When to take Social Security

[New Thinking]

Re: When to take SS

Like I said, I am no expert in FireCalc, but I am trying to understand how this works

Here is a simple numerical example which illustrates the point CFB has been making. It also makes it clear why FireCalc prefers taking SS early.

Assume you have a 62 year-old married man (no pension) with a nest egg of $1.5 million. He needs 60K per year (4% SWR). His age 62 SS benefit is 15K. By taking it at 62, he reduces his SWR to 3% (100% safe according to FireCalc) with a 75/25 equity/fixed asset allocation. If his wife is also 62, she gets half of his SS, or another 7.5K. Now he only needs to withdraw 37.5K from his nest egg which further reduces his SWR to 2.5%, a rate than can probably be covered (in today's dollars) in perpetuity from the divs/interest thrown off from his portfolio. Heck, TIPS yield nearly this much.

I use your SS amounts of $15,000 for husband and $7,000 (not $7,500) for the spouse and then delay these amounts until 70 for husband ($26,400) and $10,000 at age 66 for spouse. I get same 100% success rate but a higher average portfolio value ($4.4 million compared to $4.3 million). This is before I would go to a higher weight into equities due to the higher SS..

 

[ERD50]

Re: When to take SS

I recall now the last time I went through these subjects in detail. For me, the end result seemed to be that there was a trade off, and a reason why delaying could allow increased spending in the early years (which may be scenario dependent). It seems to actually boil down to something pretty simple after I cut through it all (except taxes and spousal benefits!).

When you delay SS, you are (on average) reducing the nest egg you die with. You spent it early, and you rely more heavily on SS in the later years rather than your portfolio. That is the trade-off, no free lunch.

I think the jdw_fire example was excellent.
http://early-retirement.org/forums/index.php?topic=12870.msg240069#msg240069.

In his scenario the retiree relied completely on SS so needed zero nest egg. Yes, one may say that was a 'contrived' scenario, but I think sometimes extremes best illustrate a concept. I fail to see how intermediate scenarios would give anything other than an intermediate result.

Where FireCalc is maybe misleading a bit here, is that is does report the size of the nest you leave, but it it does not consider any subjective value to it, just a yes/no on the success. CutThroat has stated this is not a concern for him. Others may be in a position where they want/need to leave money to heirs.

So, if you run Firecalc, you will see the trend that jdw-Fire illustrated. Higher reliance on SS will lower the average nest egg. Unless I'm missing something, that is the choice.

-ERD50

 

[New Thinking]

Re: When to take SS

Whenever you are pooling risks with others, you are reducing your potential nest egg required (if you don't adjust your asset allocation). And thus, if you are willing to reduce your potential inheritance by pooling that risk, you require a smaller nest egg. And therefore, many can retire earlier..This has been the point that I was trying to share - as this is a board where people go for ideas on how to retire earlier.

By reducing taxes and providing increased income (potentially) to a widow, you further lower the size of the nest egg required.

 

[UncleHoney]

Re: When to take SS

Since the first threshold is $32,000 for married, you could get $64,000 of SS into the formula before ever reaching that threshold. Factor in exemptions and deductions and you could receive over $115,000 in SS (theoretically) before a typical couple would pay taxes.

What am I missing, where did the $64K SS come from?

 

[New Thinking]

Re: When to take SS

What am I missing, where did the $64K SS come from?

The first threshold for married couples is $32,000 and SS income counts at a 50% rate in the formula. thus $64,000 X 50% = $32,000.

 

[jdw_fire]

Re: When to take SS

You did in fact prove that using cut-throats inaccurate numbers in an implausibly slanted way, that you can produce a desired outcome. What was it again? Using a lower 62 number and a higher 70 number than SSA sent out, then insisting that the firecalc results last until you're 120 while not factoring in any risk assessment for social security benefits being reduced in the future?

Bunny, your messaging of the truth seems to never end.

What was it again? Using a lower 62 number and a higher 70 number than SSA sent out,

The numbers I used for SS were the numbers YOU gave as coming from YOUR SS statement.

then insisting that the firecalc results last until you're 120 while not factoring in any risk assessment for social security benefits being reduced in the future?

The 4% rule is commonly used for a 30 yr plan which would make the age at plan end in my example 92 yo. (Actually FIRECalc says that the SWR for a 30 yr plan w/ 95% success is 3.98%)

You obviously didn't even read the post I referred to in my link but instead just shot from the hip as you often seem to do. You did however give some good advice when you said

So run your own numbers, dont just take the BS from someone who has already made the emotional decision and then 'found' facts to suit

however the BS distributor seems to be you.

 

[chinaco]

Re: When to take SS

Let me share with you again the tax efficiency angle.

Thanks NT. Do you have a good tax reference that outlines this info? I would find it helpful.

There definitely are some circumstances around tax situations and some specific conditions where it may pay to delay.

...

I'm having a hard time correlating hoping that I receive a higher benefit from a floundering program 40-50 years from now vs taking a smaller amount and investing it or spending it to preserve my earnings. Especially when every single calculator, when fitted with the proper numbers and without tying both arms and legs behind the displeasing scenarios back produces the result that taking the benefit early produces the highest income, highest portfolio size and highest survival rate.

THAT'S safe.

Theres no free lunch here, unless you live well past when the IRS mortality tables say you will, AND you're in great health in your 80's and 90's and will be able to appreciate the extra money.

CFB - I catch your drift on the FIRECALC survival because of the lower withdrawal rate. I agree that portfolio survival is important. I need to do more analysis... specific to my situation. FIRECALC yields some valuable insight. But I believe there are other factors to consider. At the end of the day, I need to be confident about my decision. It sounds like you are confident in your position.

Here is a simple numerical example which illustrates the point CFB has been making. It also makes it clear why FireCalc prefers taking SS early.
...

FIRE'd@51 - What you stated is part of what I thought the bunny was describing. He has some other points tossed in there also. Nice illustration by the way!



Nice passionate discussions like this get the gray matter working.

But in the immortal words of Rodney King: Can't we all get along!

 

[ERD50]

Re: When to take SS

Here is a simple numerical example which illustrates the point CFB has been making. It also makes it clear why FireCalc prefers taking SS early.

Assume you have a 62 year-old married man (no pension) with a nest egg of $1.5 million. He needs 60K per year (4% SWR). His age 62 SS benefit is 15K. By taking it at 62, he reduces his SWR to 3% (100% safe according to FireCalc) with a 75/25 equity/fixed asset allocation. If his wife is also 62, she gets half of his SS, or another 7.5K. Now he only needs to withdraw 37.5K from his nest egg which further reduces his SWR to 2.5%, a rate than can probably be covered (in today's dollars) in perpetuity from the divs/interest thrown off from his portfolio. Heck, TIPS yield nearly this much.

To me the goal of ER should be to work your portfolio into a mode where you can live off the cashflow without ever being forced to sell securities in down markets. I believe taking SS at 62 helps one safely get to this "state" sooner.

It seems like something is missing here.

Sure, taking SS at 62yo is better than *not* taking it, but you did not compare it to taking (a larger amount) at a later date. jdw_fire did, and it shows an advantage to delaying SS to later.

-ERD50

 

[unclemick]

Re: When to take SS

Nice passionate discussions like this get the gray matter working.

But in the immortal words of Rodney King: Can't we all get along!

Why? This ones a classic - guaranteed to jump start things in the future if things get slow. Along with 'pay off/don' pay off the mortgage' and dast I say it 'SWR' plus a few lesser themes.

You never know when things are gonna get boring in Missoula.

heh heh heh - Pssst - I didn't do any Math/penciling or nothing - just took the money post Katrina when I started hearing footsteps like the old wide receiver.

 

[cute fuzzy bunny]

Re: When to take SS

NT - please re-run your firecalc results and provide links to the result pages? After getting the results, you'll see a link in the upper right corner that says "link to these results". Cutting and pasting that will give anyone complete access to the summary, the run data, and the assumptions.

I'd do it myself, but I've run these ad nauseum and never came up with a result like yours, so if you'll give me the link I can show you whats screwed up in your runs.

JDW - Do you think that perhaps in another two years you'll get over taking it personally when someone doesnt agree with one of your ideas? You in fact did not use my numbers, I did in fact read your post and its erroneous and implausible assumptions and considered it AGAIN before 'shooting from the hip' and noting that you started from "I want to take social security late, how can I form a construction to 'prove' that to myself and then try to get other people to agree with it so I feel validated?".

:

I'm also not buying the tax related stuff. I have no idea what the tax code is going to look like 5 years from now. I'm sure at **** not going to try to guess what its going to be like 10, 20 or 40 years from now.

Bird in the hand please.

 

[FIRE'd@51]

Re: When to take SS

It seems like something is missing here.

Sure, taking SS at 62yo is better than *not* taking it, but you did not compare it to taking (a larger amount) at a later date. jdw_fire did, and it shows an advantage to delaying SS to later.

-ERD50

Actually, the FireCalc reference was sort of an aside for those whose withdrawal rates don't imply 100% safety. The main point I was trying to make was that early SS (like a COLA'd pension) allows one to lower his withdrawal rate, often significantly, which obviously reduces the percentage of FireCalc failures. I believe the numerical example I gave might be representative of the financial situation for a typical retiree (give or take) according to the net worth (excluding home equity) and expense numbers I have seen posted in polls on this forum. IMHO, the ideal ER situation would be to have a nest egg large enough to live off the dividend income from a broadly diversified equity portfolio. Unfortunately, this requires a nest egg some 50 times one's annual expenses (assuming a 2% dividend yield), or twice the size that most people here are shooting for. If one has a large enough portfolio, IMHO this would provide about the safest retirement possible, since dividends tend to grow significantly faster than inflation as measured by the CPI. For the majority that don't (and don't have a pension or a working spouse), early SS helps reduce the WR to a level whereby real (in today's dollars) expenses can be covered by dividends, or dividends and a small amount of interest.

With regard to terminal portfolio values, FireCalc gives a mean, minimum, and maximum - with no probabilities attached. One who never has to invade his portfolio principal will also end up with the greatest terminal value as well for his particular retirement path and asset allocation.

 

[Spanky]

Re: When to take SS

Another way to determine when to take SS is net present value. The future COLA cash flows for the three options are as follows:


Age year 62 66 70
62 2015 26,448
63 2016 27,241
64 2017 28,059
65 2018 28,900
66 2019 29,767 40,308
67 2020 30,660 41,517
68 2021 31,580 42,763
69 2022 32,528 44,046
70 2023 33,504 45,367 61,584
71 2024 34,509 46,728 63,432
72 2025 35,544 48,130 65,334
73 2026 36,610 49,574 67,294
74 2027 37,709 51,061 69,313
75 2028 38,840 52,593 71,393
76 2029 40,005 54,171 73,535
77 2030 41,205 55,796 75,741
78 2031 42,441 57,470 78,013
79 2032 43,715 59,194 80,353
80 2033 45,026 60,969 82,764
81 2034 46,377 62,799 85,247
82 2035 47,768 64,683 87,804
83 2036 49,201 66,623 90,438
84 2037 50,677 68,622 93,151
85 2038 52,197 70,680 95,946
86 2039 53,763 72,801 98,824
87 2040 55,376 74,985 101,789
88 2041 57,038 77,234 104,843
89 2042 58,749 79,551 107,988
90 2043 60,511 81,938 111,228
91 2044 62,326 84,396 114,564
92 2045 64,196 86,928 118,001
93 2046 66,122 89,536 121,541
94 2047 68,106 92,222 125,188
95 2048 70,149 94,988 128,943
1,526,848 1,917,670 2,374,251


Using a discount rate of 4%, the NPVs are:


Age NPV (62) NPV (66) NPV (77)
70 231,099 195,670 59,790
73 308,132 313,072 239,161
77 410,843 469,608 478,322

AS you can see, taking SS at age 62 is optimal if life span is less than 73; age 66 if longevity is less than 77; age 70 if you can last more 77 years of age -- good luck.

It is true the annual (or monthly) amount (age 66 or 70) is much greater (see the above table/schedule), but I rather take the $$ earlier since the longer that you wait, the higher the risk (life span, SS default, SS rule or policy change). Further, taking SS earlier enables you to withdraw less from your nest egg so that it can continue to grow.

Everyone scenario is different. For me, I will take it at 62.

 

[Cut-Throat]

Re: When to take SS

Further, taking SS earlier enables you to withdraw less from your nest egg so that it can continue to grow.

Everyone scenario is different. For me, I will take it at 62.

I would agree with you Spanky. That if your objective is to let your nest egg grow and leave the largest possible amount to your heirs, taking SS early is the right choice.

However, if you want to spend the most money yourself, preferably in your 60's, delaying to age 70 is the better option!

 

[REWahoo]

Re: When to take SS

Another way to determine when to take SS is net present value.

Yep. All you need to know is your date of death. If it were only that simple.

Factor in the issues of SS taxation, possible changes to tax rates, surviving spouse benefits, the future viability of SS, potential changes to SS payouts, global warming, the phase of the moon, and the death of Rev. Falwell...then maybe you'll know when you should begin to draw SS.

 

[Mwsinron]

Re: When to take SS

Yep. All you need to know is your date of death. If it were only that simple.

Factor in the issues of SS taxation, possible changes to tax rates, surviving spouse benefits, the future viability of SS, potential changes to SS payouts, global warming, the phase of the moon, and the death of Rev. Falwell...then maybe you'll know when you should begin to draw SS.

No no that makes sense. Thinking things will stay exactly the same is the norm.. :

 

[Spanky]

Re: When to take SS

Yep. All you need to know is your date of death. If it were only that simple.

Factor in the issues of SS taxation, possible changes to tax rates, surviving spouse benefits, the future viability of SS, potential changes to SS payouts, global warming, the phase of the moon, and the death of Rev. Falwell...then maybe you'll know when you should begin to draw SS.

Since there are so many uncertainties, it's always better to take it ASAP. It is analogous to the duration of a bond - longer duration -> higher risk -> higher yield; shorter duration -> lower yield but significantly lower risk.

 

[FIRE'd@51]

Re: When to take SS

AS you can see, taking SS at age 62 is optimal if life span is less than 73; age 66 if longevity is less than 77; age 70 if you can last more 77 years of age -- good luck.

Spanky,

I think your numbers understate the value of taking SS at 62 (probably because you assumed 3% inflation and discounted your results at 4%, which effectively assumes you earned -1% on your money). For simplicity, do everything in today's dollars (i.e. assume zero inflation). If your age 66 SS benefit is 100, you would get 75%, or 75 at age 62. For the four years from 62-66 you will collect 300. If you start SS at 66, you get 100 or 25 more per year. It will take 12 years to make up the 300 you got from 62-66 (300/25). So the break-even age would be 78, not 73, when you compare taking SS at 62 vs taking it at 66. And this ignores the fact that you could invest the 300 which pushes the break-even age even higher.

 

[Nords]

Re: When to take SS

AS you can see, taking SS at age 62 is optimal if life span is less than 73; age 66 if longevity is less than 77; age 70 if you can last more 77 years of age -- good luck.
It is true the annual (or monthly) amount (age 66 or 70) is much greater (see the above table/schedule), but I rather take the $$ earlier since the longer that you wait, the higher the risk (life span, SS default, SS rule or policy change). Further, taking SS earlier enables you to withdraw less from your nest egg so that it can continue to grow.
Everyone scenario is different. For me, I will take it at 62.

Now let's add another column-- taking SS at age 62 and direct-depositing the money into a low-cost small-cap value index fund. Since we're talking American dollars, my vote would be for WisdomTree's International Small-cap Dividend ETF (DLS), but let's back-test it with any reinvested long-term international index.

I would agree with you Spanky. That if your objective is to let your nest egg grow and leave the largest possible amount to your heirs, taking SS early is the right choice.
However, if you want to spend the most money yourself, preferably in your 60's, delaying to age 70 is the better option!

My spouse had to sign a huge stack of waivers & affadavits to decline the SBP feature of my pension.

Imagine if our spouses had to sign off on our unilateral decisions to take SS early, thereby permanently reducing their survivor's benefits...

 

[mathjak107]

Re: When to take SS

when i ran the numbers for my wife and i on the fidelity calculator for 62 vs 66 vs 70 it assumed that you got whatever return your current mix is getting as a return on your investments . .whether you spent your ss and didnt pull the money out of your nest egg or whether you lived off your nest egg and invested the same ss amount was irrelevant as its the same thing. as long as one of us lived to 81 waiting until 66 or 70 gave the bigger pot at the end. in my case figuring 87 for me and 92 for my spouse just for fun there was about 50,000 more on 2 million or so by taking it at 70 vs 62 . 50,000 though 30 years out is going to be like 5 or 10,000 in real dollars so it may hardly be worth it if your game was to die with the bigger pot.

 

[chinaco]

Re: When to take SS

Risk = unknown


- Risk of govt not paying up --- This is a low probability. Wht ever they do to fix it will impact everyone. The SS Pay as you go problem is linked to other issues that have not surfaced yet. We will also have a worker shortage. This is a fact... unless we go into a depression for 20 years. And for you number harpies out there (no the numbers are not exact)! But if you read... You will see there is a concern. Plus it makes common sense. We have two options... outsource work to a foreign country or import workers. Either way the gov will slap a tax on it.


- Risk of dying younger than SS Break Even --- increases are you get older. 62 is less than 72 is less than 82 etc...


We are all assuming "All Else Equal" types of scenarios except your personal fear (sense of risk) and bias is entered into the equation. The mortality treatment is often not entered into the equation, therefore it affects the outcome. It is funny. we are all worried about running out of money before 30 or 40 years with portfolio failure. But on the other hand... delaying SS is a bad idea because we will probably die young.

By the way, there is a way to introduce risk into the equation to determine the probable payoff (which is as good as it gets). But you will find it just as fuzzy. This can be approximated a couple of ways.

I still have an inclination to look at the delay as a hedging technique against 2 thing: Dw or I outliving our portfolio (because one of us winds up living till we are old), and in case something unexpected happens to our investments (unexpected means we could mess up or the market could have protractive problems, etc). It is a form of diversification of income streams.

Mortality and money are a difficult combination of topics and it is the reason that Actuaries make a good living.

Isn't it a great problem to have... enough money to retire early and consider delaying taking SS.

 

[teejayevans]

Re: When to take SS

My decision process is much simpler:
If the market is up when I'm 62, I'll delay it, and tap my retirement
accounts (sell high theory)
If the market is down, I'll take it, giving my retirement accounts
time to recover.
If I was 62 today, I'd delay it.

I haven't checked, but I assume you can start anytime after 62, 63, 64, etc,
so if something change at 63, I could start taking it.
TJ

 

[REWahoo]

Re: When to take SS

If the market is up when I'm 62, I'll delay it, and tap my retirement
accounts (sell high theory)
If the market is down, I'll take it, giving my retirement accounts
time to recover.

I suspect many who say they plan on delaying SS until (?) will pull the SS trigger on a big downturn. Including me.

 

[Dawg52]

Re: When to take SS

I suspect many who say they plan on delaying SS until (?) will pull the SS trigger on a big downturn. Including me.

Me too.

 

[ERD50]

Re: When to take SS

I suspect many who say they plan on delaying SS until (?) will pull the SS trigger on a big downturn. Including me.

Yep - I think it gets a bit lost in the details that no one actually makes this decision *until* they hit 62. I'll have more info to work with at the time, about 10 years from now (but this thread will probably still be going!).

-ERD50

 

[cute fuzzy bunny]

Re: When to take SS

- Risk of govt not paying up --- This is a low probability. Wht ever they do to fix it will impact everyone.

Is it really low? The Feds are already actively talking about private accounts, the tax laws have changed to increase taxation on social security, and the CPI was changed under Clinton, resulting in reduced annual adjustments. They're already warning us that the payouts may be reduced.

Seems to me that facing 250 million younger workers with private accounts and 50 million older retirees all wanting to be paid...our elected officials might realize they can still get voted in by making decisions that the baby boomers wont like.

So in short...we dont know about future changes to the CPI (Greenspan often said he felt it overstated inflation), future changes to payouts, lifespan, future tax law or future market action.

Only thing you can control is to get your hands on the money and make it work for you.

Or you can count on everything still being the same or better 30-40 years from now when you're 100 and that delay strategy might really start paying off. :