Another analysis: Why Early Social Security Provides the Greatest Spousal Benefit

[MarieIG]

. . .

I view taking my SS from a similar, simple standpoint. We do not need it now, and its primary purpose will be to provide for DW after I pass. I am fine with taking the less riskier path of delaying SS to maximize those benefits, that do be dependent on (and manage) investing for growth. There can be a reward, but not without risk.

In addition, I want to leave DW knowing that the SS check, along with my pension benefit check, will come in regularly, no need to do anything with the other investments for daily living. Much of that will likely pass on to our heirs.

So, while I see investing the money can provide - assuming the market does what it has done in the past - a greater monetary benefit, for me that is not primary factor in determining when to take SS. The perhaps-less-than-optimal-but-much-less-risky approach is what I prefer .

Yes, I agree with this reasoning. We would like the survivor to have dependable income and not be concerned with market fluctuations. (SS for us is a portion of longevity insurance.)

 

[pb4uski]

...Opensecurity does not calculate what happens with investments....

Actually it does since it allows users to input a real discount rate to use so if you input the assumed real return on your investments or more finely, the real return on the money that you would use if you defer social security then you will have factored in investment returns.

 

[Romer]

Actually it does since it allows users to input a real discount rate to use so if you input the assumed real return on your investments or more finely, the real return on the money that you would use if you defer social security then you will have factored in investment returns.

Ahh, thanks for the tip. I will investigate that further and compare to my results.

 

[FI_RElater]

the differences in later values aren't much

Relative the cut, I r an opensecurity.com assuming the cut and my optimum SS date moved to 68 years old. That included spouse benefits and my wife taking her much smaller at 66

Opensecurity does not calculate what happens with investments. I ran the whole thing in my spread sheet with a 4% ROI 2.5% inflation and the cut. I also assumed a conservative spending amount higher ($10K) than I am spending now to cover more fun stuff. I also have a pension.

70 isn't the better option until age 105

67 becomes the better option at age 89

66 becomes the better option at age 72, it runs very close to 67 though. Not a huge difference

65 is better from start until age 72

These are the options I am considering as all have a growth trend to my total investment portfolio even at 4%. Taking early covers me till mid 90's but has a negative growth trend. Of course these are all projections based on my assumptions. Your assumptions and situation will be different.

Your results will depend on your situation. For me, my Roth conversion will mostly be complete at age 67-68, so taxes will become less. I already have $650K in my Roth. The difference between 66 and 67 is small. Like 100K in my early 90's.

I did not model 64 or 63 (This year) as I already ruled those out. Those put me at a much lower set of assets in my mid 80's. I didn't model 68 as of yet, but will when I get closer.

For me (Yours will be different), I won't take SS earlier than 66 and likely by the time I am 68. Things change with actual Spending, ROI, Taxes and if SS cut gets fixed. This is where I am today, tomorrow will likely be different For me, I haven't set a line in the sand, just something I monitor.

The other consideration is if one of you passes. My wife did not have a lot of SS earnings so she will depend on my survivor benefit. That at 66 along with everything in a ROTH sets her up nicely should I go first

Everything in life is a balance. If you are looking at taking it early and haven't done the work to see how this impacts you in 20 years, then you are doing yourself a disservice. For some, taking early (62/63) is the right answer based on their unique situation. For me, it is the wrong answer.

In my IPS, I left open the possibility of taking at, or just after, FRA (I have a slightly lower PIA but am older).
When 2022 hit both bonds and equities I evaluated taking SS, both with no changes and with 20+% "haircut". The haircut did increase any "breakeven" to just before my "realistic" life expectancy of 92, which is about a two sigma beyond the average. The variation between the two options was a rounding error from the variation of our portfolio___ that's our main driver since then if I pass before spouse is 70 they get my SS as survivor (they'll be sure to wait until their FRA, taxable would be used until then) and then they get their higher at age 70.

I took mine at FRA, after doing a bit of Roth conversions before then (but still have a bit in IRA for future LTC and other cases). I would anticipate that the cuts have to occur across the board, as current law can't discriminate between potential claimants, and if they did take place a few more years of claiming before slughtly helped. Those that would be younger, especially ~62, would be better to wait to FRA+ if they are right at the time when any haircut would occur so that the don't have both the haircut AND the early claiming penalty.
Looking not at percentages but rather actual values shows that not much difference occurs in sums between FRA and age 70 ("actuarially neutral") and in our case didn't make that much difference since I was lower PIA and we had adequate funds to cover.

 

[Koolau]

From a tax perspective it makes more sense to spend down tax deferred money and let the SS benefit grow. This leads to less taxes later as SS is maximum 85% taxable while IRA withdrawals are 100% taxable. One reason to consider waiting on SS, but other reasons might trump this one.

VW

Yep. AND, that interim (between 62 and 70 or FRA or whenever you take delayed SS) gives more time to Convert to ROTH's (excuse me, Roths.)

 

[Surewhitey]

Not everyone is ACA eligible. In our case, we were faced with a $24K per year HI hit for 12+ years (DW is 6 years younger) until we both reached 65. We were too FI apparently.

SS at 62 helped soften the blow a bit.

We're starting to scratch this surface too. Doing taxes for this year and the after tax accounts' income is starting to be "too much" even after maxing out 401ks and HSA. 1st world & high interest rates problems...

 

[statsman]

An early retiree is likely on the ACA from 62-65, so they must also factor in the probably increase in cost from reduced subsidies, as the SS income will almost certainly put them in a higher tier.

I haven't been on ACA as I am fortunate to have an under-65 retiree medical plan available. Not as great as some of the Cadillac plans we hear of, but better cost-wise than being on ACA.

That said, there has been the concern that this perk could disappear (other retiree "perks" have disappeared or have been reduced over the years). With that in mind, I decided to hold off until 65 before starting SS. One less potential cost issue to have to deal with.

 

[foxcreek9]

From everything I have read on the subject any haircut would be across the board for all current recipients so there is no advantage to taking it early.

Right, Bill Gates and the the old people getting the minimum SS will both take a cut, riiiiight.


It will be income based, 1/2 the the recipients will see no cuts and it will be a sliding scale from there with 5-10% losing SS in the name of fairness.

 

[pb4uski]

^^^ You're making stuff up. Got any basis or citation for what you wrote other than in your own mind?

This is what the 2023 SS Trustee's Report says. Nowhere do they suggest that any reduction in benefits will be anything other than across-the-board. If you have a source or citation that suggests differently other than your own mind, then put it up.

If substantial actions are deferred for several years, the changes necessary to maintain Social Security solvency would be concentrated on fewer years and fewer generations. Significantly larger changes would be necessary if action is deferred until the combined trust fund reserves become depleted in 2034. For example, maintaining 75-year solvency through 2097 with changes that begin in 2034 would require: (1) an increase in revenue by an amount equivalent to a permanent 4.15 percentage point payroll tax rate increase to 16.55percent starting in 2034, (2) a reduction in scheduled benefits by an amount equivalent to a permanent 25.2 percent reduction in all benefits starting in 2034, or (3) some combination of these approaches.

 

[foxcreek9]

^^^ You're making stuff up. Got any basis or citation for what you wrote other than in your own mind?

Really, what party is going to allow grandma getting $1500 a month take a 25% cut? I'm sure the press won't have a field day with that.


No one knows for sure, but the general consensus is it will be a combination of tax hikes and more "need based" in the future.

 

[pb4uski]

Do you have any citations for this "general consensus" other than what you would like to see happen?

 

[foxcreek9]

Do you have any citations for this "general consensus" other than what you would like to see happen?

No, but here is a big hint (keep in mind envy of what other people have is always a political winner)

https://www.cnbc.com/2022/08/03/changes-americans-are-willing-to-make-to-fix-social-security.html

2. Reducing benefits for high earners

• Share in support: 81%
• Democrats in support: 86%
• Republicans in support: 78%

 

[foxcreek9]

^^^ You're making stuff up. Got any basis or citation for what you wrote other than in your own mind?

This is what the 2023 SS Trustee's Report says. Nowhere do they suggest that any reduction in benefits will be anything other than across-the-board. If you have a source or citation that suggests differently other than your own mind, then put it up.

That is what the law says now, it will not happen. Guaranteed

 

[Fermion]

Almost all of the ideas in that poll, including increasing the payroll cap, got higher than 70%. Hard to determine from that which route they could go.

 

[foxcreek9]

Almost all of the ideas in that poll, including increasing the payroll cap, got higher than 70%. Hard to determine from that which route they could go.

That is why it will be a compromise, for the young, higher taxes and an increase in their retirement age. To help swallow that pill will reductions for those who are "rich". Exactly what happened in the 80s, except the reductions was taxing 50% of your benefit that was raised to 80% a few years later.

 

[pb4uski]

That is what the law says now, it will not happen. Guaranteed

So says you.

To introduce more means testing into SS will make SS just another welfare program that will kill it's popularity overall... Congress, particularly conservatives, don't want to expand wellfare especially with significant annual deficits and the level of the national debt so while it might be popular with many people it won't pass.

What is more likely are various tweaks and perhaps an increase in the SS tax rate so there will be no reduction in benefits.

 

[foxcreek9]

So says you.

To introduce more means testing into SS will make SS just another welfare program that will kill it's popularity overall... Congress, particularly conservatives, don't want to expand wellfare especially with significant annual deficits and the level of the national debt so while it might be popular with many people it won't pass.

What is more likely are various tweaks and perhaps an increase in the SS tax rate so there will be no reduction in benefits.

It has been a "welfare" program from day 1, being popular doesn't change that fact.

 

[pb4uski]

That is why it will be a compromise, for the young, higher taxes and an increase in their retirement age. To help swallow that pill will reductions for those who are "rich". Exactly what happened in the 80s, except the reductions was taxing 50% of your benefit that was raised to 80% a few years later.

But there were good an valid reasons for going from 50% to 85% the way they did and the result was to, at least very broadly, align the taxation of SS benefits with the taxation of contributory pension plan benefits, non-deductible IRA withdrawals and other similar items. There is no reasonable basis for increasing to over 85%. They could personalize the percentage taxed based on SS taxes paid but I doubt that they would bother to do that as it may not result in any savings (higher taxes on SS that is).

 

[pb4uski]

It has been a "welfare" program from day 1, being popular doesn't change that fact.

No. Its an entitlement program, not a welfare program.

It is true that benefits are slighly skewed to lower earners as a result of the bend points in the benefits program, it is a subtle welfare component.

Unlike traditional welfare programs, Social Security is not based on a needs test. It is an entitlement program, meaning those who contribute through payroll taxes are entitled to receive benefits upon meeting eligibility requirements (age, disability, etc.).

The majority of Social Security funding comes from dedicated payroll taxes, not directly from general tax revenue. This differentiates it from programs funded solely by the government.

Benefits are calculated based on lifetime earnings, reflecting a connection between contributions and benefits. This differs from welfare programs that provide assistance based on need regardless of past contributions.

 

[Fermion]

Don't look for fairness in the tax laws. Consider some states don't tax pensions but do tax 401k withdrawals.

 

[Fermion]

No. Its an entitlement program, not a welfare program.

It is true that benefits are slighly skewed to lower earners as a result of the bend points in the benefits program, it is a subtle welfare component.

The bend points, the spousal 50% match, and the early days when the first people got a benefit far exceeding their contribution.

 

[pb4uski]

Don't look for fairness in the tax laws. Consider some states don't tax pensions but do tax 401k withdrawals.

But we are talking about the feds, and the feds tax both pensions and 401k withdrawals similarly in that return of contributions are not taxed and that was the basis for how they set the taxation of SS though they threw in a benefit that made SS benefits less than fully taxable at 85% for lower income taxpayers. They needed to throw in that benefit in order to get it passed but they fixed the hurdles so over time less and less taxpayers will benefit and the benefit will effectively phase itself out.

I concede that there are inequities in state taxation of 401k withdrawals vs pensions, but we're talking federal policy here.

 

[pb4uski]

The bend points, the spousal 50% match, and the early days when the first people got a benefit far exceeding their contribution.

Good nit picking.

 

[TheWizard]

It has been a "welfare" program from day 1, being popular doesn't change that fact.

No, it hasn't...

 

[Gumby]

No, but here is a big hint (keep in mind envy of what other people have is always a political winner)
....

If you think you'll be means tested out of Social Security, then by all means make your preparations for when that happens. Arguing that the rest of us are fools because we don't see that happening is a waste of electrons.