Theory Behind taking Social Security Early?

[marko]

Over the years he had more kids, an expensive divorce, a SAHM instead of a second white collar income, had less house appreciation, has more expensive hobbies now, doesn't have a pension, etc. and most of those factors alone would have a bigger influence on his retirement funding rather than SS claiming age, let alone added up together.

...and sounds like the type that probably drinks a lot of scotch and smokes cigars!

If I were him, I'd take SS at 62! Doesn't sound like the kind of life situation that leads to even reaching 70.

 

[pb4uski]

What is interesting to me is how tight the EPVs of SS are.... from opensocialsecurity.com using default assumptions except using 3% real discount rate:

Undiscounted: $179,838

3% discount rate:
Age 62: $118,375
Recommended strategy (62 years, 2 months): $118,379
FRA, age 67: $115,638
Age 70: $110,536

So the range of EPVs are 95.6% to 102.3% of the FRA EPVs. The total spread between the highest EPV and lowest EPV is $7,843.

 

[sengsational]

That is interesting. That's the no or yes on the haircut? And it's 30 years?

 

[fosterscik]

What is interesting to me is how tight the EPVs of SS are.... from opensocialsecurity.com using default assumptions except using 3% real discount rate:

Undiscounted: $179,838

3% discount rate:
Age 62: $118,375
Recommended strategy (62 years, 2 months): $118,379
FRA, age 67: $115,638
Age 70: $110,536

So the range of EPVs are 95.6% to 102.3% of the FRA EPVs. The total spread between the highest EPV and lowest EPV is $7,843.

Have you explored this with different mortality assumptions? I always use the non-smoker preferred rates (although I may actually be super-preferred). When I do that I get $608,150 for me at 70 wife at 62, $598,335 for me at FRA (66.5) wife at 62. Still a pretty small difference.

 

[pb4uski]

That is interesting. That's the no or yes on the haircut? And it's 30 years?

No haircut.

No specified period... what the tool does is to take your projected SS payment based on your PIA, birth date and when you start collecting for each year and multiply it by your probability of being living to collect that benefit based on the selected mortality table. It then takes those expected cash flows and discounts them for the time value of money based on a real discount rate provided by the user.

Have you explored this with different mortality assumptions? I always use the non-smoker preferred rates (although I may actually be super-preferred). When I do that I get $608,150 for me at 70 wife at 62, $598,335 for me at FRA (66.5) wife at 62. Still a pretty small difference.

When I do it for us I use 2017 non-smoker preferred mortality.... for the hypothetical I just used the default mortality assumption.

 

[sengsational]

No specified period... what the tool does is to take your projected SS payment based on your PIA, birth date and when you start collecting for each year and multiply it by your probability of being living to collect that benefit based on the selected mortality table. It then takes those expected cash flows and discounts them for the time value of money based on a real discount rate provided by the user.

Achg! Sorry for the dumb question; I used the tool the other day and understood (and like) the way that it manages that variable.

 

[joeea]

1) Determine the age you want to be when you retire and estimate where your expenses will/should be at that age. For example, I determined I wanted to retire at 60 without taking any distributions from my 401-K. The only way I could do that was to have my mortgage paid off. THAT became my goal along with enough in savings to pay expenses until age 62.

That was the only way?

Where did the money come from that you used to pay off your mortgage? What if you took that money and spent it from 60 to 62? Isn't that a different way?

 

[SomedaySoon]

Ok, since we know we can't predict when we will expire, take a safe approach and take somewhere between 62 and 70. You won't "maximize" anything, but how many people actually bounce the check to the funeral parlor ?

 

[EvrClrx311]

I'm still a long ways out from 62... but I plan to take SS as early as I can because of how the math works out for me and my plan on what to do with it. And I say this as someone with 3 of 4 grandparents who lived (two are still living) to be 95+ and parents who are still healthy in their 70s

The single biggest factor is what you plan to do with the money. In my case, I'm not planning to live on it, but rather invest it and pass it on to my children - or some combination of children and charity. The math shows that taking early will produce "on average" a larger net amount due to compounding than waiting till 70 to get a bump in payments...

Point being... I plan to put it into equities (a very atypical thing for SS), and not live on it. Another reason there is no one right answer to this question. Everyone has a different situation in front of them.

 

[pb4uski]

What is interesting to me is how tight the EPVs of SS are.... from opensocialsecurity.com using default assumptions except using 3% real discount rate:

Undiscounted: $179,838

3% discount rate:
Age 62: $118,375
Recommended strategy (62 years, 2 months): $118,379
FRA, age 67: $115,638
Age 70: $110,536

So the range of EPVs are 95.6% to 102.3% of the FRA EPVs. The total spread between the highest EPV and lowest EPV is $7,843.

Have you explored this with different mortality assumptions? I always use the non-smoker preferred rates (although I may actually be super-preferred). When I do that I get $608,150 for me at 70 wife at 62, $598,335 for me at FRA (66.5) wife at 62. Still a pretty small difference.

You picqued my curisosity so I reperformed the calculations but with 2017 preferred non-smoker morality.

Undiscounted: $217,416

3% discount rate:
Age 62: $132,520
Recommended strategy (66 years, 1 month): $134,978
FRA, age 67: $134,476
Age 70: $131,891

So a much tighter grouping. So the range of EPVs are all within 2.3% of the FRA EPVs. The total spread between the highest EPV and lowest EPV is $3.087. Essentially, every answer is a good answer and no alternative is strikingly preferable for a single.... consistent with a view that the choices are actuarially neutral for a single.

I'll concede that I was surprised that the 2017 non-smoker preferred mortality EPVs were so tight compared to the 2015 SS mortality.

 

[Independent]

I'm still a long ways out from 62... but I plan to take SS as early as I can because of how the math works out for me and my plan on what to do with it. And I say this as someone with 3 of 4 grandparents who lived (two are still living) to be 95+ and parents who are still healthy in their 70s

The single biggest factor is what you plan to do with the money. In my case, I'm not planning to live on it, but rather invest it and pass it on to my children - or some combination of children and charity. The math shows that taking early will produce "on average" a larger net amount due to compounding than waiting till 70 to get a bump in payments...

Point being... I plan to put it into equities (a very atypical thing for SS), and not live on it. Another reason there is no one right answer to this question. Everyone has a different situation in front of them.

Yep. I deferred to 70 because that works for my situation. If I were in yours, I could see taking it early, buying stocks, and forgetting about it until I'm "really old".

Then, it would be fun to give it away before I died. Something to do in those later years.

 

[joeea]

Ok, since we know we can't predict when we will expire, take a safe approach and take somewhere between 62 and 70. You won't "maximize" anything, but how many people actually bounce the check to the funeral parlor ?

What's "safe" about that approach?

I can understand if you just feel like choosing a random number for some reason. But I don't see how that makes anything "safe"?

 

[joeea]

I'm still a long ways out from 62... but I plan to take SS as early as I can because of how the math works out for me and my plan on what to do with it. And I say this as someone with 3 of 4 grandparents who lived (two are still living) to be 95+ and parents who are still healthy in their 70s

The single biggest factor is what you plan to do with the money. In my case, I'm not planning to live on it, but rather invest it and pass it on to my children - or some combination of children and charity. The math shows that taking early will produce "on average" a larger net amount due to compounding than waiting till 70 to get a bump in payments...

Point being... I plan to put it into equities (a very atypical thing for SS), and not live on it. Another reason there is no one right answer to this question. Everyone has a different situation in front of them.

That's intriguing! I'd love to see the math you used.

 

[pb4uski]

62 is typically favored if you use a high enough investment earnings rate/opportunity cost of money assumption.

 

[MrLoco]

How much does (should) the increasing talk of future cuts to SS affect your decision to take early or late? Lately I've been hearing more and more about politicians targeting SS to make up for shortfalls elsewhere. Should we "take the money and run" sooner or gamble that benefits won't be cut for those who prudently waited to maximize their monthly benefit?

I am curious why you think that current SS recipients would not be affected by any cuts/changes to SS?

I hear this all the time as if current SS recipients are somehow immune to any future changes in benefits.
Those of us a few years away from collecting vote as much as those currently receiving benefits.
I think any changes will ( and should) affect everyone....those waiting to collect and those currently collecting.


A fair and balanced approach might include:


1) Gradually raise the minimum age to begin collecting benefits from 62 to age 65 over the course of the next 20 years.


2) Increase the FICA tax withheld slowly and responsibly in future years. Amounts to be determined.


3) Responsibly cut benefits to all current SS recipients.


This way everyone takes a haircut and no one escapes the pain.
This should keep the program solvent for many years to come.


The people who are in danger of collecting much less they they ever contributed are those in their 20's and 30's....not those of us within a few years of collecting.


From everything I have read; it seems Medicare is in far worse shape financially. Imagine if Medicare vanishes and all of a sudden you, the individual, were 100% responsible for all your medical costs throughout your entire retirement years. One major surgery and recovery could wipe you out.

 

[VanWinkle]

62 is typically favored if you use a high enough investment earnings rate/opportunity cost of money assumption.

That creates another question- What is a reasonable earnings rate/opportunity cost of money assumption?

Some will be very optimistic and likely disappointed, while others will be ultra safe and miss an opportunity to do better.

Seems the question of "when" is not answered, but more questions are created that defy real answers.

Good luck to all making this decision. I am currently not taking SS and will likely wait until FRA.

I have no idea if it is the best strategy, but it is my choice.

VW

 

[workmyfingerstothebone]

Seems to me that if one takes SS early an invests it, even if the investment doesn't beat SS 8%, the individual owns that money. Then at 70 they can spend it, pass it on to the surviving spouse if one kills over, or continue investing until it's needed.


Also this cash allows for investment opportunities should they arise, like another housing or market decline, over the time period from 62 to 70.
Wouldn't it be nice to have 15K to 20K to invest annually when the Great Recession happened or use the money to pick up rental property(s)?

My spouse is 7 years younger, so we plan on doing exactly this with my SS. To be fair though we do have income to cover our expenses, and no debt.

 

[Chuckanut]

My only concern with moving the early retirement age to 65 is the amount of age discrimination I have seen. I know a number of people who lost their jobs in their mid to late 50's and then tried to hang on by their fingernails until they reached 62 and started collecting SS. Some made it and managed to keep their house, etc. Some did not.

IMHO, SS reforms should be part of a package that includes increased emphasis on non SS retirement plans that are very tax advantaged, and controlled fully by the worker - not the company, a union or politicians.

 

[Dtail]

Between all the SS posts on this site and Bogleheads, this appears to be the one topic in which there is truly no real consensus. There are so many different background scenarios, leading to different "correct" decisions.
Personally, we have most of our investments in TIRA, so spending down some of the TIRA and to a lesser extent Roth conversions appear to be my thoughts right now.

 

[Rianne]

I'm stuck with the psychology of taking SS at FRA. It feels like a financial loss because I'm using our hard earned savings/portfolio. Yet, running the numbers, one would think SS is a guaranteed income (even if they reduce the benefit down the road).

I compare it to that marshmallow experiment of delayed gratification.

"The marshmallow test is one of the most famous pieces of social-science research: Put a marshmallow in front of a child, tell her that she can have a second one if she can go 15 minutes without eating the first one, and then leave the room. Whether she’s patient enough to double her payout is supposedly indicative of a willpower that will pay dividends down the line, at school and eventually at work. Passing the test is, to many, a promising signal of future success."
I feel like I"m the child who has to eat her marshmallow as quickly as possible.

 

[pb4uski]

I ran our numbers for varous scenarios through opensocialsecurity.com yesterday.

The range of expected PVs were all within 3% (the highest was 103% of the lowest) so for us there is no compellingly right answer. We may take at 65 if Medicare premiums are increasing.... otherwise most likely at FRA of 66 and 2 months. The EPVs of those 2 alternatives are within $100 of each other.

Time will tell, but if the SHTF it is nice to know that we can start at any time of our choosing.

 

[PatrickA5]

I ran our numbers for varous scenarios through opensocialsecurity.com yesterday.

The range of expected PVs were all within 3% (the highest was 103% of the lowest) so for us there is no compellingly right answer. We may take at 65 if Medicare premiums are increasing.... otherwise most likely at FRA of 66 and 2 months. The EPVs of those 2 alternatives are within $100 of each other.

Time will tell, but if the SHTF it is nice to know that we can start at any time of our choosing.

Agreed. Every time I run one of the SS calculators, the differences between the expected PV of payouts at 62, FRA, and 70 are not enough money to get too worried about.

I still have a couple of years to run more calculations, but most of the suggestions have me taking at 62 and spouse taking at 70 (due to her slightly bigger benefit). For me anyway, a lot of the decision of taking it early will depend on my Roth conversion strategy and other factors.

 

[hausfrau]

My husband will be 62 in four years. We also have a minor child (I'm 12 years younger). The calculators I run tell us for him to collect at 70 and me to collect at 62. However, it seems like it's in our best interest for him to collect SS early because of that minor benefit. I read that it's half of the FRA, not half of what it would be at 62.


We can almost live on that amount without having to touch our portfolio.

 

[EvrClrx311]

That's intriguing! I'd love to see the math you used.

So many variables, so it's best to work with averages as well as standard deviations (10th and 90th percentiles) to consider reasonable best and worst cases. The plan is to put the funds into an index fund total market style investment vehicle. All numbers below factor inflation out as well as reinvestment of dividends. So we don't need to worry about how inflation (COLA) factors into anything. Every dollar figure below is in 2018 dollars.

Looking at the Shiller data and using the average as 6.615% above inflation for the market; I'm also going to use the 10,20,30 and 40 year 90th and 10th percentiles for returns to give best and worst cases for each type at age 72, 82, 92 and 102. Reality is, when you're looking at 30 or 40 year average real returns you'll kind of know going in if you're prime for a really bad time or good time ahead based on the current state of the market. For example... only once in a rolling 30 year period did the market return as low as just 1.9% above inflation and it just happened to occur right after a few decades of amazing returns (you caught the regression back to more normal numbers. Same can be seen in reverse. The best 30 year rolling return period of 11.15% above inflation happened after the market was in one of it's worst periods in history the decades prior. Anyway... here are the numbers:

SSA says my monthly collection at age 62 is $2,121 a month and at age 70 it is $3,752 a month
(avg: is always 6.615%, low is 10, 20, 30, or 40 year 10th percentile rolling annual return average, high is 10, 20, 30, or 40 year 90th percentile rolling annual return average) - obviously on the 10 and 20 year returns the 10th and 90th percentiles vary wildly. The gap closes when you narrow out to 30 and 40 year average returns in those percentiles further down. Example... at age 82 I'm using the high and low for 10 year rolling periods for the overall market when looking at the late start (age 70) and I'm using the 20 year rolling percentiles for the early start (62) because each had about that long to invest at the given age.

Assuming all funds are invested in the market, here is what we get based on age:
At Age 72
early (age 62): (avg: $405,043) (low: $270,098) (high: $615,188) <--- 10 year 10th and 90th percentiles
late (age 70): (avg: $148,973) (low: about $90K) (high: about $200K)

At Age 82
early (age 62): (avg: $1,125,319) (low: $708,205) (high: $1,898,566) <--- 20 year 10th and 90th percentiles
late (age 70): (avg: $913,756) (low: $499,068) (high: $2,770,981) <--- 10 year 10th and 90th percentiles

At Age 92
early (age 62): (avg: $2,492,047) (low: $1,666,683) (high: $3,741,166) <--- 30 year 10th and 90th percentiles
late (age 70): (avg: $2,364,937) (low: $1,412,362) (high: $4,252,385) <--- 20 year 10th and 90th percentiles

At Age 102
early (age 62): (avg: $5,085,422) (low: $3,243,276) (high: $7,852,725) <--- 40 year 10th and 90th percentiles
late (age 70): (avg: $5,118,560) (low: $2,893,874) (high: $9,021,038) <--- 30 year 10th and 90th percentiles

The take away from this... the benefit of those first 8 years of collection left to compound at the long term average 6.615% of the market won't be overtaken by the later higher figure (collecting at age 70) until age 101. That's "on average"

Another interesting note, is that the worst case scenario (bad market years ahead) always points to the collecting early as being more beneficial, even at the age of 102 it comes out ahead.

(if you're confused by this post... please read my previous message about 15 prior to this one in the thread that shows my situation/plan for SS before replying. My situation is a bit unusual for plans with SS money. Point being, this probably doesn't apply to many others.)

 

[HI Bill]

The take away from this... the benefit of those first 8 years of collection left to compound at the long term average 6.615% of the market won't be overtaken by the later higher figure (collecting at age 70) until age 101. That's "on average"

So...if you consider the potential for SS to be reduced in the future, you may be better off claiming at 62, and investing the $ (assuming the tax impact would be more beneficial over the long run)?

I plan to have 17 non-working years between my FIRE age (53) and 70. If, along the way, I encounter sequence of return asset depletion (significant), I will consider taking earlier than 70. If my portfolio, inflation-adjusted, is at or near where it is now, I'll wait at least until 67, but my current plan is for 70. If benefits are given a haircut, I may well claim early, with the belief that they could be cut again in the future.