Social Security at 62 - Yes or No

[Independent]

My best guess based upon nothing but my own observation of the political process and my gut feeling, is that they will 'means test' SS benefits. The more income you have, the bigger the tax on the SS benefit.

And, to add to the guessing game, what income will they use?

Suppose it is only non-SS income. In that case, deferring SS and spending down traditional IRA money, will lower non-SS income (when I start). That will lower my "means", and that may protect more of my SS benefit from means testing.

 

[Chuckanut]

In regards to not living long enough to 'get it back' I have a thought:

1. This is where a good assessment of your overall health and family health history is important. But, keep in mind that medical science is getting very good at keeping people alive into their 80's. Most of the increase in average life-span is more people living well into their 80's rather than passing in their 60's and 70's.

2. Anybody who thinks those taking SS early will be grandfathered in, while somebody of the same age who takes it later in life will be cut off at the knees, is not being realistic. My guess is that the early takers will be hit with some sort of 'adjustment factor' that will equalize the difference over the two groups as a whole. For example, COLA increases reduced or suspended until the difference is made up. Who knows?

Well, that's two thoughts. 2 for the price of 1 is not a bad deal, and worth every penny you paid for them.

 

[Independent]

... yet when you do pay-off-the-mortgage-or-not analysis you use your overall investment return rate. Why the difference? It seems to me that you are skewing factors to make numbers back up your side of the argument. Or am I confusing you with someone else?

I think that if you look at the math, you'll find that using a lower rate for this bridge fund makes deferring less attractive. If he picked a higher rate, the advantage of deferring would be even more.

You may have missed the fact that the low rate only applies to the bridge fund, the rest of the portfolio is still invested in the long term assets that support the 4% SWR.

 

[Chuckanut]

And, to add to the guessing game, what income will they use?

Suppose it is only non-SS income. In that case, deferring SS and spending down traditional IRA money, will lower non-SS income (when I start). That will lower my "means", and that may protect more of my SS benefit from means testing.

Again, my guess only, I think they might do something sneaky like include Roth withdrawals as income to make the decision on how much to tax the SS benefits, but not directly tax the Roth withdrawal itself. (Yes, I know, money is fungible. )

 

[Dtail]

My best guess based upon nothing but my own observation of the political process and my gut feeling, is that they will 'means test' SS benefits. The more income you have, the bigger the tax on the SS benefit.

My first thought they will extend the SS W/H limit to unlimited from current ~130k(wishful thinking perhaps). My second thought is in agreement with you.

And, to add to the guessing game, what income will they use?

Suppose it is only non-SS income. In that case, deferring SS and spending down traditional IRA money, will lower non-SS income (when I start). That will lower my "means", and that may protect more of my SS benefit from means testing.

I would hope you are correct, as I would be spending down my TIRA more as in the 62-70 y.o. range.
Almost like a circular reference which actually works......

 

[RunningBum]

I think that if you look at the math, you'll find that using a lower rate for this bridge fund makes deferring less attractive. If he picked a higher rate, the advantage of deferring would be even more.

I think it's the opposite. You have some money that could be used as a bridge fund. The question is whether to take SS at 62 and invest the bridge fund, or defer to 62, and drain the bridge fund over 8 years.

The higher the return, the better you'll do if you keep the whole bridge fund invested. In other words, take SS now so you don't have to spend any of the bridge fund, and let it grow. IF you have reason to believe the return will be high.

If the return on investments were high enough, you'd never catch up by spending down that bridge fund and deferring to 70 even with the higher benefits later. The bridge fund would be large enough to continue producing more return than the higher benefits provide.

You may have missed the fact that the low rate only applies to the bridge fund, the rest of the portfolio is still invested in the long term assets that support the 4% SWR.

I didn't miss that. What I'm pointing out is that (I think) pb4 made the case for holding a mortgage is that you don't compare a mortgage rate to the alternative of holding a safe CD investment, you compare it to your overall investment rate. But in this situation, he is saying to use a CD rate for comparison, rather than your overall investment rate. That's inconsistent. He uses the point that people don't (usually) adjust their AA whether or not they've paid off their mortgage. One could just as easily assume that they don't adjust their AA whether they take SS at 62, 70, or somewhere in between.

If I've misspoken pb4 can correct me.

 

[RunningBum]

btw I do a slightly different calculation than a bridge fund. I assume if I'm taking SS, that same amount can stay invested and earn some x% return. If I defer to 70, at 70 I'll start being able to invest that amount at that same x% return. I think it works out to be the same as taking a bridge fund, as long as you use the same return assumption for that bridge fund.

What I find is, if I get a 9% return on investments with 2% COLA on SS, deferring and taking a larger benefit at 70 still won't have quite caught up to taking at 62 by age 100. That's all the farther I went for that table. This is using the table where I assumed no cut in benefits. It's a bigger gap if there is a cut at my age 72.

I'm not counting on a consistent 9% return so I'm not using that return in my plan. What it does tell me though, is if there is a big market drop, and I anticipate a recovery, that would be a good time to take SS benefits and take less from my investments, as something close to 9% doesn't seem so unlikely after a big drop. It's market timing, but in a less risky way, IMO.

 

[haha]

They should invest that money. It'll be good for the stock market.

And they should eat health, drink moderately and abstain from non-marital sex like me.

Ha

 

[Independent]

I think it's the opposite. You have some money that could be used as a bridge fund. The question is whether to take SS at 62 and invest the bridge fund, or defer to 62, and drain the bridge fund over 8 years.

The higher the return, the better you'll do if you keep the whole bridge fund invested. In other words, take SS now so you don't have to spend any of the bridge fund, and let it grow. IF you have reason to believe the return will be high.

If the return on investments were high enough, you'd never catch up by spending down that bridge fund and deferring to 70 even with the higher benefits later. The bridge fund would be large enough to continue producing more return than the higher benefits provide.

I didn't miss that. What I'm pointing out is that (I think) pb4 made the case for holding a mortgage is that you don't compare a mortgage rate to the alternative of holding a safe CD investment, you compare it to your overall investment rate. But in this situation, he is saying to use a CD rate for comparison, rather than your overall investment rate. That's inconsistent. He uses the point that people don't (usually) adjust their AA whether or not they've paid off their mortgage. One could just as easily assume that they don't adjust their AA whether they take SS at 62, 70, or somewhere in between.

If I've misspoken pb4 can correct me.

I agree with the bold. IF I know that my investment returns are going to be high enough, I should take SS at 62.

People who follow the 4% SWR, or a 95% FireCalc test, are implicitly taking a conservative approach because they don't know that returns will be high.

To me, it doesn't make sense to protect against low returns when I'm making a decision about withdrawal rates, but then use a high return assumption when I'm making a decision about SS.

Note my earlier post where I said that people who feel 6% is an acceptable withdrawal rate could do the same math and discover they are better off starting early.

 

[RunningBum]

To me, it doesn't make sense to protect against low returns when I'm making a decision about withdrawal rates, but then use a high return assumption when I'm making a decision about SS.

That's a very reasonable point. If returns are high (and assuming inflation isn't correspondingly high), I'll be fine pretty much no matter what. I could probably do even better taking at 62, but as long as I'm safe, I'm happy.

If returns are low, my plan is probably a little more at risk, especially if I live a long time. That makes deferring to 70 a better choice.

Picking the choice that handles a bad scenario better is preferable to picking the choice that optimizes an already good scenario, for me. That's a big point for 70. It's a safeguard for both longevity and bad returns, the only real situation (other than unexpected large expenses) that really concerns me. I'll still look for a big market dip sometime between 62 and 70 to start at, but I think this revelation means the drop has to be bigger than I had been thinking to be worthwhile.

And that's why I participate in yet another SS 62/70 thread, I've still got things to learn.

 

[copyright1997reloaded]

My original intention when I retired in 2009 was to take social security as early as possible (2020), simply because politicians control the eventual 'solution' to the problem which will be some sort of means testing to provide social security "to those who truly need it".

However, it doesn't look like I will be able to execute on that plan because I am back working full time and as a result haven't been able to convert tax-deferred funds to a Roth or non-tax deferred accounts (and I am now becoming concerned about my eventual 70+ RMD impact). So, even when I do retire again I will likely defer social security.

I'm guessing the eventual political solution to the problem will be a) a large increase in the wages subject to social security taxation and b) additional means testing in terms of who can draw (or more likely how it is taxed).

In reality, we need some sort of weaning off of social security, perhaps by reducing the COLA adjustments over a period of time. But that is politically unattractive because of the impact to those poor souls whose entire existence is dependent on social security.

 

[pb4uski]

In another post in this thread you said

For the SS fund, I assume that it is invested in a CD ladder and earns interest that approximates inflation.

yet when you do pay-off-the-mortgage-or-not analysis you use your overall investment return rate. Why the difference? It seems to me that you are skewing factors to make numbers back up your side of the argument. Or am I confusing you with someone else?

No, you are not confusing me with someone else.

If I pay off the mortgage it will come from the retirement fund, not the side fund, so the correct rate to use in making the decision is the investment earnings rate of the retirement fund (unless you plan to change the AA of your retirement fund as a result of paying off the mortgage, in which case it is the expected future return of the asset being sold).

In this case, the side fund is simply a bridge from ER (62 in the example) to SS at age 70 to essentially replace the SS benefit for that period of time... since it is a short term fund, it just needs to earn an amount equal to inflation and I assume that CD real returns will be only slightly positive.

Also, remember that post #140 was simply supporting numerically, a previous post that suggested that "deferring SS may allow us to spend more money early in retirement"... and I think that is correct irrespective of any future cuts to SS as long as any future cuts to SS are across-the-board because if you assume a 25% cut in 2034 then you still get to spend more.

 

[Independent]

That's a very reasonable point. If returns are high (and assuming inflation isn't correspondingly high), I'll be fine pretty much no matter what. I could probably do even better taking at 62, but as long as I'm safe, I'm happy.

If returns are low, my plan is probably a little more at risk, especially if I live a long time. That makes deferring to 70 a better choice.

Picking the choice that handles a bad scenario better is preferable to picking the choice that optimizes an already good scenario, for me. That's a big point for 70. It's a safeguard for both longevity and bad returns, the only real situation (other than unexpected large expenses) that really concerns me. I'll still look for a big market dip sometime between 62 and 70 to start at, but I think this revelation means the drop has to be bigger than I had been thinking to be worthwhile.

And that's why I participate in yet another SS 62/70 thread, I've still got things to learn.

Thanks. I think the bold is an excellent summary.

 

[Red Badger]

My best guess based upon nothing but my own observation of the political process and my gut feeling, is that they will 'means test' SS benefits. The more income you have, the bigger the tax on the SS benefit.

I agree here somewhat. But as I posted earlier, the cowards in DC fear us boomers. Younger voters tend to wax and wane with respect to showing up at the polls. Us geezers (and near geezers) are like attendance role models - we show up and vote like clockwork (yeah, I know - some exceptions, blah, blah).

Anyway, I suspect the pain is going to be targeted at the younger folks via increased FRA, increased early start, and increased full monte past 70 (and, it goes without saying, higher SS taxes for all). Probably more severe "bends" (in use today) that reduce payout to high earners. I think the DC crowd fears getting voted out more than death itself and will find a way to keep SS recipients and those very close from any real financial pain.

I could be wrong, but those linguine spine politicians demonstrate year in and year out that looking out for themselves is priority 1. That may bode well for some while shafting others (but that's what they're good at).

 

[RunningBum]

No, you are not confusing me with someone else.

If I pay off the mortgage it will come from the retirement fund, not the side fund, so the correct rate to use in making the decision is the investment earnings rate of the retirement fund (unless you plan to change the AA of your retirement fund as a result of paying off the mortgage, in which case it is the expected future return of the asset being sold).

If you still have a mortgage, you've got larger monthly expenses than if you don't. So you've got to keep some of that money in short term funds. If you're talking about still having 30 years on the mortgage, I'll agree a lot of it can be invested for the long term. If you're talking about paying it off with 8 years left, it's the same thing as the SS bridge money from 62 to 70.

 

[pb4uski]

What I target for liquidity has nothing to do with whether or not I have a mortgage. Also, my liquidity would not be sufficient to payoff my mortgage and I doubt that many people with a mortgage carry such a high level of liquidity so I would not agree with your statement that it is the same thing as SS bridge money.

I'm 60/35/5 now and if I paid of my mortgage I would remain 60/35/5 so the expected earnings rate for a 60/35/5 portfolio is the correct rate to use in making the decision. If I adjusted my AA as a result of paying my mortgage then the investment earnings rate of the funds redeemed would be the correct rate to use.

 

[RunningBum]

Some people talk about keeping X number of months or years of expenses in cash. They WILL have more expenses with a mortgage, so they'd be keeping more cash.

 

[Out of Steam]

Family history suggests that I should plan for the long side of the SS lifespan bet. I'm more concerned about having a good income when I'm too old to do anything to increase it than I am about maximizing the total return on taxes paid.

Right now, I'm planning to postpone taking SS until 65. I'm also willing to w*rk more hours if our income comes to short before then. I'll rethink based on health and finances then.

 

[Perryinva]

Some people talk about keeping X number of months or years of expenses in cash. They WILL have more expenses with a mortgage, so they'd be keeping more cash.

Only if their investments are the source of all non discretionary expenses. If pensions and SS (especially if higher from delaying), rental income, divs, etc, easily more than cover all required expenses including a mortgage, then cash reserves are no more (or probably less) than someone without a mortgage (that has to rely on liquidation of investments to cover expenses). I say probably less because in a “smart” decision to carry a mortgage, (vs “the only way to afford this house is with a mortgage”) one normally COULD pay it off if they wanted to (.say with a large Roth and after tax investments/savings) with no tax consequences and simply swap decrease generated income for lower expenses. For many, besides viewing a mortgage as cheap money, the versatility of an increased portfolio size offers more choices and sometimes stability. Maintaining a large Roth/after tax savings allows a no tax lumpy expenditure event to be absorbed.

“What” your expenses are is irrelevant. It is what your expenses are compared to sources of income not affected by inflation or market whims. A mortgage, by nature is inflation free. If my mortgage is a 30yr $1k/mo today and I have a non COLA $2k pension, in 20 years, my pension is still double what the mortgage is. What’s left buys less, but that is true regardless.

 

[rayvt]

The higher the return, the better you'll do if you keep the whole bridge fund invested. In other words, take SS now so you don't have to spend any of the bridge fund, and let it grow. IF you have reason to believe the return will be high.

If the return on investments were high enough, you'd never catch up by spending down that bridge fund and deferring to 70 even with the higher benefits later.

That "high enough" return isn't even very high.

If it earns 6.5% above inflation the break-even is at age 105.
0% inflation & 6.5% return is age 104.7.
3% inflation & 9.5% return is age 105.3.

At 7% above inflation, the break-even is ... never.

https://www.dropbox.com/s/gebanzrbr3g33qf/My SS breakeven calc.xls?dl=0

 

[pb4uski]

6.5% real return is dillusional... that said, I hope it happens... if it did I could care less when I take SS.

https://www.bogleheads.org/wiki/Historical_and_expected_returns

 

[explanade]

6.5% over 10 years or less or over like 20-30 years?

 

[pb4uski]

Either.

 

[Perryinva]

6.5% real return is dillusional... that said, I hope it happens... if it did I could care less when I take SS.

https://www.bogleheads.org/wiki/Historical_and_expected_returns

Ain’t that the truth! 20 more years like the last 10, and I could care less about SS too!

 

[explanade]

No I meant the claim that if you get 6.5 return, then you will do better claiming at 62 than 70.

How long a period of 6.5 returns would you need to cross the threshold?