Another reason to claim Social Security at 62

[Gumby]

You know that you can get the SS benefits number from the SS website. No need to calculate yourself.

I have found that there are many things in many different areas that I can have calculated for me, but I like to also do it myself at least once, so that I can ensure that I know exactly how the math works.

 

[pb4uski]

... Our situation is DW and I are both 59 and have fairly substantial COLA pensions- I've started taking mine and am re-retiring starting next month (went back to work for 26 months to help DD). My DW is still working until 62 and will begin drawing pension at 65. ...

By chance, are either of these COLAed pensions from an employer that did not withhold socal security taxes? If so, then there is an additional wrinkle.

Also, have you run your situation through opensocialsecurity.com? And checked the little checkbox at the top for select situations?

 

[RunningBum]

I’m glad to see many people are advocating this idea when deciding when to take SS benefits. For some it’s a viable alternative.

People should know that there are two big IFs that have to fall into place for it to work.

1.). You need to have the money to fund your desired retirement from 62 to 70.

2.). You don’t have a need or desire to leave a meaningfully large estate to your heirs. You do spend part of your kid's inheritance when you do this.

#2 is wrong. If you die before your breakeven, you leave less. If you die after, you leave more.

 

[pb4uski]

I have found that there are many things in many different areas that I can have calculated for me, but I like to also do it myself at least once, so that I can ensure that I know exactly how the math works.

+1 at one point I had a spreadsheet that did the calculation and it matched so I have relied n SS from that point forward.

 

[pb4uski]

... I believe based on what's important to us we will both take SS at 62. ... We will do a few Roth conversions between ages 59 and 62 also. ...

Can you elaborate on the first part, the things that are important to you to both take at 62?

Keep in mind that one reason for delaying SS is to be able to do much bigger Roth conversions from 62 to 70... all else being equal bigger by the SS that you would be receiving divided by 85% or $183, 303 more Roth conversions in the example in post #291.

 

[Ballhawker]

By chance, are either of these COLAed pensions from an employer that did not withhold socal security taxes? If so, then there is an additional wrinkle.

Also, have you run your situation through opensocialsecurity.com? And checked the little checkbox at the top for select situations?

We did have social security taxes withheld throughout, so we're good there.

Yes, I've run my situation through opensocialsecurity.com, and it does recommend DH 70 DW 62. That would also be a fine choice, but for me 62/62 seems to be a better overall choice based on our preferred outcomes.

opensocialsecurity.com solves for max SS payout at expected mortality- that's it. It doesn't factor other income streams or tax planning. It's a good tool, but as it states in it's own "about" page, it should not be used as the only source of planning information.

 

[pb4uski]

You're still being obscure about why you think 62/62 is better. How much are Roth conversions from 62-70 worth to you?

 

[Ballhawker]

You're still being obscure about why you think 62/62 is better. How much are Roth conversions from 62-70 worth to you?

My strategy in the 70 / 62 simulation was to do Roth conversions each year to match but not exceed the top end of the 22% tax bracket ceiling of $190,750, while maintaining a monthly net income of no less than $14,700 which is my baseline net income floor for all simulations. This meets all needs plus adds a cushion for extras.

The 62 / 62 simulation I am able to hit the $14,700 with much less in Roth conversions, and a very small dip into the post-tax retirement accounts, thereby allowing a long runway for greater compounding of the retirement accounts. Overall tax burden is lower too. Income stays at this level all the way to RMD's. If we need extra income for some reason, it's there - just grab the money from one of the retirement accounts.

The 70 / 62 simulation takes much greater hits to taxable and post tax retirement accounts all the way to me hitting 70. Then income jumps from 70 to 75 with my SS payments and jumps again with RMD's at 75. I don't like these forced income jumps - I'd rather have the flexibility of the 62 / 62 plan with consistent income and be able to take what we need from our (fatter) retirement accounts if and when needed. Even with less in Roth we end up with hypothetically more for heirs (assuming a 4% investment return above inflation). This hypothetical investment return I know is a big IF though.

 

[pb4uski]

But with that plan won't you get slaughtered with taxes when RMDs start?

The benefit of compounding of retirement accounts is popular misconception.

For example, let's say that you have $100,000 in a tIRA and $22,000 in taxable.

One option is to do a $100,000 Roth conversion and use the $22,000 in taxable to pay the tax. Let's say that the $100,000 grows at 7% annually... in 10 years you have $196,715 that can be withdrawn tax free. [$196,715 = $100,000 *(1+7%)^10]

The other option is to let both accounts ride. After 10 years the tIRA grows to $196,715 and when withdrawn results in a tax of $43,277 at 22%. Meanwhile, the $22,000 in taxable grows to $37,437 so you only have $190,875 to spend. [$37,437 = $22,000*(1+7%*(1-22%))^10]

The difference is that the growth of the $22,000 in taxable gets taxed over the 10 years so it doesn't grow as much.

Even if the growth of the $22,000 was tax free, is would grow to $43,277 [$22,000*(1+7%)^10] and you would have $196,715 after paying taxes.

So that proves that the benefit of compounding of retirement accounts is a popular misconception. Compounding provides no benefit. The benefit of tax-deferred accounts comes solely from the difference in effective tax rates when contributed vs when withdrawn.

 

[Ballhawker]

But with that plan won't you get slaughtered with taxes when RMDs start?

The benefit of compounding of retirement accounts is popular misconception.

For example, let's say that you have $100,000 in a tIRA and $22,000 in taxable.

One option is to do a $100,000 Roth conversion and use the $22,000 in taxable to pay the tax. Let's say that the $100,000 grows at 7% annually... in 10 years you have $196,715 that can be withdrawn tax free. [$196,715 = $100,000 *(1+7%)^10]

The other option is to let both accounts ride. After 10 years the tIRA grows to $196,715 and when withdrawn results in a tax of $43,277 at 22%. Meanwhile, the $22,000 in taxable grows to $37,437 so you only have $190,875 to spend. [$37,437 = $22,000*(1+7%*(1-22%))^10]

The difference is that the growth of the $22,000 in taxable gets taxed over the 10 years so it doesn't grow as much.

Even if the growth of the $22,000 was tax free, is would grow to $43,277 [$22,000*(1+7%)^10] and you would have $196,715 after paying taxes.

So that proves that the benefit of compounding of retirement accounts is a popular misconception. Compounding provides no benefit. The benefit of tax-deferred accounts comes solely from the difference in effective tax rates when contributed vs when withdrawn.

I don't dispute your example. However, I've got a variety of income streams at different levels of taxation. With the assumptions I've made, 62/62 works out better for me. I assume a large 15% tax bite out of my investment account withdrawals, which is probably too high. Reducing that would make the 62/62 scenario a bit more attractive still.

The goal was to be sure I've got a steady minimum $177k net per year income stream. I've attached a snapshot of my results for the two scenarios at two time slices. As you can see, the tax hit at start of RMD's is similar in both. If I'm doing the math wrong, I'd love to hear about it. I'm trying to vet my situation and develop the best strategy that fits my goals. I'm not attached to any dogmatic position.

 

[audreyh1]

That Bogleheads post was linked to in post #31 of this thread. And post #24 described the same basic idea but using a bond ladder instead of a savings account.

As I read about these strategies, it occurred to me that an even simpler twist on them would be, beginning at age 62, use a withdrawal rate from the IRA that is higher than what would otherwise be considered a safe withdrawal rate, then at 70 when SS kicks in revert if necessary to a conventional safe withdrawal rate over your estimated remaining years.

A lot of early retiring people plan for a higher draw from investments earlier in their retirement even w/o necessarily delaying SS until 70. They factor in later income streams kicking in.

 

[camfused]

I see folks frequently mention they are doing Roth conversions between age 62 - 70. Just because you start SS at 70, doesn't mean you have to stop the Roth conversions (although you would probably want to dial them back, due to the SS income), right? Maybe I missed it, but I don't remember reading that you have to stop at 70.

 

[pb4uski]

Yes, in some cases Roth conversons may be beneficial from 70-75 when RMDs start, and I suppose even perhaps even after RMDs start, especially if heirs to the traditional IRA are in a much higher tax bracket than you are.

My plan has some modest Roth conversions after SS starts and even some small Roth conversions for a few years after RMDs start. After SS starts the planned conversions go down by roughly 85% of SS.

 

[camfused]

^^^ Ok, thanks. Yes, I am similar in my plan. I do two huge Roth conversions, at age 66 & 67, then do Roth conversions up to the IRMMA 1.0 limit, for about 10 years after that. They do get smaller starting at age 70.

 

[sengsational]

#2 is wrong. If you die before your breakeven, you leave less. If you die after, you leave more.

True, but I always thought breakeven is a distraction. It's all about how much I'm able to spend between now and "plan sunset" and the size of the estate then. Getting less from SS but being able to spend more and have a larger estate over the life of the plan seems somewhat likely, but often ignored in favor of getting as much out of SS as possible.

 

[Ballhawker]

Yes, in some cases Roth conversons may be beneficial from 70-75 when RMDs start, and I suppose even perhaps even after RMDs start, especially if heirs to the traditional IRA are in a much higher tax bracket than you are.

My plan has some modest Roth conversions after SS starts and even some small Roth conversions for a few years after RMDs start. After SS starts the planned conversions go down by roughly 85% of SS.

I have Roth conversions in the plan I shared above through age 74. But after that point Roth conversions don't make any sense for us - income taxes are already jacked up due to the RMD's combined with high SS. This conversation has been great - it has helped me to look at all possible filing dates more objectively, and to develop a solid Roth Conversion plan.

 

[LateToFIRE]

True, but I always thought breakeven is a distraction. It's all about how much I'm able to spend between now and "plan sunset" and the size of the estate then. Getting less from SS but being able to spend more and have a larger estate over the life of the plan seems somewhat likely, but often ignored in favor of getting as much out of SS as possible.

I'm with sengsational on this topic. Not looking to optimize the total $$$ I get out of SS, too much guesswork.

I am looking to optimize how much enjoyment I get out of life and if taking SS early would enable that, it's exactly what I'd do. But, I am looking to cap downside risk as much as possible and on that score, SS acts as worst-case insurance - if all else failed SS would probably be there as a basic guarantied income source.

The former objective suggests I should take SS as soon as possible, while the latter suggests I should wait until age 70.

There are a couple of additional competing considerations:
1) I should have more than enough taxable funds to bridge age 62 to 70 if I chose to wait it out. So, taking it early isn't going to really make a difference in lifestyle.
2) Given my level of rollover/t-IRA balances, Roth conversions in those 62-70 years could make a lot of sense though not a must-do priority.
3) The sooner I begin taking benefits, the sooner DW can apply for spousal increase.

The plan is I'm going to try to wait it out until at least age 65, and reassess at that point.

 

[TheWizard]

I’m glad to see many people are advocating this idea when deciding when to take SS benefits. For some it’s a viable alternative.

People should know that there are two big IFs that have to fall into place for it to work.

1.). You need to have the money to fund your desired retirement from 62 to 70.

2.). You don’t have a need or desire to leave a meaningfully large estate to your heirs. You do spend part of your kid's inheritance when you do this.

2) is not necessarily true.
I delayed SS until age 70 while spending more from my 403(b) which increased in value regardless.
Now I have excess retirement income most months, adding up to $40k per year going into my investments (stock funds).
So I expect to have several millions left when I'm gone. That's "meaningfully large" to me...

 

[gianmatt]

I’m glad to see many people are advocating this idea when deciding when to take SS benefits. For some it’s a viable alternative.

People should know that there are two big IFs that have to fall into place for it to work.

1.). You need to have the money to fund your desired retirement from 62 to 70.

2.). You don’t have a need or desire to leave a meaningfully large estate to your heirs. You do spend part of your kid's inheritance when you do this.

#2 is not necessarily true. If I claim at 70, I will end up with a larger portfolio than if I claim at 62. It all depends on how much of expenses are covered by SS after age 70. Also, claiming later allows me to do Roth conversions, which means my kids inherit a tax-free account (and means lower RMDs and lower taxes for me.)

There is no right answer, but the attitude of "get the money NOW before you die!" is amazingly shortsighted. Someone else made a good point: if you're really worried about dying before 70, then why would you save for retirement at all?

 

[GenXguy]

Someone else made a good point: if you're really worried about dying before 70, then why would you save for retirement at all?

Why? Because your SS might not get you by comfortably during your retirement years before age 70. Imagine retiring at 50 - you need the savings to live off well before you are eligible for SS, possibly pension if you're lucky. And what if you have a spouse that could live a lot longer? Or you want to leave a lot of money to your kids? I don't see a good point and the excuse of not saving for retirement.

 

[motley]

#2 is not necessarily true. If I claim at 70, I will end up with a larger portfolio than if I claim at 62.

...after you turn 80. (If you turn 80...)

 

[skipro33]

I've heard campaign promises this election year of not federally taxing any social security. If that does come about, how will that affect the ability to transfer tIRA to ROTH IRA?

 

[skipro33]

...after you turn 80. (If you turn 80...)

And after your no longer able to actually enjoy the income. I'd rather have the money when I'm in need of it, not just to pad the account so I die richer.

 

[motley]

I generally agree, but as others have mentioned, it's all an educated guess. Some are still well capable of enjoying it in latter years, some not.

 

[gianmatt]

...after you turn 80. (If you turn 80...)

Yes. You know, it's not that difficult to live to 80. Even the Social Security table says that the average 62-year-old can expect to live another 19 years. It's not like you've placed all your chips on one number on the roulette wheel, and you're praying for a miracle.