Modelling when to take Social Security and other pensions

[Time2]

For someone age 60 or so trying to decide when to start SS, I might do the following:

1) are you reasonably confident you'll be in good health a decade from now?
If not, claim SS at 62.

2) add up your monthly retirement income sources for the first few years, including a "bridge amount" of $2000 to $3000 per month in lieu of SS.
Then ask some questions:
A) by how much does this monthly retirement income EXCEED your expected expenses?
B) what is your expected annual portfolio drawdown rate over the eight years prior to age 70 SS, compared to the 4% SWR benchmark?
C) what will your three portfolio segments (tax-deferred, Roth, taxable) look like after eight years of drawdowns and delaying SS?

Answers to these questions may help you decide if you can POSSIBLY AFFORD to delay claiming SS.

Even then, you can do a wait and see approach after age 62, depending on how well the markets and your portfolio are doing.
You can claim SS in any month after age 62, depending on what happens...

Using FireCalc and my annual WR, I have zero failures and worst case out come is $4M at the 30 year mark. This is without adding SS, my HSA, some real estate and other misc. assets. So, I really have nothing to be concerned about, as someone else said, I'm just planning to maximize the kids inheritance.

 

[pb4uski]

... How do we calculate When to collect SS with Roth Conversions, Taxes and growth of saved assets in mind?...

I have a spreadsheet that does that and and it incorporates SS assuming that both of us are living... but I'm using it principally to assess how much to do in Roth conversions given DW takes at FRA and I wait until 70 (much larger benefit).

I think what I might do is look at the EPVs from opensocialsecurity.com under early and late/optimal SS claiming strategies and calculate that difference... and then compare that difference to Roth conversion tax benefit of deferring.

 

[youbet]

I had significant pension/annuity income for those seven years so I didn't desperately need SS income to live on.

How would you have handled it if you didn't "desperately need SS income to live on" but simply "needed SS income to live on?" The difference is eluding me for the moment but must have been an important part of your decision for you to call it out.

 

[Time2]

I have a spreadsheet that does that and and it incorporates SS assuming that both of us are living... but I'm using it principally to assess how much to do in Roth conversions given DW takes at FRA and I wait until 70 (much larger benefit).

I think what I might do is look at the EPVs from opensocialsecurity.com under early and late/optimal SS claiming strategies and calculate that difference... and then compare that difference to Roth conversion tax benefit of deferring.

Throwing another complication with Roth conversion. IRA balance goes down the same amount as Roth Balance goes up, but Taxable account decreases by amount of taxes paid on conversion.

 

[TheWizard]

How would you have handled it if you didn't "desperately need SS income to live on" but simply "needed SS income to live on?" The difference is eluding me for the moment but must have been an important part of our decision for you to call it out.

Good question.
It turns out that my Basic Expenses in retirement are rather modest with my house paid for, etc.
But I like to travel, both domestic and foreign, so the cost of that probably exceeded my Basic Expenses in some pre-pandemic years.

So I did withdraw $3000/month from my tax-deferred 403(b) in lieu of SS for the first few years of retirement.
Then I found I wasn't spending all of that, so I switched to Roth-converting much of that $3000 instead.

But getting back to the fundamental question of "needing SS to live on", that was never in my plan.
I worked too many extra years for that to be the case...

 

[MarieIG]

For DH, as the higher earner, we're sure we want to defer SS until 70; as longevity insurance and a (rather) secure source of income. We don't have LTCI, and this is a certain sum which could be popped on top of other income streams to go towards monthly care, if necessary.

There is also something to be said for secure income streams when you are past the age to manage your portfolio.

It also seems that certain people base their consideration on investing the totality of their SS or allowing their assets to grow. I don't see that with DH, he's pretty good at spending the income stream, and I would like him to have a higher income stream when I'm gone. (I did tell him he has to claim on mine should I go before he turns 70 and let his grow).

Mine SS date is flexible. I would like to get a few Roth conversions under my belt over the next few years.

For DH, as far as modeling his pension, other than choosing when/ what age to retire, that was not an option.

 

[TheWizard]

Throwing another complication with Roth conversion. IRA balance goes down the same amount as Roth Balance goes up, but Taxable account decreases by amount of taxes paid on conversion.

Sort of.
But my taxable account was essentially zero at start of retirement in 2013 and is now up around $100k.

That might mean that I should do more bigger Roth conversions, one could argue.
But that would bump me into a higher IRMAA tier and probably get my Taxable Income into the 31% bracket, and neither of those things would make me smile ...

 

[youbet]

Throwing another complication with Roth conversion. IRA balance goes down the same amount as Roth Balance goes up, but Taxable account decreases by amount of taxes paid on conversion.

Yes, your net worth is less after a Roth conversion (assuming you're not in a zero tax situation) than before the conversion. When I look at our TIRA's, I do a rough cut reduction of 20% to estimate what I'll really have left after taxes to spend.

 

[chassis]

Throwing another complication with Roth conversion. IRA balance goes down the same amount as Roth Balance goes up, but Taxable account decreases by amount of taxes paid on conversion.

@Time2 how does the converted Roth balance go up the same amount as the IRA balance goes down? Doesn't the government take a bite?

 

[youbet]

@Time2 how does the converted Roth balance go up the same amount as the IRA balance goes down? Doesn't the government take a bite?

The preferable way to handle the Roth conversion taxes is to pay them separately from another source of funds, perhaps your taxable account. So TIRA goes down by the conversion amount, Roth goes up by the same amount, taxable account goes down by the tax amount.

 

[Midpack]

Throwing another complication with Roth conversion. IRA balance goes down the same amount as Roth Balance goes up, but Taxable account decreases by amount of taxes paid on conversion.

Taxes you're going to pay sooner or later, so not a real reduction in net worth. Most of us have overstated net worth's in that there are unavoidable taxes within, but you can't account for it exactly.

 

[Midpack]

Throwing another complication with Roth conversion. IRA balance goes down the same amount as Roth Balance goes up, but Taxable account decreases by amount of taxes paid on conversion.

Yes, your net worth is less after a Roth conversion (assuming you're not in a zero tax situation) than before the conversion. When I look at our TIRA's, I do a rough cut reduction of 20% to estimate what I'll really have left after taxes to spend.

No disagreement, but they're taxes you're going to pay sooner or later, so not a real reduction in net worth. Most of us have overstated net worth's in that there are unavoidable taxes within (e.g. Cap Gains), but you can't account for it exactly.

 

[MarieIG]

Taxes you're going to pay sooner or later, so not a real reduction in net worth. Most of us have overstated net worth's in that there are unavoidable taxes within, but you can't account for it exactly.

Yes, I don't remove the taxes, until well, they're removed.

 

[Midpack]

Yes, I don't remove the taxes, until well, they're removed.

Just commenting on the mental obstacle of voluntarily reducing our net worth by paying considerable taxes now doing Roth conversions, after spending 40 years minimizing taxes almost at all cost. A change in mindset I had to come to grips with. Having a pile of capital gains that I know aren't all ours is another.

 

[pb4uski]

@Time2 how does the converted Roth balance go up the same amount as the IRA balance goes down? Doesn't the government take a bite?

Yes, but the government bite should come from taxable account funds. You can use tax withholding of tIRA funds to cover it but if you are under 59 1/2 you will be assessed a 10% penalty on the tax withheld.

See https://www.marketwatch.com/story/why-am-i-being-charged-a-penalty-on-my-roth-conversion-11622222048

... You are correct that when you convert to a Roth IRA, the 10% penalty for distributions from an IRA prior to age 59 ½ is not applied. The penalty arises in your case because you did not convert $15,000.

Technically, you converted $12,000 and had $3,000 withheld for taxes. Because only $12,000 of the $15,000 made it to the Roth account, the IRS considers that $3,000 to be a distribution. Taking a distribution before age 59 ½ triggers the 10% penalty. And 10% of $3,000 is $300. ...

 

[SecondCor521]

I think what I might do is look at the EPVs from opensocialsecurity.com under early and late/optimal SS claiming strategies and calculate that difference... and then compare that difference to Roth conversion tax benefit of deferring.

I'd be interested in the results of that analysis if you end up doing it and happen to remember to post it here.

I have a pretty simple spreadsheet for my RMD analysis, but it has SS hardcoded at age 70, and only looks at federal income taxes on "RMD+85%SS-StdDed" and IRMAA. The simple analysis I could do with it easily was to change my planned Roth conversions from what I had them at (400% FPL before 65; 22% bracket after) to $0 from 62 onward. Doing so increased my tax load by approximately half of what my total SS benefit would be in the year I turn 75.

When I looked at opensocialsecurity, they have added a new feature which tells you , relative to the optimal claiming strategy, how much reduction occurs when claiming at other dates. For me, even over a broad range of discount rates, the most common result there was less than a 10% difference.

So when I see a difference of half of my SS benefit versus a difference of 10% of my SS benefit, I tend to think that the Roth conversion impact is about five times greater than the SS claiming strategy impact.

However, there are limitations to this:

1. My spreadsheet is homebaked. I've checked it for errors, but it's not a commercial product and hasn't gone through rigorous QA. OTOH, it is relatively simple and I have gone over it myself a number of times.

2. The comparison probably shouldn't be between my planned Roth conversions and zero; it should probably be something less drastic than that (maybe reduce Roth conversions by the amount of SS received).

3. I didn't adjust the SS income column from my age 70 amount arriving starting at age 70 to a lower age 67 amount arriving at 67. Practically speaking, I don't think this would make much difference, since my IRA conversions and RMDs are multiples of my SS income.

 

[Time2]

@Time2 how does the converted Roth balance go up the same amount as the IRA balance goes down? Doesn't the government take a bite?

I could have been more clear. I have a Taxable account at Vanguard, I pay taxes out of that rather than reduce the Roth Conversion amount.

 

[MarieIG]

Hmmm, maybe not get the traditional IRA down to 0; but leave enough to fund charitable donations?

 

[Time2]

Hmmm, maybe not get the traditional IRA down to 0; but leave enough to fund charitable donations?

In recent years, the IRAs are growing faster than we can Roth convert, I expect to have more money in the IRAs after 8 years of conversions than when I started. AKA, First World Problem.
My two charitable Donations are Son and Daughter.

 

[MarieIG]

In recent years, the IRAs are growing faster than we can Roth convert, I expect to have more money in the IRAs after 8 years of conversions than when I started. AKA, First World Problem.
My two charitable Donations are Son and Daughter.

I have six children, and two grandchildren including a special needs grandchild, so I have options there. (We have been buying "stuff" and helping the parents of the grandchildren as part of our normal expenses.) But, I have to make it through a year or two of retirement before my plan, vis-a-vis gifting is more crystalized.

 

[pb4uski]

In recent years, the IRAs are growing faster than we can Roth convert, I expect to have more money in the IRAs after 8 years of conversions than when I started. AKA, First World Problem.
My two charitable Donations are Son and Daughter.

+1... for my Roth conversions I feel like a dog chashing its tail.

When I retired at the end of 2011 my tIRA balances were 100x. Since I retired, I've converted 44x. Today my tIRA balances are 113x.

 

[RunningBum]

+1... for my Roth conversions I feel like a dog chashing its tail.

When I retired at the end of 2011 my tIRA balances were 100x. Since I retired, I've converted 44x. Today my tIRA balances are 113x.

Yeah, I've heard people say things like that, but what would your balance be had you not converted at all?

 

[11522914]

How does the possible 25% cut in SS benefits in 2031 factor in your calculations?

Will that make any difference in your decision?

 

[bada bing]

I rolled those two projections forward to age 95. The only difference between the two projections; one included the social security benefit I would receive starting at age 62 and the other the benefit I would receive starting at age 70.

The difference in the growth in net worth between the two projections wasn’t just a few percent, it was vastly different. That difference being created by the eight years of compounding from 62 to 70. Needless to say I took my social security at 62…

YMMV

The difference between the two scenarios is not an apples to apples comparison. You are comparing what is probably the least risky investment possible (deferring SS) to an investment that has some bit of risk. The delta in outcomes for deferring SS is practically zero. The outcome delta on a portfolio including equities over 25 years is substantial.

If you wanted to do a more even comparison, model deferring SS while also moving amounts equal to what the early payout would have been from your portfolio bond allocation to portfolio stock allocation. In other words, equalize the growing equity exposure (the risk) between the two scenarios. When you do that, I am confident that deferring SS will beat by a small but consistent amount any projection past your actuarial lifetime and partially close the gap in the case of dying early. The reason is because currently, deferring SS pays a better return than any comparable fixed income investment. SS deferral rates are fixed and they were fixed when we under a higher interest rate environment. Someday interest rates may go up, or SS deferral rates may be adjusted down. Until that happens SS deferral has an advantageous return over comparables.

Most people who retire early with portfolio assets and enter the SS decision years value a de-risking of their withdrawal plans, although almost no one consciously models it that way. Deferring SS is an insurance that a lot of people want. If you don't want the insurance, consider the ways (like the paragraph above) to equalize the risks.

Of course, there's lots of individual situations with health, or cash flow, or spousal/family factors that would trump the above analysis. I don't have a dog in the fight for other people's SS claiming strategies. Just trying to bring a perspective to modelling factors I seldom see addressed when the discussion gets repeated.

I personally am waiting until 70 and I am also aware that the risk reduction of that choice allows for a rising equity glide slope, if I wanted the risk. So far I don't.

 

[FlaGator]

Yeah, I've heard people say things like that, but what would your balance be had you not converted at all?

I think that’s the right question.

In my case, the Roth is 100% equities, while the tIRA is ~ 60/40 (overall 70/30). With the market the last few years, I’m ahead after the conversions, and not by a small amount.