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Re: When to take SS
Old 05-16-2007, 08:51 AM   #101
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Re: When to take SS

Quote:
Originally Posted by Cute Fuzzy Bunny
.......

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. :
CFB, so what exactly do you think is wrong in jdw_fire's example?

http://early-retirement.org/forums/i...0069#msg240069

In his example, you do not need to live to any specific age for a 'payoff'. When you delay, you start spending *more* right away, and for the rest of your life, you have the same amount to spend as if you had not delayed.

The trade off for delaying is, you will end up with a smaller nest egg (zero in his example, since he matches spending to the SS amount to make the point clear).

This was Cut-Throat's point, which I didn't quite fully understand until jdw_fire's example.

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Re: When to take SS
Old 05-16-2007, 09:40 AM   #102
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Re: When to take SS

Simple. JDW makes a good deal of assumptions that I have no reason to believe will bear out and builds constructions that are not realistic.

The principal problem in the example he uses is the lack of accountability of the increases in base portfolio while using the early social security income to offset withdrawals. He uses a money market account and divides the amount by eight. I cant imagine why a retiree using an asset allocation strategy would suddenly default to 8 years of cash, unless they were just trying to craft a scenario that makes delaying social security look appealing.

My firecalc runs show that by NOT delaying social security, I can withdraw thousands more starting at age 45 and continue that trend until I die. Thats huge for an actual early retiree. It means I could retire earlier, with less money, and/or take more out every year.

It also means that I just have to beat the social security delay increase rate with a regular 50/50, 60/40 or 80/20 portfolio, suited to my risk level. Which as we've already beaten to death isnt that tough to do. Unless you dont factor in investment gains at all, or hamstring them by using cash.

Hmmm...near sure thing based on investment persistency and ownership of my finances or a big fat hope.

The funny thing is, the objective here is to spend more earlier in the retirement phase. Both mechanisms plausibly achieve that result, one with very good safety and control of ones assets. The other a wing and a prayer. Spend all your money, hope the government bails you out even though they're already flashing the dashboard warning lights that they might not.

I have the same problems with New Thinking's constructions, although I have to congratulate him on not taking differences of opinion as a personal matter. He's an annuity salesman who is interested in selling a specific annuity product that sells you on delaying social security and using the annuity to 'bridge the gap'. While a persuasive case can be made for low risk people who are willing to buy into a set of assumptions, I suspect the real end result is a more predictable but less lucrative retirement.

Which might be exactly what some people want. Which is why you should run your own numbers. I'd just do it now, rather than waiting until you're at the brink of the decision and I'd reconsider what some of the "other method" proponents are dismissing: investment returns, social security payment risk, CPI underperforming inflation risk, and presuming a lifespan that only .001% of the population will live to.
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Re: When to take SS
Old 05-16-2007, 09:50 AM   #103
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Re: When to take SS

According to Thomas M Dalton, PhD, CPA, a professor of accounting and taxation at the University of San Diego, San Diego, Calif, says, "The analyses suggest that in all cases except for those with very low expected investment returns from individual retirement savings, it is economically beneficial for retirees to take Social Security benefits at age 62 and use these benefits to defer taking withdrawals from their retirement savings. Each retiree is unique, however, and all factors, including those affecting individual life expectancy, must be analyzed separately to determine the best choice."

This is really a very well-written article on this subject:
http://www.nysscpa.org/cpajournal/20...ntials/p42.htm

I am convinced that taking SS benefits at 62 is a prudent thing to do.

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Re: When to take SS
Old 05-16-2007, 09:58 AM   #104
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Re: When to take SS

Quote:
Originally Posted by chinaco

- Risk of dying younger than SS Break Even --- increases are you get older. 62 is less than 72 is less than 82 etc...
actually, not. A 72 year old, according to mortality tables, can exect to live to an older age than a 62 year old. An 82 year old, can expect to live longer than a 72 year old. So the older you are, the risk of dying younger than SS break even decreases
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Re: When to take SS
Old 05-16-2007, 10:07 AM   #105
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Re: When to take SS

Quote:
Originally Posted by bosco
actually, not. A 72 year old, according to mortality tables, can exect to live to an older age than a 62 year old. An 82 year old, can expect to live longer than a 72 year old. So the older you are, the risk of dying younger than SS break even decreases
Next I suppose you are going to say that the probability of living until the break even age is 100% when you have lived to the break even age!
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Re: When to take SS
Old 05-16-2007, 10:22 AM   #106
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Re: When to take SS

After reading this whole thread and the one from March I have concluded that I will wait until we are 62 and see which way the wind is blowing.

Health issues abound in our respective families and our life expectancy is expected to be a bit shy of the "norm".

Our other finances will easily fund a more than adequate lifestyle.

My SS will be about 30% higher than DW so we would most likely start hers earlier than mine.

I believe that SS will have increasing caps and will be taxed at increasing rates...no hard data...just a gut feel based on what I believe.

Our nest egg is very likely to outlast us even without SS figured in (my calcuations have never included it for income streams past age 62). If I add it in, my income tax at 70.5+ will be very high so spending our IRAs early is part of our plan. Even then, it is hard to imagine being able to actually spend what the income projects would be at RMDs in our late 70s. Too old to have much fun...too old to care. What would there be to spend money on except healthcare and that is covered already?

I will continue to enjoy the various opinions on the topic so by all means continue...the recreational value alone is worth the price of admission.
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Re: When to take SS
Old 05-16-2007, 10:38 AM   #107
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Re: When to take SS

Quote:
Originally Posted by Cute Fuzzy Bunny
Simple. JDW makes a good deal of assumptions that I have no reason to believe will bear out and builds constructions that are not realistic.

The principal problem in the example he uses is the lack of accountability of the increases in base portfolio while using the early social security income to offset withdrawals. He uses a money market account and divides the amount by eight. I cant imagine why a retiree using an asset allocation strategy would suddenly default to 8 years of cash, unless they were just trying to craft a scenario that makes delaying social security look appealing.
I don't see how anything is invalidated by those assumptions. I see two good reasons for dividing the cash into 8 segments for 8 years under the 'delay' scenario:

1) Eight years with yearly withdraws is a short enough time frame that using a money market and assuming returns ~ CPI seems reasonable.

2) For the sake of this analysis, it simplifies the explanation - if we throw market return variables on top of it, we have just muddied the waters.

Quote:
The principal problem in the example he uses is the lack of accountability of the increases in base portfolio while using the early social security income to offset withdrawals.
I don't get that statement at all - he uses a 4% SWR number for the 'take it early' scenario. What else is there to account for?

Another advantage to the 'delay' scenario is, if you outlive the 30 year 4% SWR number, you will still be getting your higher annual SS payment.

RE: SS insolvency issues, increased taxing, etc - Well, each of us need to evaluate that when we reach 62. However, I think that for this discussion, we should put it aside for the moment, and determine if we agree with the JDW analysis as it stands. If we agree on that, then we can go back and use some discount number for SS and see how it plays. But lumping it all together just clouds the issue. One variable at a time please.

-ERD50
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Re: When to take SS
Old 05-16-2007, 11:48 AM   #108
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Re: When to take SS

Quote:
Originally Posted by youbet
Next I suppose you are going to say that the probability of living until the break even age is 100% when you have lived to the break even age!
... and you can drown in an average of 6 inches of water ...

This is a good thread in that it does make one consider the alternatives.
From a 'real world' decision, as opposed to the academic exercise, I think that it boils down to:
1) do you need the money to live on immediately (low income = early, others = later)
2) how's your health (bad family history = early, others = later)
3) do you want to leave a legacy (yes=early, no= later)

It does seem that the difference in the long haul is, in real dollars, negligible. It is about $50K (according to someones numbers) over 30 or 40 years, in inflated dollars. So if you don't want to roll the longevity dice, I think that the answer is to take it early.

I am leaning towards taking at 62. 1) do not need money to live on, 2) mixed family health history, 3) legacy not a focus or priority ... if it happens it happens

I do have a question that has NOT been addressed here, and that is of the tax consequences of taking it early or late. If you have a lot of taxable income (say 70K counting pension and income from portfolio), does it make sense to defer to later so that you actually net more. DON'T ANSWER HERE... I will start another thread.
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Re: When to take SS
Old 05-16-2007, 12:09 PM   #109
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Re: When to take SS

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Originally Posted by megacorp-firee

2) how's your health (bad family history = early, others = later)
Look at the JDW example - there is *no* 'waiting period' or age to hit before there is a payback. The payback is immediate. You take a higher withdraw early, and it is funded by the higher deferred SS payments.

If you die early, you were able to spend more while you were living, which was CutThroat's goal (spending more that is, not dieing early).

Yes, you will on average leave less to heirs. With the higher SS payment, you get by with a smaller portfolio. That is how it 'works'.

I also looked at my company pension this way, but it is not COLA, and the numbers just did not work. I will take my pension early. SS I will re-evaluate at 62.

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Re: When to take SS
Old 05-16-2007, 01:05 PM   #110
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Re: When to take SS

Quote:
Originally Posted by bosco
actually, not. A 72 year old, according to mortality tables, can exect to live to an older age than a 62 year old. An 82 year old, can expect to live longer than a 72 year old. So the older you are, the risk of dying younger than SS break even decreases
Really? Here is the mortality table.

Male Female
Age Death life Death Life
Probability Exp Probability Expectancy
60 0.012405 84,642 19.81 0.007732 90,821 23.11
61 0.013589 83,592 19.05 0.008497 90,119 22.28
62 0.014840 82,456 18.31 0.009318 89,353 21.47
63 0.016149 81,232 17.57 0.010192 88,521 20.67
64 0.017547 79,920 16.85 0.011138 87,618 19.88
65 0.019102 78,518 16.15 0.012199 86,642 19.09
66 0.020847 77,018 15.45 0.013384 85,586 18.32
67 0.022767 75,413 14.77 0.014669 84,440 17.56
68 0.024878 73,696 14.10 0.016055 83,201 16.82
69 0.027201 71,862 13.45 0.017571 81,866 16.08
70 0.029824 69,908 12.81 0.019312 80,427 15.36
71 0.032719 67,823 12.19 0.021265 78,874 14.66
72 0.035795 65,604 11.59 0.023333 77,197 13.96
73 0.039031 63,255 11.00 0.025500 75,395 13.29
74 0.042518 60,786 10.42 0.027850 73,473 12.62
75 0.046499 58,202 9.86 0.030582 71,427 11.97
76 0.051003 55,495 9.32 0.033749 69,242 11.33
77 0.055873 52,665 8.79 0.037253 66,905 10.71
78 0.061104 49,722 8.29 0.041110 64,413 10.10
79 0.066844 46,684 7.79 0.045426 61,765 9.51
80 0.073269 43,564 7.31 0.050396 58,959 8.94
81 0.080572 40,372 6.85 0.056098 55,988 8.39
82 0.088858 37,119 6.41 0.062487 52,847 7.86
83 0.098235 33,821 5.99 0.069605 49,545 7.35
84 0.108694 30,498 5.58 0.077552 46,096 6.86
85 0.120186 27,183 5.20 0.086443 42,521 6.40
86 0.132672 23,916 4.85 0.096377 38,846 5.96
87 0.146137 20,743 4.51 0.107427 35,102 5.54
88 0.160593 17,712 4.20 0.119640 31,331 5.14
89 0.176074 14,867 3.90 0.133035 27,583 4.78
90 0.192615 12,250 3.63 0.147616 23,913 4.43
91 0.210240 9,890 3.38 0.163376 20,383 4.11
92 0.228968 7,811 3.15 0.180297 17,053 3.82
93 0.248798 6,022 2.93 0.198353 13,978 3.55
94 0.269717 4,524 2.74 0.217509 11,206 3.30
95 0.290557 3,304 2.56 0.236924 8,768 3.08
96 0.311026 2,344 2.41 0.256339 6,691 2.88
97 0.330817 1,615 2.27 0.275469 4,976 2.70
98 0.349613 1,081 2.15 0.294012 3,605 2.54
99 0.367093 703 2.04 0.311653 2,545 2.39
100 0.385448 445 1.93 0.330352 1,752 2.25
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Re: When to take SS
Old 05-16-2007, 01:15 PM   #111
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Re: When to take SS

Quote:
From a 'real world' decision, as opposed to the academic exercise, I think that it boils down to:
1) do you need the money to live on immediately (low income = early, others = later)
2) how's your health (bad family history = early, others = later)
3) do you want to leave a legacy (yes=early, no= later)

Let's make this a simpler process. You can two buckets from which to withdraw money (for your living expenses). The first bucket has a historical return of 8% while the latter bucket (SS) has a low return. Which bucket would you pick?

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Re: When to take SS
Old 05-16-2007, 01:36 PM   #112
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Re: When to take SS

Quote:
Originally Posted by Spanky
Really? Here is the mortality table.
I think what Bosco probably meant is not that at age 82 one would have longer to live than he would have had at age 72, but that on average the 82 year old will have a higher attained age at death. Your figures support this statement.

Also, I have a question about your chart- the "death probability" figures you quote- I assume this is the probability of death during the year between the attained birthday and the next birthday?

Ha

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Re: When to take SS
Old 05-16-2007, 01:38 PM   #113
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Re: When to take SS

Quote:
Originally Posted by Spanky
Really? Here is the mortality table.
Which demonstrates the point:

At 60, life expectancy is 19.81 years, i.e. death at 79.81
At 70, life expectancy is 12.81 years, i.e. death at 82.81
At 80, life expectancy is 7.31 years, i.e. death at 87.31
At 90, life expectancy is 3.63 years, i.e. death at 93.63

QED

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Re: When to take SS
Old 05-16-2007, 02:05 PM   #114
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Re: When to take SS

Quote:
Originally Posted by Spanky
Really? Here is the mortality table.
Spanky I think you (or maybe it's me) missed the point. I am looking for the 'tongue in cheek' smiley but can't find it ....
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Re: When to take SS
Old 05-16-2007, 02:13 PM   #115
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Re: When to take SS

CFB....

I have not run through the numbers and for me it is moot since I do not need to make the decision for many years to come....

But I see a flaw in your logic (not numbers)... you say that you are worried that they will reduce the payout so take it now as opposed to later... well, logic would say that if they are going to be cutting after you have passed 62, then they will cut what people are already getting...

I just don't see this happening... even today they talk about protecting people 'close' to retirement age... all the cuts will come from the younger folks... so, if you are about to make the decision, no cut should be factored into the calculation... will the amount you are being told today be the number 15 year from now when you retire? I don't know (but think not).. but when that day comes, all number will be 'firm'...

Hope you understand what I am trying to say... it does not read well to me...
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Re: When to take SS
Old 05-16-2007, 02:43 PM   #116
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Re: When to take SS

Quote:
Originally Posted by New Thinking
Let me share with you again the tax efficiency angle. If you don't "get it", don't let it bother you because none of the experts got it before either. Let me first ask whether you would be interested in converting your IRA to a Roth without paying taxes on the conversion? Or, what if you could provide yourself with tax-free income from your 401k? This is somewhat similar because you can construct an income stream in retirement made up of IRA and Social Security income and pay much less in lifetime taxes (than what nearly everyone does) under current law.

And when you talk about income, wealth, and risk, in my opinion it helps to work backward. What matters is AFTER-TAX income and if you are married it is while you both are alive and then it is for the remaining life of the widow or widower. Since it is AFTER-TAX income that matters, the more you have to pay in taxes, the more you have to draw down your portfolio. This results in a lower standard of living, lower potential wealth, and higher probability of running out of money.


In a nutshell, most people will take IRA income along with SS at a reduced rate. since the thresholds under the Combined Income forumula (which determines the taxation of SS) are not indexed for inflation, many future retirees will pay high marginal tax rates on their IRA withdrawals because it will "force" the taxation of their SS benefits. Thus IRA income gets taxed and up to 85% of SS gets taxed.

If you delay SS and create larger SS income streams, you take advantage of the way the law is written to reduce taxes. You may pay a little more tax on your income in the early years of retirement because you are taking only IRA income. But when your higher SS kicks in, your taxes may be substantially reduced. You take advantage of three critical items. First, you have less IRA income so the taxes are reduced. Second, your SS income goes into the Combined Income formula at a 50% rate, so you can get much more income into the formula. Third, and this is critical, the SS tax is determined based on the least of three tests. And the test that will apply usually is 1) 50% of the Combined Income overthe first threshold plus 35% over the second threshold. 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.

For a widow, the tax angle is even sharper because she is now faced with lower tax brackets and SS taxation thresholds so allowing her to inherit a large SS survivor benefit provides much more after-tax income than a lower SS benefit and IRA income.

Thus, one could create a much more tax-efficient income strategy.. Remember that FireCalc ignores taxes and this may be a better way since it is AFTER-TAX income that matters...If you pay less taxes in retirement, can you not retire sooner because your nest egg can be smaller??
I’ve wondered about the tax angle. Your post prompted me to go out and do some calculations. Of course, taxes are complex enough that it’s hard to come up with general rules. I used this example:

Husband and wife, both age 62, with “full” SS benefit of $32,000 at age 66. They could start the benefit today at $24,000. They want $50,000 of after tax income. Their money is in a tax-deferred account (IRA).

First, I did a simple calculation that ignored taxes and the IRA and asked “What’s the crossover age for the SS benefit?” It is, of course, 78 if you ignore inflation and investment income (or assume that inflation=investment income). If you assume investment income outruns inflation by 3% annually, then the crossover is almost 81. For 6% interest, the crossover is almost 92.

Then I put in taxes and calculated how much I needed to withdraw from the IRA (before tax) to generate my after tax target of $50,000. For each future year, I increased the SS benefits, tax brackets and deductions for inflation, but I did not increase the $32,000 and $44,000 in the calculation of how much of the SS benefit is taxable.

I did this two ways, first taking the SS benefit at 62, then deferring to 66. Of course the initial withdrawals are bigger in the defer-to-66 case, but the later withdrawals are smaller. As you predicted, the “defer” case also keeps you out of the higher tax brackets longer.

Finally, I accumulated the withdrawals in the two cases to see when the “crossover” occurs. If I use an investment return equal to inflation, the crossover is just before 77 (compared to 78 when I ignored taxes). If I use an investment return of inflation plus 3%, I get 80, one year sooner than 81. If I use inflation plus 6%, my crossover point moves forward to 88, compared to 92. So I get what you predicted – taking taxes into account makes it somewhat more attractive to defer SS as you’re more likely to live long enough to overcome the initial extra withdrawals.

However, the differences are pretty small. I need to assume inflation plus 6% to get a real difference, and then it’s at ages that I probably won’t live to see. So I’m concluding that, in this one case, introducing taxes goes in the direction that favors deferring, but probably wouldn’t change a lot of decisions.

Just to document some assumptions, I used the 2005 FIT factors in the first year. This meant a standard deduction of $12,000, personal exemptions of $3,200, the top of the 10% bracket at $14,600, and the top of the 15% bracket at $59,400. I inflated each of these every year. My first year IRA withdrawal if I deferred SS was $54,716. My first year withdrawal if I took SS at 62 was $27,247.
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Re: When to take SS
Old 05-16-2007, 03:45 PM   #117
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Re: When to take SS

Quote:
If I use an investment return of inflation plus 3%, I get 80
I don't disagree that this is a likely "break-even" for a single individual using your assumed rate of return. But for most people, I would say that inflation + 3% is high enough. The long-term inflation rate is 2.8% from the SSA's point of view. So you are replacing a government-promised fixed benefit with one where you assume that you can get a net 5.8% (2.8% + 3%). Today's 10 year bonds are yielding 4.71%..If interest rates were higher than a higher rate of return may be comparable..But then again, higher inflation tends to accompany higher interest rates.

Good post.
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Re: When to take SS
Old 05-16-2007, 03:47 PM   #118
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Re: When to take SS

CFB - I will rerun and post a link when I get the time to insert everything properly again.
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Re: When to take SS
Old 05-16-2007, 03:58 PM   #119
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Re: When to take SS

Quote:
Originally Posted by ERD50
I don't see how anything is invalidated by those assumptions. I see two good reasons for dividing the cash into 8 segments for 8 years under the 'delay' scenario:

1) Eight years with yearly withdraws is a short enough time frame that using a money market and assuming returns ~ CPI seems reasonable.

2) For the sake of this analysis, it simplifies the explanation - if we throw market return variables on top of it, we have just muddied the waters.
And I see no reason to bucket it, or 'simplify' it. It needs to be muddy, its not a simple decision. If you break all of your financial decisions into tiny little boxes that have no interaction with each other, your net financial picture will suck. Do you invest without thinking about taxes? Do you pretend you have no debt when deciding whether to add more? yada yada yada. When have we talked about SWR's or retirement planning and someone said "I think in the middle of all of this, i'll go into cash and break it into eight annual buckets, and then..."? Never.

As always, I think many people have their minds made up already. Anything that 'muddies the water' is suspect or being made too complicated to suit the preordained decision.

Nearly every ER I talk to has an asset allocation, a budget and a spending plan. This decision therefore comes down to two things: when you start the external income stream and how that affects your asset growth and spending.

Firecalc doesnt this neatly: an income stream at any point, generally the earlier the better, eliminates failed series. Based on every run i've done, the smaller, earlier SS number produces a higher SWR, higher survivability, and the ability to spend more throughout a retirement.

Quote:
I don't get that statement at all - he uses a 4% SWR number for the 'take it early' scenario. What else is there to account for?
Because i'm making a shitload more than 4% on my money when i'm not spending it.

Quote:
Another advantage to the 'delay' scenario is, if you outlive the 30 year 4% SWR number, you will still be getting your higher annual SS payment.
Chances are if I made it 30 years with a 4% plan, i'll make it another 30 years. I havent seen too many plans that made it 30 years and werent bulletproof.

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RE: SS insolvency issues, increased taxing, etc - Well, each of us need to evaluate that when we reach 62. However, I think that for this discussion, we should put it aside for the moment, and determine if we agree with the JDW analysis as it stands. If we agree on that, then we can go back and use some discount number for SS and see how it plays. But lumping it all together just clouds the issue. One variable at a time please.
See, this encapsulates what makes me grouchy about this discussion...on one hand lets presume a ridiculously long life span and allow for everything going wrong. On the other hand, lets presume everything will go great and nothing, no matter how plausible, will go wrong.

The scenario I laid out HAS a minimum of variables: take your plan. Add the income stream at 62 and at 70. See that its better at 62. This alternative scenario makes no sense: lets put everything in cash for no apparent reason, then put it all into little boxes, for no good reason.

Then, lets make sure we reduce the problem to a state where we can assure the predetermined result.

I can all but assure you that you wont be getting 100% of your currently quoted, cpi adjusted social security dollars 30-40 years from now. Changes have already been made, so theres plenty of precedent.

What I think you're going to see is nationalized health care, elimination of medicare and medicaid, elimination of the CPI adjustment to social security, and private accounts or automatic 401k's for all workers. The dropping of the CPI adjustment is pretty well discussed and while it'll be painful, I think most people will take it vs getting 75c on the dollar instead.

Thanks, but while I'm like Steve and arent planning on the SS income at all, I'll take it the millisecond its available and blow every single check on whatever fun thing I can find to spend it on while i'm still young and healthy.
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Re: When to take SS
Old 05-16-2007, 05:53 PM   #120
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Re: When to take SS

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Also, I have a question about your chart- the "death probability" figures you quote- I assume this is the probability of death during the year between the attained birthday and the next birthday?
I think it is the probability of "kicking the bucket" from the last birthday to the next birthday.
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