Wellesley & Wellington: Set it and forget it?

[NW-Bound]

... some of them (like Swedroe and Ferri) have a lot of conflicts. The markets are full of conflicting advise and strategies ... and that's what makes a market. Buy or sell? The price is set by these conflicts.

+1

Imagine the market without conflicts. Imagine there are only buyers, and no sellers, or only sellers and no buyers.

The world would just stop functioning, the earth would stop spinning, the sun stop shining, and an asteroid might as well hit us and put us out of misery.

 

[nun]

....... and an asteroid might as well hit us and put us out of misery.

We'd never say that "the pedestrian hit the car" so its a bit strange to say that the asteroid hits the Earth, rather it's the Earth that hits the asteroid and destroys it. The dinosaur killer asteroid was probably 10km wide and we've discovered all the asteroids and Near Earth Objects down to 1km so we'll know if one of those is going to hit long before it happens.

 

[Lsbcal]

Clearly Nun you have never heard of those sneaker asteroids just lurking about.

 

[nun]

Clearly Nun you have never heard of those sneaker asteroids just lurking about.

There is a tiny chance that some 1km and larger asteroids remain undiscovered, but the probability of that and it's orbit and the Earth's intersecting is so tiny it's not worth worrying about. But there are plenty of city destroyers lurking out there. The recent one over Russia was around 20m wide.

 

[dixonge]

Back in 2007 Bernstein would have have very similar retirement investing advice, but in 2016 I don't think he would recommend such a portfolio for many retirees. A 50/50 Wellesley/Wellington might be a good way to fund retirement, but I'm not sure it could be described as a Bernstein approach in 2016.

To Invest for Retirement Safely, Know When to Get Out of Stocks - TIME

I don't understand this piece of advice from Bernstein:

One other income source to consider: Social Security. Unless both you and your spouse have a low life expectancy, the best version of an inflation-adjusted annuity out there is bought by spending down your nest egg before age 70 so you can defer Social Security until then. That way, you, or your spouse, will receive the maximum benefit.

How much extra income per month could that possibly provide? And how could that amount possibly be more than what your nest egg would provide?

 

[HadEnuff]

My feeling is that if we work hard enough to guarantee the minimum level of return as our safety net, that is exactly what we will get- our minimum level of return.

 

[hnzw_rui]

How much extra income per month could that possibly provide? And how could that amount possibly be more than what your nest egg would provide?

Up to 32% higher SS benefit if waiting from FRA to 70. If from 62 to 70, I think the increase is around 50+%.

For younger folk with FRA at 67, it's 24% from FRA to 70.

 

[Htown Harry]

Dixonge, this wade Pfau article lays out the delay of Social Security tradeoffs pretty well:
The New Math of Delaying Social Security Benefits - The Experts - WSJ

 

[pb4uski]

...How much extra income per month could that possibly provide? ....

While it varies depending on age generally the age 62 benefit is ~75% of the FRA (age 65-66) benefit and the age 70 benefit is ~132% of the FRA benefit.

So the age 70 benefit is ~176% of the age 62 benefit.

Plus for couples the age 70 benefit is paid to the survivor if the person with the higher benefit dies early.

So if someones FRA was $2,000/month at age 66 their benefit at age 70 would be $2,640 ($2,000 * 132%). So waiting is equivalent to paying $96,000 (the $2,000/month for ages 66-70 that was foregone) for a COLAed annuity paying $640/month or $7,680/year or a payout rate of 8%. Very attractive for a joint life COLAed annuity.

 

[HadEnuff]

While it varies depending on age generally the age 62 benefit is ~75% of the FRA (age 65-66) benefit and the age 70 benefit is ~132% of the FRA benefit.

So the age 70 benefit is ~176% of the age 62 benefit.

Plus for couples the age 70 benefit is paid to the survivor if the person with the higher benefit dies early.

So if someones FRA was $2,000/month at age 66 their benefit at age 70 would be $2,640 ($2,000 * 132%). So waiting is equivalent to paying $96,000 (the $2,000/month for ages 66-70 that was foregone) for a COLAed annuity paying $640/month or $7,680/year or a payout rate of 8%. Very attractive for a joint life COLAed annuity.

of course, this assumes SS doesn't become enough of a political football that they change the rules of the game at halftime. (same metaphor 3 times in one sentence: pretty good if you ask me. On Super Bowl Weekend besides...)

 

[dixonge]

ok, so here is my current scenario - at 62, the SSA is estimating I'll receive $920/mo. At 70 that goes up to $1636. The wife's is higher, but we haven't verified it yet.

The Pfau article covers one scenario, one that I guess most people here are looking at. But for us the delay won't be affecting our withdrawal rate from our portfolio, it will affect our *contributions* to our portfolio. We'll be living on a fraction of our pension and SS for the first several years while building our external portfolio up to decent levels. So not having that money for eight years would *cripple* our plans. 100% of our early SS money will be going into (most likely) Vanguard funds seeking that nice 7%+ relatively safe gain. We'll also be contributing a portion of our pension money.

I'd throw all of this into a spreadsheet to find the break-even approach, but I don't think it would matter. So maybe we'd have more money from 80-100 years of age? Buy a nicer retirement home package?

I think that the basic difference would involve an income that climbs to $73.5K locked in by 2023 vs climbing to only $48K from retirement through 2027, then finally maxing out at $75K in 2031. This second scenario would also result in much lower portfolio contributions.

 

[Chuckanut]

dixone - Each situation is different and there is not one, true, 100% correct way to view when to take SS benefits. If it would cripple your plans to wait until 70 then the answer for you seems clear, IMHO.

You should do what is financially and psychologically right for you two. The psychological aspects of the decision should not be denied. For example, if taking SS at 62 helps one to remain calm in the face of a downturn and not sell low into a bear market, that is a huge benefit.

I believe in the three legged stool, and by delaying SS until my FRA or later, that strengthens the SS leg and gives me a fallback in the event that one of the other legs gets a chunk chopped out of it. And, of course, the others legs would do the same for the SS leg in case it gets cut.

Since I can't predict the future, that's about the best this lowly mortal can do.

 

[Pbkmaine]

I am planning on having DH's IRA in Wellesley Income and mine in Vanguard Target Retirement 2020. I have higher risk tolerance than he does, and I like the Target Retirement funds' exposure to international stocks and bonds.

 

[dixonge]

I believe in the three legged stool, and by delaying SS until my FRA or later, that strengthens the SS leg and gives me a fallback in the event that one of the other legs gets a chunk chopped out of it. And, of course, the others legs would do the same for the SS leg in case it gets cut.

Since I can't predict the future, that's about the best this lowly mortal can do.

That sounds very reasonable. I'll continue to test projections with that in mind. If we can find a way to delay we'll definitely do that.

 

[dixonge]

Dixonge, this wade Pfau article lays out the delay of Social Security tradeoffs pretty well:
The New Math of Delaying Social Security Benefits - The Experts - WSJ

I think I just figured out my confusion. When Bernstein mentions 'spending down your nest egg' I was thinking of intentionally lowering the balance to a certain level - but obviously he just meant doing withdrawals from the nest egg until 70, then replacing that with the new, improved SS money amounts -- after which, the withdrawals from the nest egg go back to better, smaller levels...

 

[braumeister]

I think I just figured out my confusion. When Bernstein mentions 'spending down your nest egg' I was thinking of intentionally lowering the balance to a certain level - but obviously he just meant doing withdrawals from the nest egg until 70, then replacing that with the new, improved SS money amounts -- after which, the withdrawals from the nest egg go back to better, smaller levels...

Oh, thank you for this. I was at pains to understand one of your earlier posts, and I also thought you might be misunderstanding the problem, but you just reassured me that it was merely a misinterpretation of a comment.

I think you're on track now.

 

[nun]

If you invest your SS income and look at the size of the nest egg, deferring only works out better if you live longer than an average lifespan. Someone who lives until 83 will end up taking more from SS if they defer to 70, but the compounded total of the the invested SS checks works out to be very similar if you take it at 62, 66 or 70. So deferring SS is just like deferring any other annuity, you are giving yourself higher income in old age and the longer you live the better. If you are in poor health then take the SS asap so you don't have to spend other funds and potentially leave less to your family.

 

[nun]

I think I just figured out my confusion. When Bernstein mentions 'spending down your nest egg' I was thinking of intentionally lowering the balance to a certain level - but obviously he just meant doing withdrawals from the nest egg until 70, then replacing that with the new, improved SS money amounts -- after which, the withdrawals from the nest egg go back to better, smaller levels...

There are two reasons to spend down the nest egg.

1) to defer SS to 70 and get a larger SS check later in life
2) reduce RMDs

 

[Pbkmaine]

For a married couple, waiting for SS until age 70 for the higher earner gives an increased inflation-adjusted annuity over two lives, not one. It's quite likely that one spouse will live longer than age 83.

 

[nun]

For a married couple, waiting for SS until age 70 for the higher earner gives an increased inflation-adjusted annuity over two lives, not one. It's quite likely that one spouse will live longer than age 83.

Yes for a male/female married couple both aged 65 there's a 50% chance that one will still be alive at age 88, so that would give deferring to age 70 some extra time to compound.

 

[harley]

For a married couple, waiting for SS until age 70 for the higher earner gives an increased inflation-adjusted annuity over two lives, not one. It's quite likely that one spouse will live longer than age 83.

+1. The value of the survivor benefit always seems to be ignored when running the break even calculations. Since I had no control over SS, I never took it into consideration when working on my FI number. Now that I've been retired for 10 years and am getting in the neighborhood of collecting SS, I'm considering how it will work out best for us.

Since they recently changed the spousal benefit, which was my original plan, I've fallen back on collecting DW's (lower) SS benefit at 62 to allow our nest egg to rest a bit. I'll wait until 70 to collect my (higher) benefit, which will allow DW to have the higher payout for her lifetime, assuming she outlives me. To me, the value of the ongoing highest possible payout is worth more than the absolute number of dollars collected over a lifetime.

If we were depending on the SS dollars, maybe the calculations would be different.

 

[nun]

I have a pension starting at 55 and UK and US SS checks starting later on. I'm single and I'll probably take US SS at 62 and bank a lot of it and UK SS at 66. That way I can spread my income out most evenly and just let my portfolio compound. The choice between spending the portfolio down to reduce RMDs and allowing it to grow to maximize it's size is an interesting one.

 

[Fedup]

Bring back this thread to ask a question, I'm too lazy to start a new thread.
VWELX vs VWENX, in theory VWENX should be lower cost because it's an admiral shares, but yesterday percentage of change confuses me.
For example, for Friday, VWELX went up 0.25% vs VWENX went up .22%. Why is there a difference?

 

[papadad111]

I have a question - why is there no Wellington and Wellesley ETF ?

 

[jim584672]

I have a question - why is there no Wellington and Wellesley ETF ?

I would guess because these are actively managed funds while most ETFs are passively managed and hinged to an index.