Social Security Question

[carnivalday]

Thats 2 major mistakes i.orp has made. Would make me think it isnt their only tax errors. I cant believe anyone would use that web site.

 

[Rianne]

Thats 2 major mistakes i.orp has made. Would make me think it isnt their only tax errors. I cant believe anyone would use that web site.

I decided to check around, especially since firecalc recommended the site. I found this review on the "bogleheads.org" forum. Many of the posters here use firecalc. This link is a fair review of the strengths and weaknesses of i-orp.

Our taxes are prepared by a CPA. We've not started SS nor touched our portfolio and don't plan to for a few more years. I'm trying to get an idea of how to withdraw when the time comes to avoid paying taxes. SS is part of that.
I guess you'd call us semi-RE since DH consults from home and we use outside savings for spending. The very delicate puzzle withdrawing funds to last our RE is important to us. Those of us on the ACA subsidy plan understand this very well. How to curb income for the best advantage to stretch our dollars.
https://www.bogleheads.org/forum/viewtopic.php?t=218659

 

[gwraigty]

Thats 2 major mistakes i.orp has made. Would make me think it isnt their only tax errors. I cant believe anyone would use that web site.

I heartily agree, especially since it's pretty basic stuff they've got in error.

Our taxes are prepared by a CPA. We've not started SS nor touched our portfolio and don't plan to for a few more years. I'm trying to get an idea of how to withdraw when the time comes to avoid paying taxes. SS is part of that.
I guess you'd call us semi-RE since DH consults from home and we use outside savings for spending. The very delicate puzzle withdrawing funds to last our RE is important to us. Those of us on the ACA subsidy plan understand this very well. How to curb income for the best advantage to stretch our dollars.
https://www.bogleheads.org/forum/viewtopic.php?t=218659

Then your CPA should be able to help you. Or you can go the cheap route and create a spreadsheet (as I have) that mirrors your tax forms. It's a bit of work to create it, but it's easy to modify for changes in tax laws. Maybe there's something like it online? I update our spreadsheet regularly throughout the year. Every paycheck, every monthly statement. It's a great start.

I have an additional spreadsheet that tracks potential growth in investment income, aggregate account balances, future estimated RMDs, with appropriate links so that information is updated across multiple spreadsheets effortlessly. Year over year, it's been amazingly accurate.

I recently added a spreadsheet to project what our income taxes will look like in the future. Based on current tax laws, I can see what our tax situation might look like when we're 90, or at any age in-between now and then. I've added the Social Security Benefit Worksheet, accounted for RMD's, etc., though we still have quite a few years to go before any of that will apply to us. Again, it's easy to make any necessary modifications for tax law changes.

 

[sengsational]

Thats 2 major mistakes i.orp has made. Would make me think it isnt their only tax errors. I cant believe anyone would use that web site.

I must have missed those mistakes, or maybe just don't consider them "major mistakes". But help me understand what i-orp is doing wrong, because I use the tool and maybe I shouldn't be.

First, what I like: Unlike other calculators, i-orp will suggest which accounts to pull from first, and if you should do Roth conversions, rather than just use rules of thumb that "should work". I don't know of any other calculator that does as well to illustrate the RMD tax torpedo.

Beef 1: One thing i-orp does "wrong", in my opinion, is that the full calculator takes percent equities as inputs for each tax bucket, then uses that as part of the optimization. This is "wrong" for most people because they rebalance across all tax buckets. But there is a simple work-around and that is to duplicate your overall equities percentage in all tax buckets. This way, the optimization will be guided by taxes, not by the difference in expected returns of equities vs fixed income.

Beef 2: The other "beef" that some people have with i-orp is that it presumes a fixed rate of return for all years, whereas we know that we are exposed to "sequence of return" risk. That's the nature of an optimization engine and I accept firecalc should employed to check this risk.

So those two above are what I would call weaknesses in i-orp. I think you call the tool's modeling of SS taxation a "mistake". To be sure, the i-orp help text notes that it simplifies the SS tax calculations; it tells you that it's going to tax 85% of SS, even if your situation allows you to slip through somehow and not get that much taxed. I wouldn't call that a "mistake". I've recreated almost all of i-orp's calculations in a spreadsheet and everything seems to "add-up". It would be nice if the output included more columns that show how the tax calculation works, but the tax calculation seems at least roughly correct. For me, it's a bit on the high side, but that's being conservative.

So if the SS tax simplification is "major mistake 1", what's "major mistake 2"?


EDIT: I think "major mistake 2" is just the interpretation of the wording of the text on the page; the calculator doesn't tax you on money you have in after tax or Roth. It's trivial to prove this...set up a portfolio of all after tax, all bonds and see that you only pay tax on interest. But if you pull Roth early, it's subject to personal income tax and penalties, it's just not generally subject to income tax if you don't step out of line.


EDIT2: I just put in $1M, all bonds, 3% return (so $30K of personal income from after tax accounts). The tax calculation the first year for single taxpayer was no tax on the first $12K, 10% tax on $10K, 12% tax on the last $8K for a total of $2K in taxes on your 30K of income. I think if you start with simple scenarios and incrementally add to the model, you can get a feel for how the tax calculation works, and that it does indeed work logically.

 

[carnivalday]

Im not going to repeat what the major errors are, as they have already been discussed in this thread. It shows that Rianne thought she wasnt getting taxed on any SS, when she actually will be. I dont expect calculators that I use to have errors in calculation; if they do, then why use them? If 2 outright errors exist, then what else is in error? Two is too many for me.

 

[Rianne]

I must have missed those mistakes, or maybe just don't consider them "major mistakes". But help me understand what i-orp is doing wrong, because I use the tool and maybe I shouldn't be.

First, what I like: Unlike other calculators, i-orp will suggest which accounts to pull from first, and if you should do Roth conversions, rather than just use rules of thumb that "should work". I don't know of any other calculator that does as well to illustrate the RMD tax torpedo.

Beef 1: One thing i-orp does "wrong", in my opinion, is that the full calculator takes percent equities as inputs for each tax bucket, then uses that as part of the optimization. This is "wrong" for most people because they rebalance across all tax buckets. But there is a simple work-around and that is to duplicate your overall equities percentage in all tax buckets. This way, the optimization will be guided by taxes, not by the difference in expected returns of equities vs fixed income.

Beef 2: The other "beef" that some people have with i-orp is that it presumes a fixed rate of return for all years, whereas we know that we are exposed to "sequence of return" risk. That's the nature of an optimization engine and I accept firecalc should employed to check this risk.

So those two above are what I would call weaknesses in i-orp. I think you call the tool's modeling of SS taxation a "mistake". To be sure, the i-orp help text notes that it simplifies the SS tax calculations; it tells you that it's going to tax 85% of SS, even if your situation allows you to slip through somehow and not get that much taxed. I wouldn't call that a "mistake". I've recreated almost all of i-orp's calculations in a spreadsheet and everything seems to "add-up". It would be nice if the output included more columns that show how the tax calculation works, but the tax calculation seems at least roughly correct. For me, it's a bit on the high side, but that's being conservative.

So if the SS tax simplification is "major mistake 1", what's "major mistake 2"?


EDIT: I think "major mistake 2" is just the interpretation of the wording of the text on the page; the calculator doesn't tax you on money you have in after tax or Roth. It's trivial to prove this...set up a portfolio of all after tax, all bonds and see that you only pay tax on interest. But if you pull Roth early, it's subject to personal income tax and penalties, it's just not generally subject to income tax if you don't step out of line.


EDIT2: I just put in $1M, all bonds, 3% return (so $30K of personal income from after tax accounts). The tax calculation the first year for single taxpayer was no tax on the first $12K, 10% tax on $10K, 12% tax on the last $8K for a total of $2K in taxes on your 30K of income. I think if you start with simple scenarios and incrementally add to the model, you can get a feel for how the tax calculation works, and that it does indeed work logically.

Excellent help.

 

[sengsational]

Im not going to repeat what the major errors are, as they have already been discussed in this thread.

I don't see "two major errors", which is why I asked for clarification. I see that there are things to be better understood. I even guessed at and listed what I thought might have been interpreted as "major errors" in this post.



But not a problem; no one would suggest that you should use a calculator that you're not comfortable with. This one certainly requires a lot of time and brainpower to get comfortable with. That, I fully acknowledge. When I recommend this tool, I always (or always try to remember to) say that to use it right requires one set aside a few hours. And, it should go without saying, the results be interpreted in light of the results from other calculators.

 

[gwraigty]

Im not going to repeat what the major errors are, as they have already been discussed in this thread. It shows that Rianne thought she wasnt getting taxed on any SS, when she actually will be. I dont expect calculators that I use to have errors in calculation; if they do, then why use them? If 2 outright errors exist, then what else is in error? Two is too many for me.

+1

 

[Rianne]

Im not going to repeat what the major errors are, as they have already been discussed in this thread. It shows that Rianne thought she wasnt getting taxed on any SS, when she actually will be. I dont expect calculators that I use to have errors in calculation; if they do, then why use them? If 2 outright errors exist, then what else is in error? Two is too many for me.

I-Orp has helped me understand how complex RE w/d strategies can be to avoid paying high taxes and making the most of your investments. Two errors? IMHO, you're throwing the baby out with the bathwater. I have a frick'in MBA and this stuff is complicated. And my GPA was 3.7/4.0. D/H and me will ultimately get professional help regarding w/d when we get there. I dam well will do my research before I walk into any financial office for advice. The I-Orp program offers good insight for this research along with articles, spreadsheets for the best tax advantaged way forward.
It shows that Rianne thought she wasnt getting taxed on any SS, when she actually will be.
Besides, you have no idea how much cash, after tax investments we have. How do you know if we'll be taxed on SS?

 

[carnivalday]

All we know is what you posted in post #13, no more, no less.

 

[LakeRat1]

DW started SS at 62, turns 65 in May 2019, I am 57..... I am not able to draw 1/2 of her SS correct? or could I draw from 57 to 62, when I plan to begin drawing my own ..... Looking for all funds as soon as possible ..... Life is not promised, it could end at any time

 

[wmc1000]

We use 4 methods to work out a comfortable balance of our financial plans. Fidelity RIP, Firecalc. I-orp, and my own excel spreadsheet analysis. With careful input based on each methods various "shortcomings" they each yield a level of comfort to us and none are wildly disparate in their "answers" once you take into account how they work.

Now, our situation may be simpler than most so they all work out similarly so YMMV!

 

[wmc1000]

DW started SS at 62, turns 65 in May 2019, I am 57..... I am not able to draw 1/2 of her SS correct? or could I draw from 57 to 62, when I plan to begin drawing my own ..... Looking for all funds as soon as possible ..... Life is not promised, it could end at any time

LakeRat1, in any case you cannot draw on hers or yours until YOU reach a minimum of 62.

 

[Spock]

DW started SS at 62, turns 65 in May 2019, I am 57..... I am not able to draw 1/2 of her SS correct? or could I draw from 57 to 62, when I plan to begin drawing my own ..... Looking for all funds as soon as possible ..... Life is not promised, it could end at any time

You can't draw anything (your own or spousal benefit) until you hit 62 (ignoring death benefits)
You can't get a spousal benefit of 50% of spouses PIA until you reach your own full retirement age. From 62 to FRA there is a reduction in spousal benefits starting at 31% of spouses PIA.

https://www.ssa.gov/OACT/quickcalc/spouse.html

 

[karen1972]

My one question is does the FRA get adjusted for inflation after it is taken. Ie if the older spouse takes their SS at FRA and its $2000, but they are 5 years older than their spouse and spouse takes SS at their FRA, do they get $1000 or do they get $1000+COLA for the last 5 years? My understanding is they will just get $1000.

 

[Taxman59]

DW turns 62 in 2024. She will draw on her account $500 per month. I will reach FRA in 2026. At that time, I will draw $2800 per month. She will increase to the adjusted 50% of my benefit.

Seems too simple. What am I missing?

 

[Spock]

DW turns 62 in 2024. She will draw on her account $500 per month. I will reach FRA in 2026. At that time, I will draw $2800 per month. She will increase to the adjusted 50% of my benefit.

Seems too simple. What am I missing?

her % of your benefit is locked in based on her age when she starts drawing her own benefit. If she starts at 62, she'll get 32.71% of your benefit, not 50%.
https://www.ssa.gov/OACT/quickcalc/spouse.html

 

[joeea]

DW started SS at 62, turns 65 in May 2019, I am 57..... I am not able to draw 1/2 of her SS correct?

Correct. You are not able to draw any SS benefits at age 57.

or could I draw from 57 to 62

No.

Looking for all funds as soon as possible ..... Life is not promised, it could end at any time

Or it could go on for quite a long time.

 

[joeea]

My one question is does the FRA get adjusted for inflation after it is taken. Ie if the older spouse takes their SS at FRA and its $2000, but they are 5 years older than their spouse and spouse takes SS at their FRA, do they get $1000 or do they get $1000+COLA for the last 5 years? My understanding is they will just get $1000.

COLA is always applied. Both the $2000 and the $1000 will be COLA-adjusted.

 

[sengsational]

I haven't used firecalc or any other calculator. Yet. I'd be hesitant to use i-orp based on what I think is incorrect info from their website. Incorrect Social Security taxation info and now the above bold part. (Bolding is mine.) Withdrawals from Roth IRAs are not normally subject to personal income tax. That is a major appeal of them.

The author is very responsive to feedback. I'm sure if you wanted to improve the clarity of anything in the descriptive contents of the web site or in the help text, he'd be open to those improvements.

I happened to have contacted the author on a separate issue to discuss what I thought was an incorrect computation. It turned out that I was simply incorrect, but he asked if anything was going on in ER forum. I told him of your concern about the wording on the home page, so he has updated it:

Withdrawals from your Tax-deferred retirement savings account (401K, IRA, SEP, etc.), taxable savings accounts, and other sources of income (Social Security income, pensions, annuities, etc.) are subject to personal income taxes. Because of income taxes the order and amounts you withdraw from your tax-deferred, Roth IRA, and taxable accounts affects your total retirement disposable income.

If you still don't like that, or think it could be made more clear, I urge you to write-up a suggestion and send it to him.

He has also added to the help documentation associated with taxation of SS (the following is not the entire section, just some bits that I thought were germane to the discussion):

The number of users to which this assumption (taxing 85% of SS income) does not apply is so small as not warrant the considerable increase in model complexity required to implement a more detailed treatment of Social Security benefit taxation. Simplifying assumptions are a common feature of the mathematical modeling world. ... Every effort has been made to make ORP's assumptions clear through its Help Documents.

I know one man's simplifying assumption is another man's "major error", and again, I wouldn't suggest anyone use a calculator they didn't trust. Personally, the calculators I trust less are those that are more of a "black box". With i-orp, you can download a spreadsheet and see the calculations. I've gone through and replicated the model in a spreadsheet using only the model inputs and the even-spend result. The results matched pretty closely (except I've never replicated the taxes exactly). You can also replicate FireCalc in a spreadsheet. But many of the other calculators, they take inputs and give you an output without showing you how they got there. To me, those are ones to wonder more about. But to each their own.

 

[Yarnstormer]

(Why is he fuming ? He raised the kids, she never worked or helped, etc)

In the end, he supplied birth cert.

If she never worked - your husband can take comfort knowing that his work made it less likely that his ex will need to be supported by the kids.

 

[copyright1997reloaded]

Correct. You are not able to draw any SS benefits at age 57.


No.

Note that there is an exception to the minimum of 62 rule, namely if the spouse is caring for dependent children under 16 years of age, and even later if the child is disabled. I am not saying this is the questioners case, just posting this for completeness. Here's a link for more detail: https://www.ssa.gov/pubs/EN-05-10085.pdf

 

[dixter]

and just to make sure all of the eggs are in the basket all lined up...

When you turn 65 SS will garnish your SS check for the amount you will owe for medicare monthly payments.... and its no more Family health care... its individual healthcare..
so the younger spouse will be on a separate health care plan than the spouse that is 65 or older... so if your like us, your health care monthly payments will go up when one of you turns 65...

 

[WPauley]

"You can't get a spousal benefit of 50% of spouses PIA until you reach your own full retirement age. From 62 to FRA there is a reduction in spousal benefits starting at 31% of spouses PIA." FRA? PIA? It would help if for some of us for you to spell out what you are talking about, I have no idea what these mean. Final Retirement age? Sorry but this is like when my kids text us. Bill 12-3-18 RET.

 

[ivinsfan]

"You can't get a spousal benefit of 50% of spouses PIA until you reach your own full retirement age. From 62 to FRA there is a reduction in spousal benefits starting at 31% of spouses PIA." FRA? PIA? It would help if for some of us for you to spell out what you are talking about, I have no idea what these mean. Final Retirement age? Sorry but this is like when my kids text us. Bill 12-3-18 RET.

It's full retirement age and as a newbie you'll find many threads that talk about this and what it means. If SS and when to take it is important to you go to some of those threads and try to get a basic grasp of the major terms. Or go the actual SS site where they have these things spelled out in black and white.

These are well known abbreviations and here to stay.