payment.

Have been trying to read/find (haven't contacted SS/Medicare yet) the following answer for this question, during the past few months, but time is starting to creep up.

Would a Dec 2019 benefit, paid in Jan 2020 be "held harmless" from a Medicare premium that exceeded the COLA increase?

I think the premium and COLA are announced around the same time.

 

[RobLJ]

I need to poke around in i-orp to explore more thoroughly the SS age and potential Roth conversions, since these two are usually highly interdependent.

But primarily, I see taking SS before FRA as an option on bad stock returns over the next 5 years (I'm almost 61 now):


.if stocks continue to do well, I'll probably delay to at least FRA.

.if the market collapses the next year or two and does not recover, I'll consider drawing SS at 64ish. (That year, however, DW can withdraw from her IRAs without penalty, so the longer the market maintains, the less likely I'll withdraw SS early.)
.a key factor is RMDs & portfolio performance, with the advantages of withdrawing from the 403b/IRAs to the top of the 12% bracket or even higher. I plan (most likely) to withdraw from my portfolio, then later withdraw from DW's IRAs since she has an additional 4 more years before RDMs.

A lot of posts above make sense, given personal circumstances. Basically, I won't decide until the 62-66 period and market performance.

 

[Clone]

I don't know how to model it, but one of my reasons for delaying SS is to increase the amount of our annual income to something that is indexed for inflation. I do not find significant correlation between high inflation and big market returns, heck, look at the last 10 years. I personally do not think there are many wrong decisions to be made about when to start drawing SS. Folks that have pensions with COLA, may be in a different boat.

 

[Navigator]

When I retired I obsessed with finding the best time to take Social Security, running hundreds of simulations in SS calculators, looking up actuary tables and even using historical portfolio returns to see how often taking SS at 62 would have been better than taking it at 70. I found the results eye-opening, as the simulations contradicted my pre-conceived notions and the advice of many supposed experts.

While there are too many unknowns for an optimal strategy that works for everyone, two cases did seem to work well for a variety of situations: 1) For married couples, having the high earner file at 70 and their spouse as early as possible. 2) For single people, filing at 62 was best in a large majority of cases (assuming a diversified portfolio of 60% equities, 40% treasuries).