Open Social Security questions

[keithj]

I'm hoping to get some feedback and understanding of the opensocialsecurity.com calculator results provided by Mike Piper. While I understand, at least qualitatively, the methodology of comparing present value vs. future value, I'm puzzled by the results I'm seeing.

Inputs: current age 54, male, single, PIA ~$3500/mnth
Results: optimized claim age of 62 and 8 months

I assume the early claiming age is due to the decreased probability of living past my early 80s. However, even if I change the longevity table to the 2017 non smoker, super preferred, I still get optimized claiming age of only 68. This seems in contrast to the typical advice of always wait to claim until age 70 if you expect to live beyond early/mid 80s.

Am I missing something? Maybe I just misunderstand the longevity/mortality tables. If I ran this same calculation at age 65, when there is a higher probability of living past early 80s, would the results optimize to waiting until 70 to claim?
I tried this by adjusting my birth year to artificially increase my age, but I still can't find a scenario that recommends waiting until 70 to claim.

Any insights? It's not of practical concern at the moment, but I'd like to understand. Thanks,

Keith

[bombcar]

Scroll to the bottom if I think, and it should show the tables.

Run both and compare?

[Hebell]

In the standard annuity tables, your break even age for claiming at age 70, would be age 83. Meaning you have to live that long to make it worth it.

So if you put in a date of death of 83, it's going to tell you to start earlier. 68 sounds reasonable.

[Navillus1968]

Instead of using a life expectancy table, use the Assumed Age at Death option & put in 90, then 85, then 80.

My assumption is that your being a relatively youthful age 54 is skewing the results using life expectancy tables. I also suspect being unmarried is changing the outcome- joint life expectancy for a couple is where delaying SS until 70 really pays off. The chances that one person in a couple in their 60s make it to 90 & beyond are pretty good (about 50%). Drops to under 20% for a single male. Subtract 10 years, & the life expectancy tables get more pessimistic.

As an experiment, run the calculator with a fake wife who shares all your data- birth date, PIA, etc. I would guess you'll see different results due to joint life expectancy.

[ObliviousInvestor]

By default the calculator uses the yield on 20-year TIPS as the discount rate. Right now, that yield is pretty darned good -- meaningfully above 2%.

In other words, the calculator is telling you that taking the money somewhat before age 70 and investing it is not such a bad idea, for an unmarried male. Please note though that as described on the "About" page, the calculator is not accounting for tax planning (which usually weighs in favor of delaying) or longevity risk (which definitely weights in favor of delaying).

[humblecoder]

I suspect that this the result isn't due to the mortality tables, but due to the assumed discount rate. In other words, based upon the discount rate assumption, you might be better off claiming early and investing.

Additionally, since you are single, you presumably don't have a situation where a surviving spouse could benefit from a higher survivor benefit if you claim at age 70. So that could also be skewing the result younger than if you were married and were the higher earning spouse.

Of course, your decision to claim should not solely be based on maximizing the NPV of your benefit. There are other considerations, like taxes, or viewing SS as longevity insurance.

[grabiner]

Instead of using a life expectancy table, use the Assumed Age at Death option & put in 90, then 85, then 80.

My assumption is that your being a relatively youthful age 54 is skewing the results using life expectancy tables.

Your current age won't affect the life expectancy table calculations. Whether to delay from 62 to 63 is a decision you make when you are 62, and is thus based on the life expectancy of a 62-year-old.

However, the life expectancy table used by Open Social Security is the 2021 Social Security table because that is the most recent one. Life expectancies in the 2020-2021 tables were decreased by COVID. The 2022 table, when it comes out, should increase life expectancy and thus make delaying SS more attractive. (And you can also adjust for your own health; people considering delaying SS are likely to be in good health.)

[keithj]

Wow, I'm always impressed by the thoughtful and rapid responses from the forum. Thanks!

Instead of using a life expectancy table, use the Assumed Age at Death option & put in 90, then 85, then 80.

Thanks for forcing me to look closer and find that option. I didn't see it at first, and it's exactly what I was looking for. I have to adjust the assumed age at death all the way to 88 before it'll optimize waiting to claim until 70. I suppose actual claiming age will be a dynamic decision based on best guess of current health/longevity and the discount rate (TIPS 20 year return).

Please note though that as described on the "About" page, the calculator is not accounting for tax planning (which usually weighs in favor of delaying) or longevity risk (which definitely weights in favor of delaying).

Now that we've cracked open that can of worms...how does tax planning usually weigh in favor of delaying? I see the years between retirement and SS claiming as a lower income opportunity to do Roth conversions, but are there tax implications beyond that? If anything, having a higher SS payment every year could potentially push total income into a higher tax bracket. I won't have ACA insurance concerns before Medicare, but probably will have IRMAA fees later on. Those years between retirement and age 63 (2 year lookback for Medicare) are critical to Roth convert (at least for me). Are there other tax considerations I'm neglecting?

[ObliviousInvestor]

how does tax planning usually weigh in favor of delaying?

Social Security is, at most, 85% taxable at the federal level. And it's often not taxable at the state level. So in many cases if we spend down the portfolio faster in order to delay Social Security, we're trading fully taxable dollars of income for less than fully taxable dollars of income, which is generally a good thing.

[RickBoglehead]

We have some friends that are engineers and pretty smart. The husband told us that he was taking it early and continuing to work, "because Social Security is taxed at 85%". Took a few tries before he understood that 85% of Social Security COULD be taxed, at your normal tax rate...

[keithj]

how does tax planning usually weigh in favor of delaying?

Social Security is, at most, 85% taxable at the federal level. And it's often not taxable at the state level. So in many cases if we spend down the portfolio faster in order to delay Social Security, we're trading fully taxable dollars of income for less than fully taxable dollars of income, which is generally a good thing.

Ugh, forgive me for being a little dense. I would think trading the SS dollars (only 85% taxable) for tIRA dollars (100% taxable) would argue against delaying SS payments. Example:
I need to generate an extra $50k/yr for living expenses, all taxed at my normal rate (25%).
Between the ages of 62-70, I can choose to withdrawal the $50k/yr from my tIRA or claim SS to cover it.
tIRA withdrawal of $50K x .25 gives $12,500 in taxes.
SS claim of $50K x .85 x .25 gives $10,650 in taxes.

Of course, the $50K of tIRA will just be used in some later year to cover living expenses, and taxed at the same rate in that year it's used. I'm not sure I see the advantage one way or the other of using SS earlier or later. At least not from a tax standpoint.

Not trying to argue at all, just looking to be educated on this. Thanks.

[ObliviousInvestor]

Social Security is, at most, 85% taxable at the federal level. And it's often not taxable at the state level. So in many cases if we spend down the portfolio faster in order to delay Social Security, we're trading fully taxable dollars of income for less than fully taxable dollars of income, which is generally a good thing.

Ugh, forgive me for being a little dense. I would think trading the SS dollars (only 85% taxable) for tIRA dollars (100% taxable) would argue against delaying SS payments. Example:
I need to generate an extra $50k/yr for living expenses, all taxed at my normal rate (25%).
Between the ages of 62-70, I can choose to withdrawal the $50k/yr from my tIRA or claim SS to cover it.
tIRA withdrawal of $50K x .25 gives $12,500 in taxes.
SS claim of $50K x .85 x .25 gives $10,650 in taxes.

Of course, the $50K of tIRA will just be used in some later year to cover living expenses, and taxed at the same rate in that year it's used. I'm not sure I see the advantage one way or the other of using SS earlier or later. At least not from a tax standpoint.

As you note, the $50k of traditional IRA will ultimately be taxed regardless. (Setting aside, for the moment, cases in which the dollars ultimately go to charity.)

What is different is that in one case, the $50k will grow, given that it remains in the IRA, so the total amount of fully taxable dollars will be greater. And in the other case, that growth doesn't happen, but what we do get is more not-fully-taxable Social Security dollars.

[keithj]

What is different is that in one case, the $50k will grow, given that it remains in the IRA, so the total amount of fully taxable dollars will be greater. And in the other case, that growth doesn't happen, but what we do get is more not-fully-taxable Social Security dollars.

I appreciate you taking the time, Mike. I'm guessing the tax difference for either claiming strategy is small compared to the longevity/death unknown. A couple of years of extra life beyond the 'break even' age for claiming SS early or late has to pay more (or less) than the tax advantage. Maybe.

[Navillus1968]

Ugh, forgive me for being a little dense. I would think trading the SS dollars (only 85% taxable) for tIRA dollars (100% taxable) would argue against delaying SS payments. Example:
I need to generate an extra $50k/yr for living expenses, all taxed at my normal rate (25%).
Between the ages of 62-70, I can choose to withdrawal the $50k/yr from my tIRA or claim SS to cover it.
tIRA withdrawal of $50K x .25 gives $12,500 in taxes.
SS claim of $50K x .85 x .25 gives $10,650 in taxes.

I believe the advantage comes in your 70s & beyond- by spending down your TIRA & delaying SS until 70, you are maximizing the size of your partially taxable SS benefit & also reducing the size of fully taxable RMDs by spending from TIRA in your 60s.
Depending on the size of your RMDs & other income, you might even have your SS taxed at less than 85%, saving you additional taxes, if your provisional income is low enough.
Generally, having SS income be a larger proportion of your overall income is beneficial in the provisional income calculation, since only 50% of SS is included in that calculation.
https://www.annuityexpertadvice.com/cal ... alculator/

Your alternative increase RMDs by forgoing any spending from TIRA & reduces the size of your SS benefit, since you started at 62. Later in life, this has the effect of reducing the portion of your income that is coming from SS, due to larger RMDs & a smaller SS benefit. This ratio makes it more likely that 85% of SS will be taxed.

[arcticpineapplecorp.]

We have some friends that are engineers and pretty smart. The husband told us that he was taking it early and continuing to work, "because Social Security is taxed at 85%". Took a few tries before he understood that 85% of Social Security COULD be taxed, at your normal tax rate...

not only that but taking it "early" (meaning before FRA) means he'll get penalized (lose $1 of SS for every $2 he earns above $23,400. Is he aware of that?

source: https://www.ssa.gov/benefits/retirement ... rking.html

[RickBoglehead]

We have some friends that are engineers and pretty smart. The husband told us that he was taking it early and continuing to work, "because Social Security is taxed at 85%". Took a few tries before he understood that 85% of Social Security COULD be taxed, at your normal tax rate...

not only that but taking it "early" (meaning before FRA) means he'll get penalized (lose $1 of SS for every $2 he earns above $23,400. Is he aware of that?

source: https://www.ssa.gov/benefits/retirement ... rking.html

I explained it all, then went home and sent him links, cc'ing his wife. She said "he gets it now".

[arcticpineapplecorp.]

how does tax planning usually weigh in favor of delaying?

Social Security is, at most, 85% taxable at the federal level. And it's often not taxable at the state level. So in many cases if we spend down the portfolio faster in order to delay Social Security, we're trading fully taxable dollars of income for less than fully taxable dollars of income, which is generally a good thing.

this assumes the withdrawals come from trad. IRA/401k, right?

If one is taking from taxable then part of that income is not taxable as it is return of principle, right?

Agreed though most would take from combination of both above especially to reduce IRA balance prior to RMD age.

[ObliviousInvestor]

Social Security is, at most, 85% taxable at the federal level. And it's often not taxable at the state level. So in many cases if we spend down the portfolio faster in order to delay Social Security, we're trading fully taxable dollars of income for less than fully taxable dollars of income, which is generally a good thing.

this assumes the withdrawals come from trad. IRA/401k, right?

No. The key point isn't the tax treatment of what we're spending right now. The key point is the tax treatment of the growth we're giving up by spending down the part of the portfolio in question (i.e., so that it's no longer there to earn those returns).

[arcticpineapplecorp.]

No. The key point isn't the tax treatment of what we're spending right now. The key point is the tax treatment of the growth we're giving up by spending down the part of the portfolio in question (i.e., so that it's no longer there to earn those returns).

oh, i see. thanks for clarifying.

[McDougal]

We have some friends that are engineers and pretty smart. The husband told us that he was taking it early and continuing to work, "because Social Security is taxed at 85%". Took a few tries before he understood that 85% of Social Security COULD be taxed, at your normal tax rate...

not only that but taking it "early" (meaning before FRA) means he'll get penalized (lose $1 of SS for every $2 he earns above $23,400. Is he aware of that?

source: https://www.ssa.gov/benefits/retirement ... rking.html

But won't he get that back after FRA? I thought SSA recalculates benefit at FRA and increases the benefit. Not sure if it makes you whole, but it's not a total loss, is it?

[grabiner]

Please note though that as described on the "About" page, the calculator is not accounting for tax planning (which usually weighs in favor of delaying) or longevity risk (which definitely weights in favor of delaying).

Now that we've cracked open that can of worms...how does tax planning usually weigh in favor of delaying? I see the years between retirement and SS claiming as a lower income opportunity to do Roth conversions, but are there tax implications beyond that? If anything, having a higher SS payment every year could potentially push total income into a higher tax bracket. I won't have ACA insurance concerns before Medicare, but probably will have IRMAA fees later on. Those years between retirement and age 63 (2 year lookback for Medicare) are critical to Roth convert (at least for me). Are there other tax considerations I'm neglecting?

If SS were always 85% taxable, and your tax bracket were constant, then delaying SS would be tax-neutral if your spending comes from a retirement account, and tax-favorable if your spending comes from a taxable account which is taxed at a nonzero rate. The reason is that if your tax rate on a particular source of income is a constant X%, then it doesn't matter which source you draw from; the IRS owns X% of the account and the rest is yours tax-free. For example, if you are in the 22% bracket, the IRS owns 18.7% of your SS, 22% of your traditional IRA, and 0% of your Roth IRA, regardless of when you withdraw the money. But the IRS owns more of your taxable account if you withdraw in a later year, because you pay dividend tax just to hold the money, and if you hold stock, the fraction of the withdrawal paid as capital-gains tax increases. (If you pay 0% tax on qualified dividends and long-term gains, then a taxable account is just as good as a Roth IRA in withdrawal; however, in this situation, you would likely be in the phase-in of SS taxation and the tax rate would not be zero.)

With the phase-in of SS taxation, it gets more complicated, but delaying may be tax-favorable if it decreases the fraction of SS which is subject to tax. Adding $1 of SS adds 50 cents to the income used for determining how much SS is taxable, and thus 42.5 cents to the taxable amount of SS in the upper phase-in; if you would be paying tax on more than 42.5% of your SS, delaying from this year to a later year decreases the taxable fraction. But the cap may work against you. If you are just under the taxation cap at age 67, then with the lack of inflation adjustment, you would already be over the cap at 68 if you claim at 67; delaying to 68 would avoid age-67 income which is less than 85% taxed and create additional age-68 income which is 85% taxed.

[arcticpineapplecorp.]

But won't he get that back after FRA? I thought SSA recalculates benefit at FRA and increases the benefit. Not sure if it makes you whole, but it's not a total loss, is it?

there's truth in that the SSA recalculates based on earnings but you're still getting a permanently reduced benefit for life by taking before FRA (there can be some times when it's warranted, lower earning spouse for instance, while higher earning spouse delays to 70 as one example). If one is still working/earning above $23,400 one shouldn't claim SS early. You're not going to even get what you think because some portion of it will be clawed back. If someone's costs went up so much more and their wages didn't, I suppose a person may have no other choices, but I don't like to think that way. You can usually cut expenses, take a side gig, etc. to make up a shortfall.

[Exchme]

I'm hoping to get some feedback and understanding of the opensocialsecurity.com calculator results provided by Mike Piper. While I understand, at least qualitatively, the methodology of comparing present value vs. future value, I'm puzzled by the results I'm seeing.

Inputs: current age 54, male, single, PIA ~$3500/mnth
Results: optimized claim age of 62 and 8 months

I assume the early claiming age is due to the decreased probability of living past my early 80s. However, even if I change the longevity table to the 2017 non smoker, super preferred, I still get optimized claiming age of only 68. This seems in contrast to the typical advice of always wait to claim until age 70 if you expect to live beyond early/mid 80s.

Am I missing something? Maybe I just misunderstand the longevity/mortality tables. If I ran this same calculation at age 65, when there is a higher probability of living past early 80s, would the results optimize to waiting until 70 to claim?
I tried this by adjusting my birth year to artificially increase my age, but I still can't find a scenario that recommends waiting until 70 to claim.

Any insights? It's not of practical concern at the moment, but I'd like to understand. Thanks,

Keith

If you need ACA premium credits or Roth Conversions, then it is a no brainer that you should wait to claim SS as ACA and Roth Conversions can be a much greater impact than any statistical loss from waiting on SS.

The rest depends on your plan and your heirs. If you have heirs you care about, then using the statistics that OpenSS uses make some sense to optimize the size of the pile they inherit.

However, if that's not the case, then I would base the plan on living a really long time, say to age 100, but depleting the portfolio by that age. That way, within the max age you set, you've maximized your enjoyment of your money as opposed to letting heirs you don't care about buy jet-skis. For that optimization, claiming at age 70 is going to be the most secure. Dying early is not a financial risk, living to great age is the risk and SS benefits are the best insurance against that risk.

[keithj]

Lots of great insight from everybody. I appreciate the help.

No. The key point isn't the tax treatment of what we're spending right now. The key point is the tax treatment of the growth we're giving up by spending down the part of the portfolio in question (i.e., so that it's no longer there to earn those returns).

Now this makes perfect sense to me. With ~70% of my total investments in tIRA tax-deferred status, I need every possible opportunity to spend down that account on living expenses before SS (or even Medicare) starts. I'm probably looking at 8-10 years of reasonably aggressive (24% tax bracket) Roth conversions in that time as well.

[McDougal]

But won't he get that back after FRA? I thought SSA recalculates benefit at FRA and increases the benefit. Not sure if it makes you whole, but it's not a total loss, is it?

there's truth in that the SSA recalculates based on earnings but you're still getting a permanently reduced benefit for life by taking before FRA (there can be some times when it's warranted, lower earning spouse for instance, while higher earning spouse delays to 70 as one example). If one is still working/earning above $23,400 one shouldn't claim SS early. You're not going to even get what you think because some portion of it will be clawed back. If someone's costs went up so much more and their wages didn't, I suppose a person may have no other choices, but I don't like to think that way. You can usually cut expenses, take a side gig, etc. to make up a shortfall.

Understood, that makes sense. My stance has always been to wait until 70, or as long as you can, unless you absolutely need the money to live on prior to 70. However, I broke my own rule. I just started SS at 69 and 1 month old. Didn't really need it, but not much difference at this point. Several relatives have taken it as soon as they could for a variety of reasons. All of them wrong, at least to me. Thanks!

[Houseofbricks]

Tagging on to McDougal:
“unless you absolutely need the money to live on prior to 70”

My IPS has the default at 70, but includes the contingency to take sooner if facing a poor sequence of returns or high inflation during early years of retirement. IE buy time to let portfolio to heal.