Modelling when to take Social Security and other pensions

[pb4uski]

How does the 25% cut in SS benefits in 2031 factor in your calculations?

Will that make any difference?

Yes, it does. As I've previously mentioned, I periodically run various scenarios in opensocialsecurity.com, including with and without a haircut. Below is the impact of the haircut for various scenarios of the latest run that I did in late 2020.... so generally a 9.0-12.5% reduction of the expected present value of lifetime benefits if with the haircut.

At the time I think the haircut was 23% in 2034. The most current 2020 SS Trustees report was a 24% haircut in 2034. Where are you seeing a 25% cut in 2031?

	No haircut	Haircut	Impact of haircut
Optimal solution	100.0%	87.5%	-12.5%
Both now	91.2%	82.2%	-9.0%
Both 65	92.3%	83.0%	-9.2%
Both at FRA	94.5%	84.5%	-10.0%
Me 70/DW FRA	100.0%	87.5%	-12.5%

 

[chassis]

I could have been more clear. I have a Taxable account at Vanguard, I pay taxes out of that rather than reduce the Roth Conversion amount.

@Time2 Thanks for the clarification. If I understand correctly, your net worth went down at the moment in time the Roth conversion was accomplished and the tax was paid from your taxable account, correct?

Example:

IRA balance down, because of Roth conversion
Roth balance up, by virtue of conversion
Taxable balance down, to pay tax on Roth conversion
Net result: net worth down

 

[pb4uski]

@Time2 Thanks for the clarification. If I understand correctly, your net worth went down at the moment in time the Roth conversion was accomplished and the tax was paid from your taxable account, correct?

Example:

IRA balance down, because of Roth conversion
Roth balance up, by virtue of conversion
Taxable balance down, to pay tax on Roth conversion
Net result: net worth down

Yes, net worth went down by the amount of taxes paid, but only because people don't typically recognize deferred income tax liabilities in their personal net worth calculations.

OTOH, if one recognizs deferred income taxes (and some members here do) then net worth would be unchanged because the reduction in cash/net worth when the taxes are paid would be offset by a reduction of deferred tax liabilities of the same amount (ignoring any possible measurement differences).

 

[chassis]

Yes, net worth went down by the amount of taxes paid, but only because people don't typically recognize deferred income tax liabilities in their personal net worth calculations.

OTOH, if one recognizs deferred income taxes (and some members here do) then net worth would be unchanged because the reduction in cash/net worth when the taxes are paid would be offset by a reduction of deferred tax liabilities of the same amount (ignoring any possible measurement differences).

@pb4uski Thanks. What do you mean by deferred tax liability? Is there a term, time period or date for this?

 

[11522914]

Yes, it does. As I've previously mentioned, I periodically run various scenarios in opensocialsecurity.com, including with and without a haircut. Below is the impact of the haircut for various scenarios of the latest run that I did in late 2020.... so generally a 9.0-12.5% reduction of the expected present value of lifetime benefits if with the haircut.

At the time I think the haircut was 23% in 2034. The most current 2020 SS Trustees report was a 24% haircut in 2034. Where are you seeing a 25% cut in 2031?

No haircutHaircutImpact of haircut

Optimal solution100.0%87.5%-12.5%

Both now91.2%82.2%-9.0%

Both 6592.3%83.0%-9.2%

Both at FRA94.5%84.5%-10.0%

Me 70/DW FRA100.0%87.5%-12.5%

Here is where I saw the SS haircut figures.

https://www.foxbusiness.com/economy...ould-be-coming-heres-who-it-will-affect-first

"Based on CBO's*figures, Social Security’s retirement benefit would be cut by roughly one-quarter in 2031," the CRFB said in an*analysis*on Wednesday. "In other words, today’s youngest retirees will face a sharp 25% drop in their benefits when they turn 73."

 

[audreyh1]

+1... for my Roth conversions I feel like a dog chashing its tail.

When I retired at the end of 2011 my tIRA balances were 100x. Since I retired, I've converted 44x. Today my tIRA balances are 113x.

Well, it would be way worse if you hadn’t converted.

 

[daylatedollarshort]

On our company pensions, the same logic applies, to me at least. As these grow so slowly, conserving the equivalent funds as investments is even more obvious, and I should start those pensions asap. It is hard to know our exact budget in post-Covid life, but I estimate SS plus pensions could leave us with a SWR of zero.

We took our pensions as annuities at 55 and SS at 62 for a variety of reasons, including income diversity, concerns over future legislation changes and inheritance reasons. No regrets so far. Right now pensions and SS more than cover our baseline annual expenses, so if we get dementia in the future and make some bad investments, we still should have enough regular income coming in to pay the bills. We'll use the investments for big expenses like LTC, remodeling the house and leaving money to the kids to help them ER, too.

 

[PandaBear]

Hi all,
I retired at 55. Six years later I am approaching the point where 'when to take Social Security' (SS) becomes more than an academic question.

My modelling shows very clearly (if correct) that taking SS at 62 is the best route. This is because although you get a smaller SS payment, the invested funds remain invested and have longer to compound to 80 and 85.

So many financial advisers push the 'leave it until late' mantra for SS. I am not clear at all that works for everyone, even leaving aside the question of longevity.

How has any modelling you have done played out?

Cheers,

B

We also made the decision to have dh take SS at 62. He noted that he was "ahead" of the game until age 80. He is older than me (by almost 4 years) and I do not get SS myself and will not get dh's if he goes first. So we felt it was better to start as soon as we could. We have two pensions and pretty decent savings. We don't anticipate needing to take much out of our savings until we are required to do so

Our situation is not typical, I know, and what we have chosen to do may not be best for most people. Heck, financially, it might not be the best for us either.....we won't know that for many years. But we made it our decision and are okay with what we've done. And that's all you can really do......make the best decision you can and move forward.

 

[Time2]

How does the possible 25% cut in SS benefits in 2031 factor in your calculations?

Will that make any difference in your decision?

I hope it doesn't get cut and they have ten years to start the pumping up changes. All I hear is crickets.
If it gets cut it will be for those of us that spent 30 years living below our means and saving for the future. (doing the right thing) We will be means tested and loose.

 

[Time2]

@Time2 Thanks for the clarification. If I understand correctly, your net worth went down at the moment in time the Roth conversion was accomplished and the tax was paid from your taxable account, correct?

Example:

IRA balance down, because of Roth conversion
Roth balance up, by virtue of conversion
Taxable balance down, to pay tax on Roth conversion
Net result: net worth down

Yes, net worth down by the same amount as the federal taxes paid. But I still need living expenses that must be withdrawn.

However, I'm in my third year of living on savings, so far net worth is up every year, because of stock market growth. This is even with paying stupid high tuition of over $60k each year which is more than our living expenses. Only $38k left and the student expenses are over.

 

[Montecfo]

The difference between the two scenarios is not an apples to apples comparison. You are comparing what is probably the least risky investment possible (deferring SS) to an investment that has some bit of risk. The delta in outcomes for deferring SS is practically zero. The outcome delta on a portfolio including equities over 25 years is substantial.

If you wanted to do a more even comparison, model deferring SS while also moving amounts equal to what the early payout would have been from your portfolio bond allocation to portfolio stock allocation. In other words, equalize the growing equity exposure (the risk) between the two scenarios. When you do that, I am confident that deferring SS will beat by a small but consistent amount any projection past your actuarial lifetime and partially close the gap in the case of dying early. The reason is because currently, deferring SS pays a better return than any comparable fixed income investment. SS deferral rates are fixed and they were fixed when we under a higher interest rate environment. Someday interest rates may go up, or SS deferral rates may be adjusted down. Until that happens SS deferral has an advantageous return over comparables.

Most people who retire early with portfolio assets and enter the SS decision years value a de-risking of their withdrawal plans, although almost no one consciously models it that way. Deferring SS is an insurance that a lot of people want. If you don't want the insurance, consider the ways (like the paragraph above) to equalize the risks.

Of course, there's lots of individual situations with health, or cash flow, or spousal/family factors that would trump the above analysis. I don't have a dog in the fight for other people's SS claiming strategies. Just trying to bring a perspective to modelling factors I seldom see addressed when the discussion gets repeated.

I personally am waiting until 70 and I am also aware that the risk reduction of that choice allows for a rising equity glide slope, if I wanted the risk. So far I don't.

You made some good points, but I think you are mischaracterizing SS deferral as the "least risky" investment. I also think you err in suggesting that deferring social security generates a "better return than any comparable fixed income investment".

You seem to not be considering the effect of mortality. Each year you defer is one less year you collect. Your "return" from that decision will be a negative one for many folks, which is why people do breakeven analysis.

Just think it is important to not mix returns from investments, which are not death dependent with a deferred life annuity.

Deferring SS can make sense in my view, for a lot of reasons. But not because it generates a riskless "return", as it does not.

 

[pb4uski]

@pb4uski Thanks. What do you mean by deferred tax liability? Is there a term, time period or date for this?

Deferred taxes are a common accounting convention to provide for income taxes for differences between the book basis and tax basis of assets and liabilities... an easy way of thinking of it is the taxes that would be due if all assets were sold and liabilities were settled on the balance sheet date. Almost any company balance sheet will have it and if a CPA were to prepare personal financial statements for an individual deferred taxes would be required to be included as well. That said, there are some measurement difficulties, principally around the appropriate tax rate to us in the calculation.... some members of this forum provide for them in calculating net worth... but most do not.

 

[pb4uski]

Here is where I saw the SS haircut figures.

https://www.foxbusiness.com/economy...ould-be-coming-heres-who-it-will-affect-first

"Based on CBO's*figures, Social Security’s retirement benefit would be cut by roughly one-quarter in 2031," the CRFB said in an*analysis*on Wednesday. "In other words, today’s youngest retirees will face a sharp 25% drop in their benefits when they turn 73."

Thanks... I guess I'll wait to see what the next SS Trustees report says rather than the CBO, but I think it likely that it will be worst than the last report.

 

[Time2]

And still crickets from our legislators.

I'm sure when they start talking seriously about cutting the amount of SS checks $**t will hit the fan.
I was never a great fan of the return on my SS contribution, but I also know it is more than just a retirement program. It takes care of those that don't take care of themselves, it is a disability program, it takes care of children that lost a parent ans spouses that didn't work outside the house.
That said now that I'm of SS age, I see it as important and I'm kind of ticked off that the future problem is not being addressed before it becomes more drastic measures need to be taken to shore it up. Ten years of increased savings in the SS program starting now, would reduce the sacrifices needed in 2031.

 

[USGrant1962]

Thanks... I guess I'll wait to see what the next SS Trustees report says rather than the CBO, but I think it likely that it will be worst than the last report.

Yea, that is due out any time now, 2020 was published on April 22. I suspect this year is delayed a bit simply because of lost workhours due to Covid-19.

 

[ERD50]

We took our pensions as annuities at 55 and SS at 62 for a variety of reasons, including income diversity, concerns over future legislation changes and inheritance reasons. No regrets so far. Right now pensions and SS more than cover our baseline annual expenses, so if we get dementia in the future and make some bad investments, we still should have enough regular income coming in to pay the bills. We'll use the investments for big expenses like LTC, remodeling the house and leaving money to the kids to help them ER, too.

It's kinda interesting I guess, but I am delaying SS and pension for pretty much those same reasons (though I'm assuming, maybe wrongly, that any legislation changes will affect early/late takers the same)!

Knowing that I'll have more coming in later means I can tap more deeply into the portfolio now, if needed. If I develop dementia later (unlikely to kick in too badly between my current age 66 and age 72, and if I sense that, I can start pension/SS - that flexibility is nice) I'll have an even larger income stream.

-ERD50

 

[youbet]

Well, it would be way worse if you hadn’t converted.

You're describing having more money as "worse?"

 

[RunningBum]

You're describing having more money as "worse?"

If the goal is to get money from a tax deferred account to a tax free account, missing a chance to pay lower taxes on the conversion and seeing the tax deferred account grow more would be worse. It would be better to have that growth in the tax free account. All within the confines of tax rate arbitrage.

 

[chassis]

Deferred taxes are a common accounting convention to provide for income taxes for differences between the book basis and tax basis of assets and liabilities... an easy way of thinking of it is the taxes that would be due if all assets were sold and liabilities were settled on the balance sheet date. Almost any company balance sheet will have it and if a CPA were to prepare personal financial statements for an individual deferred taxes would be required to be included as well. That said, there are some measurement difficulties, principally around the appropriate tax rate to us in the calculation.... some members of this forum provide for them in calculating net worth... but most do not.

@pb4uski Thanks again. What in your mind is a reasonable deferral window for the tax liability? 1 month? 1 year? 1 decade?

 

[WestUniversity]

I don't have a dog in the fight for other people's SS claiming strategies. Just trying to bring a perspective to modelling factors I seldom see addressed when the discussion gets repeated.

Sure sounds like it.

Regarding the second part of your statement above, that’s exactly what I was doing, providing another perspective.

My NW is tracking in line with my 62 claiming projection which far exceeds my 70 claiming projection.

As I said YMMV…

 

[LRDave]

Claiming any time between 62 and 70 will work out 100% of the time assuming you have a heavily dividend-paying portfolio ......

 

[pb4uski]

@pb4uski Thanks again. What in your mind is a reasonable deferral window for the tax liability? 1 month? 1 year? 1 decade?

It doesn't really work that way... the deferred refers to taxes that have already been deferred.... when you make pre-tax 401k or tIRA contributions you are deferring income taxes.... not paying them now knowing that you'll have to pay them later when the tax-deferred money is withdrawn.

The deferred tax liability just seeks to measure and recognize that income taxes will eventually become due... either when withdrawn voluntarily or when withdrawn as RMDs.

 

[svalder85]

Something to consider

I'm a couple years behind you.
One thing I consider a lot as I watch my mother age is that she doesn't make decisions or grasp complex issues as well as she used to.
Also I believe we are all more susceptible to being swindled as we get older. (Whether stranger or family).
So I want my SS, modest pension, and likely an immediate and/or deferred annuity to provide a guaranteed monthly income.
There will be no way to make up a loss that occurs at 70 or 80 years old. So once I and financially secure there is no reason to risk major losses.

 

[RunningBum]

I'm a couple years behind you.
One thing I consider a lot as I watch my mother age is that she doesn't make decisions or grasp complex issues as well as she used to.
Also I believe we are all more susceptible to being swindled as we get older. (Whether stranger or family).
So I want my SS, modest pension, and likely an immediate and/or deferred annuity to provide a guaranteed monthly income.
There will be no way to make up a loss that occurs at 70 or 80 years old. So once I and financially secure there is no reason to risk major losses.

That's a good point. I presume this favors waiting until 70 to take SS, since you are likely of sound mind to not make poor money choices before then, and want to maximize after? Though you could take it earlier and just buy more SPIAs to cover the income difference. Probably worth modeling to see which way is better.

 

[Dtail]

And still crickets from our legislators.

I'm sure when they start talking seriously about cutting the amount of SS checks $**t will hit the fan.
I was never a great fan of the return on my SS contribution, but I also know it is more than just a retirement program. It takes care of those that don't take care of themselves, it is a disability program, it takes care of children that lost a parent ans spouses that didn't work outside the house.
That said now that I'm of SS age, I see it as important and I'm kind of ticked off that the future problem is not being addressed before it becomes more drastic measures need to be taken to shore it up. Ten years of increased savings in the SS program starting now, would reduce the sacrifices needed in 2031.

Not to mention us folks born in 1960 and the Covid effect.