NPV differences in when SS is taken

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DogDad

Recycles dryer sheets
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I took my SS several years ago, so this does not affect me, however seeing this table on the internet this morning surprised me; thought the differentials would be greater. I have not verified the calculations.
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Flyfish1 said:
All you need to know is how long you are going to live and the choice is easy....lol
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There are various online longevity calculators that can give you a sense. I like the Society of Actuaries Longevity calculator but there are others. They generally suggest that one or the other of us will live to our early 90s.

Also, opensocialsecurity.com uses a mortality table that you can select in its expected present value calculations or you can select an age at death.

I prefer looking at the IRR at various dates of death of the differential cash flows. See table below. Go to the row that you think you will live to and then look at the IRR columns. Is the total return on the money that you would use if you delay SS higher or lower. If you IRR is higher then you should delay SS to 70, if it is lower then you should take at 62. Conversely, follow the IRR column down to your total return on the money that you would use if you delay SS and go over to the age. If you expect to live longer then delay to 70, if you don't expec to live that long then take at 62. While the analysis is built for the extremes it can be easily adjusted to any two ages.

We waited as long as possible, FRA for DW and 70 for me (the higher earner) to maximize the benefits if we do live to our early 90s as expected since we didn't need the cash flow and delaying gave us more headroom for low tax cost Roth conversions.

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^^^ I think that you can do that by selecting the row of the second to die since the survivor will assume the principal's benefit; but it wouldn't reflect the loss of the survivor's benefit based on their own work record. But OSS would factor in survivor benefits more accurately.
 
As someone already said, headroom for more roth conversion is a significant factor IMO if you don't need the money earlier.

On the flip side, delaying until 70 runs the risk that the government will change the rules (not in your favor).
I have a friend who didn't really need the money yet but started taking SS as soon as he could out of concern for this. I'm the opposite, better to wait and end up with, in effect, a better 'annuity' to protect "against" have a very long life, with --- again --- the ability to more efficiently do more Roth conversion before SS and then later RMDs kick in.

We also can't predict inflation or market returns, so ... the table is helpful but the reality of what's 'best' for a given person is going to vary.
 
We took it at 62.
- We didn'tneed the money. (Maximizing outcome wasn't a consideration)
- Extra cash for our fun during our healthy years (SHTF health-wise at age 70, so.....)
- Saved portfolio withdrawals and made lots of extra money (expanded the breakeven to about 87)
- Concern of the rules changing.
 
Probably going to take it at 62. I'd rather get something out of it before the rules change too much.

Of course that is 6 years away...uhm...2032ish...might be too late.
 
Sunset said:
I'm not sure the 4% real is actually a good number to use. But maybe someone else will know.
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It depends on what you're going to use to generate the same income before SS actually starts, so there's no one, single answer.
- If the income is going to be provided from risky assets, then it needs to be the expected real returns of the portfolio consisting of those risky assets. For example, for withdrawals, VPW uses around 5% for stocks and 2% for bonds (both real). Other tools, like TPAW, use CAPE to derive an expected return for stocks and current bond yields (adjusted for expected inflation if nominal bonds) for bonds.
- If the income is going to be provided from a TIPS ladder bridge, then the yield of that bridge is going to depend on the length of that bridge, since shorter bridges use the short end of the yield curve which typically has lower yields. tipsladder.com can help you generate different length ladders to act as an SS Bridge and will also give you the yield for each of those.
- Others, like opensocialsecurity.com simply use whatever the 20 year TIPS yield is by default, not directly considering what will provide the income before SS begins. But you can always override it with anything you wish. The other thing that it does, however, is take into account life expectancy. It gives alternative life expectancy tables to choose as well - when we ran it, we used the table for healthier individuals. Net result is my wife's SS starts next month at age 66 and mine will start several years from now at age 70. It also allows you to give a fixed age as well.

Cheers.
 
We are currently planning to delay to age 70 because:
A. We would have lost all PTC on ACA premiums if SS income was added, even just for the lower earner.
B. Between 65 and 70 we will be able to do more Roth conversions in the 12% tax bracket to reduce future RMDs if we don't have SS income.
C. DH is required to deplete an inherited IRA within 10 years plus taxable dividends provides 100%+ of spending.
D. We spend what we want already, so extra income is not needed.
E. Life expectancy for both of us looks pretty good.
All of the above can change (except A. since we are both over age 65 now) and our decision to delay can change also.
 
big-papa said:
- Others, like opensocialsecurity.com simply use whatever the 20 year TIPS yield is by default, not directly considering what will provide the income before SS begins.
Click to expand...

If one uses something to provide that income before SS begins which has a different (usually higher) risk profile, then that additional risk is something that needs to be accounted for in the decision. If one takes on more risk and seeing more return, then that is a decision distinct from and AFAICT independent from when to take SS.

I'm taking at 70 for the standard reasons, but mainly because I think the tax benefit to me of Roth conversions during the delay is pretty valuable.
 
I know everyone's worried about rules changing. But in the next breath everyone's like "they wouldn't dare because they'll get voted out!".

But yes, rules can change - historically they've grandfathered most of the changes to be started 10, 20, 30 years in the future (e.g., increasing the FRA passed in 1983 but didn't begin until 2000 and took 33 years for the full effect).

I'm planning to wait until 70 unless something in my own finances changes drastically.
 
SecondCor521 said:
If one uses something to provide that income before SS begins which has a different (usually higher) risk profile, then that additional risk is something that needs to be accounted for in the decision. If one takes on more risk and seeing more return, then that is a decision distinct from and AFAICT independent from when to take SS.

I'm taking at 70 for the standard reasons, but mainly because I think the tax benefit to me of Roth conversions during the delay is pretty valuable.
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When withdrawing from risky assets that aren't TIPS, there are risk concerns to consider. How they manifest themselves depends on how you withdraw from the risky assets.

When you make the decision to purchase a TIPS ladder to form the bridge, you have made the decision to take a chunk of money out of your risk portfolio to make that purchase. Whether you keep the risk portfolio with the same AA or not is up to you.

I personally would not set aside a separate chunk of risk assets solely as bridge to SS. If you decide to withdraw the amount that is projected to be your future SS benefits each year and adjust for inflation the same way, you're basically using an SWR approach with the usual risks of pre-depleting this chunk of investment or not depleting it and ending up with a large chunk remaining.

If using risk assets, I usually suggest people use TVM (time value of money) concepts from their entire risk portfolio, along with amortization to calculate the withdrawals. This involves:
1. Each year, calculate the NPV of future SS streams. The discount rate used should be the estimated expected real return of the entire risk portfolio. This will result in some dollar amount.
2. Along with your planned withdrawals from your risk portfolio, withdraw an "extra" amount that is the amount that comes from step #1
3. The total withdrawal from your portfolio is then the "planned withdrawal" + the "extra" amount.

I generally recommend using amortization to calculate the "planned withdrawal" from the risky portfolio. But even if you don't and use SWR instead, using the risk portfolio for the "extra" is going to have some risk where the risk manifests itself as extra "noise" in your year to year withdrawals before SS begins - The average magnitude of the total withdrawal, however, should be pretty close both before and after SS begins. So you shouldn't get a big step up or step down in total income, before taxes as you go through the before SS to after SS transition.

Bogleheads member siamond has an excellent 2 part series on time value of money, which also includes a sample spreadsheet to illustrate how it works. I know of at least a couple of people who have adapted the spreadsheet for their situation to calculate all of their withdrawals, both before and after SS begins.


TPAW Planner (tpawplanner.com) also uses TVM concepts as well as part of how it calculates withdrawals.

I have a bridge to SS with a TIPS ladder and I am doing Roth conversions - but only on the stock in my TIRA, leaving all of my TIPS ladders alone. I'm projecting to complete that just before RMD age of 75.

Cheers.
 
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^^^^^

To my limited thinking, the concept of time value of money ... depends. If I have a choice of paying 22% of taxes now versus paying 22% later (everything else being equal), I'll pay taxes later when the dollar is worth less.

Some things need evaluation. Just for example's sake, let's take it as a given that travel expenses (overall) will not just exceed U.S. inflation but then some. In that case, if travel was the most important category in your life, wouldn't you prefer to travel now versus later? The problem, however, is whether that 'average' applies to you. If you can wait to see what last-minute travel deals come up (and that deal was better than it was in the past), is that average still applicable? If you avoid the so-called hot destinations for those that used to be hot five years ago, does that average matter? If you have many, many countries to visit on your bucket list, does that average matter when the conversion rate on the dollar *somewhere* makes that visit a no-brainer? Conversely, perhaps the Euro is strong, couldn't you defer that region for a different year?

Fortunately, I think that most SS decisions don't get down to the cost of money as many, many people simply just need the money. Period. So, for them, the decision becomes an unfortunate no-brainer. For myself, the decision falls into the category of a fortunate no-brainer. I waited to 70 because my SS was much higher than my spouse who is much younger and has positive longevity in her family (along with greater ability to do Roth conversions). Additionally, other factors that separate her from the 'average.' Because, living in New England, grad-school educated, never-smoker, light drinker separates her from others not in the same demographic (who weigh down those reported averages that SS actuarially are based on). So, while tomorrow is not promised to anyone, we'll take our chances.
 
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^^^^^
Just remember that the dollar might be worth less, but that tax brackets themselves are adjusted with inflation. But as you note, there is an "it depends" factor in that nobody is average living in an average city consuming an average basket of goods at an average rate.

Our SS decision came down to the same one you had. I'm waiting to 70 but my DW gets her first payment next month at age 66. NPV calculations were definitely part of this decision, as were are expected lifespans, for which we used tables that reflected what we think our health status and history are and of course our PIAs. Me being the higher lifetime earner ended up pushing me to 70 and she being a year older, female, and having lower lifetime earnings had her going earlier, net of nets. We used the lifespan tables we used as opposed to the lifespan tables that SS uses that includes everybody, including the chronically unhealthy or at high risk to become so.

Back to TVM concepts. The example I gave was purely for those who want any fixed income streams to be constant, in real terms, before and after SS starts. It can be done with TVM from risky assets resulting in more noisy income streams that get replaced with SS or it can be done with, essentially, no-noise streams with a TIPS ladder. If relatively flat income before SS and after SS starts isn't important to somebody, there is no reason to bother. And if somebody plain old needs the money sooner than later for whatever reason, then the decision is easier.

There isn't a universal answer to the "when to take SS" question that applies to everybody, but there are tools there for people who believe they have some flexibility and want to attempt to maximize lifetime income.

Cheers
 
marko said:
We took it at 62.
- We didn'tneed the money. (Maximizing outcome wasn't a consideration)
- Extra cash for our fun during our healthy years (SHTF health-wise at age 70, so.....)
- Saved portfolio withdrawals and made lots of extra money (expanded the breakeven to about 87)
- Concern of the rules changing.
Click to expand...
Agree 100% with all the bullet points.
 
marko said:
We took it at 62.
- We didn't need the money. (Maximizing outcome wasn't a consideration)
- Extra cash for our fun during our healthy years (SHTF health-wise at age 70, so.....)
- Saved portfolio withdrawals and made lots of extra money (expanded the breakeven to about 87)
- Concern of the rules changing.
Click to expand...
First and foremost, sorry about your health issues.

- We didn't need the money. (Maximizing outcome wasn't a consideration)

Let's not get hung up on semantics. Needing the money was not the outcome. Using the money (as you did) (both for "fun" and not to diminish your portfolio balance) was the outcome.

- Extra cash for our fun during our healthy years (SHTF health-wise at age 70, so.....)

"Extra cash" and cash is the same difference as the words, proactive and active ... there is none. That said, if you used that SS payout for your enjoyment, completely valid in my view ... who is to say otherwise?

- Saved portfolio withdrawals and made lots of extra money (expanded the breakeven to about 87)

The breakeven between 62, FRA and 70 that this study puts at 85 (largely due to its high inflation rate calculation) is an actuarial calculation that has nothing to do with your portfolio returns.

- Concern of the rules changing.

Completely fair.
 
^^^^^^
Thanks for the analysis
 
big-papa said:
^^^^^
Just remember that the dollar might be worth less, but that tax brackets themselves are adjusted with inflation. But as you note, there is an "it depends" factor in that nobody is average living in an average city consuming an average basket of goods at an average rate.
Click to expand...
Indeed. Which is why someone that maxes at the 22% bracket will continue to max at the 22% bracket (all else staying the same).

For those on the fence about SS, another factor is the Rachet Effect. In short, the way SS increases are calculated is based on things like petroleum prices. So, if one year gas prices are significantly up and then reverse the following year, SS payouts (or the future payout calculation) are increased, yet don't go negative the following year for the reversal. Thus, there is no true give-back in that scenario.

So, while all SS-eligible get that increase, it's obviously better to get it on a larger payout versus a smaller one.
Naturally, it would be better if SS increases were based strictly on what's important to Seniors (such as health care increases), reality is that we need to first and foremost understand the system that we have and leverage it accordingly.
 
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