Social Security - When to start benefits..

[rescueme]

I believe that is the SS rule, you can not get it any earlier.

That says it all ...

Yes, you must be at your FRA age before you can get this "supplemental benefit". You can't claim it at an earlier age. In our case, DW/me are within a few months of age; I'll reach FRA first.

Also, taking the situation of a younger spouse - let's assume actual ages of 62 and 66 against a joint FRA age of 66, when the age 66 applies for this spousal benefit, it will be based upon the younger's forecast of FRA age benefit, even though they are not yet eligible for it. In other words, rather looking at the 50% benefit against a 25% discounted benefit (at age 62), it will be against the forecast full FRA age benefit.

Here's an older article on this method, so disregard the paragraph refering to SS payback. Look under the heading "Team Play" for more info:

http://www.indexuniverse.com/sectio...-social-security-benefits-for-retirement.html

 

[jeffmete]

.
In fact, I benefit immediately even if don't live long, because locking in a higher future SS benefit enables me to spend my current assets at a slightly higher rate right now than otherwise.
.

I agree that SS is more of an insurance. But it's an insurance for when you retire, not for when you've been retired for 8 years. You say you can spend your current assets at a higher rate. So if you took earlier SS you can spend that instead of your assets. It's a trade off. My experience is that most people spend more money in their 60's and early 70's. late 70's and 80's your pretty much into maintenance mode and not spending.

 

[gerntz]

That says it all ...

Yes, you must be at your FRA age before you can get this "supplemental benefit". You can't claim it at an earlier age. In our case, DW/me are within a few months of age; I'll reach FRA first.

Also, taking the situation of a younger spouse - let's assume actual ages of 62 and 66 against a joint FRA age of 66, when the age 66 applies for this spousal benefit, it will be based upon the younger's forecast of FRA age benefit, even though they are not yet eligible for it. In other words, rather looking at the 50% benefit against a 25% discounted benefit (at age 62), it will be against the forecast full FRA age benefit.

Here's an older article on this method, so disregard the paragraph refering to SS payback. Look under the heading "Team Play" for more info:

Two Ways To Optimize Social Security Benefits

From the SS site:

"When a worker files for retirement benefits, the worker's spouse may be eligible for a benefit based on the worker's earnings. Another requirement is that the spouse must be at least age 62 or have a qualifying child in her/his care. By a qualifying child, we mean a child who is under age 16 or who receives Social Security disability benefits.
The spousal benefit can be as much as half of the worker's "primary insurance amount," depending on the spouse's age at retirement. If the spouse begins receiving benefits before "normal (or full) retirement age," the spouse will receive a reduced benefit. However, if a spouse is caring for a qualifying child, the spousal benefit is not reduced."

I read this to say that if my spouse files for benefits, I can file for spousal benefits if I'm at least 62. Won't be 50% of her FRA benefit, but something anyway. Net, I wouldn't need to wait till my FRA to collect.

 

[Lsbcal]

DW and I were talking about the survivor benefit yesterday. We sort of agreed that it's not 1/2 as costly for a single person to live but definitely lower cost then for two. She would sell the big house also and probably buy a smaller one -- no mortgage, reduced insurance, utilities, RE taxes.

So waiting to take SS to get at the larger survivor benefit seems to be low priority for us. Reducing the withdrawal rate + not having to spend so much Roth money to keep taxes in line is probably more important.

 

[rescueme]

I read this to say that if my spouse files for benefits, I can file for spousal benefits if I'm at least 62. Won't be 50% of her FRA benefit, but something anyway. Net, I wouldn't need to wait till my FRA to collect.

That is true. We tend to speak of which we know, and in our situation it has always been the 50% (at FRA) target, rather than a lesser amount. That's what we plugged into our retirement income model for forecasting.

 

[rayvt]

Good point, Khufu. Ditto for jeffmete.

I think that this debate is focussed on a small set of people, but we're acting as it it applies to everybody. And it presumes that you're retired early -- which of course includes us but excludes most people.

The sets are:
1) People who need the SS money at 62.
2) People who have enough assets & income that they don't much need the SS money at either 62 or 66/70.
3) People who have enough assets & income that they don't need the SS money at 62 , but little enough so that they will need the maximum SS money at 66/70.

Category 1 & 3 people don't really have any choices to make. The 1's must take at 62. The 3's must delay. It's only people in category 2 that (realistically) have any options.

Category 2 breaks down into 2 subsets. Keep in mind that these people don't particularly need SS benefits, so they are fine with the reduced benefit. Not only is this the only set that realistically has the alternative of early/delay, but it's not a do-or-die question -- it's only weakly important.

2a) People who view SS as longevity insurance, i.e., an annuity.
2b) People who view the early/delay decision as an investment question.

These are a matter of personal preference, and therefore neither is right or wrong. Different people can legitimately have different preferences. De gustibus non est disputum.

If you view it as longevity insurance, questions of break-even time and present value are meaningless.

If you view it as an investment issue, then break-even time, present value, investment returns, and leaving a legacy are all important factors.

My suspicion is that most FIRE people actually fall into category 2 (don't strongly need SS money at any age). And that many approach this question from an emotional standpoint rather than a cold dollars-and-cents standpoint. Quite valid, of course -- the thought of having to get a job as Walmart greeter at 75 is a stong motivator to make sure that you won't have to.

 

[haha]

I think that this debate is focussed on a small set of people, but we're acting as it it applies to everybody. And it presumes that you're retired early -- which of course includes us but excludes most people.
The sets are:
1) People who need the SS money at 62.
2) People who have enough assets & income that they don't much need the SS money at either 62 or 66/70.
3) People who have enough assets & income that they don't need the SS money at 62 , but little enough so that they will need the maximum SS money at 66/70.

Good analysis. But I would reclassify from category 2 to category 3 and include in 3 all those who can wait, but have low confidence in their ability to predict the future. In my own case, I had been living in ER for many years with no help from SS or pension. But at the age of SS eligibility, that is all history. History that likely maps to some extent onto the future but we admit that we don't know to what extent. We believe more in the randomness of life and the universe than those who confidently place themselves in category 2. Thus I would say there are really only two rational categories. Those who must have the payments for whatever reason prior to age 70, and those who judging month by month can wait. So my rule is wait past age 62 until you can't easily wait any longer. This does not address the various marriage strategies which may affect individual actions.

Of course this ignores the usefulness of this topic/debate to stir posts and traffic on this site. It is definitely an evergren topic here.

In my own case I deviated from my rule to relieve stress on my portfolio in late 2008 into 2009. When that passed (at least for now) I paid back and waited until 70 to restart in 2011. That option is gone, but it was a minor issue.

Ha

 

[Chuckanut]

Haha, +1

 

[Lsbcal]

Good summary by rayvt and follow up by Ha.

I might be in category #2 but then there are those outliers in FIRECalc -- the curves that go down until you are pretty low with respect to your beginning inflation adjusted portfolio. Who wants to go there? So the biggest SS might be a comfort then, but you can't have it and eat it unfortunately. As Ha said that loophole has been closed. Decision time.

 

[W2R]

I guess I am a (2a).... someone who doesn't need SS to survive (thank goodness), but who regards it as a longevity annuity. SS will provide another regular, reliable income stream that will not disappear as I age.

On the other hand, I do worry about political risk. I may take SS at 65-66, to balance between my desire for a longevity annuity and my fear of political risks.

 

[tightasadrum]

I paraphrase, but John Bogle put it this way: If you need SS, then take it early; if you don't need it, then wait until you do or until 70.

 

[Khufu]

I agree that SS is more of an insurance. But it's an insurance for when you retire, not for when you've been retired for 8 years. You say you can spend your current assets at a higher rate. So if you took earlier SS you can spend that instead of your assets. It's a trade off. My experience is that most people spend more money in their 60's and early 70's. late 70's and 80's your pretty much into maintenance mode and not spending.

SS is an insurance against outliving your assets. So, it is likely to play a larger role in covering you cost of life later in your old age rather than earlier in retirement.

So, yes it's a trade off, but when you accept a lower SS payment (by not delaying) you lock in a higher rate of spending your other assets to cover your cost of living. Whether this results in higher or lower legacy assets depends on how long you live and the real rate of return you are able to achieve on your portfolio, etc. But it would be hard to beat the >7% guaranteed, REAL rate of return for each year of delaying SS, and without risk (or with a negligible political risk.)

The other benefit to waiting is that by spending down tax-deferred assets prior to age 70 we reduce the RMDs which could otherwise result in a very high effective tax rate on SS payments.

A discussion in general terms like this can only go so far. The question can really only be answered by plugging in your numbers. The only way I know to do this is with Esplanner since it incorporates the SS tables and the tax tables for the IRS and the 50 states. It also will apply your inflation estimates to produce output in constant dollars making comparisons easy. Esplanner's output is the discretionary spending available to you at each age, in constant dollars. When I compare delaying SS my available discretionary spending goes up, immediately and for the rest of my life and my wife's life. But I don't own equities and assume a fairly low rate of return of the bond funds. YMMV.

So, my own strategy is:

1. convert IRAs to Roth from now until age 70 to the extent possible up to the top of my current marginal bracket

2. delay SS until 70

Since SS is inheritable by my wife, if I were to die early there would be no decline in her living standard. Our portfolio will be at a minimum just before age 70, but when the present value of my SS PIA is added back our net worth would be back up to around where it is now, if my other assumptions (inflation, investment return, consumption) are close.

Interestingly, when I consider adding additional, privately offered annuities my available discretionary spending doesn't go up any further. So, although I find annuities appealing the additional annuity we gain by delaying SS appears to be optimal under current assumptions.

 

[Khufu]

If you view it as longevity insurance, questions of break-even time and present value are meaningless.

If you view it as an investment issue, then break-even time, present value, investment returns, and leaving a legacy are all important factors.

Good post, Ray. I agree with most of it, but not entirely with the last point above. Whether a recipient views the SS PIA as insurance is not a subjective question of taste, but an empirical question of financial capacity. You can only afford to view SS as an investment decision if you can afford to self-insure against the financial risk of long-life. Which is to say, if your total assets will cover your cost of living up to age, say, 105, then yes, delaying SS is truly an investment decision for you. Very few people however have the financial resources to bear that risk. If you were following the supposed "safe" 4% rule of thumb you would have been broke long since.

 

[REWahoo]

If you were following the supposed "safe" 4% rule of thumb you [-]would[/-] may have been broke long since.

FIFY...

 

[Alan]

My experience is that most people spend more money in their 60's and early 70's. late 70's and 80's your pretty much into maintenance mode and not spending.

.... unless you need long term care, hence an insurance aspect of higher SS.

So, my own strategy is:

1. convert IRAs to Roth from now until age 70 to the extent possible up to the top of my current marginal bracket

2. delay SS until 70

Since SS is inheritable by my wife, if I were to die early there would be no decline in her living standard.

This is my strategy also. DW will only get 50% of my pension when I die which is another reason for me to delay.

 

[Lsbcal]

While I want to make sure DW has reasonable resources, there is no need to leave her with a fortune she cannot possibly enjoy. It is a tricky thing to decide how much to enjoy together now versus squirreling away for a dimly seen worst case future. One does not want to be too conservative lest one regrets it on one's the death bed.

I could imagine DW getting together with her lady friends in a very comfortable setting and reminiscing on how DH had always deferred the fun vacation because he wanted to keep the SWR plan intact. Now they will just have to go on that fun vacation with all the other older ladies.

This problem could be seen as much as a philosophical and/or religious issue then as an analytical money issue. Tough choices.

 

[jeffmete]

Well, I still have 3 more years before I have to make the decision on SS, so I don't have to put my money where my mouth is just yet. We do have the money not to take it at 62, but I am certainly leaning towards taking it as soon as possible and just putting it in the bank. The logic that your earning 7% by delaying is just not true, because your giving up current income. You will be behind the curve untill well into your 80's. While I don't have any health issues, my folks died in their late 70's, my wifes parents also. So even if I live till 80, I'll never make it back if I delay taking till 66.

 

[Khufu]

Well, I still have 3 more years before I have to make the decision on SS, so I don't have to put my money where my mouth is just yet. We do have the money not to take it at 62, but I am certainly leaning towards taking it as soon as possible and just putting it in the bank. The logic that your earning 7% by delaying is just not true, because your giving up current income. You will be behind the curve untill well into your 80's. While I don't have any health issues, my folks died in their late 70's, my wifes parents also. So even if I live till 80, I'll never make it back if I delay taking till 66.

It's not clear that you understand the point about insurance. Although your parents died in their late 70's that doesn't mean that you will since longevity is only about 30% heritable (from memory.) So, by taking early you are deciding to increase the extent to which you self-insure against the possibility of living to 90 or 100 and being poor. Would you be able to afford that? Does it sound unlikely? Well, it's more likely than your house burning down. Do you have fire insurance on your house?

If you take SS at 62 your lifelong monthly benefit would be about 75% of the FRA amount. If you wait until 70, it would be 132% percent. That is indeed roughly a 7% real rate of return, although, as you point out, it is not net of the opportunity cost of living off other assets in the meantime. Even if you were convinced that you can afford to self-insure against outliving your assets, you would have to believe that you can outperform a guaranteed 7% real rate of return for the years up to 70. Do you think you can do that?

 

[rayvt]

Some back-of-envelope facts and calculations:
For convenience, assume that inflation & COLA are a wash.
Ignore the 2nd SS benefit for the spouse. Or add it in if you want--it just makes the numbers better.

Median household income (2008): $52,029

Recognizing the FI part of FIRE, assume you have significant assets.
$1,000,000 at 4% SWR is $40,000/yr.

Average SS benefit is $14,124/yr. (All recipients, regardless of age)
Total: $54,124/yr

Age 62 SS benefit for annual income of $55k: $13,140
Total: $53,140 Slightly higher than the median income.

$1,000,000 at 5% SWR (achieved by using the Guyton-Klinger withdrawal rules): $50,000
Total: $63,140

$2,000,000 at 4% SWR: $80,000
Total: $93,140

If you retire with $1,000,000 and take SS at 62, your total income is about equal to the median household income. There is little danger of running out of money in your lifetime.

If you delay SS until 66, you have 4 years at $40,000/yr (76% of median income). At 66 the SS will be $17,064 for a total of $57,064.
You have 4 lean years, then will be comfortably above the median income.

Monetarily, what does delaying get you? Either way, you're at or above the median income. In the big picture, there's not much difference between $57k and $53K. One is a slightly better than most households and the other is a teeny bit better.

The bulk of your income is from your investment assets. The SS money is just extra frosting on the cake. And that's what FI is all about.

With $2,000,000 portfolio, the SS benefit is not much more than a round-off. It will make no significant difference to your total income, so it makes no difference whether you take it at 62 or 66 or 70.

-----------------------
After I announced my early retirement at work, I wrote my Magic Formula on my whiteboard: 2e6 * .05 = 100e3. (Can you tell that we were a bunch of engineers?) When people dropped by to ask how I could retire so early, I pointed at it and they read it aloud, "Two million dollars at 5% is $100K a year."

 

[haha]

If you take SS at 62 your lifelong monthly benefit would be about 75% of the FRA amount. If you wait until 70, it would be 132% percent. That is indeed roughly a 7% real rate of return, although, as you point out, it is not net of the opportunity cost of living off other assets in the meantime.

A rate of return is not supposed to be net of opportunity costs, aka cost of capital. You calculate or estimate both figures, and then compare them. I maintain that for most of us, in the current environment cost of capital is less than 7%.

Ha

 

[Khufu]

In the big picture, there's not much difference between $57k and $53K. One is a slightly better than most households and the other is a teeny bit better.

Once again, I agree with your post, but I would like to quibble: The difference between a $57k annual income and a $53k annual income is 7.5% better every year for the rest of your life.

That's huge.

It's better than you are likely to get in stocks. And it's safer.

This is why planning decisions, such as when to take SS, are usually more important than investment decisions and deserve more of our time.

 

[rayvt]

If you take SS at 62 your lifelong monthly benefit would be about 75% of the FRA amount. If you wait until 70, it would be 132% percent. That is indeed roughly a 7% real rate of return...

It's not a "rate of return". You can easily demonstrate that isn't by asking yourself, "7% of what?"
It's a higher monthly benefit, which is a completely different thing than a rate of return.

And this completely ignores something that you can't ignore -- the time value of money. You can't compare $750 today against $1320 eight years from now. You have to compute the Present Value of each, which means you have to discount the $1320 to get it's PV.

In fact, if you discount $1320 at 7.25% rate for 8 years you get the PV of $754. But that's not a 7.25% return, it's the discount rate. Of course, that is a very generous discount rate. A more realistic one is 4%, which gets a PV of $965. Granted, $965 is more than $750, but it's not a life-changing amount.

----------
And do I think that I can beat 4% growth? Yes.
I think I can easily get 7% with just bonds & preferred stocks.

And don't forget the 8 year head start. That's a biggie.
From my spreadsheet (using the COLA-adjusted age 70 benefit amount) the break-even age is 87.4 years. Which is 3.4 years beyond the life-expectancy of a 70 year old.
If I can get 8%, the BE gets pushed out to age 91.
9% is age 100.
10% (the long-term S&P500 average) the BE is never.

 

[rayvt]

but I would like to quibble: The difference between a $57k annual income and a $53k annual income is 7.5% better every year for the rest of your life

Yes it is. Agreed.
But when I say "essentially the same", what I mean is that the difference between a $53K lifestyle and a $57k lifestyle is negligible.
7.5% is a handsome percentage more, but it's $333/mo and that's not a huge amount extra -- especially since you had to pass up $1100/mo for 8 years in order to get that $333.

What can you do on 57k that you can't do on 53k?
Buy a BMW convertible sports car? No. You could lease one, though.
Take 3 cruises a year instead of 2.
Fly out to visit the kids at Christmas instead of drive.
Eat prime rib every week instead of every other week.

It comes down to a matter of personal preference. And that's the good thing about this discussion. To me, at least, this clarified in my mind what the different outcomes are, and that they are not hugely different. From that, we can each decide which we prefer. Whichever way you decide, it's not going to make a huge difference in your lifestyle.

In fact, it clearly demonstrates the value of having a large net worth when you retire, so that SS is just a small part of your retirement income. Makes me even more stongly want to try to get my net worth up to 2 mill.

 

[Khufu]

It's not a "rate of return". You can easily demonstrate that isn't by asking yourself, "7% of what?"
It's a higher monthly benefit, which is a completely different thing than a rate of return.

And this completely ignores something that you can't ignore -- the time value of money. You can't compare $750 today against $1320 eight years from now. You have to compute the Present Value of each, which means you have to discount the $1320 to get it's PV.

In fact, if you discount $1320 at 7.25% rate for 8 years you get the PV of $754. But that's not a 7.25% return, it's the discount rate. Of course, that is a very generous discount rate. A more realistic one is 4%, which gets a PV of $965. Granted, $965 is more than $750, but it's not a life-changing amount.

----------
And do I think that I can beat 4% growth? Yes.
I think I can easily get 7% with just bonds & preferred stocks.

And don't forget the 8 year head start. That's a biggie.
From my spreadsheet (using the COLA-adjusted age 70 benefit amount) the break-even age is 87.4 years. Which is 3.4 years beyond the life-expectancy of a 70 year old.
If I can get 8%, the BE gets pushed out to age 91.
9% is age 100.
10% (the long-term S&P500 average) the BE is never.

The life expectancy of a 70 year old white male in the US. is 13.8 years, not the difference between life expectancy at birth and 70. But the relevant life expectancy estimate should probably be at age 62, when the decision to defer would be made. That figure is about 21 years (using the CDC tables here:
FASTSTATS - Life Expectancy )

But using the actuarial life expectancy means that you have a 50% chance of living longer, not a probability that should be ignored, even if we are talking about investment and not insurance. Which means that the PV calc has 50% chance of being understated.

From an investment point of view the return on delaying SS is a return on an investment equal to the payments foregone. So, if I am 62 with a current PIA of $1400/month and I delay one year I am investing $14,400 to buy an annuity that begins a year later. My median lifespan is 21 years at 62 or 20 years at 63 approximately. The PV of the current PIA for 21 years discounted at the 2% safe rate of 10 year Treasuries is $276,743.65. The PV of the PIA with one year of delayed retirement credits is $296,115.70. But that is in real dollars. And my chance of doing better is 50%. Since I have no market risk, the return can only be compared to govt bonds.

Do you really believe that you will get a 7% real rate of return on bonds and preferred stocks?

 

[Khufu]

Yes it is. Agreed.
But when I say "essentially the same", what I mean is that the difference between a $53K lifestyle and a $57k lifestyle is negligible.
7.5% is a handsome percentage more, but it's $333/mo and that's not a huge amount extra -- especially since you had to pass up $1100/mo for 8 years in order to get that $333.

What can you do on 57k that you can't do on 53k?
Buy a BMW convertible sports car? No. You could lease one, though.
Take 3 cruises a year instead of 2.
Fly out to visit the kids at Christmas instead of drive.
Eat prime rib every week instead of every other week.

It comes down to a matter of personal preference. And that's the good thing about this discussion. To me, at least, this clarified in my mind what the different outcomes are, and that they are not hugely different. From that, we can each decide which we prefer. Whichever way you decide, it's not going to make a huge difference in your lifestyle.

In fact, it clearly demonstrates the value of having a large net worth when you retire, so that SS is just a small part of your retirement income. Makes me even more stongly want to try to get my net worth up to 2 mill.

Your response is distorted by the fact that you do not live on $53k per year. Well, neither do I. However, if you were to ask some who does, that person is likely to regard it as huge. For instance, it is the difference between taking a nice annual vacation each year for life and never having a vacation at all. Or it might be the difference between having health insurance or not. Huge in either case.