Social Security Math

[Independent]

If people are deferring SS, why aren't they also buying annuities?
.

At today's interest rates, SS is more attractively priced than private, CPI-indexed, annuities.

For our situation, simply deferring SS to age 70 will cover all of our "basic" spending. I'm not sure that we need any more longevity insurance than that.

 

[Independent]

"Scenario age 70.[/U] You stash 8 years of $34,092 from your portfolio into a savings account for a total of $272,736. Your portfolio is now down to $727,264. Your 4% SWR is now $29,090 per year and you remove $34,092 from your savings account giving you a total of $63,182 to spend each year for the rest of your 30 year retirement period."
.....
Moving 8 years' worth of future benefits from portfolio to savings ($270K+) will cause a taxable event, won't it? If taken from a taxable portfolio, it will be at cap gains rates. If from a qualified account, you're looking at paying regular income tax rates. Ouch!

I didn't think that I needed to withdraw all the 8 years of spending from the IRA in a single year. It made more sense to position the assets in the IRA so that I had a "stable" block which I could withdraw during the early years.

In that case, there isn't an obvious tax benefit/cost for either starting at 62 or deferring to 70. Of course, individual tax situations will vary.

 

[foxfirev5]

"Scenario age 70.[/U] You stash 8 years of $34,092 from your portfolio into a savings account for a total of $272,736. Your portfolio is now down to $727,264. Your 4% SWR is now $29,090 per year and you remove $34,092 from your savings account giving you a total of $63,182 to spend each year for the rest of your 30 year retirement period."
.....
Moving 8 years' worth of future benefits from portfolio to savings ($270K+) will cause a taxable event, won't it? If taken from a taxable portfolio, it will be at cap gains rates. If from a qualified account, you're looking at paying regular income tax rates. Ouch!

I still have a number of scenarios to run. However, if you're able to stay in the 15% marginal tax bracket while delaying SS, the later reductions in RMD's are a big factor. Combine this with the larger SS payments and the fact they are a smaller proportion of your taxable income. In my case it looks like a little higher taxes earlier with greater income and lower taxes later. And I don't have huge reserves in after tax savings, which would really help implement this plan.

 

[ejman]

Cut-Throat, how do you account for the anticipated 25% reduction in SS benefits starting in 2033 -17 years from now? Are you assuming congress will fix this or is the shortage mathematically taken into account in your calculations?

 

[nun]

If I'm not mistaken, deferring SS is a cheaper annuity than what insurance companies sell, is it not?

If I need/want an annuity, I'll defer SS first. If I need more, I'll also buy an SPIA. If deferred SS is enough, I won't.

Isn't it that obvious? I mean, just because I (might) want to defer SS as an annuity type decision doesn't mean I want to go all-in to annuities.

I agree, it isn't all or nothing. I'm just surprised at how many people plan to defer SS. The reason is I once asked at what IRR would people buy an annuity and was amazed that many would not buy one even at 6% IRR and above.

 

[Sunset]

I agree, it isn't all or nothing. I'm just surprised at how many people plan to defer SS. The reason is I once asked at what IRR would people buy an annuity and was amazed that many would not buy one even at 6% IRR and above.

I have more faith the US gov't will be around to pay SS than some insurance company.

Plus if I decide to delay SS, then I certainly don't need more annuities, I know some folks who basically live on just SS, without debts life can be pretty cheap.

 

[RunningBum]

I agree, it isn't all or nothing. I'm just surprised at how many people plan to defer SS. The reason is I once asked at what IRR would people buy an annuity and was amazed that many would not buy one even at 6% IRR and above.

How do you know those people refusing the annuity are the same ones deferring SS? Also, when presented with unrealistically high rates on guaranteed income, many will and should be cautious that there is an underlying high risk, and maybe even a Ponzi scheme in play.

 

[nun]

How do you know those people refusing the annuity are the same ones deferring SS? Also, when presented with unrealistically high rates on guaranteed income, many will and should be cautious that there is an underlying high risk, and maybe even a Ponzi scheme in play.

I was speaking statistically......my poll on this site found very few takers for an annuity even at an IRR that was comparable to the return they might get in equities. I don't know where Ponzi schemes come into this, I just asked a a straight question to see how high an IRR would have to be to get people to buy an annuity. So it seems a little strange to me that people are so anxious to defer when someone who might get $20k at 66 could get $15k at 62 and if they saved the money and got a 5% real return and 3% inflation at 70 they'd have $166k to go with their now $19k SS. By deferring they would have $26400 (maybe a bit more considering inflation).

The $166k would buy a 70 year old male a $13k a year SPIA making a total of $32k.....the $19k annuity is not indexed though.....or you could manage the $166k lump sum for income and you can also spend it in emergencies. I just wonder why that argument isn't made more often and that so many people default to deferring. Also it takes around 13 years to reach the break even point if you defer and you've got a 50% chance of being dead by then.

 

[RunningBum]

I was speaking statistically......my poll on this site found very few takers for an annuity even at an IRR that was comparable to the return they might get in equities. I don't know where Ponzi schemes come into this, I just asked a a straight question to see how high an IRR would have to be to get people to buy an annuity. So it seems a little strange to me that people are so anxious to defer when someone who might get $20k at 66 could get $15k at 62 and if they saved the money and got a 5% real return and 3% inflation at 70 they'd have $166k to go with their now $19k SS. By deferring they would have $26400 (maybe a bit more considering inflation).

The $166k would buy a 70 year old male a $13k a year SPIA making a total of $32k.....the $19k annuity is not indexed though.....or you could manage the $166k lump sum for income and you can also spend it in emergencies. I just wonder why that argument isn't made more often and that so many people default to deferring. Also it takes around 13 years to reach the break even point if you defer and you've got a 50% chance of being dead by then.

Ponzi scheme: In exchange for a large investment, someone offers an attractive rate of return. Make a few payments long enough to attract investors, and then stop making payments. So, when someone offers a suspiciously above market return, a Ponzi scheme is possible. At the very least, there is higher risk than usual of the insurer not staying in business to make all the payments. Maybe that's why people wouldn't go for it. I sure wouldn't without a deep look into the insurer.

Regarding the 50% chance of being dead by the break even point, if I'm dead I'm not really worrying about money anymore, am I? I doubt my last words will be, "Ha! I beat the SS system by dying early!" And for the majority of us on e-r.org who have a decent nest egg, we probably weren't running out before the break even point. But if I'm still alive past that break even point, I am still very much concerned about having enough money, so a large SS payment is nicer (unless, as you say, I was able to grow my nest egg bigger by keeping it invested while taking early SS).

 

[nun]

Ponzi scheme: In exchange for a large investment, someone offers an attractive rate of return. Make a few payments long enough to attract investors, and then stop making payments. So, when someone offers a suspiciously above market return, a Ponzi scheme is possible. At the very least, there is higher risk than usual of the insurer not staying in business to make all the payments. Maybe that's why people wouldn't go for it. I sure wouldn't without a deep look into the insurer.

My question made no assumptions about the insurer. It was just a straight question about how big the IRR would have to be for someone to feel comfortable buying an annuity. If people then immediately think Ponzi scheme that says something about the people answering the question and the zeitgeist around insurance companies.

Regarding the 50% chance of being dead by the break even point, if I'm dead I'm not really worrying about money anymore, am I? I doubt my last words will be, "Ha! I beat the SS system by dying early!" And for the majority of us on e-r.org who have a decent nest egg, we probably weren't running out before the break even point. But if I'm still alive past that break even point, I am still very much concerned about having enough money, so a large SS payment is nicer (unless, as you say, I was able to grow my nest egg bigger by keeping it invested while taking early SS).

Well yes that's the point. People on ER often choose the diversified self invested portfolio over an annuity, so it puzzles me why so many want to defer to age 70. If they took SS early they could invest the money and in my example they'd get to age 70 with $19k in SS and a $166k lump sum which FireCalc says would supply a $7k inflation adjusted income for 25 years. The chances are high that you'll die before age 95 and having the $166k lump sum gives you a lot of options. Now I am assuming that FIRECalc, 4% SWR etc etc that people use to plan their retirement are valid.....and if they are deferring to age 70 does not look like a slam dunk.

 

[nun]

Ponzi scheme: In exchange for a large investment, someone offers an attractive rate of return. Make a few payments long enough to attract investors, and then stop making payments. So, when someone offers a suspiciously above market return, a Ponzi scheme is possible. At the very least, there is higher risk than usual of the insurer not staying in business to make all the payments. Maybe that's why people wouldn't go for it. I sure wouldn't without a deep look into the insurer.

My question made no assumptions about the insurer. It was just a straight question about how big the IRR would have to be for someone to feel comfortable buying an annuity. If people then immediately think Ponzi scheme that says something about the people answering the question.

Regarding the 50% chance of being dead by the break even point, if I'm dead I'm not really worrying about money anymore, am I? I doubt my last words will be, "Ha! I beat the SS system by dying early!" And for the majority of us on e-r.org who have a decent nest egg, we probably weren't running out before the break even point. But if I'm still alive past that break even point, I am still very much concerned about having enough money, so a large SS payment is nicer (unless, as you say, I was able to grow my nest egg bigger by keeping it invested while taking early SS).

Well yes that's the point. People on ER often choose the a diversified self invested portfolio over an annuity, so it puzzles me why so many want to defer to age 70. If they took SS early they could invest the money and in my example they'd get to age 70 with $19k in SS and a $166k lump sum which FireCalc says would supply a $7k inflation adjusted income for 25 years. The chances are high that you'll die before age 95 and having the $166k lump sum gives you a lot of options. Now I am assuming that FIRECalc, 4% SWR etc etc that people use to plan their retirement are valid.....and if they are deferring to age 70 does not look like a slam dunk.

 

[Senator]

People on ER often choose the a diversified self invested portfolio over an annuity, so it puzzles me why so many want to defer to age 70.

Many people, myself included, look at it as another way to diversify. I have rental income, pension, VA Disability, Social Security and savings.

Many of the income flows could be impacted negatively, but SS will generally be there. If it does change, you either have no options, or you have time to make adjustments.

If you can take a 20-year span of minimal stock market returns, keep the SS money in the market. If you are like most people that fear running out of money more than death, take it later.

Of course, when the Dr. says "I have some bad news", you can always file right away.

 

[sengsational]

Earlier, I commented on the apparent "freezing" of Medicare Part B premiums at the point SS payments are initiated. This got me wondering how this would affect the "Math".

Using the Example 2 from the original post, I created a sheet that took into consideration those premiums. Although the model is all in constant 2016 dollars, what the model does is allow for inflation of the cost of Medicare to exceed the inflation rate of SS payments. This happened in 2015 for 2016's rate, so I think it might happen again.

2) Social Security Supplements Nest Egg
Now assuming you could save/invest this money... or more realistically, you could take less out of your nest egg because of the funds you'll receive from Social Security. Lets assume for this case that you are receiving a 4% real yield on your retirement savings. Essentially, collection of social security allows you to save the difference (what you collected) at a rate of 4% a year.

Here is how things change:

Now you'd have to reach age 85 before waiting till full age (67) made more sense and you'd have to reach age 89 before waiting till 70 to collect would make more sense.

Without the effects of excess inflation for the Medicare premiums, I got that you'd need to reach age 87 to break-even with taking it early (at 62) vs late. So that's a little bit different than your result of 89. You can check out my spreadsheet on google drive. There are several tabs at the bottom. You should be able to download it. I tried not to bury any calculations. I took the beginning year balance and ending year balance, averaged them, and hit them with whatever the real investment return is set to. And of course I add-in the annual SS payments and subtract out the annual pt B premiums. I did it for age 62 and age 70 because usually the interesting points are at the extremes.

What's interesting (now that I've fixed the model), is that if we get "excessive" investment returns and "excessive" pt B premium inflation, taking it early wins.

 

[RunningBum]

My question made no assumptions about the insurer. It was just a straight question about how big the IRR would have to be for someone to feel comfortable buying an annuity. If people then immediately think Ponzi scheme that says something about the people answering the question.

Well, you pouncing on my "maybe even a Ponzi scheme" comment when mostly I was just referring to the inherent risk in any investment that pays a higher return might say something about you. Most people here are smart enough to realize there is no free return without risk.

Well yes that's the point. People on ER often choose the a diversified self invested portfolio over an annuity, so it puzzles me why so many want to defer to age 70. If they took SS early they could invest the money and in my example they'd get to age 70 with $19k in SS and a $166k lump sum which FireCalc says would supply a $7k inflation adjusted income for 25 years. The chances are high that you'll die before age 95 and having the $166k lump sum gives you a lot of options. Now I am assuming that FIRECalc, 4% SWR etc etc that people use to plan their retirement are valid.....and if they are deferring to age 70 does not look like a slam dunk.

Not sure anyone is saying it's a slam dunk. Nor is it a slam dunk that you can do better by taking SS early and investing it, especially at a similar risk level.

I think I'm done repeating myself in this discussion.

 

[pb4uski]

For someone who turns 62 in 2016, the maximum SS is $2,102 per month. Since that is discounted 25%, if infers that for someone who turns 62 in 2016 and is at the maximum that their FRA benefit would be $2,803/month ($2,102/(1-25%)) and that their age 70 benefit would be $3,700/month ($2,803 * 132%).

So if they defer until 70 they "pay" $201,792 (foregone benefits from 62 to 70) in exchange for (an extra) $1,598 a month for life or a 9.5% payout rate. The FIXED annuity payout rate for a 70 year old would be 7.8% for a male or 7.11% for a female or 6.26% for joint life according to immediateannuities.com ... so 9.5% that has a COLA is really good (if you can afford to defer). Many of us have savings and can afford the $202k and I'm willing to invest that amount for a COLA life annuity (and arguably a joint life annuity at that since DW inherits my benefit).

In my case, we are both in good health so the breakeven point with 0% interest of 80.5 is a calculated bet on our part. But better yet, by not starting SS early we can do more Roth conversions at low tax rates (~10% each f the last 3 years) versus the high taxes we will likely pay on RMDs.

If we pass on before we turn 70 or 80.5 then we lost the bet... just like if we made $2,102/month premiums for 8 years to an insurance company and then died..... but.....if we live long which would seem likely given our current good health, family longevity, better longevity of wealthier people and improving longevity, then it will be a good bet.

And yes, we recognize that it is possible that benefits might be reduced but our bet implicitly assumes that any reductions will be modest. In 35 years or so we can compare notes and see how things came out.

 

[nun]

Many people, myself included, look at it as another way to diversify. I have rental income, pension, VA Disability, Social Security and savings.

Many of the income flows could be impacted negatively, but SS will generally be there. If it does change, you either have no options, or you have time to make adjustments.

If you can take a 20-year span of minimal stock market returns, keep the SS money in the market. If you are like most people that fear running out of money more than death, take it later.

Of course, when the Dr. says "I have some bad news", you can always file right away.

Yes I agree that deferring SS is a good diversifier. My feeling is that most people are not diversified enough in retirement and the question becomes how to diversify, how much to annuitize and how much to depend on a 4% SWR.

 

[heeyy_joe]

What about the potential ACA factors in taking SS at 62 instead of 65-66? If your income without SS gives you an ACA tax credit taking an SS payment might nullify the credit completely. I have health insurance for myself at 62 through our business, but we might be changing to an ACA plan for 2017 at age 63 for me. Our small business just can't afford the cost of employee insurance anymore. MY DH is 67 and we won't claim any SS money until we figure out how this is going to affect our ACA enrollment.

+1

Almost all SS articles ignore this new scenario. Lazy journalism!

 

[Senator]

When I do my calculations with 0% inflation and 0% CPI, ~80 years of age is what I come up with the break even, the same as pb4uski.

If you assume a 100% safe investment will perform a bit less than inflation, and CPI will equal inflation, the differences get even larger for the benefit of delaying. That is a harder thing to calculate (for me...).

Factoring in the average age you will likely live, it makes sense to delay more. If you make it to 62, you will likely (50% chance) be able to make it to 84+. You have a ~60% chance of making it to 80. Knowing your health status at 62 (and 63, 64, etc.) you can put the odds more in your favor. If you make it to 70, you likely make it to 85 or beyond.

https://www.ssa.gov/oact/STATS/table4c6.html

Could you get a better return in Stocks? Or an Annuity?

One thing that would be interesting is to determine what an annuity would return if you put 100% of your SS into an annuity from age 62 to 70. Assuming that the insurance company would be safe. The annuity could have a survivor benefit. And a inflation rider. And a death benefit.

Could you get a better with the annuity than waiting on SS? I am guessing that you could not even come close to the value of a SS benefit.

One of the reasons I waited until 55+ to retire is to make sure that SS would likely not change for me. It solidifies one component of my plan. I should have a decent lifestyle with or without it. If you do not have enough money to live a good life style, take SS when you need it.

I see people that have had heart attacks and by-passes that think they will still make it to 90. Or smokers that think they will live longer than average. You may be lucky, but life expectancy is a very known quantity. Even when taking that OMY, you should look at your life expectancy.

I am surprised of some people that are so worried about staying in the 15% tax bracket that they are leaving money on the table that they could be using to enjoy the last good years of their lives. Let's face it, your life at 62 will likely be exponentially better than at age 70. Take SS at 62 and bump up a tax bracket. Live life.

If you have enough money to be able to make the choice, and are reasonable healthy, let it sit. From a financial and statistical standpoint, that is the best investment.
https://www.ssa.gov/OACT/population/longevity.html

 

[marko]

I am surprised of some people that are so worried about staying in the 15% tax bracket that they are leaving money on the table that they could be using to enjoy the last good years of their lives. Let's face it, your life at 62 will likely be exponentially better than at age 70. Take SS at 62 and bump up a tax bracket. Live life.
/QUOTE]

++1 My vote for comment of the year!

Sent from my SAMSUNG-SGH-I747 using Early Retirement Forum mobile app

 

[target2019]

I am math-challenged, and cannot understand perfect plan that maximizes what I get from the system, given the unknown variable of my death, and my propensity to laziness and avoiding work.

I simplify the decision by just considering the next year. IOW, do I start (early in my case) this year, or wait another year? Individual decisions...

 

[nun]

I am math-challenged, and cannot understand perfect plan that maximizes what I get from the system, given the unknown variable of my death, and my propensity to laziness and avoiding work. I simplify the decision by just considering the next year. IOW, do I start (early in my case) this year, or wait another year? Individual decisions...

My calculations include 3% inflation and I get a break even age for taking SS at either 62 or 70 as age 83. That's just the straight payout amounts, no investing amounts between 62 and 70.

 

[marko]

My calculations include 3% inflation and I get a break even age for taking SS at either 62 or 70 as age 83. That's just the straight payout amounts, no investing amounts between 62 and 70.

If I make it to 83 I'll be so happy I won't be worried about 'losing' money.

To quote the great wit Mike Tyson "I won't know whether to be ecstatic or ludicrous"

 

[nun]

If I make it to 83 I'll be so happy I won't be worried about 'losing' money.

To quote the great wit Mike Tyson "I won't know whether to be ecstatic or ludicrous"

That's my take on it too. I have more than enough guaranteed life time income apart from US SS so I'm going to take it as early as I can.

 

[aza455]

Social Security Math and Medicare

For someone who turns 62 in 2016, the maximum SS is $2,102 per month. Since that is discounted 25%, if infers that for someone who turns 62 in 2016 and is at the maximum that their FRA benefit would be $2,803/month ($2,102/(1-25%)) and that their age 70 benefit would be $3,700/month ($2,803 * 132%).

So if they defer until 70 they "pay" $201,792 (foregone benefits from 62 to 70) in exchange for (an extra) $1,598 a month for life or a 9.5% payout rate. The FIXED annuity payout rate for a 70 year old would be 7.8% for a male or 7.11% for a female or 6.26% for joint life according to immediateannuities.com ... so 9.5% that has a COLA is really good (if you can afford to defer). Many of us have savings and can afford the $202k and I'm willing to invest that amount for a COLA life annuity (and arguably a joint life annuity at that since DW inherits my benefit).

In my case, we are both in good health so the breakeven point with 0% interest of 80.5 is a calculated bet on our part. But better yet, by not starting SS early we can do more Roth conversions at low tax rates (~10% each f the last 3 years) versus the high taxes we will likely pay on RMDs.

If we pass on before we turn 70 or 80.5 then we lost the bet... just like if we made $2,102/month premiums for 8 years to an insurance company and then died..... but.....if we live long which would seem likely given our current good health, family longevity, better longevity of wealthier people and improving longevity, then it will be a good bet.

And yes, we recognize that it is possible that benefits might be reduced but our bet implicitly assumes that any reductions will be modest. In 35 years or so we can compare notes and see how things came out.

pb4uski,

While you are making a number of great points, there is one more aspect that needs to be looked at. And that is the Medicare premiums that are becoming increasingly ominous for the affluent recipients. As you may know, for 2016, those whose AGI (filing jointly) exceeded $175K Medicare premiums were slated to be an additional $375/mo. It did not happen as the Congress intervened and voted in a patch that saved that category of Medicare recipients for 2016. However, this will become an issue again next year... So, if you are in the $175K/yr area, then delaying SS and adding an additional $10-$20K/yr to your income will lead to a substantial increase in Medicare premiums.

Just something to think about when making a decision to postpone the SS...

 

[homestead]

I used this site Retirement Planning and Social Security Calculator: options for you and the spouse.
to do the math and help me determine when to start SS.
I started at 62.