Modelling when to take Social Security and other pensions

[reneeh63]

Well, if I'm going to lose it, can I have fun watching it go?

She certainly earned every single penny...the hard way!

 

[jldavid47]

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

Will that make any difference in your decision?

It doesn't. Social Security is the 3rd rail of American politics. How many incumbent politicians want a substantial bloc of senior voters pissed-off at the polls? Not a single one. They will find a way to not cut benefits even if it means opening up the printing presses like they have for COVID "relief" bills. Not literally, but monetizing government spending is happening and they won't stop doing it. They will especially want to "save" Social Security. The trustees can issue all the reports they want. A 25% cut ain't happening. NOBODY has the political will to let that happen.

 

[chassis]

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 not paying them now knowing that you'll have to pay them later when the tax-deferred money is withdrawn.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 either when withdrawn voluntarily or when withdrawn as RMDs.

@pb4uski Thanks. We agree that net worth drops at the moment in time income tax is paid on a Roth conversion. You (the general “you”) are poorer at that moment in time, compared to the moment in time prior to paying the income tax on the Roth conversion. I’m glad we are on the same page with this.

What time horizon in your view would a person who has become poorer as a result of a Roth conversion, become richer than they would be had they not done the Roth conversion?

 

[pompanobeach]

Take the money at 62! Use that money and not the money you already have saved.

 

[Dash man]

@pb4uski Thanks. We agree that net worth drops at the moment in time income tax is paid on a Roth conversion. You (the general “you”) are poorer at that moment in time, compared to the moment in time prior to paying the income tax on the Roth conversion. I’m glad we are on the same page with this.



What time horizon in your view would a person who has become poorer as a result of a Roth conversion, become richer than they would be had they not done the Roth conversion?

I don’t think that is a question that can be answered accurately without detailed information about your conversion timing, market growth projections, tax rates, and asset allocations and a really good crystal ball. Just too many variables.
Most of us look at what tax rates we are converting to and compare them to projected tax rates when RMDs kick in. In my case we expect to be in a higher tax bracket beginning age 72 than we are now because we will have large RMDs if we do nothing. We have plenty after tax money to pay the tax on conversions so we are converting into the 24% bracket. We expect tax rates to increase, so we just hope to minimize taxes, but they will still be significant.

 

[daylatedollarshort]

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

For us the income diversity includes now, not the future. Inheritance means leaving more to our adult kids when they are younger and more likely to need the money. For legislation changes, I am not as optimistic as some that future changes won't reduce benefits, especially for those with significant amounts of other income. It could be sneaky ways, like changing the taxes due for the more well off, raising claiming ages again, or implementing something like "chained CPI". If you look at the history of SS, there have been changes over the years that resulted in benefit reductions, so it is not hard for me to imagine that in the future with the impending shortfall these could happen again.

Our focus has been more on trying to live better for less, which for us has had a much higher impact on our retirement planning than tweaking SS claiming ages could. I have the basic annual budget below SS and pensions now, and that is with a house that we may downsize as we get older. Lowering our annual run rate should produce more savings for us than the value of our total lifetime SS benefits. YMMV.

 

[pb4uski]

@pb4uski Thanks. We agree that net worth drops at the moment in time income tax is paid on a Roth conversion. You (the general “you”) are poorer at that moment in time, compared to the moment in time prior to paying the income tax on the Roth conversion. I’m glad we are on the same page with this.

What time horizon in your view would a person who has become poorer as a result of a Roth conversion, become richer than they would be had they not done the Roth conversion?

Not totally sure that we agree that net worth drops at the moment in time income tax is paid on a Roth conversion. It does, but only because at least in theory, we should be recording a deferred tax liability and most people don't.

For example, we have posters A and B and both have identical assets of $5 million and identical liabilities (excluding deferred income taxes) of $1 million.... however, within the $5 million of assets they each have $2 million of tax-deferred accounts. They are both in the 30% tax bracket.

B records a deferred tax liability of $0.6 million and A does not. So A shows net worth of $4 million and B shows net worth of $3.4 million.

Subsequently, they each do a $1 million Roth conversion and pay $0.3 million in tax... so their assets are $4.7 million ($5.0 million less $0.3 million tax paid) and liabilities are $1 million (excluding deferred income taxes).

A's new net worth is $3.7 million... $4.7 million of assets less $1 million of liabilities (excluding deferred tax liabilities).

B's new net worth is $3.4 million... the same as it was before... consisting of $4.7 million of assets, $1.0 million of liabilities (excluding deferred income taxes), and a $0.3 million deferred income tax liability. By including deferred income taxes in their accounting B's net worth is insulated when he does Roth conversions.

 

[pb4uski]

Take the money at 62! Use that money and not the money you already have saved.

If you elaborate on the reasons why then your post might have more credibility.

Since you can start SS benefits with a few clicks of a mouse or withdraw money you saved with a few clicks of a mouse, how is SS so different?

 

[finnski1]

You need to give it up. Your sales pitch and your way is the only way, has been heard load clear. I'm not trying to belittle you and your input is good.

There is two sides to every story, and everyone has a story to tell.

Why? I appreciate all his thoughtful analysis and financial examples etc. I don't see any post where he said his way is the "right way" only that he is pointing out alternative methods and making reasoned counterpoint to other posters thinking. I don't look at his posts as a "sales pitch." I say keep em coming.

 

[pb4uski]

You need to give it up. Your sales pitch and your way is the only way, has been heard load clear. I'm not trying to belittle you and your input is good.

There is two sides to every story, and everyone has a story to tell.

street, go back and read the last sentence of post #94.

I just wanted to see why the poster was so exuberant to "Take the money at 62!" and whether there was good reasoning for that view. What is the matter with that?

 

[street]

You may see it that way, other see it differently.

Thanks

 

[finnski1]

You may see it that way, other see it differently.

Thanks

Yes. I suppose you are right. I am only speaking for myself.

 

[Time2]

Not totally sure that we agree that net worth drops at the moment in time income tax is paid on a Roth conversion. It does, but only because at least in theory, we should be recording a deferred tax liability and most people don't.

For example, we have posters A and B and both have identical assets of $5 million and identical liabilities (excluding deferred income taxes) of $1 million.... however, within the $5 million of assets they each have $2 million of tax-deferred accounts. They are both in the 30% tax bracket.

B records a deferred tax liability of $0.6 million and A does not. So A shows net worth of $4 million and B shows net worth of $3.4 million.

Subsequently, they each do a $1 million Roth conversion and pay $0.3 million in tax... so their assets are $4.7 million ($5.0 million less $0.3 million tax paid) and liabilities are $1 million (excluding deferred income taxes).

A's new net worth is $3.7 million... $4.7 million of assets less $1 million of liabilities (excluding deferred tax liabilities).

B's new net worth is $3.4 million... the same as it was before... consisting of $4.7 million of assets, $1.0 million of liabilities (excluding deferred income taxes), and a $0.3 million deferred income tax liability. By including deferred income taxes in their accounting B's net worth is insulated when he does Roth conversions.

And then, if you do the Roth Conversion at 12% and retire in the 22%...

 

[pb4uski]

Then you're ahead by 10%, right? That's essentialy what I have been doing for the last 10 years.... converting at ~9% on average ( a blend of 0%, 10% and 12%) and paying 9% now vs 12%-22% or more later when RMDs force me to withdraw.

 

[TheWizard]

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.

For some of us, it's not JUST a rising equity glide slope.
A few years ago, I paid off the home equity loan ($1000/month) that I had for first six years of retirement.
Then I claimed age 70 SS, on top of the pension/annuity income I've had since start of retirement.

So I now have a few thousand $$$ of excess income most months after paying bills and leveling up my checking account. This excess income gets invested in stock index funds...

 

[TheWizard]

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.

It makes sense for some folks even if tax rates are the same later.
Let's say you need $50k to $100k for a new car or an RV.

Withdrawing that amount in a lump from tax-deferred is probably not the best idea. That additional Ordinary Income could put you in a higher IRMAA tier in a couple years. And in my case, my AGI would go from the 24% bracket into the 32% bracket which is not good.

Withdrawing that amount from a taxable account with LTCGs would be better, but being able to withdraw some or most of it from a Roth account would be best of all...

 

[TheWizard]

Not totally sure that we agree that net worth drops at the moment in time income tax is paid on a Roth conversion. It does, but only because at least in theory, we should be recording a deferred tax liability and most people don't.

Correct.
Net worth stays the same when doing Roth conversions within the same or lower tax bracket than later on.

For instance, I'm in the 24% Federal tax bracket to start with and do moderate Roth conversions each year, keeping me still in that bracket and avoiding the next higher IRMAA tier.
But if I did a LARGE Roth conversion of $200,000 or more one year, much of that would be taxed at 32%.
I don't expect to be in the 32% tax bracket normally in later years under current law, so that extra 8% of tax paid would be a reduction in my net worth...

 

[RetiredAt55.5]

You may see it that way, other see it differently.

Thanks

My take is that some folks just want an easy rule to follow (similar to the "pay off your mortgage early and you'll sleep better at night"). Running through the numbers and various SS considerations IS work.

Nothing wrong with simple rules. I think pb4uski is just reiterating (not selling), that a person might be leaving money on the table if they blindly follow a simple rule like take the money as early as possible.

The way I look at it, there are choices on when to start SS precisely because different people HAVE different situations to consider.

 

[flintnational]

^ +1

Additionally, the OP asked a modeling question. His model showed he was better off taking SS @62 and leaving his savings invested. That was the premise of the thread. He did not ask about all the other reasons one might delay or take SS early. There are many. But, the OP was focusing on modeling for optimal returns. Accordingly, responses focusing on modeling were staying on topic. And, modeling is more of a math exercise, quantitative vs. qualitative. Qualitative reasons to take SS are valid, just not what the OP was discussing.

 

[Chuckanut]

I have several neighbors on my block who are still very active golf and tennis players in their mid-80s, so I see that as a great incentive for me to keep going as long as I can. They also travel both domestically and internationally for several months every year.

One guy who recently moved away was still playing tennis at 90, as well as doing a lot of cruising.

I keep coming back to the above message because of several people I know in their 80's who still travel and enjoy life to its fullest. One thing I noticed about them is that they don't spend their time moaning and groaning about getting old. Instead they monitor the changes that come with age and adjust. At home, they have switched from raising veggies in a big plot in the ground to container gardening on a big table. They claim they get the same output with a lot less work and fuss. They got rid of about 1/2 their kitchen stuff, most rarely used and put fancy slide-out shelving in their cabinets to make geting things out easier. They reduced their investments to four mutual funds which they balance once a year.

Today, they have no problem admitting that their days of climbing to the top of the dome at St. Peter's are over. So they spend more time in the church studying the art, more time taking some very interesting photographs, and more time walking down little side streets in Rome. If they get tired, they grab a taxi and return to the hotel room for a nap. Whatever it takes to keep moving forward without stressing themselves.

At home or away, they always have maps, books and now podcasts that promote personal growth. If they can no longer hit the local ski slopes, they drive to the mountains and apply their new found knowledge of geology. Or trees. Or birds.

I want to be like them.

 

[harley]

You may see it that way, other see it differently.

Thanks

You could always put PB4 or the thread on ignore, or even just don't read it. Personally I think he's providing a well analyzed and expressed response to the OP and others who've stated that taking SS at 62 is the best choice and a "no brainer". It is for some, but for others not so much. And at least he backs up his arguments with numbers. Some of us like numbers when making financial decisions. Plus, I challenge you to find a single post where he states or even implies that waiting until 70 is the "best" or "smartest" option. It's just an option that refutes the "no brainer" statement.

As far as the deferred tax issue goes, a friend of mine and I have both added a column to our net worth spreadsheets subtracting our deferred tax liability from our current tIRA values. If the value is $1M it's a good reminder to see that $780K (or whatever the current tax rate is) to keep us honest.

 

[RunningBum]

As far as the deferred tax issue goes, a friend of mine and I have both added a column to our net worth spreadsheets subtracting our deferred tax liability from our current tIRA values. If the value is $1M it's a good reminder to see that $780K (or whatever the current tax rate is) to keep us honest.

Me too. Done correctly (meaning, not converting at a higher rate than you expect to be in at RMD time), Roth conversions most certainly do not effectively decrease your net worth. The easiest way to handle this would be to include the estimated tax liability you expect you will be paying when you convert or withdraw from a tax deferred account.

 

[Blue531]

My take on SS is probably a bit simplistic. I don't assume that I'm going to live to any particular age, so I'm going to take it as soon as it is available to me. I'm single. People who are in a better position financially can afford to do that. The whole amount you get, whether you take it early or later is not that different unless you live past 80 anyway. Most of the people I know, pretty much everyone I know really, is going to have to work part time even if they get SS at 62. Many will have to work full time until full retirement age, which is now 67 I think for most of them.

 

[harley]

Being single would cancel one of my two major reasons for waiting (longevity insurance for DW). I'd probably still wait because of the Roth conversions, but that's just me. If I didn't have the hobby of trying to (legally) minimize my taxes I'd almost assuredly take it early, as my family history doesn't encourage a bet on living past the break even point.

 

[statsman]

... I'd almost assuredly take it early, as my family history doesn't encourage a bet on living past the break even point.

That's where I'm at. Going back to my parents (71, 56) and grandparents (93, 66, 65, 61), only one lived past 71. Now at age 62, I am already older than two were when they passed away.

To be fair, in the case of everyone except my 93 year-old grandparent, all had various degrees of failing health for years leading up to their deaths. But family history is not on my side.