Would you delay taking SS?

[pb4uski]

([1+(8%*4)]/[1+(8%*3)])-1 = (132/124)-1 = 6.45% = the growth in the benefit from age 69 to age 70.

It is because the 8% is simple growth and not compound growth.

IOW, the 132 is 100 + (8%*4) if it were compounded it would be 100 * (1+8%)^4 or 136. It is what it is.... it doesn't make the decision any different because at the end of the day it is still good deal compared to the pricing of commercially available inflation adjusted annuities.

And for the record, where I said 8% for 4 years I was just trying to explain how the 132 was computed for those who may have thought the 8% was compounded. I recall that way back when I initially thought and would have expected it to be compounded but I learned that it is simple interest.

 

[Perryinva]

Because an 8% a year increase, when typically discussed, is compounded. The 8% in SS is always a percentage of the original FRA amount. I also think it is a bit misleading, as it is simplified for increasing its apparent value. So the DIFFERENCE in actual SS between claiming at 69 vs claiming at 70 is 6.45% of the age 69 amount, not 8%. The difference between filing at 69 and 70 is 8% of what your FRA amount was. Who discusses increases as a percentage of what the total was years ago?

Just like some people that talk about the 8% ROI of delaying. There is no 8% ROI. When you delay, you are actually making monthly payments of increasing amounts per month (since every month you delay, you are forfeiting the increased monthly SS payment that would have gone to you) for an annuity. The actual ROI would be comparing what you would have earned on the original SS claimed, vs what you make investing the higher delayed amount for the later years. In some cases, of an early bull market, followed by a long bear, early filing for SS would come out way ahead. On the other hand, the opposite would give delayed filing a super ROI in short order. There is NO right or wrong answer.

If you need SS to survive at 62, then delayed filing is not an option. Yet people in that position still insist filing at 62 is the best option for everyone, because "what if you die before the break even point?"

There is no logic to that what so ever, but I read that argument almost weekly.

Whether you delay filing or not FINANCIALLY depends on whether you can
1. Afford to delay without affecting your lifestyle.
2. Whether you can reasonably expect to live beyond about age 82.
3. Whether the cost of the annuity is worth the diversification and longevity insurance for you and your spouse.
4. Whether the protection from increased Medicare Part B premiums are significant to your retirement income or not.

Then there is the emotional decision, which is often irrational but very real nonetheless. DW retired early at 55. She wanted hers at 62, because she wanted it now, not 4 years from now. That $48k was worth way more to her now, than the increase of $300/mo in 4 years, because $300/mo is didlly to our lifestyle once I retire. But $1200/mo now, while I am working and saving means $48k that is "free" for vacations, a new car, shoes, hair, whatever...because it is $1200/mo we didn't have the month before. Financially, that is all nonsense. But to her, with little financial acumen, it was a slam dunk argument. So for $300/mo (COLA!) I decided it was not worth the turmoil. Pick your battles. Better to delay mine to at least FRA where the dollar amount is more significant, like $1000/mo.

 

[Perryinva]

And sorry, but I side with Runningburn on the tax rate. If an increase in income of $100, or $1000, causes it to be taxed at 15%, so you have a net of $85 or $850, then that is the real bracket you are paying at, regardless of whether by definition you are in the 28% bracket. Which is where my original LTCG statement came from in the first place. Also, as shown on both programs, the effective tax rate was about 7.5%. Which beats the cr@p out of the typical 15 -16% effective rate I pay now, while being in the upper end of the 25% bracket. It simply means that not all infome is created equally. Some is worth a lot more than others for the same face value.

 

[pb4uski]

I agree that in the example that the marginal tax rate is 15% and that is the relevant rate for decision making.... but as "tax brackets" are typically referred to the example is in the 28% tax bracket (as shown in the Fidelity link). In many cases the tax bracket and marginal tax rate for ordinary income are the same, particularly for those with a lot of ordinary income, but the marginal tax rate can be different in certain circumstances.

 

[Sunset]

Because an 8% a year increase, when typically discussed, is compounded. The 8% in SS is always a percentage of the original FRA amount. I also think it is a bit misleading, as it is simplified for increasing its apparent value. So the DIFFERENCE in actual SS between claiming at 69 vs claiming at 70 is 6.45% of the age 69 amount, not 8%. The difference between filing at 69 and 70 is 8% of what your FRA amount was. Who discusses increases as a percentage of what the total was years ago?

Just like some people that talk about the 8% ROI of delaying. There is no 8% ROI. When you delay, you are actually making monthly payments of increasing amounts per month (since every month you delay, you are forfeiting the increased monthly SS payment that would have gone to you) for an annuity. The actual ROI would be comparing what you would have earned on the original SS claimed, vs what you make investing the higher delayed amount for the later years. In some cases, of an early bull market, followed by a long bear, early filing for SS would come out way ahead. On the other hand, the opposite would give delayed filing a super ROI in short order. There is NO right or wrong answer.

If you need SS to survive at 62, then delayed filing is not an option. Yet people in that position still insist filing at 62 is the best option for everyone, because "what if you die before the break even point?"

There is no logic to that what so ever, but I read that argument almost weekly.

Whether you delay filing or not FINANCIALLY depends on whether you can
1. Afford to delay without affecting your lifestyle.
2. Whether you can reasonably expect to live beyond about age 82.
3. Whether the cost of the annuity is worth the diversification and longevity insurance for you and your spouse.
4. Whether the protection from increased Medicare Part B premiums are significant to your retirement income or not.

Then there is the emotional decision, which is often irrational but very real nonetheless. DW retired early at 55. She wanted hers at 62, because she wanted it now, not 4 years from now. That $48k was worth way more to her now, than the increase of $300/mo in 4 years, because $300/mo is didlly to our lifestyle once I retire. But $1200/mo now, while I am working and saving means $48k that is "free" for vacations, a new car, shoes, hair, whatever...because it is $1200/mo we didn't have the month before. Financially, that is all nonsense. But to her, with little financial acumen, it was a slam dunk argument. So for $300/mo (COLA!) I decided it was not worth the turmoil. Pick your battles. Better to delay mine to at least FRA where the dollar amount is more significant, like $1000/mo.

Thanks for stating a few things so clearly:

1) Like the amount difference between 69 vs 70, which didn't stick in my brain until now.
2) That medicare cost yearly increase that is overlooked often if one choses to delay. If it was just $5/yr, then the benefit of delaying until 70 is reduced forever by ~$25 due to the increased Medicare B cost.

It was also funny to read the family dynamic about the "free" money..

 

[Sunset]

I agree that in the example that the marginal tax rate is 15% and that is the relevant rate for decision making.... but as "tax brackets" are typically referred to the example is in the 28% tax bracket (as shown in the Fidelity link). In many cases the tax bracket and marginal tax rate for ordinary income are the same, particularly for those with a lot of ordinary income, but the marginal tax rate can be different in certain circumstances.

For folks not paying State taxes.
Here in the IL State it would be practically speaking 15% + ~5% = ~20%

 

[RunningBum]

I agree that in the example that the marginal tax rate is 15% and that is the relevant rate for decision making.... but as "tax brackets" are typically referred to the example is in the 28% tax bracket (as shown in the Fidelity link). In many cases the tax bracket and marginal tax rate for ordinary income are the same, particularly for those with a lot of ordinary income, but the marginal tax rate can be different in certain circumstances.

Fine. I agree that these sites misleadingly refer strictly to taxable income when talking about the tax brackets. It's inaccurate because that's not the income number the tax is applied to, but that's what they say. I think it's also really bogus for you to correct someone on their discussion of a tax bracket because of this technicality.

 

[pb4uski]

Noted. And I think it is really bogus for you to make up your own defintion of tax bracket rather than use the definition that the rest of world uses so I guess that we are even.

 

[Scuba]

It just seems to me that most articles on the subject dwell too much on the "8%" increase in monthly payments by waiting. Maybe just my perception. Sorry I don't understand your numbers, but what about the other side? Those that will live less than the average? Everyone seems to look at their LE based on average or better than average, just as you have. Individual SS terminates at death. Assets remain. Those wealthy enough to delay SS , probably won't alter there spending with or w/o SS, so why not just take it and save a few investment $$? Unclaimed SS payments due to death go to other recipients, nothing bad about that, but that is in the hands of others to decide. How many of us, after working hard to reach retirement, would decide to allocate an unknown amount of our assets to an unknown person or entity to decide how to use those funds?

Does your calculation account for the time value of money? It doesn't appear to. That would make the difference considerably smaller, wouldn't it?

 

[RunningBum]

The IRS publications have no definition of tax brackets that I can see in the tax instructions. They have tax tables based on percentages and a tax computation worksheet that use percentages, and the tax computation worksheet says to use the taxable income on line 43, but with this note:

Note. If you are required to use this worksheet to figure the tax on an amount from another form or worksheet, such as the Qualified
Dividends and Capital Gain Tax Worksheet, the Schedule D Tax Worksheet, Schedule J, Form 8615, or the Foreign Earned Income Tax
Worksheet, enter the amount from that form or worksheet in column (a) of the row that applies to the amount you are looking up.

See IRS Publication 17, "Tax Guide for Individuals"

Other people refer to tax brackets, and I assume it's for simplicity they use the term "taxable income", because it's too wordy to include all those caveats. I've always thought that it was understood that you include those caveats appropriately. Nothing else makes sense to me because it's inaccurate and meaningless otherwise.

 

[pb4uski]

How to Determine Your Federal Tax Bracket: 8 Steps (with Pictures)

 

[RunningBum]

How to Determine Your Federal Tax Bracket: 8 Steps (with Pictures)

Tips

The number listed as your tax bracket percentage is actually your marginal tax percentage. That is, it is the percentage you would pay of each additional dollar you made.

Hmm, see any problem here?

 

[pb4uski]

In most situations your tax bracket and your marginal tax rate would be the same. Because ordinary income and preferenced income are taxed at different rates then it is possible that they might be numerous marginal tax rates within a tax bracket depending the taxpayer's mix of ordinary and preferenced income.

I cannot for the life of me figure out what is so hard for to understand.

If your taxable income is:
Less than $18,150, your tax bracket is 10%
Between $18,150 and $73,800, your tax bracket is 15%
Between $73,800 and $148,850, your tax bracket is 25%
Between $148,850 and $226,850, your tax bracket is 28%
Between $226,850 and $405,100, your tax bracket is 33%
Between $405,100 and $457,600, your tax bracket is 35%
Over $457,600, your tax bracket is 39.6%[7]

 

[RunningBum]

In most situations your tax bracket and your marginal tax rate would be the same. Because ordinary income and preferenced income are taxed at different rates then it is possible that they might be numerous marginal tax rates within a tax bracket depending the taxpayer's mix of ordinary and preferenced income.

I cannot for the life of me figure out what is so hard for to understand.

Post #135 is the best explanation I have.

 

[RunningBum]

Looking at the Fidelity site you keep referring to:
https://www.fidelity.com/tax-information/tax-brackets

In actuality, income is taxed in tiers. When your income reaches a different tier, that portion of your income is taxed at a new rate. Your marginal tax rate or tax bracket refers only to your highest tax rate—the last tax rate your income is subject to.

It sure seems to me that they must mean taxable income, with the caveats I talked before, like not including QDivs and LTCGs, otherwise this simply isn't true. But it's too wordy to include a longer explanation of exactly what "taxable income" refers to, so they omit the note.

The 0 regular income and 200K LTCGs is an extreme case, but, for another example, $125K regular income (after deductions and exemptions) and $25K LTCGs is not. You apparently would add them up to be $150K and put them in the 28% bracket. But their last dollar of regular income, or marginal tax rate, is taxed at 25%. Fidelity says the marginal tax rate is the tax bracket, which would be 25%, not 28%. This is why I don't think any of these sites mean "taxable income" is without the caveats, or notes in the IRS instructions.

 

[MarieIG]

Right now, my "plan" is not to file at 62, but rather for me to file between 67 and 70, and DH at 70. However, the best laid plans . . .

 

[pb4uski]

RB, you're overthinking it.

 

[RunningBum]

I'm using common sense.

 

[rayvt]

This is one of the more frustrating arguments I hear, because you are unfairly and incorrectly projecting our preparation in case we live longer to somehow be smug knowledge on our part that we are going to beat the odds.

Well, in fairness that's probably because most of the arguments he hears implicitly assume that they'll "beat the odds" and live longer than the life expectancy. Sometimes the assumption is explicit.
Example of implicit: "You will collect $X thousands more over your lifetime."
Example of explicit: "My parents/grandparents lived to 100."

But a lot of us see SS as longevity insurance, a cheap annuity.

A small annuity/longevity insurance. An inflexible amount, determined by the SSA and not by you. If you want more? Or less? Too bad--you get exactly what they say.

Many of the claims of "longevity insurance" strike me as special pleading. Somebody who had enough income & assets to forego 100% of their SS benefit for 8 years suddenly fears that their independent income/assets will disappear and they'll be dependent on a (higher) SS benefit?

That's always seemed to me to be someone who has already made their decision and are casting around for a justification.

 

[rayvt]

The 8 percent argument is irksome because it is not 8 percent - it is flat eight percent of the original payment at full retirement age - for the last year the actual increase is only a 6.45% increase.

Indeed.
From my spreadsheet, the yr-yr increases (for 66 FRA) are:

63 6.67%
64 8.33%
65 7.69%
66 7.14%
67 8.00%
68 7.41%
69 6.90%
70 6.45%

—— yet I keep seeing “where else can you get a guaranteed eight per cent per year." So the actual merits of waiting decrease by each year after the FRA.

The thing that is irksome to me is that it is NOT a return. It's just a higher payment. These are not the same thing at all.
It's the same innumeracy as when people say they are making a 5% return by prepaying their 5% mortgage. No, you are not making a return, you are just reducing an expense.

 

[Which Roger]

A small annuity/longevity insurance. An inflexible amount, determined by the SSA and not by you. If you want more? Or less? Too bad--you get exactly what they say.

Many of the claims of "longevity insurance" strike me as special pleading. Somebody who had enough income & assets to forego 100% of their SS benefit for 8 years suddenly fears that their independent income/assets will disappear and they'll be dependent on a (higher) SS benefit?

That's always seemed to me to be someone who has already made their decision and are casting around for a justification.

Small? If a couple with 2 highish-earners both wait til 70 to collect, they can get 60-70k/year in longevity insurance and inflation protection. One can obtain those protections by other means, if one is willing to allocate assets for that purpose.

And deferring SS is not out of fear of going broke. It's just a different strategy (spend more of portfolio earlier, less later) than filing early (spend less of portfolio earlier, more later). Everyone's circumstances are different, so what works for one person may not work for someone else.

 

[rayvt]

That $48k was worth way more to her now, than the increase of $300/mo in 4 years, because $300/mo is didlly (sic) to our lifestyle once I retire. But $1200/mo now, while I am working and saving means $48k that is "free" for vacations, a new car, shoes, hair, whatever...because it is $1200/mo we didn't have the month before. Financially, that is all nonsense.

I highlighted the key part. "$300/mo [extra due to delaying] is didlly to our lifestyle"

"Diddly (Noun) Definition: A small worthless amount"

Why is that nonsense?
The $1200 now gets you vacations, new car, etc. but the $300 later on is diddly. Sounds to me like she make the correct decision. Get large benefits now in exchange for a foregoing a worthless amount a few years from now.

 

[rayvt]

Small? If a couple with 2 highish-earners both wait til 70 to collect, they can get 60-70k/year in longevity insurance and inflation protection. One can obtain those protections by other means, if one is willing to allocate assets for that purpose.

That's where I have a disconnect.

Playing with some back-of-envelope numbers...

Two highish-earners had working incomes of what? -- maybe $300,000/yr total? How large are their investments & retirement accounts when they retired at (say) 62? Surely significantly more than $1,000,000. $5,000,000? $8,000,000?

Drawing 4% SWR from $5M is $200,000/yr or $16,700/mo. Note that this is probably not much less than their working take-home pay (no FICA, no IRA or 401K contributions, etc.).

Maximum FRA SS benefit is $2,639. Let's say they'd get a bit less, so age 62 SS would be $1900 and 70 SS would be $3350, each.

At 62 their total income would be $20,500 (16,700 + 2*1900), or $246K/yr.
Or they could wait to 70 and get $16,700 ($200K/yr) now and $23,400/mo or $281K at 70.

Okay, so the amount of their " longevity insurance" is 60-70K/yr. Great. B.F.D. Compared to a $5,000,000 portfolio, that gets lost in the roundoff. Hopefully they are savvy enough to not invest their entire $5M in Enron stock or with Bernie Madoff.

The disconnect I have is -- what's the difference in their lifestyle between $20,500/mo and $23,400/mo? Heck, I would imagine there is not much difference in lifestyle between $16,700/mo and $20,500/mo.
Either way, you can do pretty much anything you want. (Well, maybe you can't buy your own Boeing 757 with your name emblazoned on it. )

People at that level don't even need any SS benefit, so what is the advantage to maximizing it?

BTW, these are just the people who are the greatest at risk for being hit with means-testing, if that gets put on SS. How'd you like to give up $3,800/mo for 8 years planning to get $6,700 and then get told "Nope, sorry, you have too much, you could get by without it for 8 years so you can get by without it forever."?

 

[Which Roger]

That's where I have a disconnect.

Playing with some back-of-envelope numbers...

Two highish-earners had working incomes of what? -- maybe $300,000/yr total? How large are their investments & retirement accounts when they retired at (say) 62? Surely significantly more than $1,000,000. $5,000,000? $8,000,000?

I was thinking of a couple who each earned about 60k/year. With 30-plus years of work, that's enough to get around 30k/year SS each at age 70. They would not have assets or expenses anywhere near what you cite, and SS would cover the majority of their expenses when it kicked in.

 

[RunningBum]

Why wouldn't you make the best decision for yourself, even if the difference is small? There's no guarantee which way that is, but you can still make an educated decision, or at least a guess.