Theory Behind taking Social Security Early?

[NW-Bound]

That is totally understandable and you are not alone. I found FIRECalc helped me visualize and quantify the impact of taking it earlier or later.

I thought I knew the answer, for my case at least, using FIRECalc.

Then, I came to the revelation that taxes on SS may make some difference.

 

[Independent]

Very interesting article.

Multiple people here have said his numbers don't add up.

The author provided a spreadsheet here: http://www.early-retirement.org/for...cial-security-early-93511-18.html#post2106871

Nobody here can figure out how deferring SS created an additional $100,000 of income in the first year of retirement.

My most charitable take is that someone gave him a black box, he accidentally entered bad numbers, then liked the result and didn't go back to find his input error.

 

[Lancelot]

With respect to the timing of beginning SS benefits, IMHO, most of us use subjective reasoning to influence our decisions. We then search for objective arguments to support our position

 

[pb4uski]

I read the 19 pages of this thread till the end post at this moment, and I have changed my mind at least 10 times as to when to take SS, and at the end I can say for sure I am confused, I will start my spreadsheet now and check what if scenarios. I will be 62 this coming December.

You may want to play a bit with opensocialsecurity.com

That tool runs an expected present value of benefits based on a mortality table that you select and a discount rate that you provide if you check the Advanced Options box at the top of the page.

If I look at the expected present value for me and DW at now (63), FRA, 65 and a combination of 70 for me and FRA for her and their optimal solution.... with or without a 23% haircut in 2034... the alternatives are all within $24k of each other... so in our case it isn't a huge decision.

 

[Cessna152]

I thought I knew the answer, for my case at least, using FIRECalc.

Then, I came to the revelation that taxes on SS may make some difference.

Pralana Retirement Calculator includes taxes in its calculations (satisfied customer, naught else.) You tell it what state you’ll be in for income tax purposes and asset allocation details. Then you run an analysis which provides estimates using both historical and monte carlo simulations. It has a button you click on labeled “Optimize SS” that will show what years are optimal for starting SS. Our always seemed pegged at 70, or sometimes 69 for one of us and 70 for the other.

From a tax standpoint, we are moving to a no income tax state (we’re 62 and 63) and spending down our non-IRA accounts while converting the traditional IRAs to Roth till we hit 70 (Pralana also includes a tool to help optimize Roth conversions.) Under normal circumstances a Roth conversion is roughly a wash tax-wise. However, after the conversion all our Roth distributions will not affect us income-tax-wise. Coincidently we’ll have most of are assets in Roth accounts when we take SS at 70. We’ll then have the option to move to (most) high income tax states, if the mood arises, without little or no income tax hit.

 

[Dtail]

Pralana Retirement Calculator includes taxes in its calculations (satisfied customer, naught else.) You tell it what state you’ll be in for income tax purposes and asset allocation details. Then you run an analysis which provides estimates using both historical and monte carlo simulations. It has a button you click on labeled “Optimize SS” that will show what years are optimal for starting SS. Our always seemed pegged at 70, or sometimes 69 for one of us and 70 for the other.

From a tax standpoint, we are moving to a no income tax state (we’re 62 and 63) and spending down our non-IRA accounts while converting the traditional IRAs to Roth till we hit 70 (Pralana also includes a tool to help optimize Roth conversions.) Under normal circumstances a Roth conversion is roughly a wash tax-wise. However, after the conversion all our Roth distributions will not affect us income-tax-wise. Coincidently we’ll have most of are assets in Roth accounts when we take SS at 70. We’ll then have the option to move to (most) high income tax states, if the mood arises, without little or no income tax hit.

How does Pralana compare to other retirement calculators? I heard many good things about it, but wasn't willing to pay for it with all the other free calculators out there.

 

[kaneohe]

With respect to the timing of beginning SS benefits, IMHO, most of us use subjective reasoning to influence our decisions. We then search for objective arguments to support our position

I often think the same thing, not only wrt beginning SS but many other things
such as choosing a new car, whether or not to buy LTC, etc.............but then
that general thought that subjectivity is king is probably also subjective............wonder if any researchers have studied that.

At work we once had an HR exercise about ranking employees . The HR people presented a "fairy" tale story about a bunch of characters and made us select criteria for ranking them wrt their "goodness". It was quite interesting that when we selected criteria and weighting factors for each, the final "objective" results often conflicted with our gut intuitive "subjective" feelings so we often had to go back and adjust the weighting factors to get the "objective" to agree with the intuitive answer.

 

[samclem]

I read the 19 pages of this thread till the end post at this moment, and I have changed my mind at least 10 times as to when to take SS, and at the end I can say for sure I am confused, I will start my spreadsheet now and check what if scenarios. I will be 62 this coming December.

That happens a lot, it is a complex subject.
Your plan to "what if" things is smart. Here are some things to think about:
1) It is impossible to "optimize" the "when to start SS" decision unless you know when you will die, what the future changes to legislation will bring, and how the market will perform. However, it may be possible to optimize the expected outcomes of various courses of action by making assumptions about longevity, taxes, market performance, SS changes, etc. Obviously, the results will depend a lot on those assumptions.
2) When doing your "what if" scenarios, in my opinion it makes a lot of sense for most people visiting this site to concentrate on the situation where your investments do poorly (e.g. a decade or more of essentially "flat" equity performance, bond returns that lag inflation, etc). Why? Because if your investments at the start or retirement will be "enough" to support necessary/desired spending given normal historical returns (which we test with FIRECalc), then the big unknown is you'll still be okay in the case of a black swan series that is worse than the historical data set. If a person's investments climb to the moon, then when you take SS won't have any practical importance. If your investments plummet, then the decision on when to take SS may prove to be really important.

I'm planning to defer SS to age 70 (though I'm still mulling things over . . .). Maximizing the size of that inflation-adjusted lifetime monthly SS check provides a good backup in case Mr Market decides to take a long slumber. I'm not concerned about whether this provides the highest expected returns because 1) the assumptions needed to make that calculation are too uncertain and 2) I'm more concerned with avoiding a very bad outcome than in doing all I can to get the highest monthly total income.

Good luck!

 

[Niuatoputapu]

If a person's investments climb to the moon, then when you take SS won't have any practical importance. If your investments plummet, then the decision on when to take SS may prove to be really important.

+1

Have enjoyed the 20 pages (so far) of conversation. My SS benefit is insurance. Insurance in case I die early, and DW can collect, and insurance (up until age 70) in case our investment portfolio goes into a tailspin.

 

[Fedup]

I agree with SamClem. I plan to take it at 70 because that’s when I think it might help me, a small angle, longevity and fraud insurance. I don’t really care if I break even or not. I hope I live long enough to break even. But right now, if I take it at 62, I don’t have space for Roth conversion. But for those who need money to travel or live on, take it. I don’t need SS for that purpose, the only purpose I can see is longevity and fraud insurance. I’m not worried about market risk even because I don’t rely on the market for my income.

 

[GravitySucks]

With respect to the timing of beginning SS benefits, IMHO, most of us use subjective reasoning to influence our decisions. We then search for objective arguments to support our position

So just like most decisions we make in life.

 

[NW-Bound]

A nice thing about using delayed SS as an insurance is the tax treatment.

Instead of drawing SS at 62 and get $40K, a couple will get $70K if delaying it to the age of 70. There's no tax on that $70K. And they can have up to $33K of cap gain or qualified dividend, and there's still no tax. No tax on $103K income. What's not to like?

The question of course is, how much tax they are going to pay while waiting till that age. I ran IORP last night using my own numbers, tweaked things a bit, and boy, it is complicated. And it depends on so many assumptions (inflation rate, tax rates, investment return rate, life expectancy, etc...), I think it is hopeless.

The salvation is that the results are not too sensitive to several variables. This means it may not matter that much.

I think I am back to where I was:

1) Draw wife's SS at 62, mine at 70. This is insurance against one of us dying early, and the survivor is down to only one SS. This is a risk these calculators cannot assess. You have to decide if you are lucky.

2) If the market crashes, may get mine before 70. This takes care of the bad sequence of returns. No calculator can predict crashes either.

The remaining question is how much Roth conversion to do.

 

[Cessna152]

How does Pralana compare to other retirement calculators? I heard many good things about it, but wasn't willing to pay for it with all the other free calculators out there.

I’ve only used Firecalc and Fidelity’s calculator in addition to Pralana. Only Pralana seems to have the capability of exploring tax consequences - e.g. there is a difference in taking a dollar out of a traditional IRA vs a Roth IRA.

Firecalc only projects using historical returns and Fidelity only does Monte Carlo, while Pralana automatically does both.

When I entered our assets, expenses, etc. into the three calculators, the Pralana historical always yielded the lowest probability of success. Firecalc historical always yielded the highest probability of success. As a result I’m not as confident of Firecalc as some here are. Fidelity’s Monte Carlo results were generally similar to Pralana’s Monte Carlo once I dialed in a reasonable tax rate in Fidelity (Pralana Gold outputs the effective tax rate in each projected year, which was helpful in choosing an effective tax rate to enter into Fidelity’s calculator!)

The Pralana Bronze version is free, so one can explore that family of tools without spending anything other than time.

Since I look at $100 as about an hour of flight rental time in a Cessna 152, it’s not a big deal to me to spend that much on a retirement planning tool. Besides, I was getting different answers in different tools so needed a sanity check with a third tool. All the tools provide a level of precision that is misleading, but that’s the nature of computers vs human perception.

 

[Fedup]

NW-Bound, for a couple with similar income, a dongle approach might be the best way. This is when to take SS is very much depends on your personal situation. For some couple whose wife doesn’t have SS then it may make sense to take early.

Regarding SS calculators, I ran one from maximize security calculator and I recall it’s suggested that I take it at 65, not even my FRA. Oh no, I’m NOT going to do that. It was a free calculator, I didn’t pay $40 version. So I’m done running any more SS calculators.

 

[ERD50]

Quote:
Originally Posted by samclem
If a person's investments climb to the moon, then when you take SS won't have any practical importance. If your investments plummet, then the decision on when to take SS may prove to be really important.

+1

Have enjoyed the 20 pages (so far) of conversation. My SS benefit is insurance. Insurance in case I die early, and DW can collect, and insurance (up until age 70) in case our investment portfolio goes into a tailspin.

+2

I've been following this thread, and just yesterday revisited my simple spreadsheet to accept an entry for portfolio returns. I had previously just assumed investments keep up with inflation to keep it simple.

But as samclem points out - if the market does well (favoring take-it-early), it isn't so meaningful to our portfolio safety, were are in good shape anyway. So yes, I think this also reinforces my feelings that for me, it is the longevity insurance aspect of take-it-at-70 that is the most meaningful to me. For those w/o a spouse who would receive survivor benefits, it could be a different matter.

I think the key take-away here is to keep your eye on the goal. For most of us, that is remaining solvent for what could be a long life, not a mathematical figure of optimizing net worth at our unpredictable date-of-death.

-ERD50

 

[Dtail]

I’ve only used Firecalc and Fidelity’s calculator in addition to Pralana. Only Pralana seems to have the capability of exploring tax consequences - e.g. there is a difference in taking a dollar out of a traditional IRA vs a Roth IRA.

Firecalc only projects using historical returns and Fidelity only does Monte Carlo, while Pralana automatically does both.

When I entered our assets, expenses, etc. into the three calculators, the Pralana historical always yielded the lowest probability of success. Firecalc historical always yielded the highest probability of success. As a result I’m not as confident of Firecalc as some here are. Fidelity’s Monte Carlo results were generally similar to Pralana’s Monte Carlo once I dialed in a reasonable tax rate in Fidelity (Pralana Gold outputs the effective tax rate in each projected year, which was helpful in choosing an effective tax rate to enter into Fidelity’s calculator!)

The Pralana Bronze version is free, so one can explore that family of tools without spending anything other than time.

Since I look at $100 as about an hour of flight rental time in a Cessna 152, it’s not a big deal to me to spend that much on a retirement planning tool. Besides, I was getting different answers in different tools so needed a sanity check with a third tool. All the tools provide a level of precision that is misleading, but that’s the nature of computers vs human perception.

Nice post thanks. I think I will check it out, as have a more complex situation i.e. not married but partnered, DGF already on SSDI, must manage MAGI for ACA subsidies, heavily invested in TIRA, etc.
Thus I need a more sophisticated calculator wrt minimizing taxes for the RMD's/when to take SS vs. portfolio spend down/Roth conversions in our 60's.
I-ORP doesn't do it for me.

 

[sengsational]

I think it is hopeless.

That might be good news in disguise...too close to call means any strategy is as good as another.

The salvation is that the results are not too sensitive to several variables.

Which variables did you find that were less (or more) active on the results?



That might actually be a really helpful list to have. Reasonable range of variable X has Y% effect, whereas a reasonable range of variable Z has a Q% effect.

 

[daylatedollarshort]

That might be good news in disguise...too close to call means any strategy is as good as another.

The goal for many seems to be longevity insurance, but some alternate and perhaps more concrete ways to do that are to reduce expenses, especially expenses that do not lower or may possibly even improve one's lifestyle.

 

[samclem]

The goal for many seems to be longevity insurance, but some alternate and perhaps more concrete ways to do that are to reduce expenses, especially expenses that do not lower or may possibly even improve one's lifestyle.

In our case, if our investments take a prolonged descent, then cutting spending is a given. Since the thread is about SS, I was focused on that side of the equation.
And if a person finds that cutting their spending in a certain way enhances their happiness,then that type of spending was counterproductive, and that is an independent issue delinked from any SS claiming strategy.

 

[Fedup]

The goal for many seems to be longevity insurance, but some alternate and perhaps more concrete ways to do that are to reduce expenses, especially expenses that do not lower or may possibly even improve one's lifestyle.

Cutting expense is good if you are at least conscious. When you are not, like mentally gone, expense goes up, forget about it(no pun intended). I doubt when I’m in my 90s, I will run around from grocery outlet to grocery outlet with a list of prices for the comparative shopping. In other words, be serious. That’s not what longevity insurance means, not in my book at least.

So for me longevity insurance is when the SS check keeps coming regardless of your shape, half dead, 3/4 dead, or 99% dead, as long as you are not dead. By then, you don’t have a clue how to manage your portfolio let alone rebalancing to your AA. Lots of unknown.

Also for those whose have spouses that don’t like to manage finance once you’re gone, have a larger check by delaying to 70 is better. Less dependent on the market. I know for my spouse, he probably put our savings in CDs and be done with it.

 

[teejayevans]

That is totally understandable and you are not alone. I found FIRECalc helped me visualize and quantify the impact of taking it earlier or later.

I’ll make it easy, if your investments are up, delay SS, if investments are down, start taking SS.

 

[ERD50]

The goal for many seems to be longevity insurance, but some alternate and perhaps more concrete ways to do that are to reduce expenses, especially expenses that do not lower or may possibly even improve one's lifestyle.

OK, but for many of us, the delta between SS @ 62 versus 70 is ~ $20,000, and will adjust with inflation. That's a fair amount of annual expense reduction for someone who is already doing the LBYM thing.

And of course, it isn't either/or - one could do both.

-ERD50

 

[30yeardraw]

Thanks

Great thread,

My first post been reading this site since I was laid off the beginning of summer.

Both me and the DW were planning on taking SS at 62. Now I don't think so, because all of our money is in IRA's. It may make more sense to withdraw and build up a bigger war chest in taxable accounts.

FIRE and Fidelity planner both say I can retire.

 

[NW-Bound]

Which variables did you find that were less (or more) active on the results?

That might actually be a really helpful list to have. Reasonable range of variable X has Y% effect, whereas a reasonable range of variable Z has a Q% effect.

I should have written down the variations that I tried, but I clearly remember that even the supposedly biggest factor of drawing SS at 62 or 70 did not have a large effect. The SS-at-70 case won by just 1 or 2% more spending money than the SS-at-62.

That could be because of my actual numbers, such as IRA/401k account balances, SS benefits, current Roth balances, after-tax money, etc... Someone else with a different set of numbers may see something different.

 

[fosterscik]

I'm planning to have my spouse claim at 62, me at 70. I like the longevity aspect for me (and even more so for my wife assuming I die first).

I find the "bank cash for the 62 - 70 period" to be pretty compelling. I'm already cautious in my outlook (50% stocks, 50% bonds+cash) so keeping 8 years worth of fixed-instrument money is not a problem.

I'll put aside (8 years)*(my age 70 benefit) in a CD ladder and as each CD matures I'll "claim" age 70 benefits starting at age 62. My stash will drop (obviously) but 4% of the remainder plus my age 70 benefit will be greater than 4% of the original.

For example, with a $2M stash and SS benefits of $40k @ 70; $22.7k @ 62, I can calculate I need 8*40k = $320k in a CD ladder and my stash reduces to $1.68M

4% of $1.68M = $67,200 plus my age 70 benefit from my CD ladder = $107.2k
Claiming at 62 without the ladder: 4% of $2M = $80,000 + age 62 benefit = $103k.

This $4k annual boost will help, I'll be better insulated from market drops and will not hesitate using each annual CD as it matures. The modest CD return will also help.