Is an Annuity a good way to get over a SWR of 5%?

[brewer12345]

Sorry guys, but my read on this is that all the folks who are buying an annuity for the "GUARANTEE" are not getting what they're paying for. It would not take much to have a couple of Florida hurricanes, a California earthquake and a prolonged market dive over maybe 4 yrs to put a LOT of these folks under.

Unless you are buying annuities from a multi-line insurer, hurricanes and earthquakes are unlikely to make a difference. But your point is well taken: insurer creditworthiness is important. If you plan on buying a long term insurance product, be very selective about who you do business with.

 

[Cut-Throat]

Those of us who've decided to take it & run don't bother to argue the point any longer.

By this statement, I am guessing that you would like to leave money to your heirs? - I am guessing that the main reason folks would not delay S.S. is that they plan on leaving money to someone rather than spend it?

Or have a large distrust in Uncle Sam?

 

[MasterBlaster]

Can I get you all to agree that in the absence of tax effects, it is optimal from a pure financial point-of-view to take SS at 62?

Fired@51:

I agree with you, but your decision logic is not quite valid when you ignore taxes. For those of us that expect to have other income over the SS threshold(s) the taxation issue changes the optimal decision point.

remember for each dollar of income you have over the threshold you pay income taxes on that dollar plus 50-85% of taxes on another SS dollar. The net income tax rate on that SS income is very very steep.

So the take SS at 70 (versus 62) game plan suggests that you take some of that nest-egg and spend it down. The nest-egg spend-down is then offset by the increased SS payment. As others have suggested on this and other posts your "after-tax" spendable income will be greater.

 

[Dawg52]

By this statement, I am guessing that you would like to leave money to your heirs? - I am guessing that the main reason folks would not delay S.S. is that they plan on leaving money to someone rather than spend it?

Or have a large distrust in Uncle Sam?

Yes, a large distrust in Uncle Sam. But I plan to keep an open mind. Many years before I have to make a decision.

 

[samclem]

I'm in the "take it later" camp. Still, for those of us deriving a large % of their monthly income from a govt pension, increasing the SS check each month by spending more of the nest egg in early years does increase uncompensated risk. Our Uncle Sam is gonna wake up someday and have to do some serious belt tightening to pay for the bills he's run up. There's no telling who he'll turn to for the cash.

 

[Duke of Sands]

Phew! Am trying to explain all this to wifey and havin' a tough time. Is there not a calculator that takes pensions, payouts from taxable and tax-deferred accounts AND the tax torpedo into account and spits out net AFTER-TAX income for all ages up to whatever age we decided is relevant?? I guess what I'm asking for is FIRECalc with tax analysis included?

It seems that one should be planning well ahead of age 62, e.g. should one do Roth conversions to avoid excess tax on MRD's down the road, etc. Mayhaps this is asking too much of a calculator, i.e. we each need to do our own complex spreadsheet?

DoS

 

[brewer12345]

Duke, you can check out i-orp.com which supposedly does the tax optimization for you.

 

[MasterBlaster]

Phew! Am trying to explain all this to wifey and havin' a tough time. Is there not a calculator that takes pensions, payouts from taxable and tax-deferred accounts AND the tax torpedo into account and spits out net AFTER-TAX income for all ages up to whatever age we decided is relevant?? I guess what I'm asking for is FIRECalc with tax analysis included?

It seems that one should be planning well ahead of age 62, e.g. should one do Roth conversions to avoid excess tax on MRD's down the road, etc. Mayhaps this is asking too much of a calculator, i.e. we each need to do our own complex spreadsheet?

DoS

Well, sort of.

you can use the ORP calculator http://www.i-orp.com/TaxCutForm.html

however, ORP is based on tax brackets and tax rules from a few years ago. The last mod to ORP was in 2001.
You'll get the picture though about how to optimize your income by running a few examples of your situation through ORP.

 

[Nords]

FireCalc actually likes taking SS at 62 but I'm not sure why. Maybe I should run them for a longer period after 85 which is where I usually have mine ending.

I don't know if it works across all asset allocations, but someone (SG? TH?) has already pointed out that FIRECalc gives higher success rates to portfolios with earlier cash infusions.

Taking SS at age 62 gives an ER portfolio that much more cushion against bottoming out and should raise FIRECalc's success rate. A higher-equity portfolio is probably more likely to bottom out on downward volatility, so this early-SS effect may be more pronounced at higher equity allocations.

By this statement, I am guessing that you would like to leave money to your heirs? - I am guessing that the main reason folks would not delay S.S. is that they plan on leaving money to someone rather than spend it?
Or have a large distrust in Uncle Sam?

Hey, I thought you'd be taking SS at age 62 just so that you can add another fishing vacation or two each year. If you wait until age 70 you may have to choose from the vessels with boarding ramps wide enough for walkers & wheelchairs! Why not take SS now and do both?

I think our heir would be better off learning how to earn her own money. We go back & forth on the indulgence/independence debate but today we're thinking that our obligations end after making sure that she can fund an IRA in high school/college and go to a decent college. (IMO too many USNA midshipmen are driving Audi TTs courtesy of their grateful profit-sharing parents.) We'll let the kids decide if they want a big wedding or a $12K contribution toward their house downpayment fund.

As for my spouse heir, she'll have her own pension in 2022. She's also only $130K short of me in the SS earnings history, too, so she could hypothetically close the gap if she drills in the Reserves until 2013. She doesn't need my SS.

We're only talking about $10K/year in today's dollars, although every little bit certainly helps the SWR. So with our high-equity portfolio it seems prudent to take every opportunity to infuse cash into the portfolio and improve its FIRECalc success rate. Of course that's already over 80 and thus improving the success rate may no longer be relevant.

And finally, yes, I think giving the government eight years of additional control over my SS money may prove to be a bad idea. But I have 16 more years to ignore the debate before I revisit the decision.

Phew! Am trying to explain all this to wifey and havin' a tough time. Is there not a calculator that takes pensions, payouts from taxable and tax-deferred accounts AND the tax torpedo into account and spits out net AFTER-TAX income for all ages up to whatever age we decided is relevant?? I guess what I'm asking for is FIRECalc with tax analysis included?

Maybe ESPlanner or Financial Engines, although both cost money and will suck at least 10 man-hours of data entry from your lifespan. I don't think FE looks at more than a lifetime estimated tax rate, though, and ESPlanner's interface seems to be down at the spreadsheet level anyway.

It seems that one should be planning well ahead of age 62, e.g. should one do Roth conversions to avoid excess tax on MRD's down the road, etc. Mayhaps this is asking too much of a calculator, i.e. we each need to do our own complex spreadsheet?

Yes, even Roth IRA conversion calculators have a hard time dealing with the SS decision. I think unless there are significant "SS widow" concerns that early SS is better and Roth IRA conversions should be completed before age 62.

I'm not aware of any retirement calculator that can truly do it all, although I don't have any ESPlanner experience and I'm an Excel novice. You could take a look at this review: http://www.retireearlyhomepage.com/esplanner.html

 

[REWahoo]

Phew! Am trying to explain all this to wifey and havin' a tough time. Is there not a calculator that takes pensions, payouts from taxable and tax-deferred accounts AND the tax torpedo into account and spits out net AFTER-TAX income for all ages up to whatever age we decided is relevant?? I guess what I'm asking for is FIRECalc with tax analysis included?

There is an Excel based program "SS at 62, 66 or 70" here: http://www.analyzenow.com/ Look in the Free Programs link.

 

[youbet]

Where are you folks pulling the SS amounts for 62, 65, 70 from? The calculator on the SS web site? The downloadable calculator from that same site? From someplace else?

 

[haha]

Real Return Break-even Age
0% 81
1% 82
2% 83
3% 85
4% 87
5% 91
6% 98
7% 126

Since the life-expectancy of a 70 year-old male is 13 years, I think this shows that, if you can earn better than a 2% real rate of return on the early SS payments, it is better to take SS at 62, on average.
Can I get you all to agree that in the absence of tax effects, it is optimal from a pure financial point-of-view to take SS at 62?

Couldn't get me to agree with this argument. Counters follow:

#1, We are not all males on this board, and a woman's expectancy is roughly 3 years longer. Thus in the frequent case where the husband has been the higher earner, his annuity will be picked up by his widow. In this and most other cases (unless the SS annuity of both partners is identical) the relevant life expectancy to consider is the joint and survivor of male and female partners. Price this at Vanguard and you will see that it is much more expensive, because the insurer doubles his chances of getting an outlier. I don’t remember the figure, but I think that a 70 y. o. man and a 65 year old woman have an excellent chance that one of them will live into his/her 90s

#2 Life expectancy for a 70 y. o. male in 2004 was 14+ years, not 13 years. It has slowly risen every year, and well might continue this rise. (See table)

http://www.williamburrows.com/ann/lifeexpect.aspx


#3 Most of us will know at the time of the decision whether our parents have had unusually long lives or not. I don't know what weight that should be given, but surely more than 0.

# 4 We also will know whether we have been smokers or not, and how long we have been smoking. We may know also whether we have already picked up a mortal illness at decision age, and whether we are frequent drunk drivers. The set of all 70 year olds will include some people with non life extending answers to these questions Again, the weights would be problematical, but surely not 0!

#5 Your real return table above is a fantasy. If you invest the monthly SS payments as they come in, who knows what you will get? If you pre-fund it from savings, and buy TIPS on the day you decide to take early SS, you can know what you will get for the period that you choose. There are no maturities that would encompass a very long lifespan, so you will have re-investment risk. Today, your real return fo any period greater than 5 years will be 2.5 or under. So throw out all the "returns” from your table that require very lucky equity performance if you desire apples to apples comparisons.

And most important, #6- SS or any annuity for that matter has an insurance premium embedded in it. You are going to get the payments for as long as you live, and as you realize I am sure, “life expectancy" is a median figure. Some people will live much longer, some much shorter lives. The purpose is insurance against living in much straightened circumstances in old age. I would give little consideration to plans that did not address this concern.

Ha

 

[Cut-Throat]

Hey, I thought you'd be taking SS at age 62 just so that you can add another fishing vacation or two each year. If you wait until age 70 you may have to choose from the vessels with boarding ramps wide enough for walkers & wheelchairs! Why not take SS now and do both?

Hey Nords! -- That is exactly why I would delay S.S. to age 70! - I think you are missing the point. Using some money to secure an 8% withdrawal rate lets you spend more while you are able to take the fishing trips.

I may not even live to 70! - The delay is just an insurance policy in case you do! - You are still looking at the problem in the 'break even' way! I can see that you have the same level of understanding of this issue as I previously did. Once you understand that your SWR increases on a much more 'guaranteed' level, you can make a better choice. If your goal is to have more money when you die, by all means take the SS at age 62. It only pays to delay to age 70, if you are actually interested in spending it!

 

[Mysto]

My only problem taht I see with this discussion is that many of you are assuming the government will keep it's promises. I don't believe that SS benefits will stay as they are - heck, I don't even think that I will get all of my Roth money tax free.

I plan on taking my SS as soon as the tax considerations make it favorable for me. GTFM - Get the $%^*& money.

You can tell when a lawyer is lying because his lips are moving. So to get around that he joins congress. Now he can lie without moving his lips - he passes a bill.

 

[Cut-Throat]

My only problem taht I see with this discussion is that many of you are assuming the government will keep it's promises. I don't believe that SS benefits will stay as they are - heck, I don't even think that I will get all of my Roth money tax free.

Consider that U.S. Treasuries are the 'safest' investment in the World. All of your other investments are less safe.

There will be changes to entitlement programs no doubt. Not for those drawing S.S. however. The magnitude of calmity to drastically change S.S. benefits to those already drawing them, would wreak a greater havoc on your other investments.

Think cash is safe? - Who is standing behind your paper money?

But, as I said in a previous post, If you have a large unusual fear of uncle sam, by all means take your money early!

 

[MasterBlaster]

Just to be clear here, I played around with the SS calculator and got numbers for my age that show that a 70 year old starting SS gets around 82 percent more income than a 62 year old starting SS.

So if you are a high income individual and get maybe $2000 a month at full retirement age, that means that at 62 you could expect maybe $1444 at 62 or around $2632 at 70.

The difference in this example for someone retiring at 70 versus 62 is $1188 per month or $14256/year.

Now using the 4 percent safe withdrawal rate I need $25 of nest-egg for each dollar of yearly income. But if I start SS at 70 I need $14k/year less income than if I start at 62. Therefore I can spend out of my nest-egg 25 times that $14k/year increase in my SS payment. My calculations show that I could spend my nest-egg down by around $356k (total) and still be in the same retirement position. Or put another way I could spend my nest-egg down by around $44.5k/year over the period from when I am 62 to when I am 70 and still be in the same position.

Add in the value of not paying the double taxation on that $356k and that's worth maybe another $30-$70k or more.

These numbers are a bit optimistic (but not too far out of line) in that I haven't accounted for investment income in the nest egg as others have. Nonetheless the concept of maximizing spendable income by depleting the nest-egg which is replentished by SS is valid.

 

[Cut-Throat]

Now using the 4 percent safe withdrawal rate I need $25 of nest-egg for each dollar of yearly income. But if I retire at 70 I need $14k/year less income. Therefore I can spen out of my nest-egg 25 times that $14k/year increase in my SS payment. My calculations show that I could spend my nest-egg down by around $356k (total) and still be in the same retirement position. Or put another way I could spend my nest-egg down by around $44.5k/year over the period from when I am 62 to when I am 70 and still be in the same position.

Add in the value of not paying the double taxation on that $356k and that's worth maybe another $30-$70k or more.

You got it! MB - and well said! - This is the epihany that hit me when this thread started. - It simply lets you spend more. Not Pile up more!

 

[MasterBlaster]

Well thanks CT

That is the first kind thing that you have posted

 

[JohnEyles]

Now using the 4 percent safe withdrawal rate I need $25 of nest-egg for each dollar of yearly income. But if I start SS at 70 I need $14k/year less income than if I start at 62. Therefore I can spend out of my nest-egg 25 times that $14k/year increase in my SS payment. My calculations show that I could spend my nest-egg down by around $356k (total) and still be in the same retirement position. Or put another way I could spend my nest-egg down by around $44.5k/year over the period from when I am 62 to when I am 70 and still be in the same position.

I believe a flaw in your argument is that at 70yo the 4% SWR does not make sense -
a significantly hgher SWR is viable. Thus the amount of nest-egg represented by the
increased SS at 70yo is significantly smaller.

I have two solutions to this conundrum:

(1) Trust FIRECalc. I think it gets this right. Plug various scenarios in and
see what it says. In addition to all the theoretical issues raised here, it
models the effects of market return variability, which may affect the SS argument
in ways not obvious.

(2) Let's all just take SS at 66yo and love each other.



Nonetheless the concept of maximizing spendable income by depleting the nest-egg which is replentished by SS is valid.

[/quote]

 

[MasterBlaster]

JohnEyes:

A couple of points...

1) A higher withdrawal rate than 4% will indeed diminish my case that delaying SS is a good thing. At 6% SWR for example ( which is approximately the SWR for a 70y.o ~15 year lifespan), you could spend down only two thirds of the amount that I indicated. Nonetheless two thirds of my examples spending would still be ~$30k/year extra spending. That's much much better than SS at 62 could provide.

2) Firecalc ignores the effects of double taxation on SS income.

 

[donheff]

1) A higher withdrawal rate than 4% will indeed diminish my case that delaying SS is a good thing. At 6% SWR for example ( which is approximately the SWR for a 70y.o ~15 year lifespan)

The problem is you can't rely on the actuarial tables to cover your retirement. At 70 you need to figure on at least 25 years to be safe - maybe even 30. You get right back to the 4% rate. When you get to be 85 or 90 you can safely cut down the longevity, assuming no huge fountain of youth breakthroughs before we get there. But even at those advanced ages, the actuarial tables don't help much.

 

[RockMiner]

You guys are making my brain hurt...there are too many variables here: ROR, Longevity, Inflation, Taxes, SWR, personal goals, etc. I think this problem is way too complex to "talk out" a reliable solution.

Surely there is some powerful software available that can accurately model this problem?

 

[youbet]

Only if you know how long you're going to live!

 

[FIRE'd@51]

Couldn't get me to agree with this argument. Counters follow:

#1, We are not all males on this board, and a woman's expectancy is roughly 3 years longer. Thus in the frequent case where the husband has been the higher earner, his annuity will be picked up by his widow. In this and most other cases (unless the SS annuity of both partners is identical) the relevant life expectancy to consider is the joint and survivor of male and female partners. Price this at Vanguard and you will see that it is much more expensive, because the insurer doubles his chances of getting an outlier. I don’t remember the figure, but I think that a 70 y. o. man and a 65 year old woman have an excellent chance that one of them will live into his/her 90s

True, my calculations are for a male without regard for the spousal benefit. My intention was to start with the simplest case. If it can be shown that this case is sub-optimal with respect to taking benefits at 62, it will follow that all other cases will also be sub-optimal. For the case of a single woman, just add three years to break-even ages to see what real rate of return you need. At this time, I really don't feel up to doing a joint-life distribution calculation for all the possible age combinations.

#2 Life expectancy for a 70 y. o. male in 2004 was 14+ years, not 13 years. It has slowly risen every year, and well might continue this rise. (See table)

http://www.williamburrows.com/ann/lifeexpect.aspx

I used the actuarial table on the SS website which gives 12.8 years as the life-expectancy for a 70 year-old male and 15.4 for a female.

http://www.ssa.gov/OACT/STATS/table4c6.html

#3 Most of us will know at the time of the decision whether our parents have had unusually long lives or not. I don't know what weight that should be given, but surely more than 0.

# 4 We also will know whether we have been smokers or not, and how long we have been smoking. We may know also whether we have already picked up a mortal illness at decision age, and whether we are frequent drunk drivers. The set of all 70 year olds will include some people with non life extending answers to these questions Again, the weights would be problematical, but surely not 0!

If you think you have information with respect to estimating your own life expectancy, more power to you. Go ahead and game the actuarial tables. I was trying to make this as objective as possible, so I picked the average person without trying to forecast individual life-expectancies. By the way, I know non-smokers who have died from lung cancer. You or I may not be drunk drivers, but that still doesn't guarantee that we won't be hit by one.

#5 Your real return table above is a fantasy. If you invest the monthly SS payments as they come in, who knows what you will get? If you pre-fund it from savings, and buy TIPS on the day you decide to take early SS, you can know what you will get for the period that you choose. There are no maturities that would encompass a very long lifespan, so you will have re-investment risk. Today, your real return fo any period greater than 5 years will be 2.5 or under. So throw out all the "returns” from your table that require very lucky equity performance if you desire apples to apples comparisons.

The calculations I have done assume all SS payments are invested in the same way. Thus, from age 70 on, the returns to will be the same on both sets of investments (the early SS portfolio and the age 70 portfolio). The only thing that matters is that the person who takes SS at 62 earns the real rate in the table over the 8-years from age 62 to age 70. I don't agree that the returns in the table are a fantasy. As you know, the Ibbotson-Sinquefield data shows that the historical real rate of return on stocks, LT government bonds, and T-Bills has been 7%, 2.25%, and 0.61% respectively, over the past 80 years, and a 50/50 mix of stocks and bonds has returned about 5%. While it is not guaranteed, I don't think it is unreasonable to assume that over 8 years, one might expect to get numbers reasonably close to these averages If not, as Nords points out, taking SS early takes some pressure off the retirement portfolio in the event of a few bad initial years.

And most important, #6- SS or any annuity for that matter has an insurance premium embedded in it. You are going to get the payments for as long as you live, and as you realize I am sure, “life expectancy" is a median figure. Some people will live much longer, some much shorter lives. The purpose is insurance against living in much straightened circumstances in old age. I would give little consideration to plans that did not address this concern.

Ha

This is why I compare break-even ages to the median life-expectancy. You seem to think you can forecast which side of the median you will be. I choose not to do this. I feel more confident that I will earn a 3% or greater real return over the initial 8-year period, than I do about forecasting my life expectancy relative to the median. If I'm wrong I haven't really lost that much. If you die before 70, you have basically sold a fairly substantial insurance policy on your life to the government and not collected any premiums.

 

[Cut-Throat]

You guys are making my brain hurt...there are too many variables here: ROR, Longevity, Inflation, Taxes, SWR, personal goals, etc. I think this problem is way too complex to "talk out" a reliable solution.

Surely there is some powerful software available that can accurately model this problem?

I think if you look at MasterBlaster's great explanation you will understand it. Pretty simple: If you don't care how big your portfolio is when you die (you don't want to leave it to heirs)

The difference in this example for someone retiring at 70 versus 62 is $1188 per month or $14256/year.

Now using the 4 percent safe withdrawal rate I need $25 of nest-egg for each dollar of yearly income. But if I start SS at 70 I need $14k/year less income than if I start at 62. Therefore I can spend out of my nest-egg 25 times that $14k/year increase in my SS payment. My calculations show that I could spend my nest-egg down by around $356k (total) and still be in the same retirement position. Or put another way I could spend my nest-egg down by around $44.5k/year over the period from when I am 62 to when I am 70 and still be in the same position.

Add in the value of not paying the double taxation on that $356k and that's worth maybe another $30-$70k or more.

So, if you are sctually interested in spending your money, instead of just watching the pile get bigger (which seems to be great sport here) - delay SS to age 70.