First, I want to reiterate that I’m not arguing for any particular age to take SS; too many individual variables to say one age is better than another for a particular person/couple.
I know this was just a shorthand analysis to illustrate why the ‘bridging’ strategy might be good. I’m simply saying that, IMHO, the logic is faulty, and so is some of the math. And, that doesn’t even begin to account for any risk based comparison of ‘bridging’ versus ‘SS @ 62’ (i.e.: longevity risk, sequence of returns risk, AA risk, Market risk, inflation risk, interest risk, etc.)
So, let me try this again.
IMO, this is a conservative way to increase your retirement spending. Let's take and example of 62 yo a retiree with $1 million saved and SS of $25k a year at their FRA of 66.
If they take SS at 62 and use a conservative 3.5% WR, then their inflation-adjusted spending can be $53,750 ($35,000 from portfolio and $25,000*75% or $18,750 from SS).
Alternatively, they carve out 8 years worth of age 70 benefits into a separate fund of $264,000 to provide $33,000 a year for ages 62-70 since their age 70 SS benefit will be $33,000 ($25,000 * (1+(8%*4))). They have $736k left and at a 3.5% WR that is $25,760... add the $33,000 and the total is $58,760.
So with some minimal financial engineering they have increased their retirement spending by 9.3%!
(I'm assuming that the $264k side fund earns the inflation rate so the $33,000 a year can be increased for inflation, but even if you bumped the $264k up a little bit to consider inflation more explicitly, it is still a winning strategy.)
All $58,760 comes from the same source if one defers SS until age 70. That’s a 5.9% WDR; not 3.5% just because the $$$ is segregated into two pots. To further illustrate this, I could set aside $470,080 ($58,760*8) and my WDR for the remaining $529,920 would be ZERO but, that’s sort of meaningless.
Nope. Deja vu all over again.
| SS at 62 | SS @ 70 (62-70) | SS @ 70 (70+) |
Nestegg @ 3.5% | 35,000 | 25,760 | 25,760 |
SS Replacement Side-fund | 0 | 33,000 | 0 |
SS | 18,750 | 0 | 33,000 |
Total | 53,750 | 58,760 | 58,760 |
| | | |
Here’s the same $58,760 again; all coming from the $1M portfolio from age 62-70. Again, that’s a 5.9% WR.
Two FIRECalc runs. First is spending $53,750/yr for 45 years and $1 million beginning balance and including $18,750 of SS beginning in 2017. Second is spending $58,760/yr for 45 years with $736k beginning balance including $33,000 of SS beginning in 2025 and $33,000 of inflation adjusted pension income per year beginning in 2017 and ending in 2025 ($264k side fund payments). Note success rate is the same despite higher spending.
It’s nice that you can backfit FIRECalc runs to illustrate ‘mostly’ the same output but, as we know, that’s not really where the original math came from.
The bottom line is that $59k/yr from a $1M portfolio is a 5.9% WR, no matter how much “financial engineering” is done. That might be OK for some but, let’s call it what it is. TINSTAAFL