Wade Pfau: The new math of social security

[Hermit]

I guess I'm following Pfau's thoughts. I withdraw from a 401K Stable Value fund enough each year to approximately equal what I will get when I reach 70 and begin collecting SS on my account. I call it "income smoothing". It gets taxed at 25%, but I don't think I will ever be lower and may go into a higher bracket thanks to RMDs. The total income (pension, SS on late wife's account, and withdrawal from 401K) gives me about twice what I should be spending, but probably about equal what I do spend. Between house construction (not part of spending budget, but it goes through the same checking account) and my young adult kids, keeping track of actuals is not easy.

[growing_older]

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Our plan is to delay SS if possible. But, SS is a good fall back option to deal with a poor market performance.

I've done as much planning as I think I can, but even so it's possible for future events to unfold in an unexpected way. I view SS, along with downsizing my house, as one of the reinforcements I can call on in case of adverse events. If all goes to plan, I'll take it at 70. If I need the money, I will be able to change this plan and take SS early.

[enjoyinglife102]

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Originally Posted by harley How about for dealing with the higher medical expenses that tend to come along as you age? I think the majority of people have gotten into the position of needing to take SS early by not delaying gratification. The people who can afford to delay tend to be able to do so because they accumulated a healthy nest egg that will get them through the gap. They can use that to enjoy themselves while they are younger. Having the larger annuity when you are older is a safety feature, especially the part about survivor benefits for the lower earning partner. People who save tend tolike safety.

I'm surely not saying not to be personally responsible but I've seen a lot of people in their 70's, 80's and beyond who have deferred living for too much "just in case" planning. Now they have a pile of cash, optimized SS cash flow and I guess can look back and be satisfied that they existed safely rather than lived fully.

[bmcgonig]

I ran the new Fidelity planner yesterday and there was a remarkable difference in my ending balance, larger by a factor of 2, by waiting until 70 to take SS.


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[truenorth418]

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Originally Posted by DEC-1982 I think it's a good article. I hadn't thought about setting aside money for 8 years and then managing the rest separately, so it is something for me to think about.

I've been following the RMD tables to determine my withdrawals in retirement, but I have been considering setting aside money to match my pension which will begin in about 13 years. I would then apply the RMD tables to the remainder. In my case this would lead to much higher current spending as well as a smoother transition when my pension comes on line.

I think Larry Kotlikoff has recommended this sort of smoothing approach in some of his books.

I will still plan to take SS at 70 and consider that "reinforcements" in the event my pension smoothing approach does not work out as well as planned.



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[pb4uski]

I'm not generally a Pfau fan, but thought that was a good article, especially the points that because mortality is better and interest rates are lower that the haircuts for taking early are no longer actuarially fair and the carveout for the SS bridge was an interesting approach to the decision for me.

We have two years before we need to make a decision, but the current plan is to wait until FRA (66) for DW and for me to file and suspend at my FRA and delay starting benefits until I'm 70.

[mathjak107]

8 years of dough in something very conservative for us would be about 1/3 of our portfolio .

that is a lot in my mind to spend down and worse keep at a fairly low return .

we would be talking about 800k in that bridge portfolio .

we have a meeting next friday with fidelity to run some scenarios on their new social security tool . it is not available on line for consumer use

[Free To Canoe]

Yes, you get a higher rate return and a less rate of withdrawal on your portfolio by waiting. Duh. Does it pay as Pfau suggests? Probably not if you kick the bucket before 85 or so.
Now you need a breakeven analysis and you need to know your termination date. Your higher rate needs to compensate for the -$316,800 that you are in the hole.

[UpAnchor]

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Originally Posted by Fedup The math maybe right but your health might not. Only if you are really healthy, should you delay taking it at 70. My coworker's mom was super healthy even at age 88 that she out did everybody on the yoga and exercise floor. I was shocked that she dropped dead 2 weeks ago. In fact, everybody who knew her was shocked. I'm sure you've heard of brain aneurism

Indeed we can never know for sure. Yet if I were to find myself at age 88, outdoing everyone on the yoga and exercise floor, I'd likely be pretty proud of myself for having delayed 'till 70.

[Independent]

In this poll from 2009, there were 66 responders who said they were expecting SS and had thought about how to invest for the gap.
http://www.early-retirement.org/foru...gap-44449.html

About 1/3 said they had explicitly earmarked assets set aside for this, about 1/3 said they were planning higher withdrawals from their regular, long-term asset allocation, and 1/3 said something else.

I'm not sure how many had a gap because they deferred, how many had a gap because they retired before 62, and how many did both (we're in the "both" group).

[harley]

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Originally Posted by enjoyinglife102 I'm surely not saying not to be personally responsible but I've seen a lot of people in their 70's, 80's and beyond who have deferred living for too much "just in case" planning. Now they have a pile of cash, optimized SS cash flow and I guess can look back and be satisfied that they existed safely rather than lived fully.

Well, personally I lived fully for my whole life, and somehow still survived long enough to be close to SS age, although it was close a few times. Having made it this far I'll finally do the conservative thing and delay. Although in my case it's more to ensure DW's maximum survivor benefit and to allow me an additional 8 years of Roth conversions before getting bumped out of the 15% bracket. The additional money I would get at 62 wouldn't make that big of a difference to our lifestyle, but since DW doesn't enjoy playing with finances the income stream will make her happy if I finally have too much fun.

[gerntz]

I've written something similar on another thread in the past few months:

Those that plan to live a long time are more likely to do so do to their mindset & behaviors; i.e., put your mind to something & you have a better chance of succeeding than if you leave it to chance. Net, plan to not take SS till age 70 & you'll work to better assure your health is in good shape to enjoy the benefit of doing so for a longer time. Not everyone will succeed, but I'd bet those that delay have a longer average lifespan than those that don't. JMO.

[daylatedollarshort]

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Originally Posted by mathjak107 8 years of dough in something very conservative for us would be about 1/3 of our portfolio . that is a lot in my mind to spend down and worse keep at a fairly low return . we would be talking about 800k in that bridge portfolio . we have a meeting next friday with fidelity to run some scenarios on their new social security tool . it is not available on line for consumer use

I also find 8 years a lot to spend down. We're more comfortable with diversified income streams, especially money we own and control, so we will probably take SS at 62, rather than run down the portfolio. Our filing age will also depend on part-time income at 62 and the tax implications.

I've run the numbers and I don't think we will be eating cat food either way.

[Calico]

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Originally Posted by enjoyinglife102 I'm surely not saying not to be personally responsible but I've seen a lot of people in their 70's, 80's and beyond who have deferred living for too much "just in case" planning. Now they have a pile of cash, optimized SS cash flow and I guess can look back and be satisfied that they existed safely rather than lived fully.

The two things are not mutually exclusive.

[Theseus]

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Originally Posted by MichaelB From the link Quote: However, Social Security is no longer actuarially fair. Those calculations were done in the early 1980s when interest rates were higher and when people weren’t living as long as they do today. With lower interest rates and longer lives today, the calculus leans toward delay as an advantageous route for new beneficiaries.

This is where I see the near term horizon for late boomer ER types, a group I identify with. As long as inflation and interest rates remain low, a slow controlled burn of savings/investments to supplement meager (33% of current income) pensions serves to ward off future RMD issues, and allows for delay of SS benefits. However there is a catch 22 to that, in that it will also mean that in the future we would become more reliant on SS. Projections are great, but the potential for SS to be trimmed, taxed, or otherwise truncated with our own savings already having been spent down on frivolous travel and other such devil-may-care activities of my newfound youthfulness are somewhat daunting.

So it becomes a balancing act, the central them of which is: How much do I dare be at the mercy of a future society's commitment and ability to provide financial support in my retirement years? Oh nevermind, time to go plan our next adventure!

[mathjak107]

i think that is the scariest part -trusting the gov.

[Fedup]

I also think the sooner one can retire comfortable, the better one increases the chance of living a long life. I know of immediate relatives who are sick but keep wanting to wait for a bigger SS check to retire, not because they can't afford it, but the OMY and must get above $2000/month minimum mantra from SS is what keep them from retiring. For those who must rely solely on SS then it maybe the case to wait for 70 but for others who have other sources of income, your health should also be a deciding factor.


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[daylatedollarshort]

The latest Pfau article tends to make the same assumption many finance articles do, the potential for more money = more happiness. I am not sure the neuroscience of happiness studies would agree this is true. Control over one's circumstances is often a greater predictor of happiness than more money, at least beyond a certain income level. Risk matters, and delaying benefits implies a certain risk level / government trust level that may be more appropriate for some than others.

I think personally I would more likely prioritize diversification and control throughout retirement over higher odds of more money in the future. Benefits cuts, tax rate changes, interest rates changes - a lot could happen over 30 - 40 years that also may negate the higher odds assumption as well. For those that need the money now or need longevity insurance then the answer is a bit more cut and dried.

[pb4uski]

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Originally Posted by Fedup ....I know of immediate relatives who are sick but keep wanting to wait for a bigger SS check to retire, not because they can't afford it, but the OMY and must get above $2000/month minimum mantra from SS is what keep them from retiring. ...

They do realize that retiring and drawing SS benefits are mutually exclusive, right? IOW, they can retire, live off of savings (assuming they have some since you said they can afford to retire) and their SS benefits will continue to grow.

[growing_older]

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They do realize that retiring and drawing SS benefits are mutually exclusive, right?

NOT mutually exclusive