Maximizing Social Security

[Nords]

Wade Pfau's reading a book by Reichenstein & Meyers: "Social Security Strategies".
Amazon.com: Social Security Strategies: How to Optimize Retirement Benefits (9780615457536): William Reichenstein, William Meyer: Books

Pfau admits that the subject is complicated, and this is coming from a guy who wrote his doctoral thesis on overhauling the system. The fun starts in chapter 4:
http://wpfau.blogspot.com/2012/05/reichenstein-and-meyers-social-security.html

And so, the objective of the book is how to strategize to get the most out of your Social Security benefits. The book is relatively straightforward through the end of Chapter 3. It covers the basics of Social Security and also how a single individual can maximize Social Security. The book does get vastly more complicated in Chapter 4, which is about couples. The problem is, for couples in which both spouses work, each spouse is potentially eligible for benefits based on their own work record (plus your spouse is also eligible for a benefit based on your record), plus a spousal benefit based on their living spouse’s work record, plus a survivor benefit based on a deceased spouse’s record.

IIRC, during the Great Recession one of this board's posters started SS before age 67/70 because they felt it'd help their portfolio survivability. Pfau endorses the tactic:

The idea being, even if you retiree at 62, you can delay starting Social Security until age 70, such that you spend down more of your financial portfolio between ages 62 and 70, and then spend from your portfolio at a lower rate after that. They show the benefit of delay using deterministic assumptions for asset returns and it is not a sure bet (a particularly bad sequence of returns around age 62 could possibly leave you better off with starting Social Security earlier) but their point is fairly persuasive. More risk averse retirees should delay claiming Social Security until later, because the longer they live, the more they will end up benefiting from the annuity properties of Social Security benefits.

and finally:

Lesson 1: For a single individual living to age 80, it does not really matter what age to begin Social Security, 62 to 70. The total lifetime benefits received will be about the same, since Social Security is meant to be “actuarially fair” with benefit reductions and increases calibrated to life expectancies. But for retirees living “well beyond” (this term is defined and discussed in the text) 80, it becomes increasingly attractive to wait until 70. This is how Social Security provides protection against the risk of outliving one’s assets.

Then, for the vastly more complicated case of couples, we get two more general lessons:

Lesson 2: For the higher earning spouse, the relevant life expectancy for the claiming decision is the life expectancy of the second spouse to die (which is higher than either spouse alone). The relevant life expectancy for the lower earning spouse is that for the first spouse to die.

And:

Lesson 3: If at least one of the spouses lives “well beyond” the age when the higher earning spouse turns 80, then the couple can usually maximize their joint lifetime benefits by having the higher earning spouse wait until 70 to claim his/her own benefits.

I've added the book to my reading list, although I'm not particularly motivated to jump on it until I'm at least 60 years old...

 

[gindie]

Another discussion of the subject (maybe not as detailed) can be found in the Consuelo Mack's WealthTrack interview with Mary Beth Franklin. Until recently, Ms. Franklin wrote extensively on Social Security for Kiplingers Personal Finance Magazine. She agrees that things become much more complex for couples.

It can be found at:

Consuelo Mack WealthTrack - March 23, 2012 Show

 

[Free To Canoe]

I have spent some time recently thinking about the SSA couples both work scenerio.
It got confusing enough that I had to start writing it all down. Thought I was Herman Cain there for a while. Barring life expectancy insider info and having decent assets, I think most of the hurdles on a decision turn out to be money psychology problems.

 

[Animorph]

"Lesson 1: For a single individual living to age 80, it does not really matter what age to begin Social Security, 62 to 70. The total lifetime benefits received will be about the same, since Social Security is meant to be “actuarially fair” with benefit reductions and increases calibrated to life expectancies. But for retirees living “well beyond” (this term is defined and discussed in the text) 80, it becomes increasingly attractive to wait until 70. This is how Social Security provides protection against the risk of outliving one’s assets."

“Actuarially fair” for SS assumes bond-like returns. If you use a portfolio rate of return with substantial equities, you will probably prefer an earlier SS benefit. Hence you can "preserve your portfolio" by taking SS early.

I did like Lesson 2 though. That was a great way of looking at it.

 

[Independent]

(a particularly bad sequence of returns around age 62 could possibly leave you better off with starting Social Security earlier)

I expect the problem is that if you defer SS you have to take large amounts from your savings in the early years. If those happen to be years when the market is depressed, you're aggravating the normal market value risk.

One strategy to avoid this risk is to designate some assets as "SS bridge", then move them into stable value assets before you retire.
So, if you're expecting $25k from SS, if you start at 66. Then you might put 4 x $25k = $100k into CDs and I-bonds before you retire so you can withdraw them during the first four years (assuming retirement @62).

We did something like that.

 

[PaddyMac]

Thanks for the link. Interesting that Amazon sells New copies for $25 - and the Used market wants over $80?!!

 

[obgyn65]

To help with the "SS bridge" you are referring to, I have been buying deferred annuites starting age 62.

One strategy to avoid this risk is to designate some assets as "SS bridge", then move them into stable value assets before you retire.
So, if you're expecting $25k from SS, if you start at 66. Then you might put 4 x $25k = $100k into CDs and I-bonds before you retire so you can withdraw them during the first four years (assuming retirement @62).

 

[lemming]

All I got out of this thread was a sense that it must be so hard to make money on a book these days when a review can link to a synopsis of every point. Extra irony points : it came from an author.

Still you need the book to concentrate your thinking on how it all applies to you. I liked Free to Canoe's "money psychology " problem phrase.

 

[REWahoo]

IIRC, during the Great Recession one of this board's posters started SS before age 67/70 because they felt it'd help their portfolio survivability. Pfau endorses the tactic:

Yep, that would be me. The market had just fallen off a cliff (see Oct 2008 on the chart below) triggering my decision to start SS when I turned 62 in Dec rather than wait until FRA or later. Nice to know Pfau pfeels it's a valid strategy.

 

[EvrClrx311]

They show the benefit of delay using deterministic assumptions for asset returns and it is not a sure bet (a particularly bad sequence of returns around age 62 could possibly leave you better off with starting Social Security earlier) but their point is fairly persuasive. More risk averse retirees should delay claiming Social Security until later, because the longer they live, the more they will end up benefiting from the annuity properties of Social Security benefits.

I'm still a believer that the majority of the time one is better off collecting early rather than later IF they really save the difference in a tax deferred account (such as a 401k). The growth of that money exceeds the added growth of your SS check...in almost every 20 year model in history (98% plus of them)

True... the "safer" route is to collect SS later to avoid the 2% of the time the market might work the other way for you... but that's a lot like saying keeping money under your mattress is "safer" than putting it into a CD... true, but at what cost?

 

[rescueme]

I'm still a believer that the majority of the time one is better off collecting early rather than later IF they really save the difference in a tax deferred account (such as a 401k).

So you are saying collect SS and don't retire (being contributions to a 401(k) can only be done with earned income, which SS is not)?

 

[MichaelB]

Of those fortunate ones that make it to their 90's with a combination of SS and portfolio, I wonder how their investment management skills will hold up. Delaying SS is not just a hedge against longevity, it also helps deal with the risk of declining cognitive function.

 

[rescueme]

Delaying SS is not just a hedge against longevity, it also helps deal with the risk of declining cognitive function.

+1 MB.

For me, it's a concern (due to a family history of long lifespan for both DW/me).

I put delay of SS somewhat in the same ballpark of reason as the purchase of our SPIA. If we're not around, it won't matter (money is for the living, not the dead). However, if we're still around (whether our "marbles" are rolling around in our head, or not ), we still would rather die with money than live without it - or taking care to maximize our income in later life, still making financial decisions that we do today without hesitation.

 

[EvrClrx311]

So you are saying collect SS and don't retire (being contributions to a 401(k) can only be done with earned income, which SS is not)?

Nope, not at all what I'm saying...

(fair warning... this example only is for those who have substantial savings in a 401k... it isn't worthwhile for those who plan SS in as a large portion of their retirement)

assuming someone is already retired (say 50 just for example) and they are looking at the difference between collecting $1807 at age 62... or waiting for $3,182 at age 70.

What I'm saying is that if someone wanted to wait until 70... then not collecting the $21,684 ($1807 per month) for those 8 years will really hurt their 401(k)... compounding works against you now as well since those dollars coming out are not growing at the markets rate (again, historically speaking... market return exceed inflation, by a lot... if you look at a long enough period of time).

What I'm saying is that I'd rather collect that $21,684 at age 62 and save my retirement account from dropping $173,472 (probably more like $250,000-$300,000 including lost growth)... over those 8 years

If instead I wait till 70 to collect the extra $1,375 per month, essentially what I'm doing is giving up $173,472 from my 401k to get an extra $16,500 a year from SS at age 70. If you do the math... it takes another 11 years for that to catch up (not factoring in lost interest on the 401k balance). Really... under average market conditions over a 25+ year retirement... one can expect to wait until age 95-110 (depending on the actual market returns) for the wait till 70 extra SS checks to make up the difference.

A final note... I think for the majority of Americans (not necessarily people here), the decision to wait to collect to 70 comes along with spending less for those 8 years. So in that sense, the wait till 70 puts them on top... at the expense of living on less from 62-70. For cases like that... and others where a person is relying on SS to make up 50% or more of their retirement... it definitely makes sense to hold off till 70.

However, if you have large portion of your retirement invested and growing tax free... my opinion is to take the early SS to allow it to continue growing. You'd have to live to be 100 or more for that to have been a poor decision... and even then, its about even.

Of those fortunate ones that make it to their 90's with a combination of SS and portfolio, I wonder how their investment management skills will hold up. Delaying SS is not just a hedge against longevity, it also helps deal with the risk of declining cognitive function.

A very good and valid point!

 

[rescueme]

As in all things relating to the subject of SS (what it is and how to use it as a retirement income tool), it comes down to what is best in the specific personal situation.

Just to mention that I ran the different scenarios through various forecast tools (FC, RIP, and FE) and for us (and us alone) it worked out that the marriage option (modified for DW to take SS at FRA age of 66, and me at 70) worked out the best in our case (the subject of this thread).

Of course our income ratio was 2-1 over the years and we're the same age (within a few months), so that alone could make our result much different than other folks in a similar situation.

It's difficult to look at SS in a singular way and even worse to assume that there is "one rule" that everybody should apply.

Heck, the simple fact that I don't look at SS as most do makes me an "outlier" (OK, a kook) in discussing the subject.

Why? Simply because I look at SS as a tax, much as any other tax that we paid during our employment years, and still a (different) tax that we pay today even if we are retired.

That "tax" is no different than a local school tax which we pay if we're property holders (and through our rent, if we're not) that pays for the education of the local population of kids. Sure, we see the value, assuming we have children attending the local public schools, but for those that are retired, never had children, or choose to send our children to a private school, that tax put upon us is not looked at kindly in most cases.

SS is no different. It's a tax that is used to get funds to pay a stipend to those that are retired and paid the same tax during their employment years. It isn't an investment that we think we own (even though most folks talk about "getting theirs back" or "break even points") and most of us would not equate it to a local school tax, but in my mind, it is nothing more.

The difference is that the school tax helps support (educate) us during out younger years, while SS helps to keep us out of the poor house once we reach old age.

OK, I'll get off my soap box, now ...