The Biggest Mistakes People Make With Social Security

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David Jay
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Re: The Biggest Mistakes People Make With Social Security

Post by David Jay »

New Providence wrote: Thu May 13, 2021 7:46 am I'll take it at 62.

Analysis is of little value because the most relevant data point, life span, is unknown.
If you are single, the nominal actuarial neutrality of the system means it doesn’t make a huge difference when you claim.

If married, the survivor’s benefit makes claiming strategy a big deal.
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Morgan Dollar 1921
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Re: The Biggest Mistakes People Make With Social Security

Post by Morgan Dollar 1921 »

ObliviousInvestor wrote: Thu May 13, 2021 7:34 am
Morgan Dollar 1921 wrote: Wed May 12, 2021 7:30 pm
ObliviousInvestor wrote: Wed May 12, 2021 7:13 pm
Morgan Dollar 1921 wrote: Wed May 12, 2021 7:08 pm I see Mike is answering questions.
When you pay Social Security tax the funds are contributed to the trust funds, from which distributions are made to pay for current beneficiaries.

https://www.ssa.gov/news/press/factshee ... eTrust.htm
What are the Trust Funds?

The Social Security trust funds are financial accounts in the U.S. Treasury. There are two separate Social Security trust funds, the Old-Age and Survivors Insurance (OASI) Trust Fund pays retirement and survivors benefits, and the Disability Insurance (DI) Trust Fund pays disability benefits.

Social Security taxes and other income are deposited in these accounts, and Social Security benefits are paid from them. The only purposes for which these trust funds can be used are to pay benefits and program administrative costs.

The Social Security trust funds hold money not needed in the current year to pay benefits and administrative costs and, by law, invest it in special Treasury bonds that are guaranteed by the U.S. Government. A market rate of interest is paid to the trust funds on the bonds they hold, and when those bonds reach maturity or are needed to pay benefits, the Treasury redeems them.
I know where they go, but choosing to call it a tax, is not in my point of view. I view my earnings record and the contributions as mine, if I survive to withdraw.
You explicitly requested my input, so here it is:

You are of course welcome to view it however you please and make whatever decisions you feel suit you, but from a factual point of view the Social Security tax is definitely a tax, and there definitely is not an account of dollars anywhere with your name on it. What you are describing here is choosing to believe something that is not true while also focusing on a sunk cost. These are not exactly the underpinnings of good financial planning decisions.
Thank you for responding, I see your point of view that it is a tax. I will expand on the opinion many have, we have that number, the SS number, so misleading for many, sorta like a bank/brokerate account number, or the very fact it is gone, expires upon death, is the reason once we survive to the point of eligibility, many want to file and start receiving those funds, ASAP.
The changes that impacts many currently of later FRA, of course are uncontrollable by those impacted. I fortunately was in the last birth year of FRA at 66. That also landed me in the last year of 25% reduction at 62, and with no spouse, swayed my personal opinion. The spouse reduction gets hit even harder, for those married couples making the decision. The very fact it is a "sunk" cost is even the greater reason, I believe, those with poorer health and perceived greater risk of mortality, jump early.

Reviewing three inputs, A. the mortality rate of my parents and their 17 siblings, my current personal health risks, combined with 25+ years of smoking, B, the COLA increases for both SSA & FERS payments, and C, my personal lack of concern for any spouse to receive a survivorship on FERS or SSA, combined to make the decisions that suited me best. I will add, my FERS is a QDRO from my ex-wife. I agree with your evaluation for many/most, but recognize the risk of completing the sunk cost final event, death, thus why I said in another post, "At some point we all jump off that roulette wheel, by starting to withdraw, or dying." I also am in the frame of mind, our best retirement years are the ones prior to the rocking chair years, that point when mobility ends. That can happen years before our death.

With the benefit of hindsight, watching obituaries closely due to the virus the last 14 months locally, I am even happier with my personal decision. A majority impacted were in my age group and older. I have been also pleased with my personal allocation decision of increased equity percentage, due to the fixed income nature of both FERS and SSA. I own your book, "Social Security Made Simple: Social Security Retirement Benefits" reviewed your website, Open Social Security, and value the info on your blog and have read your thoughts on decisions for the unmarried . I am also sliding under the taxation of social security benefits and got lucky with my opportunity to choose an F plan as my Medicare supplement.

I found value in the book by Brandon Christy, "Navigating your Federal Retirement" even though I had little choice with a QDRO.

Thanks for taking the time to read and respond earlier. I know you are here to help, as am I. I am happy I have survived to receive benefits. :sharebeer
lazynovice
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Re: The Biggest Mistakes People Make With Social Security

Post by lazynovice »

smitcat wrote: Thu May 13, 2021 7:20 am
lazynovice wrote: Wed May 12, 2021 11:19 pm Last week, I started looking at Mike’s calculator for the first time. I was very surprised to find that the best claiming strategy for us is not for both of us to wait until we are 70. I am still a little confused by it.

We have roughly equivalent PIAs so I ran it at 2800 per month for both
He is 2 years older than she
The recommendation is for her to claim at 62 and 4 months and for him to claim at 70.

Running an alternate scenario of both claiming at 70, we’d end up with 2.5% less. Running a scenario where he claims at 62 and 4 months and she waits until,70 results in about 2.2% less.

Survivor benefits are identical in the three scenarios.

He currently has a few years of zero earnings due to early retirement. She will likely have one or two years of zero earnings. So PIA is being modeled on the SS website.

For us, the decision is VERY sensitive to the gap between our PIAs. Being equal at 2,800 yields the answers above. Drop his down to 2,650 and it changes the answer to she claims at 70 and he claims at 65 and 9 months.

How in the world do non- Bogleheads figure this out?
"I was very surprised to find that the best claiming strategy for us is not for both of us to wait until we are 70. I am still a little confused by it.
How in the world do non- Bogleheads figure this out?"
The best strategy for us includes Roth conversions which are affected by date of SS eclection but not driven by that date alone.
Even more complicated than figuring the best solution to SS alone in a vaccuum.
Yes, a really great point. Our overall planning has assumed converting seven figures of 401(k) to Roth - or a good bit of it. Trying to also avoid IRMAA means stopping those by the time he turns 63. So that 2% difference can probably be saved on taxes. And that is before any consideration of ACA premium tax credits.

Maximizing social security is important but can’t be done in a vacuum. You are right.
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Re: The Biggest Mistakes People Make With Social Security

Post by smitcat »

New Providence wrote: Thu May 13, 2021 7:46 am I'll take it at 62.

Analysis is of little value because the most relevant data point, life span, is unknown.
"Analysis is of little value because the most relevant data point, life span, is unknown."
In some cases yes ...but in many cases there is other relavent data that is both known and unkown including:
- lifespan of a spousal benefit
- total income after taxes with SS early or later
- effects of Roth conversions before SS
- effects of portfolio value for heirs in the future
You may not know your lifespan but you can model many of these to see what the 'most likely' scenarios look like.
sid hartha
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Re: The Biggest Mistakes People Make With Social Security

Post by sid hartha »

JoeRetire wrote: Wed May 12, 2021 5:07 pm
sid hartha wrote: Wed May 12, 2021 4:03 pm
JoeRetire wrote: Wed May 12, 2021 12:13 pm
RickBoglehead wrote: Wed May 12, 2021 12:06 pm
JoeRetire wrote: Wed May 12, 2021 11:59 am

While getting divorced may indeed be a mistake, how is that a mistake made with social security? Ridiculous.
If you read the article, they point out:

- that can you get benefits if your marriage lasts 10 years (so if you were close to 10 years, you might hang on)
- that you can't get those benefits if you remarry, which someone might take into account and just live with someone
Thus, getting divorced wasn't the mistake.

Not waiting at least 10 years to get divorced might be a mistake with regard to social security benefits. And getting remarried rather than choosing to live together might be a mistake with regard to social security benefits.

Ridiculous.

By this definition, dying is a mistake.
(when you die before maximizing your spouse's survivor benefits at 70).
That's a great idea for my tombstone - "Here lies poor Sid, Failed to Maximize Spouse's Survivor Benefits"
You might want to hold off on that inscription - unless you are planning to die early?
Point taken. I'll have to have a back up plan in the event I succeed in maximizing my spouses survivor benefits!
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Re: The Biggest Mistakes People Make With Social Security

Post by SchruteB&B »

willthrill81 wrote: Wed May 12, 2021 8:55 pm
Mr.BB wrote: Wed May 12, 2021 8:41 pm
I-Know-Nothing wrote: Wed May 12, 2021 8:36 pm
Mr.BB wrote: Wed May 12, 2021 4:47 pm
Flashes1 wrote: Tue May 11, 2021 8:47 am I think a lot of Bogleheads are missing the fact that most people NEED their SS prior to FRA. Not everyone has a $3 million NW before they're 40 and not everyone has great health up thru FRA. We can argue their plight is due to their own poor life choices, but the fact is most people haven't saved up big war chests and they depend on SS....for many of us, it's simply play money.
The basic math says if you do not have enough money saved up to cover your living expenses, why would you retire? If you are retiring just to not have to work anymore and collect SS, then that is just being lazy. If you choose not save enough (or couldn't) over the years, you need to work to age 70 and let your SS grow. If you need your SS before FRA then then odds are you need to work anyway and SS will deduct your monthly total until your FRA anyway. It makes no sense to try to retire if you simply don't have the means.
That’s a bit simplistic, isn’t it? Many people don’t choose to retire out of laziness. They lose their jobs or are unable to perform them for health reasons. They need SS, and that’s why we have an SS system in place to begin with.
I'm not talking about people who lose their job or know they have a shorten life span. I'm talking about people who know they simply do not have enough to live on and choose not to work and don't try to maximize their income to help support themselves.
Over 50% (and maybe over 60%) of current retirees got that way due to a layoff (granted, many could have gotten other jobs, but that generally involves taking a big pay cut, which is hard for most to justify), deteriorating work environments, or medical issues, whether their own or those of a family member.
This is what I have observed amongst the people I know (mostly family members) who have claimed at age 62. They are laid off and can’t get another decent job because they’re too old. Or their bodies are broken from working physical jobs for decades. Or they’re just generally in bad health by the time they’re 62, like unfortunately many many Americans are. I’ve seen people hanging on with all that they have just to make it to age 62. I get why they file then.
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teen persuasion
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Re: The Biggest Mistakes People Make With Social Security

Post by teen persuasion »

SchruteB&B wrote: Thu May 13, 2021 11:08 am
willthrill81 wrote: Wed May 12, 2021 8:55 pm
Mr.BB wrote: Wed May 12, 2021 8:41 pm
I-Know-Nothing wrote: Wed May 12, 2021 8:36 pm
Mr.BB wrote: Wed May 12, 2021 4:47 pm
The basic math says if you do not have enough money saved up to cover your living expenses, why would you retire? If you are retiring just to not have to work anymore and collect SS, then that is just being lazy. If you choose not save enough (or couldn't) over the years, you need to work to age 70 and let your SS grow. If you need your SS before FRA then then odds are you need to work anyway and SS will deduct your monthly total until your FRA anyway. It makes no sense to try to retire if you simply don't have the means.
That’s a bit simplistic, isn’t it? Many people don’t choose to retire out of laziness. They lose their jobs or are unable to perform them for health reasons. They need SS, and that’s why we have an SS system in place to begin with.
I'm not talking about people who lose their job or know they have a shorten life span. I'm talking about people who know they simply do not have enough to live on and choose not to work and don't try to maximize their income to help support themselves.
Over 50% (and maybe over 60%) of current retirees got that way due to a layoff (granted, many could have gotten other jobs, but that generally involves taking a big pay cut, which is hard for most to justify), deteriorating work environments, or medical issues, whether their own or those of a family member.
This is what I have observed amongst the people I know (mostly family members) who have claimed at age 62. They are laid off and can’t get another decent job because they’re too old. Or their bodies are broken from working physical jobs for decades. Or they’re just generally in bad health by the time they’re 62, like unfortunately many many Americans are. I’ve seen people hanging on with all that they have just to make it to age 62. I get why they file then.
Another issue I learned about recently is supplemental payments for certain fields where you are forced to retire at, say, 55. They receive a pension, and a supplement to get them to SS eligibility and no farther. The assumption is that they then begin SS immediately at 62.

They obviously have the option to wait for a greater SS payment, but it's an immediate drop in income that many likely cannot bridge, unless they have additional savings. Most take the path of least resistance, and just begin SS at 62.
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Re: The Biggest Mistakes People Make With Social Security

Post by SteadyOne »

New Providence wrote: Thu May 13, 2021 7:46 am I'll take it at 62.

Analysis is of little value because the most relevant data point, life span, is unknown.

This is absolutely correct.

All these models and assumptions are basically useless in each individual case because nobody knows when they die.

Statements of sorts “everyone I know regretted taking Social Security too early” suffer from a sample adverse selection bias: people who didn’t live long enough cannot express an opposite opinion to taking SS late because they already dead to say so.

They would have said from the other side : “I should have taken SS at 62. I wanted to wait to maximise at 70, but I had a stroke and died at 69 and all my SS tax money was used by other people.”
Last edited by SteadyOne on Thu May 13, 2021 3:48 pm, edited 4 times in total.
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Re: The Biggest Mistakes People Make With Social Security

Post by SteadyOne »

Mr.BB wrote: Thu May 13, 2021 4:46 am
SteadyOne wrote: Wed May 12, 2021 9:16 pm
Mr.BB wrote: Wed May 12, 2021 4:47 pm
Flashes1 wrote: Tue May 11, 2021 8:47 am I think a lot of Bogleheads are missing the fact that most people NEED their SS prior to FRA. Not everyone has a $3 million NW before they're 40 and not everyone has great health up thru FRA. We can argue their plight is due to their own poor life choices, but the fact is most people haven't saved up big war chests and they depend on SS....for many of us, it's simply play money.
The basic math says if you do not have enough money saved up to cover your living expenses, why would you retire? If you are retiring just to not have to work anymore and collect SS, then that is just being lazy. If you choose not save enough (or couldn't) over the years, you need to work to age 70 and let your SS grow. If you need your SS before FRA then then odds are you need to work anyway and SS will deduct your monthly total until your FRA anyway. It makes no sense to try to retire if you simply don't have the means.
What if you had a stroke and cannot work anymore?
That is a completely different situation. Of course you would need your SS and/or disability income then.
So how you can plan then? In advance of the stroke? Unless one knows when this stroke happens.
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Re: The Biggest Mistakes People Make With Social Security

Post by retiringwhen »

SteadyOne wrote: Thu May 13, 2021 12:27 pm
New Providence wrote: Thu May 13, 2021 7:46 am I'll take it at 62.

Analysis is of little value because the most relevant data point, life span, is unknown.
This is absolutely correct.

All these models and assumptions are basically useless in each individual case because nobody knows when they die.
Major error here, the SS benefits tables are not biased towards living long or short, they are actuarially neutral. By choosing to take the benefit early, you are making an explicit assumption that you will die early. If you have no idea or don't want to plan your death, taking the benefit a Full Retirement Age (FRA) would be the most prudent as you are no longer betting on an outcome.

Interestingly, most financial planners will tell you one of the most important features of SS is that it helps protect against longevity risk (living longer than planned.) By taking it early you are actually reducing the value of that benefit (which is almost impossible to buy somewhere else with inflation protection too).

Besides, a reasonable planning horizon is knowable. As with all future estimates they could be completely wrong, but ignoring the odds and assuming you are dying early is not a balanced response to not knowing when you'll die.

If you want to define reasonable planning parameters, this tool is an excellent place to start: Actuarial Longevity Illustrator
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Re: The Biggest Mistakes People Make With Social Security

Post by JS-Elcano »

JoeRetire wrote: Thu May 13, 2021 6:11 am
JS-Elcano wrote: Wed May 12, 2021 9:39 pmSo, maybe I am better off claiming slightly early and get 100% instead of waiting and only getting 79%. We are certainly in for interesting times.
You are making a couple of assumptions here:
- Congress will not act to change the laws in order to allow Social Security to remain fully funded, even though it has always done so in the past
- You would somehow become "grandfathered" into your then-current benefit amount allowing you to keep 100% rather than get a 21% haircut, even though that is not what the current laws say

Fortunately, you don't have to decide today. My guess is that "claiming slightly early" will not be beneficial. We'll see.
You are correct with that none of this may come to pass. I was simply trying to imagine reasons for why people might claim early, arguing that there may be emotional reasons for it, such as anxiety caused by the uncertainty of SS's future benefits structure (1 bird in the hand is better than 2 in the bush), rather than looking at the probable developments rationally.
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Re: The Biggest Mistakes People Make With Social Security

Post by JoeRetire »

retiringwhen wrote: Thu May 13, 2021 6:54 am Basically, it does two things for my planning:

1.) I don't have to guess when the first person dies, I only use actuarial data to make an educated guess at when the second dies.
Okay. Why don't you use actuarial data to make an educated guess at when the first person dies? That would seem more consistent.
2.) It bakes in an assumption/risk mitigation of some level of reduced benefits in the future (BTW, at my age, the planned reduced benefits in current law would kick in about 2 years after I turn 70).
Okay. But I don't see how that baked in assumption would be more useful than the SSA's own estimate of 21% in 2034.
I assume full survivor benefits by assuming the higher earning spouse is the second to die
Why would that be necessary? Unless you are positing a change to current survivor benefit rules then as soon as one spouse dies, the total benefit is reduced to equal the higher earner's benefit, right? Doesn't matter which one dies first.
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Re: The Biggest Mistakes People Make With Social Security

Post by JoeRetire »

JS-Elcano wrote: Thu May 13, 2021 1:17 pm
JoeRetire wrote: Thu May 13, 2021 6:11 am
JS-Elcano wrote: Wed May 12, 2021 9:39 pmSo, maybe I am better off claiming slightly early and get 100% instead of waiting and only getting 79%. We are certainly in for interesting times.
You are making a couple of assumptions here:
- Congress will not act to change the laws in order to allow Social Security to remain fully funded, even though it has always done so in the past
- You would somehow become "grandfathered" into your then-current benefit amount allowing you to keep 100% rather than get a 21% haircut, even though that is not what the current laws say

Fortunately, you don't have to decide today. My guess is that "claiming slightly early" will not be beneficial. We'll see.
You are correct with that none of this may come to pass. I was simply trying to imagine reasons for why people might claim early, arguing that there may be emotional reasons for it, such as anxiety caused by the uncertainty of SS's future benefits structure (1 bird in the hand is better than 2 in the bush), rather than looking at the probable developments rationally.
Okay. I agree that some folks make their choice based on emotion rather than math, or the actual rules.
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Re: The Biggest Mistakes People Make With Social Security

Post by JoeRetire »

retiringwhen wrote: Thu May 13, 2021 12:42 pm
SteadyOne wrote: Thu May 13, 2021 12:27 pm
New Providence wrote: Thu May 13, 2021 7:46 am I'll take it at 62.

Analysis is of little value because the most relevant data point, life span, is unknown.
This is absolutely correct.

All these models and assumptions are basically useless in each individual case because nobody knows when they die.
Major error here, the SS benefits tables are not biased towards living long or short, they are actuarially neutral.
That used to be true. But it's no longer the case:
https://apnews.com/article/health-17b67 ... b9e39a6014
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Re: The Biggest Mistakes People Make With Social Security

Post by smitcat »

JS-Elcano wrote: Thu May 13, 2021 1:17 pm
JoeRetire wrote: Thu May 13, 2021 6:11 am
JS-Elcano wrote: Wed May 12, 2021 9:39 pmSo, maybe I am better off claiming slightly early and get 100% instead of waiting and only getting 79%. We are certainly in for interesting times.
You are making a couple of assumptions here:
- Congress will not act to change the laws in order to allow Social Security to remain fully funded, even though it has always done so in the past
- You would somehow become "grandfathered" into your then-current benefit amount allowing you to keep 100% rather than get a 21% haircut, even though that is not what the current laws say

Fortunately, you don't have to decide today. My guess is that "claiming slightly early" will not be beneficial. We'll see.
You are correct with that none of this may come to pass. I was simply trying to imagine reasons for why people might claim early, arguing that there may be emotional reasons for it, such as anxiety caused by the uncertainty of SS's future benefits structure (1 bird in the hand is better than 2 in the bush), rather than looking at the probable developments rationally.
"I was simply trying to imagine reasons for why people might claim early,"
Searching for data will supply the answer for 'most' people.
Most people file as early as possible.
Most people have very little saved for retirement
Most people need the funds early on.
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Re: The Biggest Mistakes People Make With Social Security

Post by JoeRetire »

New Providence wrote: Thu May 13, 2021 7:46 am I'll take it at 62.

Analysis is of little value because the most relevant data point, life span, is unknown.
On the contrary. Analysis is particularly valuable for that reason.

Using https://opensocialsecurity.com/ you can examine what happens when you die young, die old, or anything in between.
Particularly if you have a lower-earning spouse, examine the case where you die around 70 and your spouse lives late into their 90s.

If you are single, consider that if you die while delaying your benefits, you won't care (because you'll be dead).
Yet if you claim early and live a long life, you'll end up with significantly lower lifetime benefits. https://opensocialsecurity.com/ can tell you how much.

A little analysis can go a long way.
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Re: The Biggest Mistakes People Make With Social Security

Post by JoeRetire »

smitcat wrote: Thu May 13, 2021 1:53 pm "I was simply trying to imagine reasons for why people might claim early,"
Searching for data will supply the answer for 'most' people.
Most people file as early as possible.
Most people have very little saved for retirement
Most people need the funds early on.
Because many people stop working before they must.
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Re: The Biggest Mistakes People Make With Social Security

Post by retiringwhen »

JoeRetire wrote: Thu May 13, 2021 1:49 pm The SS benefits tables are not biased towards living long or short, they are actuarially neutral.
That used to be true. But it's no longer the case:
https://apnews.com/article/health-17b67 ... b9e39a6014
[/quote]

Interesting, Didn't realize that. It makes the case for delaying even more solid.
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Re: The Biggest Mistakes People Make With Social Security

Post by ModifiedDuration »

JoeRetire wrote: Thu May 13, 2021 1:49 pm
retiringwhen wrote: Thu May 13, 2021 12:42 pm
SteadyOne wrote: Thu May 13, 2021 12:27 pm
New Providence wrote: Thu May 13, 2021 7:46 am I'll take it at 62.

Analysis is of little value because the most relevant data point, life span, is unknown.
This is absolutely correct.

All these models and assumptions are basically useless in each individual case because nobody knows when they die.
Major error here, the SS benefits tables are not biased towards living long or short, they are actuarially neutral.
That used to be true. But it's no longer the case:
https://apnews.com/article/health-17b67 ... b9e39a6014
Yes, the current 8% increase in benefits for each year past Full Retirement Age was part of the Social Security Amendments of 1983 (H.R. 1900, Public Law 98-21) and has not been changed since that legislation was passed and the increase phased in.

Actuarially, it should be a lower percentage nowadays - something less than 7%.
Last edited by ModifiedDuration on Thu May 13, 2021 2:16 pm, edited 2 times in total.
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Re: The Biggest Mistakes People Make With Social Security

Post by vineviz »

New Providence wrote: Thu May 13, 2021 7:46 am I'll take it at 62.

Analysis is of little value because the most relevant data point, life span, is unknown.
Analysis is most valuable when uncertainty exists: if the future was known with certainty, what would be left to analyze?
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Re: The Biggest Mistakes People Make With Social Security

Post by JoeRetire »

retiringwhen wrote: Thu May 13, 2021 2:01 pm
JoeRetire wrote: Thu May 13, 2021 1:49 pm The SS benefits tables are not biased towards living long or short, they are actuarially neutral.
That used to be true. But it's no longer the case:
https://apnews.com/article/health-17b67 ... b9e39a6014
Interesting, Didn't realize that. It makes the case for delaying even more solid.
[/quote]
Yup. And actuarily speaking, maximizing survivor benefits tends to be a better deal for women.
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Re: The Biggest Mistakes People Make With Social Security

Post by ROIGuy »

SteadyOne wrote: Thu May 13, 2021 12:29 pm
Mr.BB wrote: Thu May 13, 2021 4:46 am
SteadyOne wrote: Wed May 12, 2021 9:16 pm
Mr.BB wrote: Wed May 12, 2021 4:47 pm
Flashes1 wrote: Tue May 11, 2021 8:47 am I think a lot of Bogleheads are missing the fact that most people NEED their SS prior to FRA. Not everyone has a $3 million NW before they're 40 and not everyone has great health up thru FRA. We can argue their plight is due to their own poor life choices, but the fact is most people haven't saved up big war chests and they depend on SS....for many of us, it's simply play money.
The basic math says if you do not have enough money saved up to cover your living expenses, why would you retire? If you are retiring just to not have to work anymore and collect SS, then that is just being lazy. If you choose not save enough (or couldn't) over the years, you need to work to age 70 and let your SS grow. If you need your SS before FRA then then odds are you need to work anyway and SS will deduct your monthly total until your FRA anyway. It makes no sense to try to retire if you simply don't have the means.
What if you had a stroke and cannot work anymore?
That is a completely different situation. Of course you would need your SS and/or disability income then.
So how you can plan then? In advance of the stroke? Unless one knows when this stroke happens.
You can't plan for it, but that was not my point. Same thing as not knowing when you are going to die. Bottom line was what does your numbers say. If you don't have enough to live on, then work more (if you can). If you can afford to stop, then stop. Whatever works for you.
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Re: The Biggest Mistakes People Make With Social Security

Post by ModifiedDuration »

vineviz wrote: Thu May 13, 2021 2:05 pm
New Providence wrote: Thu May 13, 2021 7:46 am I'll take it at 62.

Analysis is of little value because the most relevant data point, life span, is unknown.
Analysis is most valuable when uncertainty exists: if the future was known with certainty, what would be left to analyze?
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Re: The Biggest Mistakes People Make With Social Security

Post by smitcat »

JoeRetire wrote: Thu May 13, 2021 1:58 pm
smitcat wrote: Thu May 13, 2021 1:53 pm "I was simply trying to imagine reasons for why people might claim early,"
Searching for data will supply the answer for 'most' people.
Most people file as early as possible.
Most people have very little saved for retirement
Most people need the funds early on.
Because many people stop working before they must.
That too.
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Re: The Biggest Mistakes People Make With Social Security

Post by Artsdoctor »

Like many of my fellow Bogleheads, I thought that both I and my spouse would begin social security benefits at 70. That plan was actually part of my IPS years ago.

However, there were some data out there that slowly changed my mind. Individual life expectancies and couple life expectancies are two very different things. There are some terrific articles out there but a quick Google search brings up one (of many) which is pretty clear is looking at some numbers that influenced my decision, and that may help others understand some claiming strategies.

If you're both considerably claiming at 70, just play out the numbers. It's very unlikely that you'll live to be the same age and die together. Don't forget about survival benefits when doing your calculations. There are a lot of variables going on here, including your health status. Several posters above claimed that "you just don't know when you're going to die"--and it is true that very few people don't know the day of their deaths. However, there are plenty of people who are 62 that have an awful lot of medical problems which should be considered BY BOTH SPOUSES when claiming strategies are discussed.

http://humcap.uchicago.edu/RePEc/hka/wp ... pouses.pdf
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Re: The Biggest Mistakes People Make With Social Security

Post by JoeRetire »

Artsdoctor wrote: Fri May 14, 2021 5:31 pm Like many of my fellow Bogleheads, I thought that both I and my spouse would begin social security benefits at 70. That plan was actually part of my IPS years ago.

However, there were some data out there that slowly changed my mind. Individual life expectancies and couple life expectancies are two very different things. There are some terrific articles out there but a quick Google search brings up one (of many) which is pretty clear is looking at some numbers that influenced my decision, and that may help others understand some claiming strategies.
So, if not both claiming at 70, what was your actual decision? What numbers influenced your decision? Did you check that decision using https://opensocialsecurity.com/ ?
If you're both considerably claiming at 70, just play out the numbers. It's very unlikely that you'll live to be the same age and die together.
Right, but in many cases it doesn't matter that you don't die together.

For example, using https://opensocialsecurity.com/ you can see that if you both have about the same PIA, and are both about the same age, you could die 10 years apart (say 88 and 98), and still having both claim at age 70 would give you the highest lifetime benefits.

You can just use this link, then click Submit to see the results for yourself:
https://opensocialsecurity.com/?additio ... dren=false
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Re: The Biggest Mistakes People Make With Social Security

Post by cbeck »

David Jay wrote: Tue May 11, 2021 8:03 am
Johm221122 wrote: Tue May 11, 2021 7:10 am
Even so, only about 6% of Americans claiming Social Security in 2017 were age 70, according to the Center for Retirement Research
This is the one I don't understand. I make almost the median income exactly per year and at 70 Social Security would cover 100% of my current spending. It's a no brainer to wait to 70 if at all possible. I don't care if I break even or could make more investing the money, I want financial peace of mind in old age(a good chunk of my retirement accounts is for retirement before 70).
This topic always spirals down into a debate between two camps who talk past each other because they are operating from two very different viewpoints. It is not really about the math, it is about how you view the program:

View A (I call this the “ROI” view): I have been paying into SS my entire working life and I want to make every effort to recoup those funds. Since the date of my demise is unknown, the sooner I file the more likely it is that I can get most of my money back if I pass at a young age.

View B (I call this the “annuity” view): The date of my (“our”, if married) demise is unknown, I (one of us) may live to be 100. I want to assure the maximum income stream into my (our) golden years.

Again, neither view is “right”, but where you start almost always determines where you end up.
The "annuity" view is indeed the correct view, because SS is longevity insurance, not an investment. The crowd who insist on viewing SS as an investment with their break-even analysis have an overwhelming tendency to ignore the problem that SS was designed to avoid: running out of money in old age. The investors among them are far too confident in their investment prowess even to consider the possibility that they could go bust and have nothing left but SS benefits. If they knew what they were doing they would discuss that risk and provisions they could make to address it, such as reducing their consumption to increase savings. But they are blind to that risk.

Ignorance is not a legitimate point of view.
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Re: The Biggest Mistakes People Make With Social Security

Post by David Jay »

So many comments in this very thread that have demonstrated the difference in the two viewpoints, everyone assured that theirs is the correct understanding...
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Re: The Biggest Mistakes People Make With Social Security

Post by grabiner »

cbeck wrote: Fri May 14, 2021 9:23 pm
David Jay wrote: Tue May 11, 2021 8:03 am
Johm221122 wrote: Tue May 11, 2021 7:10 am
Even so, only about 6% of Americans claiming Social Security in 2017 were age 70, according to the Center for Retirement Research
This is the one I don't understand. I make almost the median income exactly per year and at 70 Social Security would cover 100% of my current spending. It's a no brainer to wait to 70 if at all possible. I don't care if I break even or could make more investing the money, I want financial peace of mind in old age(a good chunk of my retirement accounts is for retirement before 70).
This topic always spirals down into a debate between two camps who talk past each other because they are operating from two very different viewpoints. It is not really about the math, it is about how you view the program:

View A (I call this the “ROI” view): I have been paying into SS my entire working life and I want to make every effort to recoup those funds. Since the date of my demise is unknown, the sooner I file the more likely it is that I can get most of my money back if I pass at a young age.

View B (I call this the “annuity” view): The date of my (“our”, if married) demise is unknown, I (one of us) may live to be 100. I want to assure the maximum income stream into my (our) golden years.

Again, neither view is “right”, but where you start almost always determines where you end up.
The "annuity" view is indeed the correct view, because SS is longevity insurance, not an investment. The crowd who insist on viewing SS as an investment with their break-even analysis have an overwhelming tendency to ignore the problem that SS was designed to avoid: running out of money in old age. The investors among them are far too confident in their investment prowess even to consider the possibility that they could go bust and have nothing left but SS benefits. If they knew what they were doing they would discuss that risk and provisions they could make to address it, such as reducing their consumption to increase savings. But they are blind to that risk.
There are investors who aren't using SS that way. Some plan to buy additional annuities besides SS; they are almost always better off delaying SS until 70, as the annuity rate on SS is better than the rate on retail annuities, so delaying SS to 70 and getting a retail annuity for the rest leaves more money for the same standard of living. Others will have enough for retirement, and are optimizing extra spending and returns for their heirs. For them, optimizing returns is appropriate.

But View A still doesn't work in either situation. If you want to optimize your total return; the amount you contributed doesn't matter. If you consider delaying from 67 to 68, you will have more money by delaying if the benefit lasts past age 82; whether this is right depends on your health, and on what happens to a spousal benefit if you or your spouse dies, but not on how much you contributed.
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Re: The Biggest Mistakes People Make With Social Security

Post by chris319 »

I am very lucky to have a pension. The pension is not adjusted for inflation, however.

Work had turned into a sweatshop and a hellhole. I'm Retiring at age 66 and 2 months (born in 1955). I ran the numbers very, very carefully with input from this board. I could subsist on my pension alone. In the four years before turning 70, the pension will lose buying power to inflation. Things would be tight and I would have to carefully weigh every expenditure. I had lean times in college in my 20's and I don't care to go there again.

Collecting soc sec when I qualify for "full retirement benefits" will give me more wiggle room budgetarily. It will also allow me to run a surplus every month which I plan to invest. Whether the market will return more than the guaranteed 8% per year of soc sec during those 4 years remains to be seen. My portfolio will be divided into two components: "income" and "growth". "Income will be the pension and soc sec. "Growth" will be investments.
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Re: The Biggest Mistakes People Make With Social Security

Post by snackdog »

The article completely missed the Biggest Mistake - neglecting/forgetting to file for SS at all! It happens.
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Re: The Biggest Mistakes People Make With Social Security

Post by JoeRetire »

chris319 wrote: Fri May 14, 2021 11:32 pm Collecting soc sec when I qualify for "full retirement benefits" will give me more wiggle room budgetarily.
... For about 4 years. At the expense of having a bit less wiggle room for the rest of your life.
Perhaps a different (even part-time) job for those 4 years would give you even more wiggle room.

Such are the choices we all make.
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Re: The Biggest Mistakes People Make With Social Security

Post by Harry Livermore »

David Jay wrote: Tue May 11, 2021 8:03 am
This topic always spirals down into a debate between two camps who talk past each other because they are operating from two very different viewpoints. It is not really about the math, it is about how you view the program:

View A (I call this the “ROI” view): I have been paying into SS my entire working life and I want to make every effort to recoup those funds. Since the date of my demise is unknown, the sooner I file the more likely it is that I can get most of my money back if I pass at a young age.

View B (I call this the “annuity” view): The date of my (“our”, if married) demise is unknown, I (one of us) may live to be 100. I want to assure the maximum income stream into my (our) golden years.

Again, neither view is “right”, but where you start almost always determines where you end up.
Excellent observation. I agree.
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Re: The Biggest Mistakes People Make With Social Security

Post by #Cruncher »

cbeck wrote: Fri May 14, 2021 9:23 pm
David Jay wrote: Tue May 11, 2021 8:03 am...
View A (I call this the “ROI” view): ...
View B (I call this the “annuity” view): ...
The "annuity" view is indeed the correct view, because SS is longevity insurance, not an investment. The crowd who insist on viewing SS as an investment with their break-even analysis have an overwhelming tendency to ignore the problem that SS was designed to avoid: running out of money in old age. ...
To the contrary, I contend that a form of break-even analysis is necessary to properly evaluate SS as longevity insurance.

For example, a single male with a Normal Retirement Age (NRA) of 67 would need to live to age 84.5 for starting at age 70 to break even with starting at age 69. This is based on the benefit increasing from 116% of the Primary Insurance Amount (PIA) at age 69 to 124% at age 70 (84.5 = 70 + 116 / 8) [1]. Actuarily this is unlikely for a man in average health. [2] However, if he can afford to wait, I'd still suggest that he do so in order to provide "insurance" against living beyond the break even age.

But what if the benefit didn't increase from 116% of PIA to 124%? What if it only increased from 108% to 112%? In this case the breakeven age would be 97.0, not 84.5. (97.0 = 70 + 108 / 4). Would delaying still be smart insurance? Yes, if one lived to 100. But it would not be good insurance against living to age 90 -- still well beyond his life expectancy. [3]

And what if the benefit increase was even less, say from 104% to 106%? In this case the breakeven would be age 122. No reasonable person would purchase insurance against that possibility -- even for the case of a married couple where the survivor would continue to receive the larger benefit.

The following table shows the breakeven ages calculated with three alternate yearly increases (2%, 4%, and 6%) versus PIA as well as with the actual SS benefits for someone with an NRA of 67. If SS increased only 2% points per year, it wouldn't even be smart for a married couple to delay from age 62 to 63, since the breakeven age would be 108 (63 + 90 / 2).

Code: Select all

Row         Col A   Col B  Col C  Col D    Col E  Col F  Col G    Col H  Col I  Col J
  1          Born   1960
  2           NRA     67
  3     Claim age     62     63     64       65     66     67       68     69     70
  4  Actual % PIA   70.00  75.00  80.00    86.67  93.33 100.00   108.00 116.00 124.00
  5            2%   90.00  92.00  94.00    96.00  98.00 100.00   102.00 104.00 106.00
  6            4%   80.00  84.00  88.00    92.00  96.00 100.00   104.00 108.00 112.00
  7            6%   70.00  76.00  82.00    88.00  94.00 100.00   106.00 112.00 118.00
                           --------- Age to Break Even by Delaying One Year ---------
  8  Actual % PIA           77.0   79.0     77.0   79.0   81.0     80.5   82.5   84.5
  9            2%          108.0  110.0    112.0  114.0  116.0    118.0  120.0  122.0
 10            4%           83.0   85.0     87.0   89.0   91.0     93.0   95.0   97.0
 11            6%           74.7   76.7     78.7   80.7   82.7     84.7   86.7   88.7
  1. This implicitly assumes a 0% real discount rate, which is reasonable I believe given that long term TIPS yields are currently close to 0%.
  2. For example the SSA 2017 Period Life Table shows a life expectancy of 84.07 for a 69-year old man. And Mike Piper's Open Social Security calculator recommends starting at age 69 + 2 months with a 0% discount rate and all other inputs at their defaults.
  3. According to the same SSA mortality table, only 24% of men age 69 live to age 90. (24% = 18,070 / 74,263)
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Re: The Biggest Mistakes People Make With Social Security

Post by retiringwhen »

#Cruncher, what is the purpose of comparing lower annual increases and discounts in the benefit vs. the current annual 8% and 70% rules?

[edited for clarity and correctness]
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Re: The Biggest Mistakes People Make With Social Security

Post by chris319 »

JoeRetire wrote: Sat May 15, 2021 4:56 am
chris319 wrote: Fri May 14, 2021 11:32 pm Collecting soc sec when I qualify for "full retirement benefits" will give me more wiggle room budgetarily.
... For about 4 years. At the expense of having a bit less wiggle room for the rest of your life.
Perhaps a different (even part-time) job for those 4 years would give you even more wiggle room.
I have more than enough capital for an income-producing bond fund or a (gasp!) annuity if I need one.

I'm finished with being a wage slave. 51 years in my industry is enough. Give the job to someone who lost theirs as a result of the pandemic.
Financial decisions based on emotion often turn out to be bad decisions.
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Re: The Biggest Mistakes People Make With Social Security

Post by montanagirl »

vested1 wrote: Wed May 12, 2021 1:11 pm Always learning something new.

I have a friend who was married to a woman 10 years younger than him for over 10 years before getting divorced 30 years ago. He got remarried and is delaying his own SS benefit until age 70. His ex got remarried but that marriage only lasted a few months. The ex is under the impression that she can file for spousal benefits on my friend's SS and get survivor benefits based on what he was getting when he dies.

The ex-wife only earned enough on her own to get a small SS benefit. Is she not able to file for spousal or a survivor benefit on my friend's benefit because she got remarried for a couple months, and also not able to file on her more recent husband's benefit because they weren't married for 10 years?

If that's the case I think we have a new winner for biggest mistake with Social Security.
My mother filed on my father's record after he died. They had been divorced 50 years, she had been remarried and divorced, and he was a widower.

She got his entire benefit, which I hadn't thought possible.
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Re: The Biggest Mistakes People Make With Social Security

Post by Dandy »

Some people feel that since longevity genes are not in their family that means they should take SS early. If their current health is good and they have enough assets to easily fund the wait for the higher earner to collect at 70 that still might be a good idea. Lots of factors involved in determining if your health risk is very similar to parents/siblings.

A lot depends on what you give up by waiting to age 70 to collect vs living a longer than expected life without sufficient assets/income.

We also have a tendency to not to defer the receipt of money especially if we have to spend more now to get it.
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Re: The Biggest Mistakes People Make With Social Security

Post by JoeRetire »

chris319 wrote: Sat May 15, 2021 8:13 am
JoeRetire wrote: Sat May 15, 2021 4:56 am
chris319 wrote: Fri May 14, 2021 11:32 pm Collecting soc sec when I qualify for "full retirement benefits" will give me more wiggle room budgetarily.
... For about 4 years. At the expense of having a bit less wiggle room for the rest of your life.
Perhaps a different (even part-time) job for those 4 years would give you even more wiggle room.
I have more than enough capital for an income-producing bond fund or a (gasp!) annuity if I need one.

I'm finished with being a wage slave. 51 years in my industry is enough. Give the job to someone who lost theirs as a result of the pandemic.
Slavery is bad. Of course there are other industries.
Good luck with your wiggle room the next four years.
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Re: The Biggest Mistakes People Make With Social Security

Post by cbeck »

#Cruncher wrote: Sat May 15, 2021 7:37 am
cbeck wrote: Fri May 14, 2021 9:23 pm
David Jay wrote: Tue May 11, 2021 8:03 am...
View A (I call this the “ROI” view): ...
View B (I call this the “annuity” view): ...
The "annuity" view is indeed the correct view, because SS is longevity insurance, not an investment. The crowd who insist on viewing SS as an investment with their break-even analysis have an overwhelming tendency to ignore the problem that SS was designed to avoid: running out of money in old age. ...
To the contrary, I contend that a form of break-even analysis is necessary to properly evaluate SS as longevity insurance.

For example, a single male with a Normal Retirement Age (NRA) of 67 would need to live to age 84.5 for starting at age 70 to break even with starting at age 69. This is based on the benefit increasing from 116% of the Primary Insurance Amount (PIA) at age 69 to 124% at age 70 (84.5 = 70 + 116 / 8) [1]. Actuarily this is unlikely for a man in average health. [2] However, if he can afford to wait, I'd still suggest that he do so in order to provide "insurance" against living beyond the break even age.

But what if the benefit didn't increase from 116% of PIA to 124%? What if it only increased from 108% to 112%? In this case the breakeven age would be 97.0, not 84.5. (97.0 = 70 + 108 / 4). Would delaying still be smart insurance? Yes, if one lived to 100. But it would not be good insurance against living to age 90 -- still well beyond his life expectancy. [3]

And what if the benefit increase was even less, say from 104% to 106%? In this case the breakeven would be age 122. No reasonable person would purchase insurance against that possibility -- even for the case of a married couple where the survivor would continue to receive the larger benefit.

The following table shows the breakeven ages calculated with three alternate yearly increases (2%, 4%, and 6%) versus PIA as well as with the actual SS benefits for someone with an NRA of 67. If SS increased only 2% points per year, it wouldn't even be smart for a married couple to delay from age 62 to 63, since the breakeven age would be 108 (63 + 90 / 2).

Code: Select all

Row         Col A   Col B  Col C  Col D    Col E  Col F  Col G    Col H  Col I  Col J
  1          Born   1960
  2           NRA     67
  3     Claim age     62     63     64       65     66     67       68     69     70
  4  Actual % PIA   70.00  75.00  80.00    86.67  93.33 100.00   108.00 116.00 124.00
  5            2%   90.00  92.00  94.00    96.00  98.00 100.00   102.00 104.00 106.00
  6            4%   80.00  84.00  88.00    92.00  96.00 100.00   104.00 108.00 112.00
  7            6%   70.00  76.00  82.00    88.00  94.00 100.00   106.00 112.00 118.00
                           --------- Age to Break Even by Delaying One Year ---------
  8  Actual % PIA           77.0   79.0     77.0   79.0   81.0     80.5   82.5   84.5
  9            2%          108.0  110.0    112.0  114.0  116.0    118.0  120.0  122.0
 10            4%           83.0   85.0     87.0   89.0   91.0     93.0   95.0   97.0
 11            6%           74.7   76.7     78.7   80.7   82.7     84.7   86.7   88.7
  1. This implicitly assumes a 0% real discount rate, which is reasonable I believe given that long term TIPS yields are currently close to 0%.
  2. For example the SSA 2017 Period Life Table shows a life expectancy of 84.07 for a 69-year old man. And Mike Piper's Open Social Security calculator recommends starting at age 69 + 2 months with a 0% discount rate and all other inputs at their defaults.
  3. According to the same SSA mortality table, only 24% of men age 69 live to age 90. (24% = 18,070 / 74,263)
Trying to talk a SS-as-investment fundamentalist out of his break-even analysis is like trying to take a bone away from a dog. But, without any hope of success, I will give it yet another try.

An investment is an allocation of capital with the expectation of a future gain along with the eventual return of the capital either to the investor or his estate. An insurance policy is the transfer of a risk that is too large for the annuitant to bear himself to an insurance company which provides a service that the annuitant cannot provide himself of pooling the risk. The pooling of the risk enables the insurance company to predict with a high degree of accuracy the probability of a payoff.

For the SS annuitant the risk in question is the risk of outliving one's assets probably resulting in the pessimal trifecta of old, sick, and broke. The mistake that the SS-break-even crowd including yourself never address is: well, what happens if you do live to 105 by which time your portfolio is only a fond memory? This scenario is directly analogous to buying homeowner's insurance for your house, which you are willing to buy, not based on the likelihood of its burning down, but based on the fact that were it to do so you would not be able to replace it. We note how seldom we hear homeowners' regretting that after all those years they never had so much as a small kitchen fire to enable them to recoup those insurance premiums paid.

Insurance, like surgery, is normally a case of what game theorists call "minimaxing," i.e. choosing the strategy to minimize not the average or expected loss, but the maximum loss. When we buy insurance we accept a certain, small loss, the premiums, to protect against the possibility of a loss too catastrophic for us to cover.

If the crowd of break-even-analysis-is-our-hammer-and-SS-is-ust-another-nail actually understood the risk they were accepting by not increasing their the only income stream they cannot outlive when they have the chance and can afford to do so, they would realize that by doing so they are increasing the risk that they will be old and broke. They might then rationally decide to reduce consumption to build savings against that undesirable outcome, but that option never comes up in their discussions. The question you should be answering is not how likely is it that I outlive my assets, but what if I do? If that day were to arrive, you would likely have few, if any, options available.

We know what it takes to maintain living standards without risk throughout retirement: a pension providing approximately 80% of pre-retirement income for life with COlAS. In American life those pensions have mostly gone the way of the mastodon. SS aims only to replace 40% of pre-retirement income, which is not enough. Delaying SS benefits as long as possible is the only way to buy more SS annuity, but even that does not get us to the worry-free target level. So, the conclusion is that most Americans who can afford to do so should buy more annuity and SS is, by far, the best available.
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Re: The Biggest Mistakes People Make With Social Security

Post by cbeck »

Dandy wrote: Sat May 15, 2021 9:41 am Some people feel that since longevity genes are not in their family that means they should take SS early. If their current health is good and they have enough assets to easily fund the wait for the higher earner to collect at 70 that still might be a good idea. Lots of factors involved in determining if your health risk is very similar to parents/siblings.

A lot depends on what you give up by waiting to age 70 to collect vs living a longer than expected life without sufficient assets/income.

We also have a tendency to not to defer the receipt of money especially if we have to spend more now to get it.
Though it is widely believed that long life runs in families for genetic reasons, estimates of life span “heritability” are consistently low (∼15–30%).

https://www.genetics.org/content/210/3/1109
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Re: The Biggest Mistakes People Make With Social Security

Post by willthrill81 »

cbeck wrote: Sat May 15, 2021 7:47 pm
Dandy wrote: Sat May 15, 2021 9:41 am Some people feel that since longevity genes are not in their family that means they should take SS early. If their current health is good and they have enough assets to easily fund the wait for the higher earner to collect at 70 that still might be a good idea. Lots of factors involved in determining if your health risk is very similar to parents/siblings.

A lot depends on what you give up by waiting to age 70 to collect vs living a longer than expected life without sufficient assets/income.

We also have a tendency to not to defer the receipt of money especially if we have to spend more now to get it.
Though it is widely believed that long life runs in families for genetic reasons, estimates of life span “heritability” are consistently low (∼15–30%).

https://www.genetics.org/content/210/3/1109
Indeed. It seems that most people just don't believe the data though.

Since about 1950, 70 year old people in first-world nations have been gaining roughly one year of life expectancy for every calendar decade (e.g., 70 year olds are likely to live almost seven years longer today than in 1950). In the prior 100 years, 70 year olds only gained about one year of life expectancy. Talk about the 'good old days'...

Image

That graph makes me highly suspect of those who claim that most of us will shortly be living to 100 or beyond. For that to happen, the trends we've seen for the last 70 years would have to increase at a far faster rate.
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Re: The Biggest Mistakes People Make With Social Security

Post by SteadyOne »

cbeck wrote: Sat May 15, 2021 7:33 pm
#Cruncher wrote: Sat May 15, 2021 7:37 am
cbeck wrote: Fri May 14, 2021 9:23 pm
David Jay wrote: Tue May 11, 2021 8:03 am...
View A (I call this the “ROI” view): ...
View B (I call this the “annuity” view): ...
The "annuity" view is indeed the correct view, because SS is longevity insurance, not an investment. The crowd who insist on viewing SS as an investment with their break-even analysis have an overwhelming tendency to ignore the problem that SS was designed to avoid: running out of money in old age. ...
To the contrary, I contend that a form of break-even analysis is necessary to properly evaluate SS as longevity insurance.

For example, a single male with a Normal Retirement Age (NRA) of 67 would need to live to age 84.5 for starting at age 70 to break even with starting at age 69. This is based on the benefit increasing from 116% of the Primary Insurance Amount (PIA) at age 69 to 124% at age 70 (84.5 = 70 + 116 / 8) [1]. Actuarily this is unlikely for a man in average health. [2] However, if he can afford to wait, I'd still suggest that he do so in order to provide "insurance" against living beyond the break even age.

But what if the benefit didn't increase from 116% of PIA to 124%? What if it only increased from 108% to 112%? In this case the breakeven age would be 97.0, not 84.5. (97.0 = 70 + 108 / 4). Would delaying still be smart insurance? Yes, if one lived to 100. But it would not be good insurance against living to age 90 -- still well beyond his life expectancy. [3]

And what if the benefit increase was even less, say from 104% to 106%? In this case the breakeven would be age 122. No reasonable person would purchase insurance against that possibility -- even for the case of a married couple where the survivor would continue to receive the larger benefit.

The following table shows the breakeven ages calculated with three alternate yearly increases (2%, 4%, and 6%) versus PIA as well as with the actual SS benefits for someone with an NRA of 67. If SS increased only 2% points per year, it wouldn't even be smart for a married couple to delay from age 62 to 63, since the breakeven age would be 108 (63 + 90 / 2).

Code: Select all

Row         Col A   Col B  Col C  Col D    Col E  Col F  Col G    Col H  Col I  Col J
  1          Born   1960
  2           NRA     67
  3     Claim age     62     63     64       65     66     67       68     69     70
  4  Actual % PIA   70.00  75.00  80.00    86.67  93.33 100.00   108.00 116.00 124.00
  5            2%   90.00  92.00  94.00    96.00  98.00 100.00   102.00 104.00 106.00
  6            4%   80.00  84.00  88.00    92.00  96.00 100.00   104.00 108.00 112.00
  7            6%   70.00  76.00  82.00    88.00  94.00 100.00   106.00 112.00 118.00
                           --------- Age to Break Even by Delaying One Year ---------
  8  Actual % PIA           77.0   79.0     77.0   79.0   81.0     80.5   82.5   84.5
  9            2%          108.0  110.0    112.0  114.0  116.0    118.0  120.0  122.0
 10            4%           83.0   85.0     87.0   89.0   91.0     93.0   95.0   97.0
 11            6%           74.7   76.7     78.7   80.7   82.7     84.7   86.7   88.7
  1. This implicitly assumes a 0% real discount rate, which is reasonable I believe given that long term TIPS yields are currently close to 0%.
  2. For example the SSA 2017 Period Life Table shows a life expectancy of 84.07 for a 69-year old man. And Mike Piper's Open Social Security calculator recommends starting at age 69 + 2 months with a 0% discount rate and all other inputs at their defaults.
  3. According to the same SSA mortality table, only 24% of men age 69 live to age 90. (24% = 18,070 / 74,263)
Trying to talk a SS-as-investment fundamentalist out of his break-even analysis is like trying to take a bone away from a dog. But, without any hope of success, I will give it yet another try.

An investment is an allocation of capital with the expectation of a future gain along with the eventual return of the capital either to the investor or his estate. An insurance policy is the transfer of a risk that is too large for the annuitant to bear himself to an insurance company which provides a service that the annuitant cannot provide himself of pooling the risk. The pooling of the risk enables the insurance company to predict with a high degree of accuracy the probability of a payoff.

For the SS annuitant the risk in question is the risk of outliving one's assets probably resulting in the pessimal trifecta of old, sick, and broke. The mistake that the SS-break-even crowd including yourself never address is: well, what happens if you do live to 105 by which time your portfolio is only a fond memory? This scenario is directly analogous to buying homeowner's insurance for your house, which you are willing to buy, not based on the likelihood of its burning down, but based on the fact that were it to do so you would not be able to replace it. We note how seldom we hear homeowners' regretting that after all those years they never had so much as a small kitchen fire to enable them to recoup those insurance premiums paid.

Insurance, like surgery, is normally a case of what game theorists call "minimaxing," i.e. choosing the strategy to minimize not the average or expected loss, but the maximum loss. When we buy insurance we accept a certain, small loss, the premiums, to protect against the possibility of a loss too catastrophic for us to cover.

If the crowd of break-even-analysis-is-our-hammer-and-SS-is-ust-another-nail actually understood the risk they were accepting by not increasing their the only income stream they cannot outlive when they have the chance and can afford to do so, they would realize that by doing so they are increasing the risk that they will be old and broke. They might then rationally decide to reduce consumption to build savings against that undesirable outcome, but that option never comes up in their discussions. The question you should be answering is not how likely is it that I outlive my assets, but what if I do? If that day were to arrive, you would likely have few, if any, options available.

We know what it takes to maintain living standards without risk throughout retirement: a pension providing approximately 80% of pre-retirement income for life with COlAS. In American life those pensions have mostly gone the way of the mastodon. SS aims only to replace 40% of pre-retirement income, which is not enough. Delaying SS benefits as long as possible is the only way to buy more SS annuity, but even that does not get us to the worry-free target level. So, the conclusion is that most Americans who can afford to do so should buy more annuity and SS is, by far, the best available.
It’s a good observation, but a rather small proportion of retirees have a luxury (if it’s a right word) to make this decision Most take SS at 62 because they are unable to work and have no other sources of income. Others continue to work because SS is too small to live on and retire when they physically done and claim SS then regardless of optimal financial calculations.
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cbeck
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Re: The Biggest Mistakes People Make With Social Security

Post by cbeck »

All too true. But the small portion of the US population that does have the luxury of deciding whether to delay SS is well-represented among the Bogleheads.
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JoeRetire
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Re: The Biggest Mistakes People Make With Social Security

Post by JoeRetire »

SteadyOne wrote: Sat May 15, 2021 8:20 pmMost take SS at 62 because they are unable to work and have no other sources of income.
Is that true?

If you said "Most take SS at 62 because they don't want to work and have little other income." I would buy it.
Or I would buy "Most people who stop working at 62 do so because SS (plus whatever savings they might have) allows them to have enough income to get by".

I'm not sure that most people who take SS at 62 are unable to work. I love to see a link to a study that shows this to be true
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Re: The Biggest Mistakes People Make With Social Security

Post by cbeck »

JoeRetire wrote: Sat May 15, 2021 8:48 pm
SteadyOne wrote: Sat May 15, 2021 8:20 pmMost take SS at 62 because they are unable to work and have no other sources of income.
Is that true?

If you said "Most take SS at 62 because they don't want to work and have little other income." I would buy it.
Or I would buy "Most people who stop working at 62 do so because SS (plus whatever savings they might have) allows them to have enough income to get by".

I'm not sure that most people who take SS at 62 are unable to work. I love to see a link to a study that shows this to be true
Makes sense. 56% of retirements of people over 50 in long-term, full-time work are involuntary. And the median retirement account balance of those aged 55 to 64 is $104,000.

https://www.aarp.org/work/working-at-50 ... ement.html
https://smartasset.com/retirement/avera ... you-normal
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JoeRetire
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Re: The Biggest Mistakes People Make With Social Security

Post by JoeRetire »

cbeck wrote: Sun May 16, 2021 1:11 am Makes sense. 56% of retirements of people over 50 in long-term, full-time work are involuntary.
The linked article actually says something different.

"56 percent of workers over the age of 50 in long-term, full-time positions lost their jobs involuntarily."

Losing a job isn't the same as retiring.

I was laid off twice over my career. In neither of those cases did I retire.
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Re: The Biggest Mistakes People Make With Social Security

Post by cbeck »

JoeRetire wrote: Sun May 16, 2021 5:08 am
cbeck wrote: Sun May 16, 2021 1:11 am Makes sense. 56% of retirements of people over 50 in long-term, full-time work are involuntary.
The linked article actually says something different.

"56 percent of workers over the age of 50 in long-term, full-time positions lost their jobs involuntarily."

Losing a job isn't the same as retiring.

I was laid off twice over my career. In neither of those cases did I retire.
That's true. An AARP survey had this to say about earlier-than-planned retirements:

Image

https://www.retirery.com/retirement-fac ... index.html
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Re: The Biggest Mistakes People Make With Social Security

Post by dknightd »

#Cruncher wrote: Sat May 15, 2021 7:37 am For example, a single male with a Normal Retirement Age (NRA) of 67 would need to live to age 84.5 for starting at age 70 to break even with starting at age 69. This is based on the benefit increasing from 116% of the Primary Insurance Amount (PIA) at age 69 to 124% at age 70 (84.5 = 70 + 116 / 8) [1]. Actuarily this is unlikely for a man in average health. [2] However, if he can afford to wait, I'd still suggest that he do so in order to provide "insurance" against living beyond the break even age.
Unless I misread the actuarial tables, which is possible, once you reach 69 you have an average life expectancy of about 84. So an average person, of age 69, or 70, has abut a 50/50 chance of living beyond that.

I fall into camp B. I look at SS as a COLA adjusted annuity. One of the few available. It is not perfect.

If you are part of a couple, it gets even more complicated. If one of us lives longer than average, I want to maximize survivor benefits. In part because the survivor will lose their partners SS income. To make up for what SS will not pay, I have dual life annuities. They are not inflation adjusted, but will provide the same nominal income as long as one of us is alive. So I want to maximize somewhat COLA adjusted income for whoever lives longer.

I am the higher earner, but younger member of the couple. Spouse claimed at FRA, I'm waiting till I'm 70 (unless things change between now and then). I suspect on a ROI outlook this is best this way for most couples. The low earner claims before 70, the other waits till 70. It would not surprise me if for every person that waited till 70, there was another person who claimed before that. I have no idea what the actuarial chance of couple lasting more than 30 years is.

I've crunched some numbers. As near as I can figure we will never get out of SS what we put into it. So our ROI will likely be negative. I'm OK with that. It was designed that way. We've been lucky, had higher than average income, can afford to wait to claim SS. So I'll wait, Smile, and be happy.

edit: I've run some numbers, as near as I can figure the surviving spouse needs about 3/4 the income of a couple. I have set things up so I think we'll be OK - unless we get divorced - hopefully spouse recognizes that. We can not afford to be divorced . . .
Last edited by dknightd on Sun May 16, 2021 7:30 am, edited 1 time in total.
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Re: The Biggest Mistakes People Make With Social Security

Post by sunny_socal »

cbeck wrote: Sun May 16, 2021 5:32 am
JoeRetire wrote: Sun May 16, 2021 5:08 am
cbeck wrote: Sun May 16, 2021 1:11 am Makes sense. 56% of retirements of people over 50 in long-term, full-time work are involuntary.
The linked article actually says something different.

"56 percent of workers over the age of 50 in long-term, full-time positions lost their jobs involuntarily."

Losing a job isn't the same as retiring.

I was laid off twice over my career. In neither of those cases did I retire.
That's true. An AARP survey had this to say about earlier-than-planned retirements:

Image

https://www.retirery.com/retirement-fac ... index.html
Graph adds up to 186%, I guess I won't turn to AARP for any of my math questions
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