Can you expound on this for me? I’m a younger guy and newer to this stuff? Could you break it down with fake numbers?
I’m interested cause it sounds like it could allow you to withdraw more in an early retirement scenario cause the portfolio would be supplemented later with SS.
If I understand correctly, that's what he's doing. He's discounted it by 25% to be conservative. Another method is to take the expected SS income stream (discounted if you wish to be conservative) and do an NPV calculation on the future SS Stream with a life expectancy assumption. Add this amount to your current portfolio value and calculate the withdraw% on this sum. Recalculate the NPV each year with 1 less year of life expectancy and do the sum again. Once SS starts, only the portfolio value is used for the withdrawal % calculation. This was also discussed on a recent bogleheads thread.
Yes, that's basically it, though what I actually do is go to
https://www.immediateannuities.com/annuity-calculators/ to see what $100,000 in that calculator would give me in income, and take my monthly benefit/that calculated number * 100,000 to give the number it would cost to buy that annuity to replace SS. I multiply that by 0.75 in case of a 25% cutback in benefits.
You could also plug in your expected SS benefit and get the number directly rather than doing the math with $100,000 but I wasn't sure how it handled inflation.
So if I plug in age 57, not taking benefits until 70, and $100,000 investment, I get about $1100 monthly payment. If my expected SS benefit is $2500, 2500/1100*100,000 = $227,272. *0.75 = 170,454. That's the number I add to my investments. If I use a 3.5 WR, that gives me an extra ~$6000 to spend now. I can safely take that out of taxable now, because I know at age 70 I'm getting that $2500/month.
So if I have $1M in other assets and a 3.5% WR would give me $35K/yr to spend, I add that $227K on to give me $41K/yr.
Actually I further reduce it by another 15% for taxes, because I use expected post tax numbers rather than treat taxes on CGs and IRA distributions as expenses, but that's another discussion.
Some people may fear SS will go away and not want to include it at all, and some would rather just keep it as a buffer, and that's fine. It's just not what I do. I hear people talk about not doing OMY and freeing themselves from work as soon as possible, so why not take into account this very likely income.
I feel like it also helps with the SS at 62 or 70 or when decision. I can plug in age 62 and the smaller benefit into that tool and get about the same number, so this negates the argument that some give that they want to take SS early when they are healthy enough to enjoy spending the money travel, etc. Since I factor in SS now and am not viewing SS as a bonus increase to my spending ability when I take it, I can take SS anytime with no change to my spending. What I've actual done is treat it like I'm taking SS now, with an even further reduced benefit for taking at 57. Does that make sense?