When to take Social Security

[vimwick]

Re: When to take SS

from cfb:

If you feel comfortable with the inputs you provided, then you should delay receiving benefits. However, I didnt see a link posted to look at your results. Perhaps something was out of whack.

no point in inserting a link. you'd have to check every input. from advanced firecalc's default state, please enter the few parameters explicitly stated in the post. if i can take 3 minutes to run the numbers, surely you can take 1 minute to check the results

maybe there is something wrong with firecalc or my input. please check. if not, please concur that firecalc indicates that delay is optimal (in terms of maximum safe revenue stream) instead of continually insisting otherwise

again, thanks to all for this interesting and informative thread!

 

[SecondCor521]

Re: When to take SS

I don't know if this will help any, but I thought I would throw it out there for consideration.

I am currently taking my last MBA class on the subject of financial modeling and decision making. The instructor has been discussing a framework for solving these problems that is based on the following areas:

1. Inputs. These are the "knowns" or givens of the problem. For example, SS full retirement age of the individual is something that is an input to the problem. Inputs would also include any assumptions one wanted to make, for example, the average SS COLA.

2. Objective function. This is what you're trying to maximize or minimize. In my own case, I would be trying to minimize my age at FIRE. Another objective function might be to minimize the risk of running out of money. Yet a third objective function might be to maximize the amount of money spent between ages 62 and 70.

Note that, depending on the objective function one chooses, other variables in the problem become fixed inputs. For example, my objective function would have an input of my annual after-tax spending rate, whereas the second objective function would have an input of retirement age.

3. Decision variable(s). These are the things you're willing to change in order to achieve your objective function. I think that everyone here is discussing the decision variable "what age to take SS?" (1)

4. Constraints. These are the "subject to" factors, or limitations that one imposes on the solution. One example of the constraints that I would have is that my year end portfolio balance would never be negative for the rest of my life. Another person might add a constraint that their SS income never be more than 25% of their total income (maybe they don't want to rely on SS too much and want to mitigate their risk that way).

5. The Model. This is what you build to solve your objective function by changing your decision variables, based on your inputs and subject to the constraints. This would be the part of the spreadsheet that presumably projects out over the next X years one's spending, portfolio balance, age, taxes paid, etc. In my own case the model would be based on Firecalc -- that is, I would want to model my historical portfolio survival rate based on historical stock returns and inflation. My own model might also incorporate IRS mortality tables. A simpler model might be built on a static portfolio rate of return and a fixed death age.

I would respectfully submit a few things. First, once you identify the above five areas, the solution to the problem is pretty straightforward; if I identify to you precisely my choices for the above five areas, we should both be able to come up with the same answer. (2) Second, the solution to the problem is very dependent on all of the above five areas; if you and I have different constraints, or different objective functions, for example, we'll almost certainly get different answers (or if we get the same answer it's just a coincidence). Finally, I think many people on this thread are arguing past each other because they're arguing what the outcome of the decision variable should be even though they have different inputs, objective functions, constraints, and models. By my first and second points, unless you agree on those other things first, arguing about what the result should be is senseless.

2Cor521


(1) I don't think it has been noted here yet -- maybe it has -- but one can take SS any time after the early SS age (62 in most cases, I think). The benefit amount is reduced on a monthly basis prior to full retirement age and increased on a monthly basis after full retirement age but stops increasing at age 70, I think. The point is that the decision variable really should be allowed to range from 62 years 0 months, 62 years 1 month, ... 69 years 11 months, 70 years 0 months, and not just 62 vs. full vs. 70.

(2) Provided each of us hasn't made any miscalculations. Given that these models can be pretty complex, the fact that people make mistakes in their calculations adds an additional level of difficulty to the discussion. It's really easy to double count cash flows, forget to change a relative cell reference to an absolute cell reference, have an off by one error in an NPV calculation, etc.

 

[vimwick]

Re: When to take SS

nuts!

 

[Bikerdude]

Re: When to take SS

I don't know if this will help any, but I thought I would throw it out there for consideration.

I am currently taking my last MBA class on the subject of financial modeling and decision making. The instructor has been discussing a framework for solving these problems that is based on the following areas:

OK guys, funs over we got to add 'structure' to our discussion.

Good post SecondCor521!

 

[OAG]

Re: When to take SS

I have really enjoyed reading ALL of these SS threads AND injecting some minor input to them. But gosh does anyone make a decision and then learn to live with it (the decision) anymore? It is like looking for 6% versus 5.75% on a CD for 10K; the difference is not much. Granted SS differences can be larger especially if we assume we will live forever. No one will make the decision UNTIL at least age 62 (preceded by the applicable application processing timeframe) and then remember it is revocable at any point before death. Just pay back the money and reset the clock. Now I have blown my initial "live with it" decision.

 

[Cut-Throat]

Re: When to take SS

No one will make the decision UNTIL at least age 62 (preceded by the applicable application processing timeframe) and then remember it is revocable at any point before death. Just pay back the money and reset the clock. Now I have blown my initial "live with it" decision.

Not sure this is true! - I looked at the form and it is a request to 'reset the clock'. You must also list a reason for repayment. It may not be granted. I am guessing that you might have to be working and paying into SS for the request to be granted. I'm not going back to work!

 

[OAG]

Re: When to take SS

C-T: I was 66 when I called late last year and asked the question of the SS Representative. I was told the primary determinate was refunding all payments of SS (and if over 65 that included paying the Medicare premiums that were applicable). Reason(s): Guess it would be that you made an error in judgment when first electing to take the early payment. Guess you could also cite your education on this forum. :

Personally I did not elect to pursue it since I would have to repay 5 years worth along with an additional 7 years for the spouse but for someone that maybe changed their mind at say 63 or 64 (and before the water gets a tad muddier with Medicare) it appears clearly and easily doable.

Just a suggestion.

 

[Texas Proud]

Re: When to take SS

I have really enjoyed reading ALL of these SS threads AND injecting some minor input to them. But gosh does anyone make a decision and then learn to live with it (the decision) anymore? It is like looking for 6% versus 5.75% on a CD for 10K; the difference is not much. Granted SS differences can be larger especially if we assume we will live forever. No one will make the decision UNTIL at least age 62 (preceded by the applicable application processing timeframe) and then remember it is revocable at any point before death. Just pay back the money and reset the clock. Now I have blown my initial "live with it" decision.

I agree... it does not seem to be a huge difference whichever way you go... and it will not be a major decision for me until I am 62.... I will not spend money today without knowing how much I will be getting from SS..

 

[Independent]

Re: When to take SS

I don't know if this will help any, but I thought I would throw it out there for consideration.

I am currently taking my last MBA class on the subject of financial modeling and decision making. The instructor has been discussing a framework for solving these problems that is based on the following areas:

Good post. It's nice to have a framework like this.

I'm thinking that CFB's inputs include (a)"SS probably won't be there for my entire lifetime" and (b) "Because of (a), I wouldn't recommend that anyone retire until his/her/their assets are sufficient to provide for at least a basic level of spending, without any use of SS".

The result of (a) and (b) are that any SS benefit you actually get can be spent on luxuries. Therefore, the objective function can be "maximize the total SS benefit in the most likely case(s)". The calculations in the Dalton article are appropriate for that goal. Taking SS at 62 is a perfectly rationale conclusion for this set of inputs.

I intentionally constructed an example ($500k of assets, SS benefit, and nothing else) that fits different inputs. My inputs would include (a')"SS will probably be there for people who are turning 62 in the next few years" and (b')"Because of (a'), they can retire even though they need both SS and withdrawals from their savings to cover their basic spending".

Because these inputs say that I need both to cover the basic spending, my objective function becomes "Highest income consistent with the portfolio lasting my(our) entire life, even in the worst investment and longevity scenarios."

It so happens that this objective function is reasonably consistent with running FireCalc with a 95% requirement and a 30 year horizon, so this is the model I used. In this case, FireCalc is "controlled" by the almost worst (94th percentile) investment scenario coupled with an unusually long life. But, these are exactly the situations where it's best to defer SS (and Dalton's calculations agree with this). Deferring SS gives you the better position in the unusually bad scenarios, and these are the scenarios that control your decision when your basic needs are at risk. Hence the FireCalc results aren't surprising.

CFB would say to these people "Well just work for a few more years and you wouldn't need to be so ___ conservative!". That's factually correct, but it may be missing the fact that for some people, getting out of the workforce today may be a practical (they've been downsized) or psychological (I've worked 40+ years and I want to quit while I still have my health) necessity. So I think that my example works for some people.


As an aside, I would argue that most people who buy into the 4% withdrawal rate, even though they're using a model that has average investment returns over 6%, are making choice to "protect myself in the very bad cases" rather than to "maximize my withdrawals in the most likely cases". This choice probably isn't necessary if you're in "pretty comfortable" economic shape, so those people can use more liberal withdrawal rates. I'm sure this has been discussed at length on other threads.

 

[Cut-Throat]

Re: When to take SS

I agree... it does not seem to be a huge difference whichever way you go... and it will not be a major decision for me until I am 62.... I will not spend money today without knowing how much I will be getting from SS..

The way I look at it is that it may not make that much of a difference, but by delaying SS you get some added longevity insurance as well as not having to worry about Market fluctuation as much.

My personal strategy would be to 'lock in' my Expenses with delaying SS and an immediate annuity and have another chunk of assets invested in the Market. This would give me the 'staying power' to not touch assets in a downturn and pretty much guarantee my current standard of living.

I don't mind dying with a smaller portfolio than I had when I was alive. Also, I may consider a reverse Mortgage when I'm 75 and take the most expensive Atlantic Salmon Fishing trip on the planet!

I still feel that I'll probably die with some of my hard earned money unspent, but I'll continue to work on that, until I can figure out how I can bounce that check to the undertaker - I really don't want any vultures circling over my estate.

 

[megacorp-firee]

Re: When to take SS

I don't mind dying with a smaller portfolio than I had when I was alive. Also, I may consider a reverse Mortgage when I'm 75 and take the most expensive Atlantic Salmon Fishing trip on the planet!

Good for you .... I am starting to come to the same point you are.... except I have trouble figuring out where to buy that platinum diamond stud salmon lure..

I still feel that I'll probably die with some of my hard earned money unspent, but I'll continue to work on that, until I can figure out how I can bounce that check to the undertaker - I really don't want any vultures circling over my estate.

ditto, once I start to see any sustantial portfolio growth I will start taking the sailing lessons ... if I have something left over ... fine ... but it won't be because I tried to plan it that way,

 

[cute fuzzy bunny]

Re: When to take SS

It so happens that this objective function is reasonably consistent with running FireCalc with a 95% requirement and a 30 year horizon, so this is the model I used. In this case, FireCalc is "controlled" by the almost worst (94th percentile) investment scenario coupled with an unusually long life. But, these are exactly the situations where it's best to defer SS (and Dalton's calculations agree with this). Deferring SS gives you the better position in the unusually bad scenarios, and these are the scenarios that control your decision when your basic needs are at risk. Hence the FireCalc results aren't surprising.

Not an entirely bad summary; when you consider that it'll be nearly 20 years before I can even begin to start collecting, and the raft of bad news/prospective legislation in the works, for my model it seems a bit foolish to plan for social security.

However, I'm going to contest this point, and its the main thesis of what I've been writing but seems consistently missed.

As Dory noted in the 'great grampa' thread I linked to, volatility...particularly the sudden and downward variety...is the killer of retirements, especially early ones. The injection of an income stream into a retirement series...even a smaller stream somewhat earlier...increases the likelihood of success, higher income potential, and inversely...the chance of retiring earlier with less money.

Thats IF you believe you'll get your benefits, all of them, at 100%.

It just doesnt help you to get a few bucks extra a few years later if your net worth drops below zero prior to that happening.

Its about avoiding the draw down of assets when they're severely depreciated.

Which is why (again, this point seems to be passing unread, over and over) it may pay to plan and visit the decision BEFORE 62, because it can impact your spending, survivability, and ER age/pot size at 42 or 52. If you wait until 62, the income stream injection to an already healthy portfolio isnt as important. Its still a viable analysis at that point, but you may have missed out on the ability to have spent more earlier...which was the fricking point of this whole brouhaha when it came about.

I'd also note Ted's agreement to this line of thinking in that great grampa post. While Ted may have been a gigantic butthead, I think any seasoned er.org poster would agree that he was one of our sharper financial contributors.

 

[jdw_fire]

Re: When to take SS

As Dory noted in the 'great grampa' thread I linked to, volatility...particularly the sudden and downward variety...is the killer of retirements, especially early ones. The injection of an income stream into a retirement series...even a smaller stream somewhat earlier...increases the likelihood of success, higher income potential, and inversely...the chance of retiring earlier with less money.

Thats IF you believe you'll get your benefits, all of them, at 100%.

It just doesnt help you to get a few bucks extra a few years later if your net worth drops below zero prior to that happening.

Its about avoiding the draw down of assets when they're severely depreciated.

Bunny, if downward volitility is your major concern why did you protest so much about my example using a MMF which reduced the downward volitility to near zero for the 8 years between age 62 & 70 and also reduced the dependance of income on the fluctuating market throughout the entire plan? Have you really thought this through or do you just like arguing.

 

[garrynky]

Re: When to take SS

Simple guy here chiming in. I'll take SS at 62. Why? Two big reasons...I don't know if the SS rules will change and I don't know how long I'll live.

 

[Spanky]

Re: When to take SS

Simple guy here chiming in. I'll take SS at 62. Why? Two big reasons...I don't know if the SS rules will change and I don't know how long I'll live.

Possibly one more .... necessity (for some).

 

[chinaco]

Re: When to take SS

...
Which is why (again, this point seems to be passing unread, over and over) it may pay to plan and visit the decision BEFORE 62, because it can impact your spending, survivability, and ER age/pot size at 42 or 52. If you wait until 62, the income stream injection to an already healthy portfolio isnt as important. Its still a viable analysis at that point, but you may have missed out on the ability to have spent more earlier...which was the fricking point of this whole brouhaha when it came about.
....

Agreed... legislation, SS, economics, our understanding of our personal mortality, are shifting terra firma (a contradiction in terms). But we still need to seek an understanding and tune our understanding as things change. Otherwise, certain variables become a bit more cast in stone and we will be stuck with them (or the tax burden rather).

Bunny, your primary assertions have seemed to rotate around two concerns... Portfolio survival and SS/Govt will renege (via a shell game... taxes).

I have those very concerns. But my situation is slightly different than yours. You are correctly putting emphasis on those factors... but there are other variables to consider. The guy finishing his MBA pointed this out with his formula/framework from school.

Case in point. I will be retiring later than you (i.e., older). We have substantial amount of tax deferred money (401k, IRA). This money represents 2/3 of our portfolio. We have 1/3 in after tax accounts. Plus I have a small pension (non- COLA) coming which is not included in the portfolio. The pension will amount to about 10% of our projected income need in ER. We will have health benes provided by the company.

I have always suspected there was a means test on SS but had not found the write-up (have looked too hard) till "New Thinking" put his paper in front of us. Now I know. This is the type of information I needed to help me understand the tax situation so I can plan... and position myself now for the future. I do realize that I may have to change direction if certain situations/realities emerge.

I want to know more about the SS tax implications. I will have to study the subject a bit more.

 

[Texas Proud]

Re: When to take SS

Hmmm... all this bickering of a number between 62 and 66....

SO... split the difference and start at 64

 

[cute fuzzy bunny]

Re: When to take SS

Bunny, if downward volitility is your major concern why did you protest so much about my example using a MMF which reduced the downward volitility to near zero for the 8 years between age 62 & 70 and also reduced the dependance of income on the fluctuating market throughout the entire plan? Have you really thought this through or do you just like arguing.

Methinks the lady doth protest too much.

Unless you've got a hell of a portfolio, an early retiree needs to reach for a decent return on their investment in order to maintain satisfactory leverage against inflation, the tax man, etc. A money market wont cut it.

In order to protect yourself from downward volatility in a portfolio with a higher volatility risk level, one can use several tools. Debt reduction to reduce spending needs, budget restructuring to reduce costs, or an alternative income source like a pension, annuity, social security, or (gasp) a part time job or other income producing effort. We've certainly beaten most of these topics to death, and ESRBobs "work less live more" plenty well highlights the benefits of an income stream on portfolio survivability.

The problem with your 'model' is that you're trying to 'solve' the volatility problem by reducing the volatility risk by going to a money market. Unfortunately that creates a 'return' problem, which you then have to solve by changing your social security strategy.

I'm sort of all for not creating problems and then having to turn around and solve them.

By keeping the same asset allocation, enjoying the higher returns, and taking the income stream early, I'm maintaining a high level of long term returns (solving the returns problem) and also solving the volatility problem by replacing a portion of my portfolio draw down with the SS income stream. In fact, as I pointed out earlier in the thread, I may maintain or increase my portfolios return/volatility risk when the SS income stream is close to showing up...because I can.

This seems more intuitive to me than temporarily changing asset allocation to a reduced return, low volatility asset class for a specific period just to prove a point.

This situation is very similar to when I went from being a single ER to being married with a wife working PT. I had a much lower risk/volatility portfolio as a single. When we had a small income stream to work with and our health care covered, I felt we could take more risk in exchange for higher long term returns.

You've taken the reverse tack, I suppose in some effort to make everything "equal", when in fact you're just hamstringing one alternative to no benefit.

I guess the closest analog to the way I feel about this 'solution' is this: You know you're going to need to buy a new car, and you know right about when...ten years from now. You can plan for that, save the money, invest it in an asset class appropriate to the time frame, then a year or two prior to the purchase start easing the money out into cash. Substitute a college education, home purchase, or any other major financial activity to please yourself. Your proposal seems to say to me that its ideal to wait until the cusp of the purchase, put everything in cash, hold off on the purchase to maximize the value of delaying the cash outlay, then make the purchase. Makes no sense at all, does it? So why when the matter is one of cash flow the other way (incoming) that we jump through all of these funny hoops instead of simply planning for it in advance and investing accordingly?

But dont just listen to me...

Volatility is the killer when you're drawing down a portfolio. A few bad years early in the retirement combined with your withdrawals will seriously drain the nest egg, while as many bad years late in the retirement won't even show up in the safe rate data -- because then you're only reducing the estate you're leaving.
[...]
Let's apply this to the Social Security age question. The sooner you start taking Social Security, the sooner you insulate part of your withdrawals from adverse impacts of volatility.

What you have seen is that, given your variables and your decision to look at the 95% "safe" point, adverse volatility in the early years would have occurred often enough to make the earlier Social Security withdrawals more attractive.

Social Security payouts are basically an "immediate annuity," but in the past have been better than private annuities in two important respects: (1) Payments have risen with inflation and (2) Payments have not been taxed as heavily.

The possibility of not living long enough to receive any Social Security benefits, much less to maximize those benefits, is an important argument for receiving benefits as soon as possible. Other considerations that favor this strategy are (1) the likelihood that Social Security benefits will not be increased as fast as overall inflation in the future, and (2) the possibility that Social Security benefits will be more heavily taxed in the future, especially for people who have substantial income from other sources. So I fully agree with the strategy for most retirees to withdraw their benefits as early as possible.

I agree with the sentiment for early withdrawal. I had expected that the safe thing to do would be to defer payout, which would make more money overall available and allow higher safe withdrawals of other funds earlier.

However, as Dory points out, the reduced exposure to market volatility seems to be the controlling factor. In any case, the difference seems to be small enough to allow one to base the decision on other factors if they wish. I'm pleased to see that the 'safe' withdrawal strategy is also the early one...

Now lets see if you can actually read through the post, comprehend it, and not rush to attack it...since thats what you're repeatedly accusing me of...

 

[Independent]

Re: When to take SS

....
As Dory noted in the 'great grampa' thread I linked to, volatility...particularly the sudden and downward variety...is the killer of retirements, especially early ones. The injection of an income stream into a retirement series...even a smaller stream somewhat earlier...increases the likelihood of success, higher income potential, and inversely...the chance of retiring earlier with less money.

Thats IF you believe you'll get your benefits, all of them, at 100%.

It just doesnt help you to get a few bucks extra a few years later if your net worth drops below zero prior to that happening.

Its about avoiding the draw down of assets when they're severely depreciated.

This certainly seems plausible -- don't put yourself in a position where you have to sell assets when prices are down.
Therefore, early income form some non-portfolio source is a good thing.

However, I can't make the math work. I tried Firecalc with my prior example ( $500,000 assets, either $24k SS at 62 or $32k SS at 66), but I put in Annual Spending of $45,000 for both.

It turns out that the later start date is successful in 105 out of 106 scenarios. The earlier start date is successful in 98 out of 106. This isn't surprising given the earlier results.

However, it's interesting to note which of the 106 possibilities make the difference. They are the 6 retirement years from 1964 thru 1969, plus 1906. The years in the 60's all had poor investment returns early on. They all eventually get to the bull market starting in 1981, but if you started SS at age 62, you didn't make it to the end.

As it turns out, the "start at 66" strategy pulls ahead of the "start at 62" strategy in the 14th or 15th year after retirement in these six cases. Of course it widens its lead after that.

These were bad years for both SS strategies. That seems to support the idea that poor returns in the early years are particularly tough on retirement income.

However, the strategy that brought SS income in sooner actually did worse in these years. That seems to contradict the notion that early SS income is more valuable than later income in tough investment scenarios.

Which is why (again, this point seems to be passing unread, over and over) it may pay to plan and visit the decision BEFORE 62, because it can impact your spending, survivability, and ER age/pot size at 42 or 52. If you wait until 62, the income stream injection to an already healthy portfolio isnt as important. Its still a viable analysis at that point, but you may have missed out on the ability to have spent more earlier...which was the fricking point of this whole brouhaha when it came about.

I started doing "when can I retire?" calculations in my early 50's. It looked to me like the "start SS early vs. start SS later" was a pretty close call that I wouldn't think about much until I got closer to 62. You're saying that doing a careful analysis at that time would have made a significant difference to me. It's not clear to me what I would have done differently.

 

[ERD50]

Re: When to take SS

This certainly seems plausible -- don't put yourself in a position where you have to sell assets when prices are down.
Therefore, early income form some non-portfolio source is a good thing.

However, I can't make the math work. I tried Firecalc with my prior example ( $500,000 assets, either $24k SS at 62 or $32k SS at 66), but I put in Annual Spending of $45,000 for both.

It turns out that the later start date is successful in 105 out of 106 scenarios. The earlier start date is successful in 98 out of 106. This isn't surprising given the earlier results.

Independent, I replicated your results and also stretched them out to $42,240 taken at age 70 (1.76 times $24,000). For your scenario, delay of SS seems to 'peak' near 66 yo. I got a 103/106 success rate at a delay to 70 yo. Summary:

$24,000 SS taken 2007 (age 62) - 98/106 success 92.5%
$32,000 SS taken 2011 (age 66) - 105/106 success 99.1%
$42,240 SS taken 2015 (age 70) - 103/106 success 97.2%

The % of your 'spend' that SS represents will apparently move the inflection point around. This scenario also does not include the idea of moving the relatively short term money (4 or 8 years) to a MMF. I may address that issue in a separate thread (after I get some yard work done!).

...
As Dory noted in the 'great grampa' thread I linked to, volatility...particularly the sudden and downward variety...is the killer of retirements, especially early ones. The injection of an income stream into a retirement series...even a smaller stream somewhat earlier...increases the likelihood of success, higher income potential, and inversely...the chance of retiring earlier with less money.

CFB, the problem with this statement is that it is a *general* statement. The results *will* vary dependent upon how much less and how much earlier. Several Firecalc runs have shown that it can help to defer SS.

There is the possibility that the model using a MMF for the short term money tips this further to delay. Yes, I know, you reject that as not Apples-to-Apples, fine, but if them apples are better, I'm all for it. I mean, aren't we looking for better alternatives? Doesn't 'better' imply 'different'? As I said, I'll try to tackle an apples-to-apples format (simulate FireCalc with the first 4 or 8 years in a MMF - constant SS) in a separate thread a bit later.

-ERD50

 

[cute fuzzy bunny]

Re: When to take SS

CFB, the problem with this statement is that it is a *general* statement. The results *will* vary dependent upon how much less and how much earlier. Several Firecalc runs have shown that it can help to defer SS.

Which is why I repeatedly suggested people do their own calcs, take everything into consideration, and dont stack the deck. Unless of course you want a particular answer, in which case stack away!

There is the possibility that the model using a MMF for the short term money tips this further to delay. Yes, I know, you reject that as not Apples-to-Apples, fine, but if them apples are better, I'm all for it. I mean, aren't we looking for better alternatives? Doesn't 'better' imply 'different'? As I said, I'll try to tackle an apples-to-apples format (simulate FireCalc with the first 4 or 8 years in a MMF - constant SS) in a separate thread a bit later.

I think I distilled this whole thing down to a simpler form while I was grocery shopping earlier. Hey, produce makes ya smarter, doesnt it?

We're comparing a CPI indexed immediate annuity to a CPI indexed deferred annuity to a cash position.

With no other inputs, the deferred annuity will usually win with the immediate annuity in second place. Cash is always going to lose, its the low common denominator. You dont even need any fancy math, special buckets, or much of an explanation.

However, I think its been well established that a self directed portfolio using a reasonable asset allocation containing at least 25-35% equities will trump both an immediate and deferred annuity due to the expenses of the latter two options.

The wild cards and other inputs to this equation:

- When are you going to die? Obviously long livers (not to mention long spleens) will start to gain in the 90+ age range. Now next serial question: will it matter to you to have extra money at that point? Unfortunately we cant answer this question for any individual that isnt bought into the smith and wesson retirement plan.

- Will the 'insurer' pay? Would you buy an annuity from a company who printed on their prospectus that they anticipated running out of money in <40 years, and that their operating management were frequently working towards cutting payments and payment benefits, and had done so several times already? Pretty bloody unlikely IMO. If you're so risk averse that you're looking to defer your annuity for a larger payout, risk factors like that would give you the heebie jeebies.

- Can you manage the volatility risk and sleep at night factors? Everyones got their own answer for this one, its pretty personal. But I'm thinking most ER's are risk takers.

Looking at this from a pure ER standpoint, starting in my 40's, self directed portfolio of about 75% equities, borrowing Nords' "invest like you're immortal" strategy, 50 year time horizon, social security early allows me to draw thousands more per year starting from my current age...for the rest of my life. Unfortunately I dont believe that SS will be paying what they say they will by the time I'm eligible, so I plan without it. However, if I was 8-10 years older...maybe a different story.

Here's another way to look at it, tying in the "dividend stock" approach, which I also favor. Its pretty easy to dig up a dividend stock mutual fund that pays close to 3%, has good NAV growth to offset inflation over a 20-30+ year period. I think for most people, even early social security will pay at least 25% of their costs of living. Between the two, you're at well over a 4% draw, with a skinny tax profile of your SS income and qualified dividends. Not too shabby.

I'm not in this to argue. I just think its patently stupid to think you can spend down your money in your 50's, then count on a 30k a year annuity to bail you out and keep paying when there are clear and present signs that it might not, when an alternative approach still lets you spend extra in your youth AND maintain a safe withdrawal rate that works for any life span. There just isnt a free lunch here. It might sound great when your wife is making six figures and has no plans to retire...you've got a backup plan. I'm thinking that most actual retirees living off a portfolio that take a swing at this 'alternative plan' better think about living in an efficiency apartment and eating a lot of spaghetti in their 90's.

I'm also not into stacking the deck. While there are some ER's that have serious risk aversion and think 5 year cd's are a little too risky, I think most retired and prospective retired folks are comfortable with at least some equity risk, self directed portfolios and low cost investment shops. Those folks can kick the crap out of any annuity if they work their plan and stick with it.

For those people, taking an income stream injection as early as possible, mid plan, will help their portfolio survivability.

Or me, the guy that started the web site and wrote the retirement calculator, and a couple of other smart guys have it all wrong.

 

[mathjak107]

Re: When to take SS

its very difficult for individuals to duplicate the rates of most annuties because the insurance company has a big advange you dont. while you can ladder bonds and investments too they have a big pile of dead people funding the pot. thats why you can usually get a greater draw off an immeadiate annuity than you can do on your own.

 

[Cut-Throat]

Re: When to take SS

its very difficult for individuals to duplicate the rates of most annuties because the insurance company has a big advange you dont. while you can ladder bonds and investments too they have a big pile of dead people funding the pot. thats why you can usually get a greater draw off an immeadiate annuity than you can do on your own.

This is exactly the conclusion that I have come to. Despite all of the 'wild' calculations presented in these discussions, I cannot see how you can match the withdrawal rates of delaying SS and/or buying an annuity at age 70. Yeah, you end up with a smaller pile, but if you're not focused on leaving something to your heirs, but instead on being able to spend more money while you are alive, it looks like the way to go.

There is a lot of focus on 'break even point' living to age 107, getting your hands on the SS money at age 62 - but all are completely irrelevant on what you actually get to spend while you're alive.

 

[mathjak107]

Re: When to take SS

its funny why you mention a smaller pile. when my wife and i ran it using the fidelity calculator which is also quite detailed as long as one of us made it to 81 the bigger pile was also by taking it at 70. i thought for sure it would be collecting early but it never worked out that way. i could either take a bigger withdrawl at 62 by waiting to 70 or leave the withdrawl the same as id get at 62 and i still got the bigger pile or my spouse did.

 

[Cut-Throat]

Re: When to take SS

its funny why you mention a smaller pile. when my wife and i ran it using the fidelity calculator which is also quite detailed as long as one of us made it to 81 the bigger pile was also by taking it at 70. i thought for sure it would be collecting early but it never worked out that way. i could either take a bigger withdrawl at 62 by waiting to 70 or leave the withdrawl the same as id get at 62 and i still got the bigger pile or my spouse did.

The 'Bigger Pile' reference was if you purchased an annuity with half of your stash, to up the withdrawal rate or spent more between 62-70 in anticipation of a larger SS check.