Modelling when to take Social Security and other pensions

[latexman]

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Originally Posted by Time2 Yes, that is basically the whole reason for my post. Trying to get a flow chart of how to figure it out. (Fortran class in the 70s :-)

As you indicated Excel is probably the best tool of choice for this task, but for all us old Fortran warriors, I have one word of advice. Python!

[TheWizard]

Quote:

Originally Posted by Time2 Why?

I delayed claiming SS until age 70 to give me seven years of doing larger Roth conversions from my 403(b) so that my eventual RMD amount starting at age 70 (now starting at age 73) wouldn't be too large.

I had significant pension/annuity income for those seven years so I didn't desperately need SS income to live on.

And the stock market has gone up considerably since 2013, so my 403(b) balance isn't all that much lower now than in 2013.
But if I hadn't done the few hundred $K of Roth conversions, that tax-deferred balance would be lots higher...

[Time2]

Quote:

Originally Posted by TheWizard I delayed claiming SS until age 70 to give me seven years of doing larger Roth conversions from my 403(b) so that my eventual RMD amount starting at age 70 (now starting at age 73) wouldn't be too large.

OP here, yes that's why I'm waiting to 70.

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I had significant pension/annuity income for those seven years so I didn't desperately need SS income to live on.

No pensions or annuities, but large net worth for the income I want/need/

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And the stock market has gone up considerably since 2013, so my 403(b) balance isn't all that much lower now than in 2013. But if I hadn't done the few hundred $K of Roth conversions, that tax-deferred balance would be lots higher...

OH... there's a big one, I didn't subtract the Roth Conversions from my tax deferred accounts. Add a column!

[TheWizard]

For someone age 60 or so trying to decide when to start SS, I might do the following:

1) are you reasonably confident you'll be in good health a decade from now?
If not, claim SS at 62.

2) add up your monthly retirement income sources for the first few years, including a "bridge amount" of $2000 to $3000 per month in lieu of SS.
Then ask some questions:
A) by how much does this monthly retirement income EXCEED your expected expenses?
B) what is your expected annual portfolio drawdown rate over the eight years prior to age 70 SS, compared to the 4% SWR benchmark?
C) what will your three portfolio segments (tax-deferred, Roth, taxable) look like after eight years of drawdowns and delaying SS?

Answers to these questions may help you decide if you can POSSIBLY AFFORD to delay claiming SS.

Even then, you can do a wait and see approach after age 62, depending on how well the markets and your portfolio are doing.
You can claim SS in any month after age 62, depending on what happens...

[Time2]

Quote:

Originally Posted by latexman As you indicated Excel is probably the best tool of choice for this task, but for all us old Fortran warriors, I have one word of advice. Python!

I can't take any credit for being a Fortran warrior, I wouldn't even remember how to make a punch card! I was more making fun of the flow chart, I don't think they are a big thing now, could be wrong.

[Time2]

Quote:

Originally Posted by TheWizard For someone age 60 or so trying to decide when to start SS, I might do the following: 1) are you reasonably confident you'll be in good health a decade from now? If not, claim SS at 62. 2) add up your monthly retirement income sources for the first few years, including a "bridge amount" of $2000 to $3000 per month in lieu of SS. Then ask some questions: A) by how much does this monthly retirement income EXCEED your expected expenses? B) what is your expected annual portfolio drawdown rate over the eight years prior to age 70 SS, compared to the 4% SWR benchmark? C) what will your three portfolio segments (tax-deferred, Roth, taxable) look like after eight years of drawdowns and delaying SS? Answers to these questions may help you decide if you can POSSIBLY AFFORD to delay claiming SS. Even then, you can do a wait and see approach after age 62, depending on how well the markets and your portfolio are doing. You can claim SS in any month after age 62, depending on what happens...

Using FireCalc and my annual WR, I have zero failures and worst case out come is $4M at the 30 year mark. This is without adding SS, my HSA, some real estate and other misc. assets. So, I really have nothing to be concerned about, as someone else said, I'm just planning to maximize the kids inheritance.

[pb4uski]

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Originally Posted by Time2 ... How do we calculate When to collect SS with Roth Conversions, Taxes and growth of saved assets in mind?...

I have a spreadsheet that does that and and it incorporates SS assuming that both of us are living... but I'm using it principally to assess how much to do in Roth conversions given DW takes at FRA and I wait until 70 (much larger benefit).

I think what I might do is look at the EPVs from opensocialsecurity.com under early and late/optimal SS claiming strategies and calculate that difference... and then compare that difference to Roth conversion tax benefit of deferring.

[youbet]

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Originally Posted by TheWizard I had significant pension/annuity income for those seven years so I didn't desperately need SS income to live on.

How would you have handled it if you didn't "desperately need SS income to live on" but simply "needed SS income to live on?" The difference is eluding me for the moment but must have been an important part of your decision for you to call it out.

[Time2]

Quote:

Originally Posted by pb4uski I have a spreadsheet that does that and and it incorporates SS assuming that both of us are living... but I'm using it principally to assess how much to do in Roth conversions given DW takes at FRA and I wait until 70 (much larger benefit). I think what I might do is look at the EPVs from opensocialsecurity.com under early and late/optimal SS claiming strategies and calculate that difference... and then compare that difference to Roth conversion tax benefit of deferring.

Throwing another complication with Roth conversion. IRA balance goes down the same amount as Roth Balance goes up, but Taxable account decreases by amount of taxes paid on conversion.

[TheWizard]

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Originally Posted by youbet How would you have handled it if you didn't "desperately need SS income to live on" but simply "needed SS income to live on?" The difference is eluding me for the moment but must have been an important part of our decision for you to call it out.

Good question.
It turns out that my Basic Expenses in retirement are rather modest with my house paid for, etc.
But I like to travel, both domestic and foreign, so the cost of that probably exceeded my Basic Expenses in some pre-pandemic years.

So I did withdraw $3000/month from my tax-deferred 403(b) in lieu of SS for the first few years of retirement.
Then I found I wasn't spending all of that, so I switched to Roth-converting much of that $3000 instead.

But getting back to the fundamental question of "needing SS to live on", that was never in my plan.
I worked too many extra years 🙁 for that to be the case...

[MarieIG]

For DH, as the higher earner, we're sure we want to defer SS until 70; as longevity insurance and a (rather) secure source of income. We don't have LTCI, and this is a certain sum which could be popped on top of other income streams to go towards monthly care, if necessary.

There is also something to be said for secure income streams when you are past the age to manage your portfolio.

It also seems that certain people base their consideration on investing the totality of their SS or allowing their assets to grow. I don't see that with DH, he's pretty good at spending the income stream, and I would like him to have a higher income stream when I'm gone. (I did tell him he has to claim on mine should I go before he turns 70 and let his grow).

Mine SS date is flexible. I would like to get a few Roth conversions under my belt over the next few years.

For DH, as far as modeling his pension, other than choosing when/ what age to retire, that was not an option.

[TheWizard]

Quote:

Originally Posted by Time2 Throwing another complication with Roth conversion. IRA balance goes down the same amount as Roth Balance goes up, but Taxable account decreases by amount of taxes paid on conversion.

Sort of.
But my taxable account was essentially zero at start of retirement in 2013 and is now up around $100k.

That might mean that I should do more bigger Roth conversions, one could argue.
But that would bump me into a higher IRMAA tier and probably get my Taxable Income into the 31% bracket, and neither of those things would make me smile ...

[youbet]

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Originally Posted by Time2 Throwing another complication with Roth conversion. IRA balance goes down the same amount as Roth Balance goes up, but Taxable account decreases by amount of taxes paid on conversion.

Yes, your net worth is less after a Roth conversion (assuming you're not in a zero tax situation) than before the conversion. When I look at our TIRA's, I do a rough cut reduction of 20% to estimate what I'll really have left after taxes to spend.

[chassis]

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Originally Posted by Time2 Throwing another complication with Roth conversion. IRA balance goes down the same amount as Roth Balance goes up, but Taxable account decreases by amount of taxes paid on conversion.

@Time2 how does the converted Roth balance go up the same amount as the IRA balance goes down? Doesn't the government take a bite?

[youbet]

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Originally Posted by chassis @Time2 how does the converted Roth balance go up the same amount as the IRA balance goes down? Doesn't the government take a bite?

The preferable way to handle the Roth conversion taxes is to pay them separately from another source of funds, perhaps your taxable account. So TIRA goes down by the conversion amount, Roth goes up by the same amount, taxable account goes down by the tax amount.

[Midpack]

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Originally Posted by Time2 Throwing another complication with Roth conversion. IRA balance goes down the same amount as Roth Balance goes up, but Taxable account decreases by amount of taxes paid on conversion.

Taxes you're going to pay sooner or later, so not a real reduction in net worth. Most of us have overstated net worth's in that there are unavoidable taxes within, but you can't account for it exactly.

[Midpack]

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Originally Posted by Time2 Throwing another complication with Roth conversion. IRA balance goes down the same amount as Roth Balance goes up, but Taxable account decreases by amount of taxes paid on conversion. Quote: Originally Posted by youbet Yes, your net worth is less after a Roth conversion (assuming you're not in a zero tax situation) than before the conversion. When I look at our TIRA's, I do a rough cut reduction of 20% to estimate what I'll really have left after taxes to spend.

No disagreement, but they're taxes you're going to pay sooner or later, so not a real reduction in net worth. Most of us have overstated net worth's in that there are unavoidable taxes within (e.g. Cap Gains), but you can't account for it exactly.

[MarieIG]

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Originally Posted by Midpack Taxes you're going to pay sooner or later, so not a real reduction in net worth. Most of us have overstated net worth's in that there are unavoidable taxes within, but you can't account for it exactly.

Yes, I don't remove the taxes, until well, they're removed.

[Midpack]

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Originally Posted by MarieIG Yes, I don't remove the taxes, until well, they're removed.

Just commenting on the mental obstacle of voluntarily reducing our net worth by paying considerable taxes now doing Roth conversions, after spending 40 years minimizing taxes almost at all cost. A change in mindset I had to come to grips with. Having a pile of capital gains that I know aren't all ours is another.

[pb4uski]

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Originally Posted by chassis @Time2 how does the converted Roth balance go up the same amount as the IRA balance goes down? Doesn't the government take a bite?

Yes, but the government bite should come from taxable account funds. You can use tax withholding of tIRA funds to cover it but if you are under 59 1/2 you will be assessed a 10% penalty on the tax withheld.

See https://www.marketwatch.com/story/wh...on-11622222048

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... You are correct that when you convert to a Roth IRA, the 10% penalty for distributions from an IRA prior to age 59 ½ is not applied. The penalty arises in your case because you did not convert $15,000. Technically, you converted $12,000 and had $3,000 withheld for taxes. Because only $12,000 of the $15,000 made it to the Roth account, the IRS considers that $3,000 to be a distribution. Taking a distribution before age 59 ½ triggers the 10% penalty. And 10% of $3,000 is $300. ...