The old Social Security break even dilemma

[RunningBum]

It's a totally fake example that has little to no change of happening. My point is that Legislation Risk can drastically change the future value of your benefits. Many people use the work "guaranteed" when describing their future bigger SS benefit for delaying their start date. It is far from guaranteed.

I'm not going to plan for cases which have little or no chance of happening.

In my analysis, I ran a version where SS gets cut the expected 25% across the board at the worst possible time for me, right when I'm about to turn 70 and start taking it. I think this is a reasonably likely case, with a possibility of happening at that time. It moves my breakeven age out to 94 with the assumptions I made. If I know for sure this would happen, I'd take at 62. But I can live with it if it does happen. It would still give me longevity insurance, though not as attractive as it would be with no changes.

 

[CRLLS]

And yet those who take SS early, based on them not being able to predict the government's possibility of reducing or eliminating SS benefits, are doing just that. They are predicting that the government WILL reduce the benefits.

You can't have it both ways guys.

 

[jkern]

This is a common misperception. Genetics plays only a very small role in predicting how long you will live. Lifestyle is actually the biggest predictor of lifespan.

Sometimes is just a roll of the dice. Someone close to me was just diagnosed with Cancer at age 62. Doesn't drink, doesn't smoke, good diet, regular exercise, no family history of cancer; it's one of those things that you will never really know.

 

[razztazz]

This is a common misperception. Genetics plays only a very small role in predicting how long you will live. Lifestyle is actually the biggest predictor of lifespan.

Only in large populations. Cannot be applied to individual specimens. To think genetics , which are KNOWN factors in ones bag of predictive tools, matter less rather than more is anti-statistics. Genetics must be considered, especially when one knows their own lifestyle is not among those to be of any particular risk.

 

[Perryinva]

Again, because of all these cited examples, it makes no sense to ever base the decision on total collected lifetime. (Assuming you don’t need the SS to actually live on, but to compliment your income). Like any insurance, it is for “what if”. In this case, “what if I live very long” and for married couples where you are the high earner “what if I die first”. I can live exactly the same way, whether I file early or late. I will be 77 in 2035 when (if ever, which personally I think will never happen) the cuts are scheduled to earliest occur. By then it is beyond even any imaginable possibility that that SS would be eliminated. If its cut a percentage then I’d rather have a percentage of a much larger number. But I think thats never going to occur. And the likelihood of an economic meltdown or loss of investments from cyber theft or loss due to a bad market decision are way more likely. In the meantime, I base my income on assuming that amount is coming, and using my funds in the meantime, which is only for 7 years, max, in my case.

 

[ShokWaveRider]

I thought there was talk now on doing "something" with Medicare and SS. Not sure what something is, but I am sure it will not be good.

 

[Ronstar]

^That's part of what makes the SS withdrawal date decision so difficult. Lots of unknown variables.

How long will the benefits stay as they are now?
What if I don't live as long as I think I will?
What if I live longer?
What if the taxing of SS changes?
What does the future of the markets look like?

I know I missed a few other variables. But the break even test is somewhat moot when several of the contributing factors are unknown. Good for background info though if the future goes as planned.

 

[GenXguy]

If its cut a percentage then I’d rather have a percentage of a much larger number. But I think thats never going to occur.

It's already been cut. The SS full retirement age has already been increased. When I was younger, it was 65. Now, I won't reach FRA until age 67. I would call that a benefit cut.

Also, Social Security after-tax "net" benefits are already being "cut" every year and have been for years, but most people aren't aware of how this is being done.

The SS formula for determining how much of your SS benefits are taxed is NOT indexed to inflation, so that threshold has not increased since it was first introduced in 1983. For a single person, if your income combined with half your SS benefits exceeds $25,000, you have to pay income tax on up to 50% of your SS benefits. If it exceeds $34,000, you have to pay income tax on up to 85% of your SS benefits. $25K in 1983 is worth a lot more than $25K in 2018. Since your retirement distributions and SS benefits will be adjusted with inflation, but NOT the $25,000/$34,000 thresholds, a greater percentage of your SS benefits will become taxable as each year passes (for married filing jointly, the thresholds are $32,000/$44,000.) It's a built-in tax increase, reducing "net" SS benefits, hurting seniors further. The greater your combined income and SS/2, the more you will be affected by this up to a max of 85% of your benefits being taxed! It's absurd, and those thresholds should be increased to reflect inflation since 1983.

The ways it is, you should play it safe by estimating that 85% of your SS benefits well into the future will be taxable. More information about this can be found in these references:

https://www.marketwatch.com/story/p...-punished-by-social-security-taxes-2019-01-07
https://www.fool.com/retirement/gen...ear-old-social-security-rule-is-wreaking.aspx
https://www.foxnews.com/story/2007/03/25/double-whammy-taxation-social-security-benefits.html
https://www.ssa.gov/policy/docs/issuepapers/ip2015-02.html

I'm not one to support tax increases, but I would be open to paying higher FICA taxes to help shore up SS to prevent cuts to benefits and to prevent increasing the FRA for people within a decade of collecting SS.

At some point, the FRA will need increased for younger workers also as lifetime durations increase over time.

 

[ShokWaveRider]

I think it is fair that SS is taxable, after all it was funded by our Pre-Tax income.

 

[pb4uski]

It's a totally fake example that has little to no change of happening. My point is that Legislation Risk can drastically change the future value of your benefits. Many people use the word "guaranteed" when describing their future bigger SS benefit for delaying their start date. It is far from guaranteed.

I can't recall anyone referring to SS as being "guaranteed"... especially given the funding deficiencies and potential for a 23% haircut beginning in 2034.

What I do see is people referring to avoiding mortgage interest by paying off a mortgage as being a guaranteed return.

 

[pb4uski]

I think it is fair that SS is taxable, after all it was funded by our Pre-Tax income.

While I agree with your conclusion that it is fair that a portion of SS is taxable, it wasn't funded with pre-tax income like a 401k or deductible iRA. If you earn $50k and pay $3k in SS taxes your taxable earnings is still $50k... so in effect you pay SS taxes with post-tax income.

I agree that a large portion of SS should be taxable. It is similar to retirement benefits from a contributory pension plan where the recipient is taxed on the portion of benefits relating to growth or non-deductible IRA withdrawals where only the growth portion of withdrawals are taxable or a pension annuity. While the 85% is broad-brush, it is in the ball-park for most people and I'm ok with lower income people getting a pass with 0% or 50% taxable.

 

[Sunset]

^That's part of what makes the SS withdrawal date decision so difficult. Lots of unknown variables.

How long will the benefits stay as they are now?
What if I don't live as long as I think I will?
What if I live longer?
What if the taxing of SS changes?
What does the future of the markets look like?

I know I missed a few other variables. But the break even test is somewhat moot when several of the contributing factors are unknown. Good for background info though if the future goes as planned.

What if both DW & I die together in a plane crash (eliminating the delay to 70 of higher earner due to one out of a couple living to 90's). ?

 

[GenXguy]

I think it is fair that SS is taxable, after all it was funded by our Pre-Tax income.

No, the rate is calculated on your pre-tax income, but you still have to pay income tax on that income. Your SS contribution is NOT a tax deduction for figuring your taxable income.

Note - I'm talking about your personal contribution, not your employer's, if you have one vs. being self-employed.

Really, the effective taxable amount is becoming too high because of the lack of indexing to inflation when the SS taxing thresholds were put in place decades ago, and it's going to get a lot worse in the future if nothing is done to fix it.

This bill would address the higher yearly taxation problem some by increasing the 85% taxable threshold.

H.R.860 - Social Security 2100 Act

https://www.congress.gov/bill/116th-congress/house-bill/860

The 50% threshold isn't mentioned there, but this document states the 50% taxable threshold would be eliminated.

https://larson.house.gov/sites/larson.house.gov/files/Larson Blumenthal Van Hollen_2019 0918.pdf

The new threshold would still not be indexed to inflation going forward, so it's not perfect.

 

[ShokWaveRider]

PB4USKI and GenXGuy. Yup sorry you are both right, I was not clear. They just get lower if you have more "Other" Tax Deductions.
In that case, it is double taxation on the contribution, Tax in and Tax out if the principle paid is taxed as well as the earnings. Then only the amount OVER (Principle), what was paid should be taxed.

 

[audreyh1]

I believe that’s where the 85% of SS taxed ultimately comes from - that you only paid taxes on 50% of your SS paid in, and that your benefits are higher than what you paid into the system.

 

[HGTVFanatic]

I just read this article. It may be helpful. Make sure you read the comments. https://vanguardblog.com/2020/02/07/the-social-security-timing-debate/#comments

 

[pb4uski]

I believe that’s where the 85% of SS taxed ultimately comes from - that you only paid taxes on 50% of your SS paid in, and that your benefits are higher than what you paid into the system.

Yes, much higher. For me in relation to what I paid in (normalized to 100):

Benefits assuming I live to 82 and claim at FRA: 430 [(((82-FRA)*12)*monthly benefit)/what I paid in]

What I paid for SS: 100
What employers paid for SS: 104 (from benefit statement/what I paid in)

I used 82 as an estimate of longevity since that is the breakeven age for most SS calculators. So for me if I live to 82 and collect 430, 330 of that is growth and 100 is my contributions.

However, in reality some my 100 of contrbutions were for life insurance and disability insurance rather than retirement benefits.... I seem to recall reading somewhere that only 72% of what is paid in relates to retirement benefits, reducing my contributions to 72.... so of the 430 that I receive, 358 was for growth.... 358/430 is 83%... pretty close to 85%.

 

[PatrickA5]

It is as silly as using break even as a reason to file early, unless one’s objective is to die with the most money unspent.
.

I don't think looking at the breakeven point as one set of data is silly at all. It's just one piece of the puzzle.

Those people that look at SS as mainly longevity insurance probably don't care about when the breakeven point occurs. They are primarily interested in having a larger SS check just in case they live a long time.

Those people that have reason to believe they will die in their mid-70's or earlier should take that into account and would most likely be better off taking earlier.

I don't think either side is silly, just a different way of looking at things. Besides, some people really don't care if they come out "ahead" financially on all things.

 

[VanWinkle]

I will reach FRA in Nov 2020 and will wait until 2021 to allow for another Roth conversion. I have not decided for sure to take it in 2021 as it may be more effective to wait and do additional Roth conversions. I am currently receiving a very small survivor benefit that is not affecting my ability to do Roth conversions. Each person's decision is different based on circumstances. There is no one right way to claim.

 

[KARENS]

My husband and I just filed for SS! He is 64 with a minor child so with the dependent benefit the break even point for him is 46 years! I am semi retired and working part time and will be 66 in October which means that my earnings limit in the first nine months of this year is $48,600. I am using the extra SS funds that I don't need right now for investments, etc. Everyone's situation is different. I laboriously calculated the file and suspend option only to discover that it was discontinued for anyone born prior to 1/1/54! So who knows what will happen? I say that if it works for you now then take it!!!

 

[skipro33]

I'm enjoying my early SS, started at the earliest possible age of 62, of $2100 a month. My budget is such that it doesn't need any of it, so it's all 'play' money for us. DW will start her's at FRA in 3 more years, giving us another substantial boost to our income. We live very comfortably on my pension alone and have been investing our IRA 75 equities in index funds and 25 cash and bonds. We won't be drawing on that until RMD time when I calculate we'll be required to draw $4,000 a month to begin with.

It sure is a comfortable feeling to have our expenses covered twice over with the SS and IRA while living on pension. Anything can and does happen, so I see it as a belt AND suspenders sort of thing. Either we'll get inspired to spend some day or our family will inherit it, we are content with our financial plan.

 

[VanWinkle]

I'm enjoying my early SS, started at the earliest possible age of 62, of $2100 a month. My budget is such that it doesn't need any of it, so it's all 'play' money for us. DW will start her's at FRA in 3 more years, giving us another substantial boost to our income. We live very comfortably on my pension alone and have been investing our IRA 75 equities in index funds and 25 cash and bonds. We won't be drawing on that until RMD time when I calculate we'll be required to draw $4,000 a month to begin with.

It sure is a comfortable feeling to have our expenses covered twice over with the SS and IRA while living on pension. Anything can and does happen, so I see it as a belt AND suspenders sort of thing. Either we'll get inspired to spend some day or our family will inherit it, we are content with our financial plan.

Congrats on a great retirement future!!

VW

 

[Retch The Grate]

Why else? Longevity insurance. Also as part of a plan to pay for LTC.

Keep in mind that, if leaving an estate is not a concern, you will 'get more' in terms of having more money to spend each year starting at age 62 if you take SS at 70.

The math is here:

https://www.early-retirement.org/forums/f28/laurence-kotlikoff-maximize-my-ss-com-77660.html#post1604411


Take what you wish and leave the rest.

Ah yes, there's the thread I remembered reading! The math seems pretty clear for my goal of maximizing annual safe spending.