SS at FRA vs. at 70 - Unexpected results

[pb4uski]

May we have the table link/reference?

Fairmark Forum :: Retirement Savings and Benefits :: Distributions from RIRA after TIRA transfer

Starts about 1/2 way down the page.

 

[Telly]

I brought my original topic back, to report some results, before I forget them!
The original issue was that with my big spreadsheet, I was finding that delaying SS till age 70 (versus FRA of age 66), that the investment fund value never recovered in a reasonable lifetime versus taking SS at 66. This was a surprise, and I wanted to know why that was. First, I suspected an error on my part, but could find none.

So I created a new simple spreadsheet just for the purpose of investigating the unexpected effect. I was still wondering if I had an error somewhere in the big spreadsheet.

New Work -- A simple spreadsheet was created, and then added onto iteratively.

Two people, “A” and “B”, exactly alike.
“A” takes SS at their FRA = 66. “B” delays SS till age 70. SS benefit @ 66 set to 100 Units annually. Delaying till age 70 SS benefit set to 132 Units annually (32% more). Both have living expenses of exactly 100 Units annually. No inflation, no COLAs, no other source of income nor investable assets, no taxes. A column for each tracks the accumulated SS benefits over time.


“A”s living expenses exactly match their benefit. “B” has to dumpster dive for age years 66, 67, 68, and 69, as he has no other source of income. But at age 70, he gets 132 Units annually. Looking at the accumulation of benefits paid, crossover occurs at age 82. No surprise, as it deals only with benefit crossover.

First Change -- But this isn’t a helpful comparison, as “B” is destitute for 4 years before starting SS at age 70. So I created an asset fund for each at age 66. $1 million sounds like a relevant fund amount. I wanted to keep everything in “Units”, so I assumed that the annual 100 Units of SS benefit at FRA equated to $27,000 of SS annually. Then took $27,000 divided by 100 Units to get $270 per Unit. So $1 million divided by $270 per unit = 3704 Units. “A” and “B” come into a fund of 3704 Units at age 66. This fund is in effect like an escrow, there is no appreciation or loss.

Remember that living expenses for both are 100 Units, and “A”s benefit exactly matches living expenses, so as the years go by, “A”s Fund remains at 3704 Units. But “B” needs to withdraw 100 Units per year from his Fund for age years 66, 67, 68 and 69 for his 100 Units of living expenses before his SS starts at age 70. So “B”s Fund drops till age 70, when he starts receiving 132 Units annually, of which he uses 100 Units for living expenses, and puts the other 32 Units each year into his Fund. At age 82, the Fund of “B” has finally recovered, and crossover occurs. For each year beyond that, “B” adds another 32 Units to his fund, while “A” remains at the original starting total of 3704 Units.

Second Change – I changed the Fund from escrow to having a positive return. So both start at age 66 with the same 3704 Units in their respective Funds, but the Fund amounts will appreciate by 1% annually. “A”s Fund, with no withdrawal needed ever, grows each year. But “B” needs to take the 100 Units out for living expenses each year for the first 4 years, so his Fund drops until age 70, then starts to recover. Substituting different Fund return percentages:

With a 1% Fund return, crossover occurs late in the age 82 year.
2%, age 84
3%, age 86
4%, age 88
5%, age 92
6%, late in age 98 year

So as the investment return percentage of the Fund increases, it takes longer and longer for “B”, who delayed taking SS till age 70, to catch up to “A”, who took SS at age 66. Remember, there is no inflation, no COLAs, and no tax brought into this model. Also, I set SS benefits to equal living expenses.

It would seem that there are parallels here to the “sequence of returns” situation. But instead of poor market returns clobbering a just-retired person, “B”s Fund gets hit with early withdrawals for living expenses that are not compensated for by SS. “A” does not.

I am NOT advocating one way or the other here, I just wanted to find out why what I had expected to be an obvious conclusion, that delaying SS till age 70 would be a fund winner in my big spreadsheet, did not occur at all, unless I cranked the expected fund return percentage down. There was no spreadsheet mistake made.

 

[EastWest Gal]

That's interesting. It would be also worth looking at taking SS at age 62 and see what happens to someone who retires at, say 55.


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[karluk]

With a 1% Fund return, crossover occurs late in the age 82 year.
2%, age 84
3%, age 86
4%, age 88
5%, age 92
6%, late in age 98 year

So as the investment return percentage of the Fund increases, it takes longer and longer for “B”, who delayed taking SS till age 70, to catch up to “A”, who took SS at age 66. Remember, there is no inflation, no COLAs, and no tax brought into this model. Also, I set SS benefits to equal living expenses.

Thanks for posting this, Telly. I had already made all of these calculations earlier in this thread. I posted my results for a 3% real rate of return in my post dated 03-25-2015, 08:25 AM. I also calculated, but did not post, results for other real rates of return. I no longer remember the exact numbers, but I do remember that the general trend was for higher returns to delay the break even point for delaying claiming SS from the mid 80s into the 90s and beyond. So it's true that if one makes sufficiently optimistic assumptions about future returns, the crossover point gets delayed for so many years as to make early claiming the clear winner.

Remember, there is no inflation, no COLAs, and no tax brought into this model. Also, I set SS benefits to equal living expenses.

Inflation and COLAs are irrelevant to the calculation, since SS benefits are inflation adjusted. Your original calculations assumed a 6% rate of return with 3% inflation, which of course is a 3% real return. That's why the crossover point occurs in one's 86th year in both your original 6% returns, 3% inflation scenario and the new 3% returns, 0% inflation scenario.

It's also irrelevant whether the early SS benefit is large enough to pay 100% of expenses. Making the assumption that it does cover 100% of expenses does, however, simplify the calculations somewhat.

Taxes are another story. I believe, but haven't made extensive calculations to prove it, that delaying SS would generally improve one's tax situation by spreading income over more years and hence tend to favor delaying SS until 70. You do, of course, need to take full advantage of the entire 15% tax bracket during the years before you claim in order to make as big Roth conversions as possible. This strategy is well known to the regulars on this board.

It would seem that there are parallels here to the “sequence of returns” situation. But instead of poor market returns clobbering a just-retired person, “B”s Fund gets hit with early withdrawals for living expenses that are not compensated for by SS. “A” does not.

I am NOT advocating one way or the other here, I just wanted to find out why what I had expected to be an obvious conclusion, that delaying SS till age 70 would be a fund winner in my big spreadsheet, did not occur at all, unless I cranked the expected fund return percentage down. There was no spreadsheet mistake made.

I agree that there are some interesting parallels to sequence of return risks. But this is also another clear cut reason to delay SS benefits until age 70. Many people on this board refer to delayed SS as "longevity insurance". Sure, it's possible to come out behind by delaying SS benefits, either by dying early or missing out on extremely strong stock market returns, but in return you are eliminating the absolutely worst case scenarios - living so long that your money runs out before you do and the equally grim possibilty that stock market returns may fall in the low end of their historic ranges. In both cases of an extremely long life span and extremely sup par investment performance, the higher delayed SS benefits will be there to make your old age much more comfortable than if you had claimed benefits at either 62 or 66.

 

[pb4uski]

Fairly intuitive results. I would look at any returns as being real returns since you didn't include inflation or COLAs, so between 82-88 would seem appropriate with a real rate of return depending on the assumed asset mix.

For me, Mom will be 85 this year, Gram lived to 99 and other great aunts in their early 90s and Dad passed at 75, so my plan is to wait until I am 70 as a form of longevity insurance.

 

[Katsmeow]

Taxes are another story. I believe, but haven't made extensive calculations to prove it, that delaying SS would generally improve one's tax situation by spreading income over more years and hence tend to favor delaying SS until 70. You do, of course, need to take full advantage of the entire 15% tax bracket during the years before you claim in order to make as big Roth conversions as possible. This strategy is well known to the regulars on this board.

I think this is complicated but I'm not sure delaying SS would improve the tax situation. It seems more likely to make it where more of SS is taxable. For the individual person this may not be an issue (that is, even early SS may be 85% taxable if other income is high enough).

 

[youbet]

Sure, it's possible to come out behind by delaying SS benefits, either by dying early or missing out on extremely strong stock market return.........

My bold above.

Actually, market returns don't have to be "extremely" strong in order for the SS benefits collected during ages 62 though 69 to build into a large enough kitty to more than compensate for the difference between SS at 62 and SS at 70 payments. As Telly showed above, even moderate returns will do it.

Just saying...... No need to overstate the scenario.

 

[Cut-Throat]

My bold above.

Actually, market returns don't have to be "extremely" strong in order for the SS benefits collected during ages 62 though 69 to build into a large enough kitty to more than compensate for the difference between SS at 62 and SS at 70 payments. As Telly showed above, even moderate returns will do it.

Just saying...... No need to overstate the scenario.

Sure, as long as you pull it out of the market after those gains..... So, if you're extremely good at timing the market, take your S.S. early and 'play' the stock market!

 

[youbet]

Sure, as long as you pull it out of the market after those gains..... So, if you're extremely good at timing the market, take your S.S. early and 'play' the stock market!

I try to have all of my investments allocated appropriately per my age and goals. My "SS kitty" is no different.


You don't need to be "extremely" good (as you say) at timing the market. In fact, I've used no market timing at all, just basic AA appropriate to my circumstances. No playing the market involved.

 

[Independent]

With a 1% Fund return, crossover occurs late in the age 82 year.
2%, age 84
3%, age 86
4%, age 88
5%, age 92
6%, late in age 98 year

So as the investment return percentage of the Fund increases, it takes longer and longer for “B”, who delayed taking SS till age 70, to catch up to “A”, who took SS at age 66. Remember, there is no inflation, no COLAs, and no tax brought into this model. Also, I set SS benefits to equal living expenses.

It would seem that there are parallels here to the “sequence of returns” situation. But instead of poor market returns clobbering a just-retired person, “B”s Fund gets hit with early withdrawals for living expenses that are not compensated for by SS. “A” does not.

I am NOT advocating one way or the other here, I just wanted to find out why what I had expected to be an obvious conclusion, that delaying SS till age 70 would be a fund winner in my big spreadsheet, did not occur at all, unless I cranked the expected fund return percentage down. There was no spreadsheet mistake made.

Yes, you've got the math right. Other people have arrived at the same numbers.

The interpretation varies between individuals.

Note that your returns are "real" not "nominal", since you've taken inflation out of both sides. The question becomes how "low" a 1% real return is. Are there past periods when that really was the return, at least in the critical first 10 years?

Another other question is "how old is 86"? What's the probability that I as a healthy, above average income, individual will live past that age?

The third is "Suppose my concern is not maximizing the dollars that my heirs inherit, but rather minimizing the chances that my money runs out before I do, does this math address that concern?"

 

[omni550]

As we've seen in various studies/reports, spending tends to decrease with age.

So it appears that if a person with longevity in their family is delaying SS until 70 and, as a result, is withdrawing a bit more than their long-term safe withdrawal rate in the years before SS, their strategy might not be as favorable as they once thought?

omni

 

[Cut-Throat]

As we've seen in various studies/reports, spending tends to decrease with age.

So it appears that if a person with longevity in their family is delaying SS until 70 and, as a result, is withdrawing a bit more than their long-term safe withdrawal rate in the years before SS, their strategy might not be as favorable as they once thought?

omni

This does not make any sense to me. .... Would you rather draw less in the years before S.S.

 

[Koolau]

Unfortunately, my head exploded back in March as I was reading through these threads. I sort of follow the concepts, but can't seem to keep up with the math without looking at the spread sheets. Not to worry, I can trust this group to get the math right. So, just a couple of observations/questions.

Someone mentioned the value of the additional "annuity" provided by waiting until age 70. Quite honestly, I'm very much less concerned about "maxing" out the total dollars I get to spend before I kick - I'm comfortable now and plan to be into the future, assuming the economy doesn't blow up. So, leaving a higher "guaranteed" monthly income to DW is probably my MOST important consideration. I say this because we made the conscious decision to take a lower survivor pension for DW once I kick. In exchange for this reduction (from 50% to 25% survivor pension benefit) we have been receiving a higher pension amount - and will continue to do so - until I kick. So, there's that.

Next, I'm thinking about the issue of overall returns on my stash. I don't plan to do as well as most of you 70/30 kind of folks as I'm more of a 30/70 kind of guy. I'm thinking my theoretical (and so far) "smoother" ride means I have an earlier "cross-over" point than those getting the "big" returns. I could be wrong. I was once.

Someone also brought up the topic of taxes. I know it's complicated because SS is (currently) only taxed on up to 85% (and that could change as well.) BUT, I'm thinking about RMDs (looming soon for me.) On a qualitative level, I can see a point (maybe by age of late 70s or early 80s) when RMDs will really be getting heavily taxed due to their contribution to total income. One could look at this as a good problem to have, I suppose. But so far, I can't get my tax guy to help me at all in the way of planning ANYTHING. I've thought about finding a CFP or similar to run numbers on such things, but my gut tells me the folks here think about this stuff a lot more than any CFP geek. So far, I've simply come down on the side of "getting rid" of as much of my "qualified" money at the 15% (unfortunately, sometimes invading the 25%) tax level. That's why I've done Roth conversions or otherwise tried to live mostly from my modest pension and generous withdrawals from my qualified stash. Also, just at the back of my exploded head is the thought that, when they COME for me (uh, a paranoid reference to MEANS TESTING) maybe they'll just ignore me if I can get rid of a few more buckets full of qualified money. Just a thought - probably silly - or not.

So, with my exploded cranium, adequate funds, comfortable life-style, relatively smooth ride and lack of a good geek, I think I'm going to keep on doing what I'm doing. Still, it does bother me - just a bit - to think about leaving ANY money on the table. That probably indicates some sort of psychological problem, but I can always self-medicate with a frosty beverage at the beach and not worry about it (until the next time a poster here comes up with another way in which I could be leaving money on the table.)

Well, speaking of a frosty beverage, heh, heh.

Thanks to all you folks who think this stuff up - very entertaining! YMMV.

 

[karluk]

Unfortunately, my head exploded back in March as I was reading through these threads. I sort of follow the concepts, but can't seem to keep up with the math without looking at the spread sheets. Not to worry, I can trust this group to get the math right.

You are writing humorously, but to me the key issue in this whole thread is getting the math right. I normally would not get involved in a "when should I claim SS?" type of thread, since it is quite well known that SS is actuarially neutral, so it's possible to make a reasonable case both for claiming early and delaying.

But the OP in this thread presented some calculations (which turned out to have a few mistakes) that appeared to show that claiming at age 66 would win vs. claiming at age 70 for far longer than most people live and without even making particularly optimistic assumptions about portfolio performance. If true, that would have forced me and many other delayed claimers to seriously reconsider our decision.

Now that we appear to be reaching a consensus on the math, with a break even point in one's mid 80s assuming 3% real returns, I think we are back to debating an issue where there is no clear cut "best" answer. 3% real returns under normal market conditions are decent, but not exceptional, for the typical balanced portfolio held by most retirees. In today's environment, with ultra low interest rates and unusually high PE10 stock valuations, 3% real returns might arguably even be considered optimistic. So claiming at 66 or 70 doesn't strike me as a clear win at either age. It all depends on the assumptions one makes - in other words "actuarially neutral". I do think, however, that delaying until 70 has the advantage of eliminating more of the worst case scenarios, which is why I decided to delay in the first place.

 

[eytonxav]

I know I will better be able to critique my decision about when to take SS by looking in the rear view mirror some years down the road.

 

[rayvt]

Actually, market returns don't have to be "extremely" strong in order for the SS benefits collected during ages 62 though 69 to build into a large enough kitty to more than compensate for the difference between SS at 62 and SS at 70 payments. As Telly showed above, even moderate returns will do it.

I have a spreadsheet that I've developed over the years, for helping me decide what to do. It's gone through a few comprehensive iterations.

https://www.dropbox.com/s/gebanzrbr3g33qf/My SS breakeven calc.xls?dl=0

As everybody says, the breakeven age is right around your life expectancy.

One thing that has always nagged at me is just the whole concept of delaying SS until you are 70, so you can collect a higher SS payment. Just who are those people who can do this? People who don't need the money, right? People who have enough money that they can get along quite well without getting anything from SS for 8 years.

But if that's the case, what is the attraction for getting extra SS money, when you didn't need anything from SS up to then? What's the point?

Longevity insurance? In case you live longer than ~86 and have managed to lose all your investments & savings?

Seems to me to be a case of the people who need it can't afford to do it, and the people who can afford to do it - don't need to do it.

 

[ERD50]

...

One thing that has always nagged at me is just the whole concept of delaying SS until you are 70, so you can collect a higher SS payment. Just who are those people who can do this? People who don't need the money, right? People who have enough money that they can get along quite well without getting anything from SS for 8 years.

But if that's the case, what is the attraction for getting extra SS money, when you didn't need anything from SS up to then? What's the point?

Longevity insurance? In case you live longer than ~86 and have managed to lose all your investments & savings? ....

It's not all or nothing. I believe it is Cut-Throat who pointed out that you can withdraw more now, knowing that you have the higher income stream later.

So maybe someone allows a little extra in their WR, knowing that there is some longevity insurance there in the future if they need it. And longevity insurance is just that, insurance. When we decide to buy insurance, we shouldn't expect to 'break even' or profit, we should expect (hope?) to be covered for the unknown.

That (and spousal benefit) has me leaning towards delaying, but I will revisit in a few years.

-ERD50

 

[SunnyIsleMark]

Regarding Roth conversions to minimize RMD's, has anyone investigated (or used) an Oil drilling MLP tax advantaged strategy that allows large first year deductions to offset the tax hit from the conversion? Apparently it works because for the first year you are a General Partner and can write off the large up front costs all at once. You only invest the amount you need to offset your conversion tax. After that you become a Limited Partner for the duration.
I've heard this presented by several investment advisors, claiming it is used often by people wanting to convert a significant amount over a several year period, but I don't personally know anybody that has used this technique.

 

[pb4uski]

....I normally would not get involved in a "when should I claim SS?" type of thread, since it is quite well known that SS is actuarially neutral, so it's possible to make a reasonable case both for claiming early and delaying.....

IIRC SS is designed actuarially neutral but using single, unisex mortality. So as I understand it in theory single men who are in average or below average health would be biased to claim early and single women in average or above average health would be better off claiming later. Similarly, most couples would be better off to claim later in most cases because of joint mortality.

 

[Running_Man]

I have a spreadsheet that I've developed over the years, for helping me decide what to do. It's gone through a few comprehensive iterations.

https://www.dropbox.com/s/gebanzrbr3g33qf/My SS breakeven calc.xls?dl=0

As everybody says, the breakeven age is right around your life expectancy.

One thing that has always nagged at me is just the whole concept of delaying SS until you are 70, so you can collect a higher SS payment. Just who are those people who can do this? People who don't need the money, right? People who have enough money that they can get along quite well without getting anything from SS for 8 years.

.

If one is to get SS of $20,000 per year at age 62 the age 70 SS would be right around $37,000. If you were going to retire at age 62 with a million dollars and a 4% withdrawal rate you would be having $60,000 per year to retire on. You could defer taking SS and allocate $240,000 in a separate portfolio for the $30,000 per year to fund to age 70 for an 8 year portfolio. That leaves $760,000 for the other $30,000 withdrawal. At age 70 your income would be $30,000 from the $760,000 portfolio and $37,000 from SS for a total of $67,000.

One could play to optimize the withdrawals for a blend, but as you increase the amount of current spending you are decreasing in practice your retirement portfolio, I would recommend that one wait to age 70 to see how the portfolio and SS are doing, if you were seriously going to retire on the 60K to begin with but that is certainly a personal decision.

As can be seen the more money one retires on the less percentage of your portfolio you are consuming for the wait to age 70, less than this and you are putting more of your eggs in the SS basket but also probably insuring with the best possible chance of not defaulting on a minimum payout. For instance at 1/2 million the same practice leads to a 17.5% increase in annual payout vs the 11.6% increase the million dollar portfolio gives at age 70.

 

[Cut-Throat]

It's not all or nothing. I believe it is Cut-Throat who pointed out that you can withdraw more now, knowing that you have the higher income stream later.

So maybe someone allows a little extra in their WR, knowing that there is some longevity insurance there in the future if they need it. And longevity insurance is just that, insurance. When we decide to buy insurance, we shouldn't expect to 'break even' or profit, we should expect (hope?) to be covered for the unknown.

That (and spousal benefit) has me leaning towards delaying, but I will revisit in a few years.

-ERD50

+1 .... And also, it's not about how much money you get to Pile up, it's about how much you actually get to spend. Especially in your early retirement years rather than eyeing a larger pile in the nursing home.

 

[43WorkYears]

Excellent statement


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[Texas Proud]

You are writing humorously, but to me the key issue in this whole thread is getting the math right. I normally would not get involved in a "when should I claim SS?" type of thread, since it is quite well known that SS is actuarially neutral, so it's possible to make a reasonable case both for claiming early and delaying.
/snip/

SS is neutral except when you throw a spouse into the calculations... DW is 10 years younger than me.... just that fact skews my decision into waiting as long as I can to maximize her survivor benefits... I have not done the math, but I bet that it is far from neutral for me....

 

[fritz]

I have a spreadsheet that I've developed over the years, for helping me decide what to do. It's gone through a few comprehensive iterations.

https://www.dropbox.com/s/gebanzrbr3g33qf/My SS breakeven calc.xls?dl=0

As everybody says, the breakeven age is right around your life expectancy.

One thing that has always nagged at me is just the whole concept of delaying SS until you are 70, so you can collect a higher SS payment. Just who are those people who can do this? People who don't need the money, right? People who have enough money that they can get along quite well without getting anything from SS for 8 years.

But if that's the case, what is the attraction for getting extra SS money, when you didn't need anything from SS up to then? What's the point?

Longevity insurance? In case you live longer than ~86 and have managed to lose all your investments & savings?

Seems to me to be a case of the people who need it can't afford to do it, and the people who can afford to do it - don't need to do it.

+1 With SS, I always felt that if you think you're going to need it - consider delaying, but if you don't need it - consider taking it. What you decide is totally up to you.

We retired 58/57 (five years now), and started SS at 62 (no pensions/annuities). Paid little to no taxes each year (no tax deferred withdrawals - just qualified dividends/CGs and used a separate set-aside savings until SS kicked in).

It's a pretty complex moving target when estimating best time to take your SS with future unknowns (health, death, taxes and your own financial position if calculated on market conditions). I believe it's as individual a decision as when your can afford to retire (only you know what's right for you). I make the horrible assumption (I might be wrong here) that the folks at SS have spent many long hours running the numbers and have minimized any advantage obtained by when you decide to sign up. I don't see them leaving any advantages in the future either.

 

[MooreBonds]

I make the horrible assumption (I might be wrong here) that the folks at SS have spent many long hours running the numbers and have minimized any advantage obtained by when you decide to sign up. I don't see them leaving any advantages in the future either.

As others have pointed out, SS is apparently calculated based on a single person, and is gender-neutral. When you add in a spouse, and different salary histories, AND differences in ages, it results in an almost "anything but" neutral. Granted, the numbers may not result in much differences, but if there are significant age and/or salary record differences, it can result in a sizable difference that is worth crunching the numbers to compare.