Social Security Math

[Cut-Throat]

Quote:

Originally Posted by EvrClrx311 I understand that a lot of factors can influence the math (some are addressed below and if any are missing please chime in), but from a strictly cash-flow perspective here was my analysis of when to collect...

You are focusing on How much Money you can 'Pile Up' instead of Focusing on How much you get to Spend. A common misunderstanding for someone your age because you are currently Piling up Money. When you are retired however, you are now spending money and it takes a slightly different thought process. No one knows when they are going to die or how much returns on investment or inflation will be in the future, so these calculations are pretty futile.

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You can actually Spend more money in your 60s by Delaying SS to age 70.

Here is a pretty simple calculation for those that wish to spend more money in retirement and do not care about leaving an estate. For those that have a Big enough Portfolio and can afford to wait until 70 to take SS, you'll have more to spend every year of retirement.

Let's Say you retire this year at age 62 with the $1 Million Portfolio and decide to take a 4% SWR. You get Social Security of $19,476 per year at age 62 and delaying to age 70 would get you $34,092 per year. Let's assume no inflation for ease of calculations.

Scenario age 62. Your SWR is $40K per year and Social Security of $19,476 gets you a Spending total of $59,476 for each year of your retirement period.

Scenario age 70. You stash 8 years of $34,092 from your portfolio into a savings account for a total of $272,736. Your portfolio is now down to $727,264. Your 4% SWR is now $29,090 per year and you remove $34,092 from your savings account giving you a total of $63,182 to spend each year for the rest of your 30 year retirement period.

The Delay to age 70 gives you $3,706 more every year starting at age 62 with no more increased risk.

No need for any 'break even analysis'.

If your WR is more conservative, such as a majority of the people here and myself, the results are even more compelling. At a 3% WR plus SS at age 62 scenario is a total of $49,476 and the age 70 scenario is $55,910. The delay of SS to age 70 now increases your annual spending by $6,434.

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For a complete discussion on this Topic including inflation ramifications visit this link

https://www.bogleheads.org/forum/vie...ocial+Security

[sengsational]

Quote:

Originally Posted by Cut-Throat You can actually Spend more money in your 60s by Delaying SS to age 70.

Well, again, if you presume that Medicare Part B premiums don't shoot up faster than inflation. This is discussed on this boggleheads thread which, at the end, points to another 'consolidated' thread. I have not read those completely, but just searched for after reading part of the 2013 thread which you referenced. The OP of the boggleheads thread points to this paragraph which says in the long run part B premiums are supposed to be about 5%, which wouldn't be bad if inflation were also 5% over that same "long run". This is kind of "old news" because they were all talking about the 2016 increase. My speculation is that if there was a kerfuffle over a 2016 increase, then there will probably be continuing kerfuffles and if you get your part B taken out of SS and you're jointly making less than $170K, you've got your part b premiums capped.

Quote:

MEDICARE PREMIUMS SPIKE? Some beneficiaries may face steep premium increases for Medicare Part B, which provides coverage for outpatient services. For about 70 percent of beneficiaries, premium increases cannot exceed the dollar amount of their Social Security cost-of-living adjustment. Because no COLA is currently expected for 2016, increased costs of outpatient coverage would have to be spread among the remaining 30 percent. That would result in an increase of about $54 in the base premium, bringing it to $159.30 a month. It works out to paying 52 percent more. Those who would feel the impact include 2.8 million new beneficiaries, 1.6 million who pay the premium directly instead of having it deducted from their Social Security, and 3.1 million upper income beneficiaries, those making at least $85,000 for an individual and $170,000 for a married couple. The increases for upper-income beneficiaries would be higher, up to $174 a month for those in the highest bracket. State budgets would also take a hit, because states pay the Part B premium for low-income beneficiaries who have dual Medicare and Medicaid coverage. Health and Human Services Secretary Sylvia M. Burwell said no final decision has been made, and that premium increases are expected to average less than 5 percent a year over the long run.

[nun]

If people are deferring SS, why aren't they also buying annuities?

For people with only SS as guaranteed income (ie no annuity or pension) it's probably best to defer. Of course the fine structure and general trend of investment return and inflation and your life expectancy are going to determine if SS at 62 is better or worse than taking it at 70.

[Cut-Throat]

Quote:

Originally Posted by nun If people are deferring SS and betting they'll live longer than expected why aren't they also buying annuities?

Who says they're not!


Also, if you could buy an annuity as cheap and inflation protected with Spousal Survivor-ship, like delaying S.S. to age 70 provides, they would be selling countless more annuities.

[nun]

Quote:

Originally Posted by Cut-Throat Who says they're not! Also, if you could buy an annuity as cheap and inflation protected with Spousal Survivor-ship, like delaying S.S. to age 70 provides, they would be selling countless more annuities.

The insurance companies.....but the resistance to buying annuities is a well known issue which has been compounded by the 401k and SWR studies. If we look at the larger picture the UK has just changed their retirement rules and removed the requirement for many to buy an annuity to fund retirement.

[Senator]

Quote:

Originally Posted by nun If people are deferring SS, why aren't they also buying annuities?

They are expensive
There is insurance company risk
It is money out of pocket now, not just a delayed payment

[nun]

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Originally Posted by Senator They are expensive There is insurance company risk It is money out of pocket now, not just a delayed payment

SS risk gets into politics.
Not taking SS at 62 is "money out of pocket now" too.

SS maths and the choice of when to take it depends on individual circumstances and how factors are emphasized. How important is current income, longevity insurance, total lifetime benefit, maximizing inheritance etc. are you fit and health?

[RunningBum]

Quote:

Originally Posted by nun If people are deferring SS, why aren't they also buying annuities?

If I'm not mistaken, deferring SS is a cheaper annuity than what insurance companies sell, is it not?

If I need/want an annuity, I'll defer SS first. If I need more, I'll also buy an SPIA. If deferred SS is enough, I won't.

Isn't it that obvious? I mean, just because I (might) want to defer SS as an annuity type decision doesn't mean I want to go all-in to annuities.

[starry night]

"Scenario age 70.[/U] You stash 8 years of $34,092 from your portfolio into a savings account for a total of $272,736. Your portfolio is now down to $727,264. Your 4% SWR is now $29,090 per year and you remove $34,092 from your savings account giving you a total of $63,182 to spend each year for the rest of your 30 year retirement period."
.....
Moving 8 years' worth of future benefits from portfolio to savings ($270K+) will cause a taxable event, won't it? If taken from a taxable portfolio, it will be at cap gains rates. If from a qualified account, you're looking at paying regular income tax rates. Ouch!

[Cut-Throat]

Quote:

Originally Posted by starry night "Scenario age 70.[/U] You stash 8 years of $34,092 from your portfolio into a savings account for a total of $272,736. Your portfolio is now down to $727,264. Your 4% SWR is now $29,090 per year and you remove $34,092 from your savings account giving you a total of $63,182 to spend each year for the rest of your 30 year retirement period." ..... Moving 8 years' worth of future benefits from portfolio to savings ($270K+) will cause a taxable event, won't it? If taken from a taxable portfolio, it will be at cap gains rates. If from a qualified account, you're looking at paying regular income tax rates. Ouch!

Not for me, I stashed plenty of Cash in my Taxable Accounts. Zero Taxable Event.

[Independent]

Quote:

Originally Posted by nun If people are deferring SS, why aren't they also buying annuities? .

At today's interest rates, SS is more attractively priced than private, CPI-indexed, annuities.

For our situation, simply deferring SS to age 70 will cover all of our "basic" spending. I'm not sure that we need any more longevity insurance than that.

[Independent]

Quote:

Originally Posted by starry night "Scenario age 70.[/U] You stash 8 years of $34,092 from your portfolio into a savings account for a total of $272,736. Your portfolio is now down to $727,264. Your 4% SWR is now $29,090 per year and you remove $34,092 from your savings account giving you a total of $63,182 to spend each year for the rest of your 30 year retirement period." ..... Moving 8 years' worth of future benefits from portfolio to savings ($270K+) will cause a taxable event, won't it? If taken from a taxable portfolio, it will be at cap gains rates. If from a qualified account, you're looking at paying regular income tax rates. Ouch!

I didn't think that I needed to withdraw all the 8 years of spending from the IRA in a single year. It made more sense to position the assets in the IRA so that I had a "stable" block which I could withdraw during the early years.

In that case, there isn't an obvious tax benefit/cost for either starting at 62 or deferring to 70. Of course, individual tax situations will vary.

[foxfirev5]

Quote:

Originally Posted by starry night "Scenario age 70.[/U] You stash 8 years of $34,092 from your portfolio into a savings account for a total of $272,736. Your portfolio is now down to $727,264. Your 4% SWR is now $29,090 per year and you remove $34,092 from your savings account giving you a total of $63,182 to spend each year for the rest of your 30 year retirement period." ..... Moving 8 years' worth of future benefits from portfolio to savings ($270K+) will cause a taxable event, won't it? If taken from a taxable portfolio, it will be at cap gains rates. If from a qualified account, you're looking at paying regular income tax rates. Ouch!

I still have a number of scenarios to run. However, if you're able to stay in the 15% marginal tax bracket while delaying SS, the later reductions in RMD's are a big factor. Combine this with the larger SS payments and the fact they are a smaller proportion of your taxable income. In my case it looks like a little higher taxes earlier with greater income and lower taxes later. And I don't have huge reserves in after tax savings, which would really help implement this plan.

[ejman]

Cut-Throat, how do you account for the anticipated 25% reduction in SS benefits starting in 2033 -17 years from now? Are you assuming congress will fix this or is the shortage mathematically taken into account in your calculations?

[nun]

Quote:

Originally Posted by RunningBum If I'm not mistaken, deferring SS is a cheaper annuity than what insurance companies sell, is it not? If I need/want an annuity, I'll defer SS first. If I need more, I'll also buy an SPIA. If deferred SS is enough, I won't. Isn't it that obvious? I mean, just because I (might) want to defer SS as an annuity type decision doesn't mean I want to go all-in to annuities.

I agree, it isn't all or nothing. I'm just surprised at how many people plan to defer SS. The reason is I once asked at what IRR would people buy an annuity and was amazed that many would not buy one even at 6% IRR and above.

[Sunset]

Quote:

Originally Posted by nun I agree, it isn't all or nothing. I'm just surprised at how many people plan to defer SS. The reason is I once asked at what IRR would people buy an annuity and was amazed that many would not buy one even at 6% IRR and above.

I have more faith the US gov't will be around to pay SS than some insurance company.

Plus if I decide to delay SS, then I certainly don't need more annuities, I know some folks who basically live on just SS, without debts life can be pretty cheap.

[RunningBum]

Quote:

Originally Posted by nun I agree, it isn't all or nothing. I'm just surprised at how many people plan to defer SS. The reason is I once asked at what IRR would people buy an annuity and was amazed that many would not buy one even at 6% IRR and above.

How do you know those people refusing the annuity are the same ones deferring SS? Also, when presented with unrealistically high rates on guaranteed income, many will and should be cautious that there is an underlying high risk, and maybe even a Ponzi scheme in play.

[nun]

Quote:

Originally Posted by RunningBum How do you know those people refusing the annuity are the same ones deferring SS? Also, when presented with unrealistically high rates on guaranteed income, many will and should be cautious that there is an underlying high risk, and maybe even a Ponzi scheme in play.

I was speaking statistically......my poll on this site found very few takers for an annuity even at an IRR that was comparable to the return they might get in equities. I don't know where Ponzi schemes come into this, I just asked a a straight question to see how high an IRR would have to be to get people to buy an annuity. So it seems a little strange to me that people are so anxious to defer when someone who might get $20k at 66 could get $15k at 62 and if they saved the money and got a 5% real return and 3% inflation at 70 they'd have $166k to go with their now $19k SS. By deferring they would have $26400 (maybe a bit more considering inflation).

The $166k would buy a 70 year old male a $13k a year SPIA making a total of $32k.....the $19k annuity is not indexed though.....or you could manage the $166k lump sum for income and you can also spend it in emergencies. I just wonder why that argument isn't made more often and that so many people default to deferring. Also it takes around 13 years to reach the break even point if you defer and you've got a 50% chance of being dead by then.

[RunningBum]

Quote:

Originally Posted by nun I was speaking statistically......my poll on this site found very few takers for an annuity even at an IRR that was comparable to the return they might get in equities. I don't know where Ponzi schemes come into this, I just asked a a straight question to see how high an IRR would have to be to get people to buy an annuity. So it seems a little strange to me that people are so anxious to defer when someone who might get $20k at 66 could get $15k at 62 and if they saved the money and got a 5% real return and 3% inflation at 70 they'd have $166k to go with their now $19k SS. By deferring they would have $26400 (maybe a bit more considering inflation). The $166k would buy a 70 year old male a $13k a year SPIA making a total of $32k.....the $19k annuity is not indexed though.....or you could manage the $166k lump sum for income and you can also spend it in emergencies. I just wonder why that argument isn't made more often and that so many people default to deferring. Also it takes around 13 years to reach the break even point if you defer and you've got a 50% chance of being dead by then.

Ponzi scheme: In exchange for a large investment, someone offers an attractive rate of return. Make a few payments long enough to attract investors, and then stop making payments. So, when someone offers a suspiciously above market return, a Ponzi scheme is possible. At the very least, there is higher risk than usual of the insurer not staying in business to make all the payments. Maybe that's why people wouldn't go for it. I sure wouldn't without a deep look into the insurer.

Regarding the 50% chance of being dead by the break even point, if I'm dead I'm not really worrying about money anymore, am I? I doubt my last words will be, "Ha! I beat the SS system by dying early!" And for the majority of us on e-r.org who have a decent nest egg, we probably weren't running out before the break even point. But if I'm still alive past that break even point, I am still very much concerned about having enough money, so a large SS payment is nicer (unless, as you say, I was able to grow my nest egg bigger by keeping it invested while taking early SS).

[nun]

Quote:

Originally Posted by RunningBum Ponzi scheme: In exchange for a large investment, someone offers an attractive rate of return. Make a few payments long enough to attract investors, and then stop making payments. So, when someone offers a suspiciously above market return, a Ponzi scheme is possible. At the very least, there is higher risk than usual of the insurer not staying in business to make all the payments. Maybe that's why people wouldn't go for it. I sure wouldn't without a deep look into the insurer.

My question made no assumptions about the insurer. It was just a straight question about how big the IRR would have to be for someone to feel comfortable buying an annuity. If people then immediately think Ponzi scheme that says something about the people answering the question and the zeitgeist around insurance companies.

Quote:

Regarding the 50% chance of being dead by the break even point, if I'm dead I'm not really worrying about money anymore, am I? I doubt my last words will be, "Ha! I beat the SS system by dying early!" And for the majority of us on e-r.org who have a decent nest egg, we probably weren't running out before the break even point. But if I'm still alive past that break even point, I am still very much concerned about having enough money, so a large SS payment is nicer (unless, as you say, I was able to grow my nest egg bigger by keeping it invested while taking early SS).

Well yes that's the point. People on ER often choose the diversified self invested portfolio over an annuity, so it puzzles me why so many want to defer to age 70. If they took SS early they could invest the money and in my example they'd get to age 70 with $19k in SS and a $166k lump sum which FireCalc says would supply a $7k inflation adjusted income for 25 years. The chances are high that you'll die before age 95 and having the $166k lump sum gives you a lot of options. Now I am assuming that FIRECalc, 4% SWR etc etc that people use to plan their retirement are valid.....and if they are deferring to age 70 does not look like a slam dunk.