When to take Social Security

[cute fuzzy bunny]

Re: When to take SS

Oh dont go throwing actual facts written by actual experts in the matter into this ugly bowl of soup.

To save people the lengthy read, the Dalton piece has come up before. His article suggests that if you can make 5% or better on your money, that you're better of taking social security at 62 and continuing your investments growth. At a growth rate of 8%, he calculates that you'd have to reach the age of 106 before a delay strategy would pay off.

Here's another way to look at it, since it seems we're stuck on playing with the money and return rates in a manner I consider ridiculous.

Take a look at the social security payment $ amount you'd get at 62. What portion of your annual cost of living is this? 25%? 35%?

By taking the benefit at 62 and using it to replace that portion of your income stream, you're also freeing that same percentage of your portfolio from a short investment time horizon and loosening up volatility concerns.

So that 25% (whatever) of your portfolio no longer has to produce an income or be sold for 8 years, given the silly 8 year model we're going to build in the middle of our retirement, sole value being to try to microscope a decision that should be looked at with a macroscope.

Would you do anything differently with what is now intermediate term money?

I guess the alternative way of asking the question is this: at this age range (early to mid 60's), people are often throttling back their equities and other high risk investment classes and shifting towards bonds and cash. The senseless argument posted above suggests you look at is as an all cash proposition. How about instead of the throttle back, you take the benefit early and leave your allocations towards higher return, higher volatility options.

Methinks you get that 8%. Maybe more. And probably wont do a lot of lamenting on your 107th birthday

Pay particular attention to the legislative articles that Dalton links to.

And before the same misinformation that floated the last time Daltons article came into play, NO, he did not later admit that he screwed up any calculations and NO, he did not retract any portion of his article.

 

[vimwick]

Re: When to take SS

then why when i took 3 minutes to run the numbers (as cfb suggested) did firecalc indicate it was better (higher revenue stream) to delay?

 

[jdw_fire]

Re: When to take SS

Wouldn't you have to retain earnings to offset inflation on the the $327K so it's there in real terms when you're 66?

No, by the 4% rule the $327K portfolio will produce a real (i.e. inflation adjusted) $13080/yr for 30 yrs.

 

[FIRE'd@51]

Re: When to take SS

Let me help. First if your SS at age 62 is $17k/yr then at age 70 it will be 1.76*$17K = $29,920/yr (in real dollars). Now back to your numbers, when you take SS at age 62 you stated you get a real "income" of $43K total. Now lets suppose you wait till 70 to start taking SS, you will need to have your portfolio produce $43,000 - $29,920 = $13,080 per year. To get this you need a portfolio of 25* $13,080 = $327K. Now that leaves you $650k - $327k = $323K to spend in the 8 years between 62 and 70. So let's see what income you can have during those years. First you have the $13,080/yr produced by the $327k portfolio. Second you have $327k/8yrs = $40,875/yr. Add these two and for the years between the ages of 62 & 70 you can spend $53,955/yr and for as long as you live after age 70 you can spend the $43k you mentiond earlier. To answer your question the benefit is the additional amount you get to spend each year between the ages of 62 and 70. (Note that all the dollar figures used in this post are in real terms.)

The problem that I have with this analysis is that the multiplier you are using should not be 25. I know you are using it because it is the reciprocal of the 4% SWR. But the 4% SWR doesn't apply to the average 70 year-old who, according to the table Spanky posted (which is from the SS web site) has a life expectancy of 12.8 years. I think you should be using a much lower multiplier.

I went to the Vanguard annuity calculator and priced a lifetime inflation-adjusted (using CPI-U) annuity for a 70 year-old man. The SWR is 6.85%, which implies a multiplier of 14.6. Redoing your analysis with a 14.6 multiplier leaves you with 14.6 x $13,080 = $190,968 to spend down over the 8 years from 62-70, or $23,870 per year. So the residual portfolio becomes 650K - 191K = 459K. Applying the 4% SWR to the 459K yields $18,360. So you have a total amount to spend from age 62-70 of $18,360 + $23,870 = $42,230 about the same as the original $43K you would get from taking 17K SS at 62 and adding it to 26K (4% of 650K).

So it seems to me that all this additional spending power from age 62-70 is the result of choosing a multiplier which is way too high.

 

[Bikerdude]

Re: When to take SS

I went to the Vanguard annuity calculator and priced a lifetime inflation-adjusted (using CPI-U) annuity for a 70 year-old man. The SWR is 6.85%, which implies a multiplier of 14.6. Redoing your analysis with a 14.6 multiplier leaves you with 14.6 x $13,080 = $190,968 to spend down over the 8 years from 62-70, or $23,870 per year. So the residual portfolio becomes 650K - 191K = 459K. Applying the 4% SWR to the 459K yields $18,360. So you have a total amount to spend from age 62-70 of $18,360 + $23,870 = $42,230 about the same as the original $43K you would get from taking 17K SS at 62 and adding it to 26K (4% of 650K).

So it seems to me that all this additional spending power from age 62-70 is the result of choosing a multiplier which is way too high.

Very interesting! Maybe we're getting close to understanding this issue.

 

[73ss454]

Re: When to take SS

Really, I'm glad someone can figure this stuff out. My head is about to explode.

 

[Cut-Throat]

Re: When to take SS

The problem that I have with this analysis is that the multiplier you are using should not be 25. I know you are using it because it is the reciprocal of the 4% SWR. But the 4% SWR doesn't apply to the average 70 year-old who, according to the table Spanky posted (which is from the SS web site) has a life expectancy of 12.8 years. I think you should be using a much lower multiplier.

I went to the Vanguard annuity calculator and priced a lifetime inflation-adjusted (using CPI-U) annuity for a 70 year-old man. The SWR is 6.85%, which implies a multiplier of 14.6.

So it seems to me that all this additional spending power from age 62-70 is the result of choosing a multiplier which is way too high.

Well, If a 70 year old man runs FireCalc and he has a lot of longevity in his family, and uses a 30 year time frame, his SWR would be less than 4% - So that is where the 25 multiplier comes in.

Which also may be why I might be interested in an annuity when I'm age 70, so that I could get a 6.8% SWR

Which is why I am also interested in Delaying SS to age 70 and an inflation adjusted annuity at 70 too

 

[ERD50]

Re: When to take SS

Very interesting! Maybe we're getting close to understanding this issue.

Yes, it is very helpful when we get numbers and methodology to base a comparison on.

Well, I agree with C-T's post right above this, I support the 4% number for the 70 yo. But I think I see a source of error. We are using 4% whether the person is 62 or 70. It is the same person, planning for the chance that they will be one of those people that live a long time (averages have little to do with it). But, if you use 100yo as your outside number, that is a 38 year cycle for the 62yo and a 30 year cycle for the 70yo.

Or a 30 year cycle for the 62yo (out to 92) and a 22 year cycle for the 70yo.

OK, so now a dozen of us will go run 22, 30 and 38 year cycles on FireCalc and report back in.....

-ERD50

 

[megacorp-firee]

Re: When to take SS

Geez, I don't even pretend to understand all of the math, but with all of the different parameters that affect all of the conclusions, I think that this is an example of a case of 'exceeding the precision of the model'.

I take it most of you guys were on the debate team in high school ...

 

[HFWR]

Re: When to take SS

I take it most of you guys were on the debate team in high school ...

That makes this a "mass-debation"...

 

[ERD50]

Re: When to take SS

ERD50,

The graph is from this article written a professor in accounting/finance:
http://www.nysscpa.org/cpajournal/2006/606/essentials/p42.htm

He suggests that age 62 is the best time to take SS benefits.

The trouble is - the definition of 'best' is a purely fiscal one. He who dies with the most toys 'wins'.

C-T is working under a different definition of 'best'. He is not concerned with leaving money to heirs, but does not want to run out if he happens to survive to a ripe, old age. If you think about SS as an annuity, delaying SS effectively annuitizes more of his income. And this appears to help meet his stated goals.

As you effectively sell off a portion of your portfolio to fund the increased SS payment, you are decreasing the Nest Egg - not as much needed with the larger SS payment and not as much left for heirs. But, a stream of income from Uncle Sam for as long as C-T is breathing.

I have little doubt that the professor in accounting/finance did his calculations correctly. But he was not addressing C-T's situation, so it may not be fully relevant.

-ERD50

 

[jdw_fire]

Re: When to take SS

First some housekeeping for my analysis of Bikerdude's numbers.  Some of my numbers need to be changed: the amount divided over 8 years should have been $323k which drops the yearly income between age 62 & 70 by $500 to $53,455.

And now to your comment

The problem that I have with this analysis is that the multiplier you are using should not be 25.  I know you are using it because it is the reciprocal of the 4% SWR.  But the 4% SWR doesn't apply to the average 70 year-old who, according to the table Spanky posted (which is from the SS web site) has a life expectancy of 12.8 years.  I think you should be using a much lower multiplier.

I went to the Vanguard annuity calculator and priced a lifetime inflation-adjusted (using CPI-U) annuity for a 70 year-old man.  The SWR is 6.85%, which implies a multiplier of 14.6.  Redoing your analysis with a 14.6 multiplier leaves you with 14.6 x $13,080 = $190,968 to spend down over the 8 years from 62-70, or $23,870 per year.  So the residual portfolio becomes 650K - 191K = 459K.  Applying the 4% SWR to the 459K yields $18,360.  So you have a total amount to spend from age 62-70 of $18,360 + $23,870 = $42,230 about the same as the original $43K you would get from taking 17K SS at 62 and adding it to 26K (4% of 650K).

So it seems to me that all this additional spending power from age 62-70 is the result of choosing a multiplier which is way too high.

My example is from the perspective of a 62 yo person deciding whether to take SS at 62 or wait and take it at 70, i.e. what can he do at age 62 to increase his yearly income for the next 8 years.  I don't think using the 4% rule at age 62 is way out of line (heck even the bunny agreed to it).  Remember that the choice here is whether to have a plan that starts at age 62 and produces a real income of $43k/yr ($17k/yr from SS plus $26k/yr from the $650k portfolio using the 4% rule)  OR  have a plan that produces a real income of $53,455/yr from age 62 to age 70 ($40,375/yr from $323k/8 plus $13,080/yr from the $327k portfolio using the 4% rule) and a real income of $43k from age 70 on ($29,920/yr from SS plus $13,080/yr from the $327k portfolio using the 4% rule).  Which ever plan you choose, the WDs from the portfolio using the 4% rule start at age 62.

 

[ERD50]

Re: When to take SS

The problem that I have with this analysis is that the multiplier you are using should not be 25.


I went to the Vanguard annuity calculator and priced a lifetime inflation-adjusted (using CPI-U) annuity for a 70 year-old man. The SWR is 6.85%, which implies a multiplier of 14.6.

Fire'd@51, I think we went around on this a bit on the previous thread, but let me look at it a bit differently this time.

What if we try to value the SS difference as you did? Not by how much it reduces a portfolio that we are only willing to draw 4% from, but by looking straight at the 'cost' of the additional payments received for SS. Like this:

Assume SS would be $10,000 for a 62yo. $17,600 if delayed to 70yo. The 70yo gets an added $7,600. But he had to 'pay' for it by not getting the $10,000 for 8 years. So that is $80,000 plus add in a compounded real rate of return of 4% on that increasing balance should get you about $95,800. So the added $7,600 SS annuity cost him $95,800, or a SWR of about 7.93%, or a multiplier of 12.61.

Is that correct?

The reason I went through that exercise is that it appears the Feds are giving a better 'deal' than Vanguard is (easy when it is not 'your' money!). If that were not the case, I might suggest that C-T should not delay SS, but use the money instead to buy an annuity from Vanguard. It looks like SS is the better deal, but C-T may want to supplement that at age 70, as the govt only offers X amount.

-ERD50

 

[youbet]

Re: When to take SS

An article over at the Retire Early Home Page discusses the pros and cons of cola'd annunities and concludes that an older retiree could increase his/her SWR by 1% or more, at the expense of giving up some/all of their portfolio to the insurance company. The author does not recommend cola'd annuities for younger (example = 45 yo) retirees.

To the extent that delaying SS is in effect purchasing a cola'd annuity, the article has some relavance.

http://www.retireearlyhomepage.com/inflannu.html

 

[jdw_fire]

Re: When to take SS

An article over at the Retire Early Home Page discusses the pros and cons of cola'd annunities and concludes that an older retiree could increase his/her SWR by 1% or more, at the expense of giving up some/all of their portfolio to the insurance company. The author does not recommend cola'd annuities for younger (example = 45 yo) retirees.

To the extent that delaying SS is in effect purchasing a cola'd annuity, the article has some relavance.

http://www.retireearlyhomepage.com/inflannu.html

If you want to see how a COLAed annuity might increase your SWR check out the example I gave in this old post http://early-retirement.org/forums/index.php?topic=7503.msg136091#msg136091 and the discussion in the rest of that thread. BTW if you think SS is a heated discussion just look at the discussions on annuities.

 

[New Thinking]

Re: When to take SS

Pay particular attention to the legislative articles that Dalton links to.

And before the same misinformation that floated the last time Daltons article came into play, NO, he did not later admit that he screwed up any calculations and NO, he did not retract any portion of his article.

CFB - I don't know where you get your information, but I can tell you that Dr. Dalton admitted his mistakes in the CPA article to me personally. I have proof but would not post without his blessing. He did not take the increases into account by inflation from age 62 to FRA to age 70 and these do cut down the "cross-over ages" by a few years. Many scholars have made this mistake in the past.

 

[cute fuzzy bunny]

Re: When to take SS

He submitted a letter to the editor and noted that while his article created a furor, that he stood by it. In particular, he noted that he DID inflation adjust the amounts appropriately.

So, I dont think so.

With regards to the 25x...no, you're not going to live to be 100, but why not tie another arm behind the alternatives back just to be sure you get the 'right' number. And substituting an annuity for the money market isnt a big step up either.

Although I'd trust the vanguard annuity to pay the quoted amounts far more than anticipating that the SSA will be paying you the full quoted amount of SS 38 years out, which is where you'd be if you were 62 and looking at a 30 year run after age 70 for comparison purposes. I'm quite sure near term numbers are pretty safe. Every other dashboard indicator says that wont be the case 38 years from now. Too many retirees, too few workers, not enough money to go around.

then why when i took 3 minutes to run the numbers (as cfb suggested) did firecalc indicate it was better (higher revenue stream) to delay?

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.

I have seen situations where people position the input to firecalc as being a decision made immediately, and with a very small portfolio where the failure rate is low early in all the runs due to the immediacy issues, but the same run calculated ten years in advance or using a reasonable sized portfolio tips the balance the other way.

So the results can be 'gamed' unintentionally. Which is why I recommend that people visit this 'decision' as part of their financial planning NOW and not wait until they're 62. Much of the potential "benefit" of income stream substitution and higher portfolio ramp up returns is neutralized at that point.

Not sure I'd promote retiring at 62 with only 500k and social security either. I'm quite sure that doesnt end well given these 100, 107 and 120 year life spans you guys all think you're going to get to...whether you take late social security or not. Probably good if you want to live in a foreign country and suck the morning dew from the leaves under the tree you're sleeping under but...

 

[Independent]

Re: When to take SS

I was under the impression that FC added inflation only after you had reached the year of your SS payment. Are you saying FC adds inflation from 2007 to SS at a later date? I've been putting the inflated amount from the SS web calculator for future dates. If you're right that's double dipping.

I got my results from putting in $24,000 of SS starting in 2007, and then $32,000 of SS starting in 2011. I didn't inflate the $32,000 before I entered it (i.e. I did not say "let's assume inflation is 3%, so the $32k will increase to $36,016 by age 66, so I need to tell FireCalc $36,016 starting in year 2011.)

I still get a higher "safe" spending plan by delaying.

Dory is the authority on FireCalc. I didn't see this issue in the FAQs in FireCalc.

But I'm pretty sure I'm doing it right. When I did my two runs, I downloaded the Excel files that show the portfolio balance at the end of each year. Then I "checked" the calculation by rolling forward from one year to the next, using the SS benefits above. Note that if you do that, all the values are shown in "constant" dollars (inflation has been backed out). I did not get "perfect" matches, but I wasn't off by anything as big as 12.5%.

 

[cute fuzzy bunny]

Re: When to take SS

Dory has previously reported that firecalc inflation adjusts every number entered, so the social security numbers you enter should be the ones from the SSA web site or report you receive.

Look at the great grampa of social security threads...

http://early-retirement.org/forums/index.php?topic=142.0

 

[ERD50]

Re: When to take SS

With regards to the 25x...no, you're not going to live to be 100, but why not tie another arm behind the alternatives back just to be sure you get the 'right' number.

You seem to be hung up on this long life span thing, using it as a 'proof' that people are twisting the numbers.

I can make the decision to plan for an unlikely event. That is different than saying I *expect* that event to occur.

I don't *plan* or *expect* to live to 100. But, I cannot rule it out, and I don't want to be in the position that I am dependent on my kids (who would be in their 60s and 70s) for support in those final years. So, to the extent that I can prepare for it, I will.

I don't expect my house to burn down, yet I have insurance against it. I don't expect to get sued, but yet, I have umbrella insurance as some protection against it.

Although I'd trust the vanguard annuity to pay the quoted amounts far more than anticipating that the SSA will be paying you the full quoted amount of SS 38 years out,

IMO, this is a worthwhile debate (but in a separate thread - please!). As I said before, I think we should understand the underlying assumptions before layering other scenarios on top of those assumptions.

I have seen situations where people position the input to firecalc as being a decision made immediately...

What is wrong with this? IMO, it is the most sensible approach. You can't act on the decision until you are at age 62. So it makes sense to model it as if you are age 62, ready to decide. I am looking at it now, just to get an understanding of the principles and decision points. But no way I would 'decide' prior to age 62. Things may change between then and now. For me this is an exercise, for people near age 62 I hope it is of some immediate value.

Not sure I'd promote retiring at 62 with only 500k and social security either.

Depends on your spending level. I've seen a wide range of numbers on this board. Some people seem to be happy with an income that I would consider 'dew sucking' already. The default in Firecalc is $30,000 spend. So if we changed that would be accused of 'gaming' the inputs? So earlier, you said you wanted to see a FireCalc run support a SS delay. Now that you have been shown them, you say those inputs are unreasonable?

-ERD50

 

[FIRE'd@51]

Re: When to take SS

Fire'd@51, I think we went around on this a bit on the previous thread, but let me look at it a bit differently this time.

What if we try to value the SS difference as you did? Not by how much it reduces a portfolio that we are only willing to draw 4% from, but by looking straight at the 'cost' of the additional payments received for SS. Like this:

Assume SS would be $10,000 for a 62yo. $17,600 if delayed to 70yo. The 70yo gets an added $7,600. But he had to 'pay' for it by not getting the $10,000 for 8 years. So that is $80,000 plus add in a compounded real rate of return of 4% on that increasing balance should get you about $95,800. So the added $7,600 SS annuity cost him $95,800, or a SWR of about 7.93%, or a multiplier of 12.61.

Is that correct?

I think your methodology is very plausible. It probably comes close to the "correct" multiplier. It also allows one to estimate the fees built into the Vanguard (AIG) product - looks like about 1% per year, although their pool of annuitants probably have a longer-than-average life expectancy since 70 year-olds in poor health presumably don't tend to buy annuities.

A "theoretical" way to estimate this without any reference to the return on early SS payments might be to take the current real interest on TIPS (about 2.5%) and plug it into a financial calculator as follows:

PMT = 7600

FV = 0

i = 2.5%

N = 13 years (the life expectancy of a 70 year-old from Spanky's table)

PV (calculated) = 83,500

SWR = 7600 / 83500 = 9.1%

multiplier = 11 (not far from your result)

 

[ERD50]

Re: When to take SS

Dory has previously reported that firecalc inflation adjusts every number entered, so the social security numbers you enter should be the ones from the SSA web site or report you receive.

I need to look at this more closely. I have a non-cola pension that I can take in 3 years or delay and take 2X in 13 years. It looked to me that FireCalc was inflating it between now and when I take it, but I need to review the excel output again to be sure. This *may* be a 'bug' in FireCalc. I'm out the rest of the day, or I would test it now.

-ERD50

 

[New Thinking]

Re: When to take SS

He submitted a letter to the editor and noted that while his article created a furor, that he stood by it. In particular, he noted that he DID inflation adjust the amounts appropriately.

So, I dont think so.

Well here is the letter that you refer to and I am sure you read it as it is on the web. But he does not say he put the inflation in appropriately, he implies that he did not..I guess others can read it and make their own conclusions.

"The author responds:
The effect on a spouse regarding the decision of when to begin Social Security benefits is an important point. My calculations consider only one person, not a husband and wife together. When a spouse is involved, the choice becomes more complicated and requires a more sophisticated analysis. I appreciate the insight offered by the readers’ comments.
Mr. Saglinbeni’s estimate (that it would take 14 years of collecting Social Security beginning at age 65 to equal the benefits one would receive if benefits began at age 62) is consistent with my analysis in the article. I estimated that it would take 14 to 15 years to reach equality if the normal retirement age is 66 (i.e., 81 years less 66 years). Certain assumptions (such as COLAs), however, can significantly influence this estimate.
Although the reduction in benefits for working and collecting Social Security was modified in the Clinton administration, it was not eliminated. The rule still applies to all who receive benefits before their normal retirement age. The rule is correct as stated in the article."
Thomas M Dalton, PhD, CPA
University of San Diego, San Diego, Calif.

 

[haha]

Re: When to take SS

Thanks for posting his letter. I was not likely to search the web for it, because I would rather trust analysis than debate the bona fides of gurus.

Still, it is interesting as an example of how someone might stretch or even ignore what is printed in order to make a point.

Ha

 

[Peter]

Re: When to take SS

Still, it is interesting as an example of how someone might stretch or even ignore what is printed in order to make a point.

Indeed. But then some people have developed a high level of skill in that technique ...

Peter