How to factor future SS into pre-SS spending

[disneysteve]

I've always done our retirement planning without counting in Social Security. That way we'd be prepared no matter what happened to the program. Now that retirement is here, and we're only 2 years from early SS eligibility, it's time to start figuring out how best to move forward knowing SS benefits will happen within the next 10 years.


Our portfolio is sufficient, based on all models and projections, to support us. Add in SS at whatever age we choose to start benefits, and we'll have well more than we need.


How, if at all, should that influence our spending/withdrawal rate over the time between now and whenever we start SS benefits? Do you allow for increased spending early in retirement, when you probably most want the extra funds for travel and such, knowing that SS will kick in later? Or do you just stay the course pretending that SS won't exist and just enjoy the higher income when it happens?

 

[skyking1]

it all depends on what percentage of your income stream it will represent, when you do take it.
It is signifcant for us and we are planning on spending up front because of it, but more for the idea that we want to go and do while we can do more.

 

[TheWizard]

Spending isn't necessarily the issue. Taxes are.
I ballparked my age 70 SS at $3000/mo when I retired at age 63 in 2013.
So for the next seven years, I took that amount out of my 403(b) and Roth converted much of it.

I had additional pension/annuity income to live on.

It's worked out swimmingly...

 

[HI Bill]

How, if at all, should that influence our spending/withdrawal rate over the time between now and whenever we start SS benefits? Do you allow for increased spending early in retirement, when you probably most want the extra funds for travel and such, knowing that SS will kick in later?

Agree with others, what % of your spending will SS represent? One way to maximize spending (if that's your desire) using FIRECALC is to include SS on the Other Income/Spending Tab. Then use the Investigate Tab to determine your maximum spending level for a given % of success such as 95% or 100%.

That said, I use Boglehead's VPW spreadsheet, which also accounts for your eventual SS income. VPW's aim is to allow you to spend as much as you can as early as you can without being done in by the SORR.

The other consideration is taxes. If you have to take SS, dividends and RMDs (and pensions, rental income, etc.) at the same time in your later life, you may end up in a whole new (higher) tax bracket, so it may make sense to take more out earlier, do ROTH conversions, or reset the basis on your taxable investments.

 

[RunningBum]

I use opensocialsecurity.com to find the present value of my SS benefit, and add it to my investment net worth which I multiple by my WR. That way I'm not waiting for my SS benefit to start spending it. Discount the number if you think SS benefits will be cut.

 

[HI Bill]

I use opensocialsecurity.com to find the present value of my SS benefit, and add it to my investment net worth which I multiple by my WR. That way I'm not waiting for my SS benefit to start spending it. Discount the number if you think SS benefits will be cut.

How many years do you include in the present value? I think adding it to FIRECALC gives you a better idea of maximum WR with regards to the SORR if one is not yet taking SS. It's about how many years it would take for you to run out of $ given the worst case SOR. But SS won't run out completely, although it might take a ~25% haircut.

 

[USGrant1962]

To start, don't pretend - pretending isn't a plan. Worst case is SS pays ~80% of what your current SS statement says. If you don't include that in your retirement income modeling you are being insanely conservative.

FIRECalc and most other retirement planners allow SS inputs. Use them. In particular, build a model in FIRECalc and use the Investigate tab to look at 100% success spending levels with 80% or 100% of your SS benefit. That will give you a conservative spending level to compare to your desired spending level.

You'll need to decide your SS claiming strategy and that decision that might be iterative between FIRECalc and opensocialsecurity.com. Though in the end it won't make much difference in FIRECalc, IMHO.

The point is that ignoring SS makes your "safe" spending level much lower than necessary. Whether you want to spend that much is a whole 'nother matter...

 

[RetiredHappy]

In our case, we just spend as we wish before and after retirement. Our SS filing strategy has always been 70 for my husband because he is quite a bit older than me and for me to file at 62 (against my own record). We don't link SS benefits to our spending as money is fungible.

 

[RunningBum]

How many years do you include in the present value? I think adding it to FIRECALC gives you a better idea of maximum WR with regards to the SORR if one is not yet taking SS. It's about how many years it would take for you to run out of $ given the worst case SOR. But SS won't run out completely, although it might take a ~25% haircut.

You would have to ask the developers of opensocialsecurity.com. I just fill in the info the ask for like age and PIA, and on the resulting page it gives me the PV. There's a box you can click at the top of the first page to handle special situations, like if you are still working or want to factor in a possible future cut.

 

[Alan]

When we retired I was confident that SS would come along on schedule and we spent extensively on travel before SS started knowing that it was a future income stream. By the time my wife claimed her SS we were living in England and it is still as reliable as I’d hoped, hitting our bank account every month like clockwork. Our UK SS also came along as planned, starting for each of us at age 66, along with a free bus pass. I’ll be applying for my own SS at the end of this year.

 

[mrfeh]

Enter your SS into firecalc, and then explore to see what your annual withdrawals could be while maintaining 95/100% success rate.

What percentage of that number you'd be comfortable with is up to you. I like to keep ours under 2/3 of that value (being conservative in early years of retirement, to avoid SORR).

 

[LateToFIRE]

To start, don't pretend - pretending isn't a plan. Worst case is SS pays ~80% of what your current SS statement says. If you don't include that in your retirement income modeling you are being insanely conservative...

The point is that ignoring SS makes your "safe" spending level much lower than necessary. Whether you want to spend that much is a whole 'nother matter...

+1 exactly what I was gonna say

I just don't see a reason to ignore it if you're within a few years of being eligible to collect.

Would also add that as I enter RE, I'm viewing $$$ spent today as somewhat more valuable than $$$ spent later. Most of the online calculators are showing us expiring with far more than we start with - I'm guessing same for you given your approach. Don't know bout you, but while I like having a big cushion, it's not really our goal to die rich. So, what's the downside of blowing a bit more dough early on while you're still alive and healthy enough to enjoy it? None.

Live life to fullest sensible limits today because you really don't know what tomorrow will bring.

 

[MarieIG]

We are postponing SS as longevity insurance and as the annuity with a COLA, i.e some income protection.

We had initially planned for me to take SS at 62 and DH at 70 as he was the higher-longer earner, but I decided to use the income gap for Roth conversions.

If I make it to 70 - I don't anticipate spending less money.

DF was very active until age 80 and went to Ireland for several weeks every summer with his brother. They flew first class and hired the same driver every year and they didn't skimp on costs as they wanted to be comfortable. (He was ill towards end of life - and we did not skimp on home health care.)

 

[Spock]

Add up the number of years you expect to collect (life expectancy - age of benefit start).
Multiply that by your annual benefit amount = total benefits you expect to collect.
Divide total expected benefits by (life expectancy - current age) = average benefit you expect to collect over your projected lifetime = amount you can budget for spending now.
That's if you assume benefits won't be cut by whatever means testing algorithm gets adopted between now and then.

 

[Exchme]

We just spend what we wish. It's just that over the years, our wishes have become much less than what the portfolio might be able to bear.

From a math perspective, you could just add the early SS benefit to your previously determined SWR and spend that. Obviously you would be no worse off than your previously calculated numbers that didn't account for SS at all.

The SS claim date math will likely favor at least the higher earner deferring SS and that is also nice as it can leave room for Roth Conversions if you need them. You could still spend at least as much as the early SS case and you would do that by spending down your bonds by the amount of the foregone early SS benefit.

 

[Out-to-Lunch]

+1 on using Firecalc's SS feature.

One other approach I use is fairly simpleminded.
*I figure out my wife's and my eventual SS benefit at our desired claiming age(s).
*Then I mentally set aside a chunk of money from my overall portfolio equal to the (expected benefits)*(years until benefits), and subtract this from my overall portfolio.
*Then consider what a SWR on the remaining pot would yield.
*Then sum these amounts.

The net result is a slightly higher WR until you start drawing SS, and then a lower one afterwards.

 

[Koolau]

I've always done our retirement planning without counting in Social Security. That way we'd be prepared no matter what happened to the program. Now that retirement is here, and we're only 2 years from early SS eligibility, it's time to start figuring out how best to move forward knowing SS benefits will happen within the next 10 years.


Our portfolio is sufficient, based on all models and projections, to support us. Add in SS at whatever age we choose to start benefits, and we'll have well more than we need.

How, if at all, should that influence our spending/withdrawal rate over the time between now and whenever we start SS benefits? Do you allow for increased spending early in retirement, when you probably most want the extra funds for travel and such, knowing that SS will kick in later? Or do you just stay the course pretending that SS won't exist and just enjoy the higher income when it happens?

To answer your specific question:

Yes, we felt comfortable exceeding the (roughly) 4% Safe WDR in early retirement - partly because we knew SS was just down the road a few years. We spent (on a % basis) quite a bit more in the very early FIRE years. We rehabbed an old place and then bought a new place, all within the first few years. We also took comfort in thinking of the value of our equity (significantly higher) in the new place as well, but knowing SS was waiting was the real key for us. Do keep in mind that our "over spending" occurred just at the time of the Great Recession.

Though SS keeps reminding us that we might be taking a hair cut in the near future, it never really occurred to us that SS might not be there. Too many voters are on or soon will be on SS for a serious hair cut in my humble opinion, but YMMV.