Wade Pfau: The new math of social security

[growing_older]

I saved to be independent of what others think/want & thus to do as I please. If I'd spend to be near penniless when I die, I would risk becoming dependent because I couldn't perfectly judge the future. I fear that more than having funds leftover.

Likewise, I don't really care about having funds leftover. I want to be prepared for an unknown future and having some extra resources available, not committed to maintaining whatever lifestyle I craft for myself, seems like a good part of that. Maybe I'll find a way to use them, maybe I won't. We may or may not see radical expensive medical advances, life extension, space vacations, labor market upheaval, robot butlers, rejuvenation therapies, personal self-flying cars or other attractive toys in our lifetimes, but if we do, I'd like to be able to at least contemplate if I'm interested rather than be locked in to a minimal acceptable income stream I set up years ago. I guess that's what makes me a sucker for OMY.

 

[pb4uski]

I have read Pfau's article, but I don't get his example concerning waiting until 70 to claim SS.

The individual involved needs $60,000 a year to live on. Pfau'scalculation for the bridge money needed while waiting to collect SS at 70 is based upon the $39,600 that a person gets when collecting SS at age 70 - $39600x 8 = $316,800 in bridge money needed.

But, if the person retires at 62 and does not claim SS immediately, would not they need the entire - $60,000 a year x 8 = $480,000 - for their bridge money? This would leave them with only $320,000 to fund their life style after 70. And that would mean a significantly higher withdrawal rate. Or am I missing something?

He is just saying that the WR of deferring after considering that you have to withdraw more in those first 8 years is less than the WR of taking at 62 and the lower WR is less risky. IOW, rather than carving out of the portfolio the entire $60k as you would do , he is only carving out the SS support from 62-70 and recomputing the WR at age 62.


Another way to think of it is that the portfolio needs to provide in inflation adjusted $20,400 for life under both alternatives. So the real comparison is an inflation adjusted $17,100 for life under the take at 62 alternative compared to a $39,600 for 8 years under the take at 70 alternative.

At a 4% WR you would need $510k to fund the $20,400 for life common to both alternatives.

You would also need $428k to fund the remaining $17,200 gap if you take SS at 62... so if you take at 62 you need a total of $938k.

You would need $317k ($39,600 * 8) on top of the $510k if you take at 70, but the $317 isn't inflation adjusted.. to adjust for inflation it is probably more like $350k, so if you defer until 70 you need $860k in total.

Needing $860k is better than needing $938k so it is better to defer.

I think you can use just about any WR below 4.9% and the conclusion will be the same.

 

[ejman]

It never ceases to amaze me that all of the learned ones calculations assume the present laws and benefits will continue as they are into the far future. So trading one's liquid NW for a future promise to pay by SS is perfectly all right because well, because there never has been a change to promised benefits and anyway the beneficiaries would all rise with their pitch forks once they found out about it. Besides any change would be presented and discussed for a very long time before being implemented.

Yup, just as we saw re this week's SS changes. First heard about proposed changes on Tuesday, signed sealed and delivered by Friday. There was a preview when the do over provision was removed overnight a few years ago.

 

[Ian S]

It never ceases to amaze me that all of the learned ones calculations assume the present laws and benefits will continue as they are into the far future. So trading one's liquid NW for a future promise to pay by SS is perfectly all right because well, because there never has been a change to promised benefits and anyway the beneficiaries would all rise with their pitch forks once they found out about it. Besides any change would be presented and discussed for a very long time before being implemented.

Yup, just as we saw re this week's SS changes. First heard about proposed changes on Tuesday, signed sealed and delivered by Friday. There was a preview when the do over provision was removed overnight a few years ago.

I'm beginning to think you're right: these changes affecting relatively small numbers of folks are really trial balloons to establish what can be gotten away with with little public discussion and "crisis" votes to deal with the foolishness of the "debt ceiling" among other things.

 

[jebmke]

These changes have been kicked around for longer than a week. I don't have any citations but I have been reading about them for quite a while. They just haven't gotten traction before and therefore didn't make the major media.

Anyone who thinks SS is a vested right should read Flemming v. Nestor.

That said, one has to assume something when planning the future. Up until now, assuming the law wouldn't change substantially was a fairly good assumption.

 

[daylatedollarshort]

I guess the new math of SS means ignoring highly relevant data like the funding projections for SS in that are in the SS Trustee's Report, free and available online.

 

[Chuckanut]

I have wondered about the future of SS for a while. I may chose to compromise and just take SS at my full retirement age rather than wait until 70. However, taking it earlier seems like to large of a cut in the benefits, assuming I live as long as my parents.

 

[Ian S]

These changes have been kicked around for longer than a week. I don't have any citations but I have been reading about them for quite a while. They just haven't gotten traction before and therefore didn't make the major media.

They've certainly been hinted at and as far as the file and suspend schemes probably expected by experts and those who've studied the intricacies of SS rules. IMHO, file and suspend was a form of double-dipping; my only issue with eliminating it is how short a timeframe is being used to fully implement the change.

 

[Running_Man]

These changes have been kicked around for longer than a week. I don't have any citations but I have been reading about them for quite a while. They just haven't gotten traction before and therefore didn't make the major media.

Anyone who thinks SS is a vested right should read Flemming v. Nestor.

That said, one has to assume something when planning the future. Up until now, assuming the law wouldn't change substantially was a fairly good assumption.

There were lots of idea floated around and most were said to be roundly rejected. What is undeniable is that no bill was presented for discussion prior to Tuesday and there was no discussion of details, only passed as part of raising debt ceiling.

There is no doubt in my mind that what occurred last week makes the case for spending 316K in exchange for a higher SS at age 70 may be far more risky than Pfau or any "expert" is willing to admit.

 

[Ian S]

There is no doubt in my mind that what occurred last week makes the case for spending 316K in exchange for a higher SS at age 70 may be far more risky than Pfau or any "expert" is willing to admit.

That old adage "a bird in the hand is worth two in the bush" may be as useful a guide as any of the experts.

 

[Youngster]

Please forgive my ignorance; but, what changes are being made to ss as referenced in the last few posts?

 

[REWahoo]

See this thread: http://www.early-retirement.org/forums/f28/ss-file-and-suspend-to-end-79224.html

 

[Youngster]

Thanks, REWahoo.