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A personal story – I’m not advocating anything.. Well, I take that back, I think Dr. Quinn is spot-on when he says you should begin benefits when you need them and the heck with the fancy math.
I’m 66, wifey is 65. She’s never worked since our marriage 42 years ago.. Well, I take that back, that woman has out worked me beyond measure. 5 Children. Homeschooling. The youngest is now 30. 9 Grandchildren. Threats of more. Yikes.
Just out of school I was pessimistic enough to believe SS/Medicare was a pure tax that I’d never see a revenue stream from. I love it when I’m wrong, which makes me a consistently happy person. I built retirement around that thought, so reasonably maximizing SS benefits at this point is my goal. FRA yields a tad less than waiting to 70 for me. So what. It’ll be fun starting benefits next year. (Fun is an emotion. It’s still legal.)
My background is all about the time value of money, but applying it to SS benefits is tough. You just don’t know when you’re gonna go see Elizabeth. I’m guessing 83 since that’s when my Dad died and 95 for wifey. Her family is unreasonable.
The Fancy Graph (you can enlarge it and download it).
Of course I calculated Present Value anyway. 4% Discount rate. COLA average for SS benefits over the last 10 years is about 3%, so is my estimate of inflation. A wash. 4% it is.
I also show monthly payment traces as well as cumulative traces for those payments.
I compared filing at age 62 (green), 67 (blue) and 70 (red). The vertical axis on the right with the smaller dollar amounts is for the payment traces. The vertical axis on the left with the larger dollar amounts are for the other traces (cumulative payments and present value).
Present Values were calculated by discounting all cash flows at 4% from the combined payments to myself and my wife. Then I took those PV’s at the dates corresponding to the beginning of the cash flows and let them grow at 4% to my wife’s age 95 to generate a trace. If I live to a different age than 83 or my wife at 95, these plots fall apart. Old school CIF (cash-in-fist) makes the most sense here (the cumulative traces).
My take is, make some reasonable calculations, and run with what you think is best. I chose for my wife to take SS at 65, and I waited to 70. No one can predict the future, but you still have to plan. My calculation from 1991 at age 45 was 4 times too low, compared to age 80! My final age on that chart was 88, now I use 100 and with good blessings, I just might make it. The good news is, I did better than my calculation, which was with a Vanguard tool. Of course I did a lot of calculations at age 70, and thankfully way ahead of those too. I use a 10% and 12% yearly return. Best of luck to all.
I’ve been in finance my entire career – until I retired at 67 in March. I plan to wait until 70 to take SS: 1) I already have have a pension/annuity; 2) I will “take” the guaranteed 8%/yr growth in SS and use it for worse case planning – if the market goes down “significantly”, I may then draw SS so as to remain invested and benefit from a then-higher market upside potential; 3) I don’t think politicians can politically afford to cut SS by 20%, but if they do, my check will be approx 20% higher by 70, offsetting the cut. Finally, I agree with others that this is not a (not so?) simple PV exercise. If you don’t have or haven’t bought an annuity/pension, then by all means pull the trigger and build a conservative cornerstone to your retirement income and add portfolio risk around it.
Every individual is unique. The challenge here is multi-faceted. For some, it is about maximizing present value. For others, CIF may be more about avoiding leaving money on the table. (Never heard of “Cash in Fist” before).
Myself, we had unique issues (GPO, significant differences in worker and spouse life expectancy, working past SSFRA, etc.),
To me, the two most important considerations about Social Security claiming (among many other concerns and considerations):
First, in the past, few people did exactly what you did, seriously consider the different options, including not only “present value”, but how you planned to use the money after commencement, other risks of claiming and deferred claiming, and
Second, how Social Security is the only “annuity” available which provides guaranteed, inflation indexed income and a surviving spouse benefit.
The first item didn’t happen for many Americans in the past (and even today) because they were unable to continue employment (involuntary job loss, illness, care giver, etc.) and they arrived at older age having failed to save enough or secure other sources of income (pension, self-employment income, business ownership, etc.) And, until a decade or so ago, the claiming rules allowed you to start and stop and restart.
The second item is for those who have saved, but whose monthly income is not sufficient to cover everyday expenses. It allows individuals to consider using accumulated assets to buy a SS “annuity” by creating an income “bridge” to deferred claiming, whether to SSFRA or to age 70. That strategy allows for more aggressive investing of other assets not used for income replacement and it may be the most effective option for minimizing the risk of a reduced standard of living throughout retirement (especially where inflation rears its ugly head after retirement).
One wise sage once told me if you take the time to be informed, “you never make a wrong decision”. Sometime in the future, circumstance/fate may suggest you could have done better had you made different choices (Oh! I coulda had a V-8!).
But, whatever you chose after informed deliberation, the option you selected was always, always the right one based on what you knew, when.
Finally, a recent study just released suggests that there is added value to be gotten by acknowledging and accepting behavioral preferences for early claiming, even at age 62, where the perceived value of those preferences (CIF, for example) outweight clear differences in present value.
“But, whatever you chose after informed deliberation, the option you selected was always, always the right one based on what you knew, when.”
There’s freedom in those words.
Everybody’s discount rate is different and varies as we are molded by life. We are human, not Vulcan and that was one of the great lessons I learned working with my father the first 10 years after I got out of school. Armed with stats, multivariate regression, those old Morningstar CD’s with a universe of data to be mined and the arrogance that youth and degrees conjures..
My Dad tells me to recommend a portfolio for one of his wealthy clients. I’m off and pounding on keyboards and after a couple of days say “Dad! I’ve got it! The good doctor could have made X more money had he simply had a few of these fancy new equity index funds. He’s got plenty of cash, too many bonds and a huge annual income, this is perfect! He’ll be rich(er)!”
My Dad, looking for words to cut, but not quite deep enough to kill, says “Son, that won’t work.” “But.. Why??” “Because the good doctor is strongly risk averse and he’ll never be able to sleep if we do this after his experience with the 70’s market”. “Go back and try again.”
Oh.
I chose to wait until I my FRA. I’m assuming I will live past the break even point (79/80). But the real reason I waited was to rollover a large amount of my IRA into a Roth, so as to avoid being in a higher tax bracket when I’m forced to take my minimum distribution at age 74. If I started collecting at 62 my SS would have been penalized because of my Rollovers.
Only earned income reduces SS because of pre FRA collecting. An RMD won’t affect your SS benefit.
You’re right about that. I should have specified better. The penalty I was worried about was my Medicare Part B payment, which would be higher, because my IRMAA would be to high, and since they calculate from two years prior returns the IRS would use my return from when I turned 63. The RMD wouldn’t affect my SS Benefits, but would put me in a higher tax bracket. This way my SS payments are much higher, my Part B payments stayed at the minimum, and my future RMDs should remain in the 12% bracket.
My wife—four years older than me—started Social Security at 63 this year. I’m 59 and plan to wait until my full retirement age (67). We don’t need the income right now as I’m still working, and waiting until FRA gives me my full benefit and helps maximize the benefits my wife and our disabled adult child could receive based on my record.
Sounds like you’re talking about waiting until 70.
I think 67 will be my year. Yes, at 70 it would be more, but then you run into the maximum amount allowed per family and by waiting to 70 would cripple that. So, taking it at 67 will be best without them losing income.
A 2018 Stanford study found that, on average, people who live to 65 are living 3 year longer than their parents and 6 years longer than their grandparents, so you might want to add 3 years to when you expect to die.
https://news.stanford.edu/stories/2018/11/lifespan-increasing-people-live-65
That reminds me of a quote from The Fiddler on the Roof. 🙂
Perchik: Money is the world’s curse.
Tevye: May the Lord smite me with it! And may I never recover!
Enjoyed the Sanford and Son reference.
Langston,
Excellent post!
Please keep writing.
I think “wifey” is an outdated or personal label to use—not for posts.
I think “wifey” is a term of endearment. It sounds like Langston both likes his spouse and appreciates her. Delightful!
I find it sexist. Would the author like to be referred to here as hubby?
My beautiful bride of 39 years has permission to call me anything she wants but “late for dinner”
She was your bride 39 years ago. She hasn’t been a bride for decades. Do you expect her to refer to you as her groom?
Please see the above … Smile, the fresh air is good for your teeth
I would never use it and I know my wife wouldn’t appreciate it. However, Google indicates that both wifey and hubby are making a comeback. The phrase my wife finds much more offensive is “the wife.”
Agreed. “The wife’ puts wives on the same level as ‘the car’, ‘the boat’ and etc. We frequently use ‘wifey’ and ‘hubby’, but if I said ‘the wife’, I would be dealt with in a most severe fashion.
“Wifey” is apparently having a renaissance among young people who are dating (or the current equivalent). The poster is not in that demographic.
I always learn something new here, and it’s not always financially-related. Some ideas have changed my life! Interesting opinions about spouse terminology. One of my female friends uses the word “wifey” in her personal email address. It bothers me a little, but it’s none of my business and from what I can gather, she and her husband have a deeply loving partnership of equals.
It bothers me when someone uses “the wife” sounds like a possession.
4+ decades ago I wanted a partner and not a parrot.
I still feel that way.
🤔
I chose to take SS at full retirement age also. The graph is fancy but way above my simple mind.
Do I know how many years either of us have left, nope. We don’t need our SS income so we invested most of it and build our cash reserve with the rest
Thanks for sharing how you made your decision to take SS at FRA. I did something along those lines and took family life history into my calculations. It wasn’t so much what the numbers told me…it was the hand-me-down genetics, but so far so good.
Langston, I like your style, but I have to say that you lost me at “the heck with fancy math”. This is no reflection on your analysis whatsoever, it’s all just over my truck driver brain. The important thing is that you made the right decision for you and the missus.
I see you referencing you”truck drive brain”. If I remember correctly, were you a beer delivery guy in Toledo? I’m a retired Hostess Cake route driver in the Toledo area
LH, yes, I’m betting we crossed paths many times.
I admire your fancy math and the fancy graph. By the time I actually understood it all I will have collected social security for 40 years with no idea if I broke even. 😁
From my simplistic point of view, Social Security is an annuity and insurance, not an investment to be analyzed. It is funded by a tax I paid from 1959 to 2010. Connie and I now receive guaranteed (hopefully) income for our joint lives with only one of us having paid the taxes.
The only PV I care about is what appears in our checking account each month.
Maybe you can do another graph considering the $500,000+ accumulated in municipal bond funds since we started SS at FRA while I was working and invested both our benefits for several years, reinvested all interest and which now generate over $1,500 tax-free interest per month. 🤑
Just kidding about the graph, but I’m happy making what many people no doubt think was a bad choice. After all, our monthly benefits could have been higher🤷🏻♂️
What you might find useful is an analysis that compared the approach you took with one in which you started SS at FRA and invested both your benefits for the same period of time in an index fund and two comparable approaches where you waited until 70 to claim–one in which invested your 32% larger SS benefits for several years in municipal bonds and one in which you invested your 32% larger benefits in an index fund.
It might be interesting to look backward on the choice, but probably not very useful. What’s done is done. The strategy of claiming Social Security early while investing the proceeds seems to me like a relatively short term goal, allocating 100% to stocks is taking on too much risk.
My wife and I both waited until 70 and our combined SS gross income is now just over $100k so I wasn’t advocating for a 100% stock allocation. I queried RQ simply because he has touted his approach countless times since HD was started. I agree about stocks not being the best comparison with his approach and that I should have suggested that it might be interesting to compare his approach with claiming at 70 and investing his 32% larger benefits in treasuries.
Do you really mean “early” or is before 70 early.
Having waited until 70, I usually refer to claiming anytime prior as being early. Probably not the correct nomenclature.
I expect if I had invested in an index fund the account balance would be higher, not sure about the income, but it would not be tax free. On the other hand, it might have been lower.
I was looking for as much stability as possible. Who knew how long the post age 70 SS benefit would last?
I like the cash in hand more than maybe more cash in the future.
Dick, I’ve known many people who claimed at or before FRA, but only know two, including you, who saved and invested the payments in order to generate income at a later time. That is the key to making it all work.
Of course, many people need the income, and claiming early is their only option; I get that too.
My wife and I must be the other ones that took our SS at FRA, invest the majority, and build our cash reserve with the rest
It only worked because I was still working when we started SS and after I stopped work had pension income.
No doubt many people could not do it unless they worked several years past FRA while collecting SS.
I just think we are in a better position than if we delayed SS to age 70. We could generate a nearly equivalent income via tax free interest payments plus we would still have the asset pool of money.
Good luck in retirement Langston.
Hi Rick, unfortunately for you I saw your great questions. I did the spreadsheet stuff yesterday to confirm or reject my plan to start taking benefits next year (the blue traces). Plus I was bored. I wasn’t planning on posting it anywhere, but then I got my Saturday HD email..
I updated the plot with the time value traces removed. Present value is largely theoretical with SS benefits, but I might come back to it because it’s so much fun.
Answers: I choose 4% because that more or less is what the default money market fund (VMFXX) is getting at Vanguard recently. The plot now explains the timeline, and you’ll notice that I’ve decided to take a $79 hit on the spousal portion by starting her benefits at my FRA. That’s a 15 month advance and I’ll be about 78 before the breakeven point of waiting until her FRA. If I die on time, that’s close enough to a wash given the reduced value of future money. After my death, she gets the full PIA benefit regardless. The one-and-done approach to starting SS benefits is a plus.
Updated Plot (deletes time value traces, adds useful stuff).
PIA is social security lingo for Primary Insurance Amount (me) and Spousal is normally half of that if you wait until her FRA, or Full Retirement Age, for me that’s 66 and 10 months, for my wife it’s 67. The 15 month advance on spousal will reduce the 50% of PIA to 44.79%. Thus; $1,522*(0.5-0.4479)=$79 per month reduction. The 0.4479 comes from the SS formula that specifies a reduction of 25/36 of 1% per month for early claiming within the first 36 months before the spouse’s FRA.
Rick, do you honestly care about all that or are your engineer’s genes getting the best of you? 😁
Your just sympathetic because you’ve been upgraded to Dr Quinn in the article 😂
Wasn’t there a TV show called Dr. Quinn, Medicine Woman?
Whenever I see my name, I don’t know what’s coming next. It could be someone still seething over cartgate😢
“Cartgate” … that’s an artificial scandal pushed by ‘those’ people. 🤪
With any luck I’ve upset close to 100% of those who read comments on this wonderful blog.
Or perhaps “Dear Dickie”