Theory Behind taking Social Security Early?

[marko]

I think there is some truth to this. Deferring SS amounts to buying some longevity insurance. People at the bottom of the asset curve don't have the assets to pay the premium (ie spend down). People at the top have no worries about running out of money.

Yes. Maybe we're focusing on the math behind all of this and when we perhaps need to think more of how folks plan/need to use the benefit.

Seems that there can be very different motivations for doing the same thing.

 

[joeea]

Larry's general premise is that "if you've won, quit the game". So the quote is absolutely true for his scenario. If you've pulled your chips off the table and you're basically just getting a whiff more than inflation, then waiting is better.

That's not Larry's general premise. Not sure how you came up with that one.

 

[corn18]

Delaying SS could also work as LTC insurance. I think we could get a nice place between my pension and SS if I delay SS to 70.

 

[sengsational]

That's not Larry's general premise. Not sure how you came up with that one.

Maybe not always, maybe not now, but the the book that I read of his, it was all about getting everything invested in TIPS if you had enough money to fund your retirement without the growth of equities.

 

[sengsational]

Let's take the simplest example. Single, 62-year old has $1,000,000 in IRA and a
$20,000 SS benefit (stating at 62) or a
$35,000 SS benefit (starting at 70).

How much can/should this person spend in the first year of retirement if he/she
A. Starts at 62
B. Plans to start at 70

There's a boatload of assumptions that have to be made in order to answer this question. That's my beef with a lot of the suggestions here and by experts. Ignoring inflation, presuming the portfolio gets a whiff of a percent over inflation, building a scenario where SS makes a larger part of the spending. Fine, but let's put those assumptions front and center.

I'm not dogmatic about taking it early or late. Frankly, based on what's knowable, it's about as close to a crap shoot as you can get. And the differences are generally pretty small. What people say about the differences in how they feel about blowing through SS dough vs pulling money out of the portfolio is as real as any math.

I did run a few scenarios on i-orp. I selected that tool because it's quick to run a scenario like this, and it doesn't ignore important things. What I did was do successive runs, switching between taking SS at 62 vs 70. First, the assumptions: AA of 60% equities that returned (in most runs) 5% over inflation, but I ran a few with 7%. These are much lower than the historical CAGR for equities, but supposedly in line with what the experts are saying nowadays. CPI Inflation of 2%, spending inflation of 4% (those are defaults on the site). I varied the dirt nap through 87, 92, and 97, because obviously, the longer you live the more waiting makes sense. But really, the 97's would be an unlikely event for most of us, especially the males. But it's in there because I wanted to show the "take it late" option "winning", given a long enough life.

For the simple scenario proposed, the $1M IRA, presuming SS will continue to be fully funded, 60% stock allocation growing at 5% real, your annual spend could be between 1.4% (87), 3.0% (92) and 4.5% (97) higher by waiting until 70 to claim.

A similar scenario, $1M in Roth, presuming SS will not continue to be fully funded, 60% stock allocation growing at 7% real, your annual spend could be between 1.7% (87) lower, 0.5% (92) lower and 0.4% (97) higher by waiting until 70 to claim.

Yes, you can pick apart the second scenario I used. I simply picked one that I figured might be more favorable to taking it now, and it was. I didn't have to reduce the realism by turning up the equity allocation or anything. Just a slightly higher return and the default on the i-orp site is to presume SS will not continue past 2034 with full benefits. Still squarely in the realm of reality for some people. Anyway, without much effort I found a scenario where the "taking it late is always better" dogma can be proven false based on the math. Any scenario where anything close to the historical CAGR for equities is entered will give you a "take it now" answer as well.

As to the original scenario, there is not just one answer because there are too many assumptions that have been left out.

 

[Cut-Throat]

I'm not seeing an answer here.

 

[rayvt]

... so there is the tax torpedo effect of RMD's

With the recent Trump EO https://www.whitehouse.gov/presiden...der-strengthening-retirement-security-america Sec 2d it looks like RMDs will be reduced.

Who saw this coming? Anybody?

When I first heard about this, people said that he can't do that because RMD is required by law and an EO cannot change the law. People speculated that the only way he could possibly even change RMDs would be to fiddle with the assumed life expectancy tables. And guess what--that's just what the EO says.

180 days takes us into next year---so quite possibly your 2019 RMD will be less at the end of the year than in January.


This reconfirms to me that counting on the current laws (related to retirement income) staying as they are for the 30+ years of your retirement is a mistake.

 

[MichaelB]

With the recent Trump EO https://www.whitehouse.gov/presiden...der-strengthening-retirement-security-america Sec 2d it looks like RMDs will be reduced.

Who saw this coming? Anybody?

When I first heard about this, people said that he can't do that because RMD is required by law and an EO cannot change the law. People speculated that the only way he could possibly even change RMDs would be to fiddle with the assumed life expectancy tables. And guess what--that's just what the EO says.

180 days takes us into next year---so quite possibly your 2019 RMD will be less at the end of the year than in January.


This reconfirms to me that counting on the current laws (related to retirement income) staying as they are for the 30+ years of your retirement is a mistake.

There is a discussion on this EO here http://www.early-retirement.org/forums/f28/eo-to-raise-rmd-age-93571-2.html#post2102116

 

[sengsational]

I'm not seeing an answer here.

You might consider looking a bit closer. It looks like there are six specific answers.

 

[Cut-Throat]

You might consider looking a bit closer. It looks like there are six specific answers.

And that is just part of the Problem! He asked for 2 Numbers.

Let's take the simplest example. Single, 62-year old has $1,000,000 in IRA and a
$20,000 SS benefit (stating at 62) or a
$35,000 SS benefit (starting at 70).

How much can/should this person spend in the first year of retirement if he/she
A. Starts at 62
B. Plans to start at 70

Here let me help you with this:


At a 4% SWR


A.) Starts at 62 -- Spends $60,000 the First year of retirement.
B.) Starts at 70 -- Spends $63,800 the First year of retirement.


Reference - Spend More at 62 by Delay Social Security to age 70

 

[MarieIG]

We are looking at DH taking SS at 70, he has the better earning record. I have a number of zeros due to being a SAHM.

I'm thinking, that I should complete my Roth conversions prior to triggering my own SS; and then run one of those assessment scenarios.

DH has long lived parents and having a larger SS check should allow him more spending money at 70; and allow more money for his care when he is older.

 

[sengsational]

At a 4% SWR

The more broad the assumptions you make, the less nuanced the result. And less instructive.


No plan duration, no defined rates...that seems to be less than a complete answer.

 

[TwoByFour]

Bolded - is your reference to the WR% after substituting investment asset drawdown for SS, or is the reference related to a current WR% before the decision at 62?

I calculated it based on a budgeted annual spend rate which must be met by the sum of SS and actual withdrawal amount. The 4% I referenced is the budgeted annual expenses relative to starting assets when I retired so once SS commences, the actual withdrawal amount decreases accordingly. The calculation I ran was for my own situation and for me, SS at 62 is about 0.8% of initial assets, so it would lower the actual withdrawal rate to about 3.2%.

As I recall, the Trinity study found that at a withdrawal rate = 4%, the chance of not running out of money before you die is around 90%. A withdrawal rate of 3.2% is closer to 100% success. This is why, if you are starting at a high withdrawal rate, it is a safer strategy to take SS early. But if you're already at a low withdrawal rate (like 3% or less), you won't be making things less risky by taking it early so might as well delay it and have a higher annual spend rate.

 

[Dtail]

I calculated it based on a budgeted annual spend rate which must be met by the sum of SS and actual withdrawal amount. The 4% I referenced is the budgeted annual expenses relative to starting assets when I retired so once SS commences, the actual withdrawal amount decreases accordingly. The calculation I ran was for my own situation and for me, SS at 62 is about 0.8% of initial assets, so it would lower the actual withdrawal rate to about 3.2%.

As I recall, the Trinity study found that at a withdrawal rate = 4%, the chance of not running out of money before you die is around 90%. A withdrawal rate of 3.2% is closer to 100% success. This is why, if you are starting at a high withdrawal rate, it is a safer strategy to take SS early. But if you're already at a low withdrawal rate (like 3% or less), you won't be making things less risky by taking it early so might as well delay it and have a higher annual spend rate.

Okay thanks. For us, I believe our WR% would be about 4.5% for 8 years, then 2.5% after 70.5 yo.
If taking the SS at 62, the WR% would be around 3%.
Thus one of the decisions revolves around the risk of going over 4% for 8 years at the earlier stages of retirement.

 

[Independent]

There's a boatload of assumptions that have to be made in order to answer this question. That's my beef with a lot of the suggestions here and by experts. Ignoring inflation, presuming the portfolio gets a whiff of a percent over inflation, building a scenario where SS makes a larger part of the spending. Fine, but let's put those assumptions front and center.

I think we all know the assumptions for the 4% SWR, or for a FireCalc run.

I'm not dogmatic about taking it early or late. Frankly, based on what's knowable, it's about as close to a crap shoot as you can get. And the differences are generally pretty small. What people say about the differences in how they feel about blowing through SS dough vs pulling money out of the portfolio is as real as any math.

I did run a few scenarios on i-orp. I selected that tool because it's quick to run a scenario like this, and it doesn't ignore important things. What I did was do successive runs, switching between taking SS at 62 vs 70. First, the assumptions: AA of 60% equities that returned (in most runs) 5% over inflation, but I ran a few with 7%. These are much lower than the historical CAGR for equities, but supposedly in line with what the experts are saying nowadays. CPI Inflation of 2%, spending inflation of 4% (those are defaults on the site). I varied the dirt nap through 87, 92, and 97, because obviously, the longer you live the more waiting makes sense. But really, the 97's would be an unlikely event for most of us, especially the males. But it's in there because I wanted to show the "take it late" option "winning", given a long enough life.

For the simple scenario proposed, the $1M IRA, presuming SS will continue to be fully funded, 60% stock allocation growing at 5% real, your annual spend could be between 1.4% (87), 3.0% (92) and 4.5% (97) higher by waiting until 70 to claim.

A similar scenario, $1M in Roth, presuming SS will not continue to be fully funded, 60% stock allocation growing at 7% real, your annual spend could be between 1.7% (87) lower, 0.5% (92) lower and 0.4% (97) higher by waiting until 70 to claim.

Yes, you can pick apart the second scenario I used. I simply picked one that I figured might be more favorable to taking it now, and it was. I didn't have to reduce the realism by turning up the equity allocation or anything. Just a slightly higher return and the default on the i-orp site is to presume SS will not continue past 2034 with full benefits. Still squarely in the realm of reality for some people. Anyway, without much effort I found a scenario where the "taking it late is always better" dogma can be proven false based on the math. Any scenario where anything close to the historical CAGR for equities is entered will give you a "take it now" answer as well.

As to the original scenario, there is not just one answer because there are too many assumptions that have been left out.

I'm glad you aren't dogmatic.

I think my problem is the difference between what assumptions you start with and what actually happens.

I could assume that stocks will generate a real return of 10%, put 100% of my assets into stocks, and take 10% of my (inflated) original balance every year.

Someone else could run FireCalc and decide to take 4% of the (inflated) original balance every year.

I would certainly have more to spend in the first year. But, reality will be the same for both of us. If stocks/bonds have historic or somewhat worse than historic returns, eventually they'll come a year when I'm spending less than the 4% person.

You gave six sets of assumptions to build an initial withdrawal amount. But, reality will not be exactly any of those six. None of the choices dominates the other five in all possible actual scenarios.

You said

if you "feel lucky" and you get a more typical return from equities, "you'll have more to spend every year of retirement" by taking it now.

that sounded pretty dogmatic. You probably meant something else, but I'm not sure exactly what you meant. For example, your statement implies you have some withdrawal plan in mind, but I don't know what it is. Hence, I thought I'd start by asking for a dollar amount in the first year, and then ask whether/how you'd modify that amount as reality plays out.

 

[sengsational]

All models are going to be wrong. The idea I try to follow is to model everything that's practical to model. Ignoring time value of money in one's model, or the growth rate of stored funds seems to me like it won't produce a trustworthy result. Wrong, like all models, but even more wrong than it has to be.


I had to go find this quote:

For every complex problem there is an answer that is clear, simple, and wrong.

H. L. Mencken

The more I look at at this problem, the more I'm considering waiting on my SS (taking spouse now is closer to a good bet though). I've got a few years before I could possibly do anything with mine, though. The CAPE ratio will play into the decision, I'm sure.

 

[Independent]

I calculated it based on a budgeted annual spend rate which must be met by the sum of SS and actual withdrawal amount. The 4% I referenced is the budgeted annual expenses relative to starting assets when I retired so once SS commences, the actual withdrawal amount decreases accordingly. The calculation I ran was for my own situation and for me, SS at 62 is about 0.8% of initial assets, so it would lower the actual withdrawal rate to about 3.2%.

As I recall, the Trinity study found that at a withdrawal rate = 4%, the chance of not running out of money before you die is around 90%. A withdrawal rate of 3.2% is closer to 100% success. This is why, if you are starting at a high withdrawal rate, it is a safer strategy to take SS early. But if you're already at a low withdrawal rate (like 3% or less), you won't be making things less risky by taking it early so might as well delay it and have a higher annual spend rate.

The Trinity study was designed around a level withdrawal amount for all retirement years.

You seem to be comparing one case where the retiree wants a level withdrawal amount with another case where the retiree wants stepped withdrawal amounts. That requires a little more care.

I don't see how to get to the bolded statement. Maybe you can provide some sample numbers.

 

[pb4uski]

The more broad the assumptions you make, the less nuanced the result. And less instructive.


No plan duration, no defined rates...that seems to be less than a complete answer.

I disagree... the 4% rule implicitly has a 30 year duration as I recall... it is a complete enough answer... the exercise indicates that if you defer you can spend more with the same risk of running out of money.

If you run FIRECalc with 4% WR for 30 years you'll get the same 95% or so.

 

[sengsational]

I was going to check the example scenario in FIRECalc to see how it came out, success % wise, just to see if it was realistic, but didn't think the scenario had sufficient specifics to supply to FIRECalc. Maybe "everybody knows" how to expand "4% SWR" into explicit assumptions (i.e. 30 years). Everybody except me, lol! Anyway, thanks for that bit of info.

 

[pb4uski]

You might want to start here.

https://incomeclub.co/wp-content/up...ing-a-withdrawal-rate-that-is-sustainable.pdf

.... For stock-dominated portfolios, withdrawal rates of 3%
and 4% represent exceedingly conservative behavior. At
these rates, retirees who wish to bequeath large estates
to their heirs will likely be successful. Ironically, even
those retirees who adopt higher withdrawal rates and
who have little or no desire to leave large estates may
end up doing so if they act reasonably prudent in protecting
themselves from prematurely exhausting their
portfolio. Table 4 shows large expected terminal values
of portfolios under numerous reasonably prudent scenarios
that include withdrawal rates greater than 4%. ...

And if you go to Table 4 it indicates that a 50/50 portfolio will provide 4% inflation adjusted withdrawals for 30 years at a 95% success rate... hence, the "4% rule".

 

[joeea]

Maybe not always, maybe not now, but the the book that I read of his, it was all about getting everything invested in TIPS if you had enough money to fund your retirement without the growth of equities.

Please tell me which book of his you read where he wrote anything like "Larry's general premise is that "if you've won, quit the game"."

It appears you are either confusing your authors or just making things up.

 

[NW-Bound]

True on all points. Anyway, I am bushed this morning from a couple hours of sex last night and my old brain can hardly process posts this morning.

I guess life is still worth living if you can manage that!

Gee, I never managed that even when still young!

So, why am I still clinging to life?

 

[Independent]

I was going to check the example scenario in FIRECalc to see how it came out, success % wise, just to see if it was realistic, but didn't think the scenario had sufficient specifics to supply to FIRECalc. Maybe "everybody knows" how to expand "4% SWR" into explicit assumptions (i.e. 30 years). Everybody except me, lol! Anyway, thanks for that bit of info.

Just open FireCalc and read the standard assumptions.
The first page has $30k from a $750k portfolio (that's 4%),
and a 30 year horizon.
The "your portfolio" tab will have 75% equities and 25% "long interest".
The "spending model" will be level (cpi adjusted).
"Portfolio changes" and "other income/spending" will be zeros.

Don't change anything.

Just hit any "submit" key and you'll get a report that says 6 failures out of 118 historic 30 year periods, for a 94.9% success rate.

That's one set of assumptions that results in "4% SWR was successful in 95% of historic scenarios".

-------------------

For the example I gave, change the beginning portfolio to $1 million,
input the SS amount you're testing in the "other income" tab,
go to the "investigate" tab and click the "Search for settings that will ...." "Spending level" button.
Hit submit again.

Then switch to the other SS option and hit submit.

You'll get the maximum level withdrawals to your two SS options.

 

[pb4uski]

Opened FIRECalc and changed portfolio from 75% to 60% equities since 60% is more common on these boards... left all other assumptions at defaut... with 4% WR success rate is 95.8% consistent with the Trinity Study.

Added $25k of SS starting in 2018 (age 62) and solved for 95% safe spending level... $55,188
Changed SS to $33,333 starting in 2022 (age 66) and solved for 95% safe spending level... $57,448
Changed SS to $44,000 starting in 2026 (age 70) and solved for 95% safe spending level... $57,920

Note that the maximum spending with the same level of risk by delaying to age 70 is 105% of the spending if starting SS at age 62. Broadly consistent with 6.2% higher annual spending in the more simple analysis that Cut-Throat posted in the other thread:

Forget trying to calculate how much 'You'll Get'...Focus on How much you get to spend.

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 stupid 'break even analysis'.

 

[Dtail]

Opened FIRECalc and changed portfolio from 75% to 60% equities since 60% is more common on these boards... left all other assumptions at defaut... with 4% WR success rate is 95.8% consistent with the Trinity Study.

Added $25k of SS starting in 2018 (age 62) and solved for 95% safe spending level... $55,188
Changed SS to $33,333 starting in 2022 (age 66) and solved for 95% safe spending level... $57,448
Changed SS to $44,000 starting in 2026 (age 70) and solved for 95% safe spending level... $57,920

Note that the maximum spending with the same level of risk by delaying to age 70 is 105% of the spending if starting SS at age 62. Broadly consistent with 6.2% higher annual spending in the more simple analysis that Cut-Throat posted in the other thread:

With my SS scenario, Firecalc also gives the best results in delaying to 70 yo.