Iy 8% per year

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graveday
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Iy 8% per year

Post by graveday »

I just discovered what it is actually worth to me to continue to postpone collecting social security. I turn 66 next January. Each year I further postpone up to age 70, I gain eight percent. In the current financial environment I cannot do better. I am thinking of compromising and putting it off for a couple three years. I would like to spend some before Alzheimers kicks in.
Guy goes to the doc. Doc says he has Heart Disease and Alzheimers.
Guy says well at least I don't have Alzheimers.
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sage1166
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Post by sage1166 »

I don't really have much advice to offer, but +1 for the joke that I'll tell my dad...over and over again.
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Post by sport »

While it's true that you get a larger payment for each year you delay, it is also true that you will receive those payments for one less year for each year you delay. Actuarily, it is supposed to be a wash. If you know you will live longer than average, delaying is profitable. If you know you will not live to the average age, starting sooner is profitable. If you do not know either one, well...

Jeff
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Post by dbr »

jsl11 wrote:While it's true that you get a larger payment for each year you delay, it is also true that you will receive those payments for one less year for each year you delay. Actuarily, it is supposed to be a wash. If you know you will live longer than average, delaying is profitable. If you know you will not live to the average age, starting sooner is profitable. If you do not know either one, well...

Jeff
It may be helpful to recognize the benefit in insuring against longevity risk by delaying SS benefit. This is not just a break-even analyis. The same issue applies to all lifetime income streams distinct from asset based income planning.
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Lbill
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Post by Lbill »

Yeh, and for every year you delay SS you can move that much more from your traditional IRA to a Roth and save on the tax. That's what I'm doing.
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Post by alvinsch »

dbr wrote:
jsl11 wrote:While it's true that you get a larger payment for each year you delay, it is also true that you will receive those payments for one less year for each year you delay. Actuarily, it is supposed to be a wash. If you know you will live longer than average, delaying is profitable. If you know you will not live to the average age, starting sooner is profitable. If you do not know either one, well...

Jeff
It may be helpful to recognize the benefit in insuring against longevity risk by delaying SS benefit. This is not just a break-even analyis. The same issue applies to all lifetime income streams distinct from asset based income planning.
Some other things besides longevity insurance that could influence whether waiting or not is a wash include:
- interaction with spousal benefit and expected longevity of one person versus one of a couple
- eligibility of receiving spousal benefit prior to receiving your own benefit
- if you have significant assets, probability of later benefits being taxed higher than earlier benefits

In our case, waiting to gain low cost longevity insurance is a definite plus as is the benefit of a larger payout due to one of us likely to live longer than average. Since we have similar wage histories, I hope to take 1/2 spousal benefit at my full retirement age and delay SS on my earnings until 70. The only negative for us delaying my SS, is that I believe the longer one waits the less one is likely to net due to higher taxes or other means testing.

- Al
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graveday
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Post by graveday »

Interesting replies. Thanks.
I hadn't considered it as an insurance move, and especially not as a consideration in converting IRA to Roth.
And the idea of postponing while taking half of the spousal benefit perplexes me. Could you expand on that? Is you spouse taking theirs already? Are you saying you can claim it even if they haven't yet?
And the complication of reduced net due to later higher taxes.... I don't even know where to start with that, but don't expect that particular problem.
Thanks all. The level of knowledge about money here is astonishing, as always.
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Post by CaptMidnight »

graveday wrote:Interesting replies. Thanks.
I hadn't considered it as an insurance move, and especially not as a consideration in converting IRA to Roth.
And the idea of postponing while taking half of the spousal benefit perplexes me. Could you expand on that? Is you spouse taking theirs already? Are you saying you can claim it even if they haven't yet?
And the complication of reduced net due to later higher taxes.... I don't even know where to start with that, but don't expect that particular problem.
Thanks all. The level of knowledge about money here is astonishing, as always.
The option of collecting spousal benefits while suspending your PIA to earn delayed retirement credits is described here, among other places:

http://www.forbes.com/2009/04/03/social ... il-70.html

As for calculating the comparative benefits of the various options, including the tax consequences, I use ESPlanner software from
www.esplanner.com

ESPlanner handles these calculations easily and a lot more. (I have no connection to the company other than as an enthusiastic user.)
The history of thought and culture is ... a changing pattern of great liberating ideas that inevitably turn in suffocating straightjackets... | --Isaiah Berlin
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Post by dpbsmith »

One way to look at delaying Social Security is that it is roughly equivalent to buying a single-premium immediate annuity (SPIA).

If you delay Social Security one year, you "pay" a price of one year's benefits in return for a lifetime increase in future benefits.

You can do some rough calculations and easily convince yourself that if you want to spend some money now in order to increase your lifetime income later, delaying Social Security is a better deal than buying a commercial SPIA.

Here are some rough numbers. I assume (on the one hand) that Social Security will pay its projected benefits and (on the other hand) that the insurance company also will!

Let's say you are 66 and that your Social Security benefit is $2,000/month. Let's say that delaying one year will increase your benefit by 8% = $160/month. You have, then, effectively "purchased" a lifetime annuity that will pay $160/month, inflation-adjusted, starting a year from now, for $24,000.

Such an annuity can be purchased from AIG, through Vanguard, for $26,938.66.

So, on the face of it, delaying Social Security is a good deal.

(Since Social Security benefit rates are "unisex," it is an even better deal for a woman; an inflation-adjusted annuity paying $160/month would cost $30,110.68).


Primary Annuitant -- Birth date: 04/01/1943 Sex: M
Quote Expiration Date: 05/04/2009
Benefit Commencement Date: 05/04/2010
State of Residence: IN
Payments per Year: 12
Initial Payment Amount: $160.00
Total Premium Amount for Fixed Single Life Annuity with inflation adjustments: $26,938.66

Primary Annuitant -- Birth date: 04/01/1943 Sex: F
adjustments: $30,110.68
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Post by graveday »

This has been very informative. I see I messed up the title, but don't know how to fix it.
Thank you dpbsmith. Those are some nice calculations where the feminine gender comes out ahead.
If Social Security never gives me a cent, I will survive. It is gravy for this train, and as such, making it richer by letting it simmer is attractive. It also will pay off for my wife, who will likely survive me.
But it is not the sumptuous amount you proffered, and even if it were, it would be reduced because I was a teacher in California.
So a mini-rant. Teachers get hosed with 403b's, then get hosed some more, in that, because they get State Teacher's Retirement System money, their Social Security allotment, worked for in the usual manner, is reduced up to forty percent. I will not mention lower pay for a damn hard job. Teachers who go the distance make out pretty well, but a retread like myself gets shorted several ways financially. As mentioned, I will be OK barring catastrophe, but there is something wrong when benefits acquired rightfully are curtailed because of some wrongful notion of "double dipping".
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Random Musings
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Post by Random Musings »

graveday wrote:
I just discovered what it is actually worth to me to continue to postpone collecting social security. I turn 66 next January. Each year I further postpone up to age 70, I gain eight percent. In the current financial environment I cannot do better
For the near future, this may be certain. But at a certain point, the payroll taxes will not be able to cover all schedule benefits (78% by 2041).

Isn't that just admitting that S.S. is nothing than a ponzi scheme?

RM
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Post by graveday »

I don't know. Saying that S.S. is a ponzi scheme because it shares certain structural problems [appears to be an unwarranted leap].

[words in brackets admin's paraphrase of original unnecessarily off-color remarks]
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DR
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smoothing in future SS to the present

Post by DR »

Graveday:

I agree with CaptMidnight on this one. Although I do some contract work for ESPlanner and am biased I guess, I do think that there are two ways of looking at this question. From an actuarial perspective, it's a wash I guess--but that's from the SSA perspective. From our perspective, it's not really an actuarial question unless one has a terminal illness or is very confident of a short life. We typically don't buy insurance based on probabilities, but rather on possibilities. If it's possible that you can live to 95 then you should plan to do so. For example, if you are 60 and a married male, then you are *probably* going to live to age 83 according to an actuary. But who would thus time their retirement account withdrawals to end at age 83? No, instead, we we time our withdrawals to end at the highest (or near to it) *possible* age that we might live.

But even that point aside, if your calculator does consumption smoothing--as ESPlanner does--then you can begin, even at 60, to live as if that greater income stream is on its way ten years from now. So you can begin to enjoy the higher living standard that this future income affords you, but there's no reason to wait until you get it to age 70 to raise your living standard. But using a consumption smoothing approach requires software that will calculate that highest sustainable living standard.

So if you die at age 68 before you've taken even a dollar of SS, you will have lived 8 years at a higher living standard than you would have lived if you planned to take SS at age 65. But that's only true if you use a consumption smoothing approach.

Again, (dislosure) I do website work for ESPlanner.

Dan

PS. There's a recently added feature in ESPlanner that if you set both of the persons to take SS at age 70, it will automatically calculate any spousal benefit that the lower earning spouse might collect and it will show the year to begin that. So the higher earning spouse then applies and then suspends and this triggers the spousal benefit.
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Post by graveday »

Thanks DR. I do not see myself from an actuarial perspective. Life is short enough. I like your notion of insurance purchased because of possibilities, not probabilities. That is succinct and well-put.
It is interesting to think, with consumption smoothing, I could start living now as if I were already getting the money. I will have to see just what this idea actually means. I suspect that a frugal lifestyle obviates any need for "smoothing", and I a little leery of computer modeling, but it is still an interesting concept.
It sounds at first blush like living beyond your means, which has gotten so many in trouble, but it is not that. I just wonder how such a program considers the unexpected, like the fed in the red.
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Post by muddlehead »

the easiest financial "so-called decision" one will make in his/her life is to take social security at the first possible second. if you don't need it, save it monthly till you do.
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Post by DR »

Graveday:

Yes, there is no doubt that you can raise your lifetime living standard by a significant amount by postponing SS to age 70 if you consumption smooth.

I suppose you could take SS early and reinvest it as suggested above, but this assumes a certain rate of return that is not risk free. If you put it in cash you lose to inflation. If you bought stocks last year, you lose your ass. And the rate of return you would need to beat the risk free proposition of a higher "annuity" at age 70 is, what, 8% per year real return that you get from SS as the delayed benefit premium?

No, the smart thing is, if you have other income to sustain your calculated higher living standard, is to take Uncle Sam's very generous, inflation adjusted delayed credit. If you had no other money, then you don't have a choice.

In ESPlanner you can model this option by telling the program that you want to assume SS will be cut by X percent at some future date. Then you look the lifetime living standard this entails and compare it to the living standard that is entailed by taking SS at 65. So, to answer your question, yes, there is a way to factor in some of that unknown.

I could run some scenarios for you to compare if you like.

Dan
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Post by DR »

Graveday:

Yes, consumption smoothing is an interesting concept. It's a model that is invented, not by the financial planning industry, but by economists nearly 40 years ago. Econ's use it all the time, but FPs only recently have begun to talk about "life cycle" planning and this includes, to some extent, consumption smoothing.

One quick way to grasp the concept is to think about what we do on an annual level when we have uneven income and expenses. I teach, so I take paychecks over 9 months. I have to make sure I don't burn through all my income and save some for the summer. Conversely, if I know I'm going to be working in the summer and have a contract for future pay in June, July, and August, I can go ahead and spend now based on the knowledge that this income is forthcoming.

This concept is at work in all kinds of ways we never think about. The utility company, for example, may let you make even payments through the year--taking less from you in the winter when your bills are high, and more from you in the summer when your bills are low.

I would think that if you are already 60+, there is not much risk in taking the government's offer to pay you a significant premium if you'll postpone. It's not a decision that can be determined piecemeal. You should look at it in the context of taxes as well since SS does impact your tax burden. That said, I've *never* run a case where taking SS early created a higher lifetime living standard than would be had by delaying. I've run perhaps a hundred of different cases. Whet we do see, however, is that some people have to take SS at 65 simply because they have no other income to support their living standard. But when there are other resources like a 401(k) or pension, you can always raise your lifetime living standard if highest sustainable lifetime living standard is the final measure of the comparison.

Dan
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Post by Stevewc »

What if a person retires early (55 or so) and doesn't pay into the system all those years? Do the number of zero's paid in 10 or 15 years straight hurt the bottom line on what $$$'s you will get?
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Post by DR »

Yes, certainly.

If you take a person born Jan. 1, 1968 and give him a salary of 70K (starting in 2009) that is sustained at that level in today's dollars through age 65 (given 3% inflation), and if he takes SS at age 65, he has an annual SS benefit of 23,502 (in today's dollars). If you have him quit working at age 55, his payment at age 65 becomes 18,780.

I created a modest earnings history for this fellow prior to the current year, 2009.

Just curious, I ran the same numbers if he delays SS to age 70. In that case, he'd have 33,591 if he works through age 65. He'd have 26,842 if he quits working at then end of his 54th year.

Dan
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Post by graveday »

Thank you DR. I am persuaded to wait till 70.
Somewhere I once read that if one changes jobs just once, your potential SS earnings are cut in half. Further job changes were also destructive, but less so with each one. I have not thought about this till now, and I doubt it would change anyone's mind about changing jobs, but I have always wondered about it. Have you ever encountered this notion?
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Post by DR »

Sounds like an urban legend. :)

Dan
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Post by graveday »

I don't know, I remember it was posted on the wall at a career counseling center. I asked about it at a SS office once and they just shrugged.
An interesting sidepoint I stumbled across while registering for Medicare is that, for older parents who sign up for SS and still have children under 18, those children will receive a financial stipend beyond the applicant's payment.
Since I fit that picture, putting off my claim to increase my payment will eliminate the stipend my daughter could get. Here is where the software you mentioned could help. On the other hand, she would spend that money on a horse and not put it away for college, so I feel a little hard-hearted on this score.
The SSA has many quirky bits to learn about that can affect your bottom line.
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Post by DR »

That's pretty good--spend it on a horse!

Oh well, I've spent money on less worthy things in life.

I'm sure that's not true about the SS and changing jobs.

But I also don't think that delaying SS means that you have to give up the child benefit or the spousal benefit. You can simply apply for benefits (this triggers the child and spouse benefit if applicable) and then suspend benefits. There is no negative effect on your own future benefit. And this is done all of the time. In fact, such a strategy is built into the ESPlanner program.

I was able to trigger this in the program but I see that's its quite dependent on childrens' ages and so forth.

Dan
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Post by nisiprius »

graveday wrote:Thank you DR. I am persuaded to wait till 70.
Somewhere I once read that if one changes jobs just once, your potential SS earnings are cut in half. Further job changes were also destructive, but less so with each one. I have not thought about this till now, and I doubt it would change anyone's mind about changing jobs, but I have always wondered about it. Have you ever encountered this notion?
Sounds totally wrong.

I can't say that I understand the ANYPIA calculator, the Social Security Administration's official benefits calculator, but the only data it wants to know is the number of dollars you made each year. It doesn't care about which employer or length of job tenure. And the Social Security statement they mail every year does not show employers or job transitions, either.

Furthermore, the way they calculate it--don't quote me but it's something like your best 35 years of earnings after the earnings are adjusted for wage growth--means that a small gap or missed year here or there doesn't make much difference.
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Post by DR »

Yes, I agree. That's pure myth.

Here's another one. Your SS payment is all based on your last three years' income. That too is wrong.

I have been running some cases where the retired couple has children under 18. I didn't realize that they got benefits. Very good. My program is showing some significant benefits in these cases.
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Post by alvinsch »

DR wrote:That's pretty good--spend it on a horse! Dan
So what's the problem with spending the money on a horse? :wink:
- Al
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Post by DR »

Oh my gosh: LOL.

I revise my comment--yeah, buy the horse.
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Post by graveday »

I am thinking there must be a glitch in my memory. Probably it was a 401k being referred to in the posting I saw. I can find nothing about SSI being affected by a change of employers, unless you become a teacher and it gets docked because you have a pension. There is discussion of 401k's being hurt by the wait times etc. involved.
DR, thanks for investigating the dependents under 18 scenario. I will be looking into her collecting when I register next year, but with me postponing. I hope they allow that as it makes it simple. If they don't then you may be hearing a cry for help.
My wife and daughter are horse crazy. I call myself a horse widower.
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Post by DR »

Yes, I believe what you do is apply and then suspend. This is different than the apply, take, repay strategy that is been talked about so much recently.

Just apply, then suspend. That will trigger child and spouse benefits if done in the appropriate year.

Dan
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