Wade Pfau: The new math of social security

[pb4uski]

I'm not generally a Pfau fan, but thought that was a good article, especially the points that because mortality is better and interest rates are lower that the haircuts for taking early are no longer actuarially fair and the carveout for the SS bridge was an interesting approach to the decision for me.

We have two years before we need to make a decision, but the current plan is to wait until FRA (66) for DW and for me to file and suspend at my FRA and delay starting benefits until I'm 70.

 

[mathjak107]

8 years of dough in something very conservative for us would be about 1/3 of our portfolio .

that is a lot in my mind to spend down and worse keep at a fairly low return .

we would be talking about 800k in that bridge portfolio .

we have a meeting next friday with fidelity to run some scenarios on their new social security tool . it is not available on line for consumer use

 

[Free To Canoe]

Yes, you get a higher rate return and a less rate of withdrawal on your portfolio by waiting. Duh. Does it pay as Pfau suggests? Probably not if you kick the bucket before 85 or so.
Now you need a breakeven analysis and you need to know your termination date. Your higher rate needs to compensate for the -$316,800 that you are in the hole.

 

[UpAnchor]

The math maybe right but your health might not. Only if you are really healthy, should you delay taking it at 70. My coworker's mom was super healthy even at age 88 that she out did everybody on the yoga and exercise floor. I was shocked that she dropped dead 2 weeks ago. In fact, everybody who knew her was shocked. I'm sure you've heard of brain aneurism

Indeed we can never know for sure. Yet if I were to find myself at age 88, outdoing everyone on the yoga and exercise floor, I'd likely be pretty proud of myself for having delayed 'till 70.

 

[Independent]

In this poll from 2009, there were 66 responders who said they were expecting SS and had thought about how to invest for the gap.
http://www.early-retirement.org/forums/f28/social-security-gap-44449.html

About 1/3 said they had explicitly earmarked assets set aside for this, about 1/3 said they were planning higher withdrawals from their regular, long-term asset allocation, and 1/3 said something else.

I'm not sure how many had a gap because they deferred, how many had a gap because they retired before 62, and how many did both (we're in the "both" group).

 

[harley]

I'm surely not saying not to be personally responsible but I've seen a lot of people in their 70's, 80's and beyond who have deferred living for too much "just in case" planning. Now they have a pile of cash, optimized SS cash flow and I guess can look back and be satisfied that they existed safely rather than lived fully.

Well, personally I lived fully for my whole life, and somehow still survived long enough to be close to SS age, although it was close a few times. Having made it this far I'll finally do the conservative thing and delay. Although in my case it's more to ensure DW's maximum survivor benefit and to allow me an additional 8 years of Roth conversions before getting bumped out of the 15% bracket. The additional money I would get at 62 wouldn't make that big of a difference to our lifestyle, but since DW doesn't enjoy playing with finances the income stream will make her happy if I finally have too much fun.

 

[gerntz]

I've written something similar on another thread in the past few months:

Those that plan to live a long time are more likely to do so do to their mindset & behaviors; i.e., put your mind to something & you have a better chance of succeeding than if you leave it to chance. Net, plan to not take SS till age 70 & you'll work to better assure your health is in good shape to enjoy the benefit of doing so for a longer time. Not everyone will succeed, but I'd bet those that delay have a longer average lifespan than those that don't. JMO.

 

[daylatedollarshort]

8 years of dough in something very conservative for us would be about 1/3 of our portfolio .

that is a lot in my mind to spend down and worse keep at a fairly low return .

we would be talking about 800k in that bridge portfolio .

we have a meeting next friday with fidelity to run some scenarios on their new social security tool . it is not available on line for consumer use

I also find 8 years a lot to spend down. We're more comfortable with diversified income streams, especially money we own and control, so we will probably take SS at 62, rather than run down the portfolio. Our filing age will also depend on part-time income at 62 and the tax implications.

I've run the numbers and I don't think we will be eating cat food either way.

 

[Calico]

I'm surely not saying not to be personally responsible but I've seen a lot of people in their 70's, 80's and beyond who have deferred living for too much "just in case" planning. Now they have a pile of cash, optimized SS cash flow and I guess can look back and be satisfied that they existed safely rather than lived fully.

The two things are not mutually exclusive.

 

[Theseus]

From the link

However, Social Security is no longer actuarially fair. Those calculations were done in the early 1980s when interest rates were higher and when people weren’t living as long as they do today. With lower interest rates and longer lives today, the calculus leans toward delay as an advantageous route for new beneficiaries.

This is where I see the near term horizon for late boomer ER types, a group I identify with. As long as inflation and interest rates remain low, a slow controlled burn of savings/investments to supplement meager (33% of current income) pensions serves to ward off future RMD issues, and allows for delay of SS benefits. However there is a catch 22 to that, in that it will also mean that in the future we would become more reliant on SS. Projections are great, but the potential for SS to be trimmed, taxed, or otherwise truncated with our own savings already having been spent down on frivolous travel and other such devil-may-care activities of my newfound youthfulness are somewhat daunting.

So it becomes a balancing act, the central them of which is: How much do I dare be at the mercy of a future society's commitment and ability to provide financial support in my retirement years? Oh nevermind, time to go plan our next adventure!

 

[mathjak107]

i think that is the scariest part -trusting the gov.

 

[Fedup]

I also think the sooner one can retire comfortable, the better one increases the chance of living a long life. I know of immediate relatives who are sick but keep wanting to wait for a bigger SS check to retire, not because they can't afford it, but the OMY and must get above $2000/month minimum mantra from SS is what keep them from retiring. For those who must rely solely on SS then it maybe the case to wait for 70 but for others who have other sources of income, your health should also be a deciding factor.


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[daylatedollarshort]

The latest Pfau article tends to make the same assumption many finance articles do, the potential for more money = more happiness. I am not sure the neuroscience of happiness studies would agree this is true. Control over one's circumstances is often a greater predictor of happiness than more money, at least beyond a certain income level. Risk matters, and delaying benefits implies a certain risk level / government trust level that may be more appropriate for some than others.

I think personally I would more likely prioritize diversification and control throughout retirement over higher odds of more money in the future. Benefits cuts, tax rate changes, interest rates changes - a lot could happen over 30 - 40 years that also may negate the higher odds assumption as well. For those that need the money now or need longevity insurance then the answer is a bit more cut and dried.

 

[pb4uski]

....I know of immediate relatives who are sick but keep wanting to wait for a bigger SS check to retire, not because they can't afford it, but the OMY and must get above $2000/month minimum mantra from SS is what keep them from retiring. ...

They do realize that retiring and drawing SS benefits are mutually exclusive, right? IOW, they can retire, live off of savings (assuming they have some since you said they can afford to retire) and their SS benefits will continue to grow.

 

[growing_older]

They do realize that retiring and drawing SS benefits are mutually exclusive, right?

NOT mutually exclusive

 

[jkern]

Considering a modest ROI, the breakeven point is somewhere around the mid 80s. That's good enough for me. The government can always change the rules and push out that breakeven point even farther. If I had a spouse that was more dependent on my SS, I would reconsider delaying.

 

[Fedup]

Not to them. Most people who decide to retire will draw on some form of income, whether SS or pension or investment income. While they have all of them, but the desire to squeeze out the last drop of money before they want to retire is very strong sentiment. I understand the sentiment completely, I have 90-100% of my retirement income from the same sources, I plan not to touch my savings until I have too. But I do keep an eye out for future tax.


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[pb4uski]

NOT mutually exclusive

You are correct... my bad.

Not to them. Most people who decide to retire will draw on some form of income, whether SS or pension or investment income. While they have all of them, but the desire to squeeze out the last drop of money before they want to retire is very strong sentiment. I understand the sentiment completely, I have 90-100% of my retirement income from the same sources, I plan not to touch my savings until I have too. But I do keep an eye out for future tax. ....

Seems silly to me. It seems that many people become hoarders once they have a nice nestegg saved and lose sight of the fact that they saved that money to spend it in their retirement. I'm living off savings and doing as much low tax-cost Roth conversions as I can before I start my pension and SS. According to my "at retirement" plan, I would have spent as much as 30% of my at retirement date nestegg to support us up until I started SS at age 70 (WR of 4-5% for those first 15 years), then our nestegg would actually grow as pensions and SS cover about 80% of our living expenses so would withdrawals would decline precipitously to less than 1% WR.

 

[gerntz]

Seems silly to me. It seems that many people become hoarders once they have a nice nestegg saved and lose sight of the fact that they saved that money to spend it in their retirement.

I don't know why you think people saved to spend.

I saved to be independent of what others think/want & thus to do as I please. If I'd spend to be near penniless when I die, I would risk becoming dependent because I couldn't perfectly judge the future. I fear that more than having funds leftover. And that's not to mention that there are others I want to help even after I'm gone. Net, spending it all seems quite selfish from here.

 

[pb4uski]

I wasn't suggesting spending everything... dying broke.....I was more referring to those who think it is sacrilegious to "invade" principal. I'm perfectly fine with dipping into principal if we have one or more unfavorable investment return years.

While my plan had me invading 30% of my principal (portfolio declined 30%) while waiting for my pension and SS to begin and then actually building back up thereafter, that was based on relatively conservative investment return assumptions. As it turns out, the favorable investment returns over the last 4 years actually have me today at ~120% of my at retirement balance even after drawing out money to live on, build a garage, etc.

Left to our own LBYM devices we would likely leave a bundle to our kids and charity. I struggle to balance that with splurging here and there and enjoying the fruits of our labors while we can enjoy it and still being prudent in case things go sideways between now and the end.

 

[Fedup]

I have no intention of LBYM to leave my kids a bundle and they are also my charity. They need to go earn and make a bundle. While I think it's harder than when I was younger, there are still lots of opportunities out there, and I don't believe in the rhetoric especially it's election year.
However, some people are still nervous or have anxiety regarding solely depends on SS, I have exactly 3 more paychecks so I know the feeling. But living a healthy life comes first for me. Others might not see it clearly. That's why you read the news and there are homeless or near homeless people who died and left millions. I mean it's not unheard off.
Regarding SS, i have two incomes, two SS and two pensions, however small, I guess I can stretch them out comfortably.


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[nun]

Considering a modest ROI, the breakeven point is somewhere around the mid 80s. That's good enough for me. The government can always change the rules and push out that breakeven point even farther. If I had a spouse that was more dependent on my SS, I would reconsider delaying.

With 2% inflation I find that age 82 is the break even point for taking SS at 62 or deferring to 70. But amount of lifetime payout isn't the main reason for deferring. It's to give you greater income while you are living. You are deferring to increase your payout rate, not necessarily the total amount you'll get.

 

[Running_Man]

Current interest rates have no influence on the decision as to whether or not to take Social security other than if you are 100% fixed investor. The pile of money to separate in this example will be invested conservatively and if the markets opportunity lost is greater than the benefit of deferring then delaying SS will be financially inferior. As an example in March of 2009 interest rates were lower across the board than they are now. Anyone that held a lump of money in conservative to investments to us as the eight years payments for in replacement of SS money if they reached 62 in March of '09 is not in a better position today at age 68 by not claiming. The missed market returns overwhelm the gain in SS payments.


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[Bir48die]

Plan is for DW to take SS sometime while she's 62. That will pay for all medical. Will draw from deferred comp program, her pension and a bit of savings in Bucket 1. Then I'll claim at 66.2. A bit of the mix and match.

 

[Chuckanut]

I have read Pfau's article, but I don't get his example concerning waiting until 70 to claim SS.

The individual involved needs $60,000 a year to live on. Pfau'scalculation for the bridge money needed while waiting to collect SS at 70 is based upon the $39,600 that a person gets when collecting SS at age 70 - $39600x 8 = $316,800 in bridge money needed.

But, if the person retires at 62 and does not claim SS immediately, would not they need the entire - $60,000 a year x 8 = $480,000 - for their bridge money? This would leave them with only $320,000 to fund their life style after 70. And that would mean a significantly higher withdrawal rate. Or am I missing something?