My dad is taking Social Security at 62, why would anyone not? (If they already quit working)

[celia]

My dad is taking Social Security at 62, why would anyone not?

I will answer only from the numeric side. Of course, if someone already knows they have a shorter life expectancy or they NEED the money to live off of, the question would not apply to them.

The SS monthly benefit is calculated off of the worker's salary history. Once the worker "retires" the numbers "freeze" except for annual COLA, which I'll address in a minute. The calculated amount is for their Full Retirement Age (FRA), which appears to be 67 in this case. The monthly benefit will increase 8% (guaranteed!) for each year the person delays taking SS and decrease a little less than that for each year they start collecting early. The increase/decrease is due to collecting for fewer/more months, so it is actuarially the same. But actuarial tables apply to a group of people--the general population, in this case, not to individuals. For example, women live longer than men overall, but the calculations are the same for them. A healthy person or someone whose family tends to have longer longevity would be calculated the same as for an unhealthy person, although they will tend to live longer overall. A higher income person would tend to live longer than a poorer person because she has access to better health care and likely knows more about how to stay healthy. These factors should be considered since they show whether a person's chances of living (and collecting SS) longer show they are "average" or not.

Each year, SS calculates the COLA. (You may disagree with it, but let's just say there is a COLA. For 2016, the COLA was 0% because there was very low inflation. For 2017, it is 0.3%.) The COLA is applied to not only those who are receiving SS, but to everyone over 62 who is waiting to start collecting it. It will show up in a current statement of how much you can expect to receive starting at FRA and at the lowest and highest age. If you compare a current statement to one a few years old (both for someone over age 62), you will see the difference. You will not see the difference in a year where the COLA was 0%.

Since the cost of living will impact both your living expenses and the monthly SS benefit pretty much the same, it is basically a "wash". So I wouldn't even bother with calculations using it.

Why wait?
1. Where else can you get a guaranteed yearly 8% increase in your "investment" (up to age 70)?
2. You will be collecting this for the rest of your life, and probably want to maximize your income in your final years, especially if you think you will live longer than average. Your chance to increase your income streams at age 80 or 90 is very limited, unless you take lots of risk. SS is relatively risk-free. (People have been saying that SS won't be there when they retire for 50 years, but when the program needs financial adjustments, it has been adjusted.)
3. If the person has tax-deferred accounts and has calculated what their RMD will be at age 70 and estimated their taxes then, they may see that they have a few years of low/no income tax, then many years of an extremely high income tax after age 70 due to SS and RMDs. (When calculating the RMDs, take into account that the account will grow between now and when RMDs are started. The account value (and RMDs) will continue to grow even after that as long as the RMD is less than the growth of the account.) It is often beneficial, in this case, to delay SS to age 70 and do Roth conversions during the low income tax years, so that the tax on the Roth conversions is lower than the tax on the future RMDs. This will also bring down the size of the after-70 RMDs. If the income is still needed, some of the Roth can be withdrawn tax-free instead. (There are tons of threads on this.)
4. If a widowed person remarries, he/she will want to know that their new spouse has a higher monthly income for as long as the spouse lives. (Don't laugh, it happens. My dad was widowed when he was about 60. He remarried several years later but was widowed again after 10 years. Then he remarried a third time and they are both still going strong--as well as someone in his 90s can be.)

[Hyperborea]

Another factor that is often forgotten in these early or late SS discussions is senility insurance. If you delay taking SS and have a larger monthly payment then you are less likely to be left destitute because you made bad financial choices or were taken advantage of by a relative or a caregiver. Sure, they might get your money one month but you'll get more next month. If a bad person gets it from your portfolio or you make stupid choices in a less than fully compos mentis state you could lose enough to make life difficult. Yes, this is still possible if you take SS late but at least you've got a larger safety net.

This is also the main reason that I am planning to buy an annuity sometime between 70 and 80 if I'm still here (I'm a few decades away still) with at least some of the portfolio.

[Peter Foley]

One thing often missing in these discussions is the fact that one can start at any time after the age of 62. The phrase "why would anyone not" ignores a broad array of issues already detailed in this thread. Perhaps 66 is not the right age, nor is 70. 64 could even be the right answer given a specific set of circumstances.

The OP is also ignoring the taxation of SS benefits. Such taxation can be at a very high marginal tax rate for a single person.

[Hyperborea]

One thing often missing in these discussions is the fact that one can start at any time after the age of 62. The phrase "why would anyone not" ignores a broad array of issues already detailed in this thread. Perhaps 66 is not the right age, nor is 70. 64 could even be the right answer given a specific set of circumstances..

Exactly right. It's not a one time decision. It's a month by month decision. If the markets do really badly during the time that I am 62 to 70 then I can make the decision to start taking SS at that point. If they do from slightly bad or better then I will delay until 70.

[vitaflo]

For this topic, I've always appreciated this old post by cut-throat:

"Delay Social Security to age 70 and Spend more money at 62"
viewtopic.php?t=102609

[Toons]

Wow,,,
I never gave SS this much thought before taking it.,
I turned 62,,,,show me the money.
That was almost 5 years ago.
No regrets.
Enjoyed both spending and investing the money.

[CFM300]

For this topic, I've always appreciated this old post by cut-throat:

"Delay Social Security to age 70 and Spend more money at 62"
viewtopic.php?t=102609

Bingo! If you delay, you can spend MORE money per year even before you begin receiving SS payments.

[tennisplyr]

Been taking SS since I was 62, wife as well. It works for us. Like using that money and who knows how long I'll live. We've already received well into the 6 figures.

[#Cruncher]

The OP is also ignoring the taxation of SS benefits. Such taxation can be at a very high marginal tax rate for a single person.

This isn't correct, Peter. From the original post, the father can choose from a SS benefit of about $18,000 at age 62 up to about $31,000 at age 70. We won't know for sure the effect on his federal taxes of delaying the start of SS benefits without knowing his other income. But it is likely to be small. For example consider the following graph which assumes his other income is $33,000 and that he takes the standard deduction. From $18,000 up to about $28,000 of SS the marginal tax rate is only 6.375%. From there up to $31,000 it is only 10.625%.

This graph is taken from this post and was prepared with my Marginal Tax Rates spreadsheet.

I prepared the following table to help determine the best age to begin collecting SS. It uses this longevity estimator with the 2013 SSA Period Life Table to compute the present value (PV) of the survival-weighted benefits when discounted at 2%. [1] While single females and joint male/female couples [2] distinctly receive a larger PV by delaying until age 68, there is a much smaller increase when a single male delays, and then only up to age 67.

Code: Select all

               --- PV $100 PIA / mo ---    ---- Versus Age 62 -----
Age    % PIA    Male    Female    Joint     Male    Female    Joint
---   ------   ------   ------   ------    ------   ------   ------
 62    74.17   14,170   15,810   24,100     0.0%     0.0%     0.0% 
 63    79.17   14,190   15,940   24,320     0.1%     0.8%     0.9% 
 64    85.56   14,350   16,250   24,800     1.3%     2.8%     2.9% 
 65    92.22   14,450   16,480   25,190     2.0%     4.2%     4.5% 
 66    98.89   14,440   16,590   25,390     1.9%     4.9%     5.4% 
 67   106.67   14,490   16,780   25,700     2.3%     6.1%     6.6% 
 68   114.67   14,440   16,870   25,860     1.9%     6.7%     7.3% 
 69   122.67   14,280   16,830   25,820     0.8%     6.5%     7.1% 
 70   130.67   14,010   16,670   25,620    (1.1%)    5.4%     6.3% 

For example, each $74.17 of SS taken immediately at age 62 has a survival-weighted PV of $14,170. But if the claimant waits five years, each $106.67 [3] of the benefit he'd receive then has a 2.3% higher PV of $14,490.

My mom was a stay at home wife the majority of her life so her benifits were very low, he has been collecting hers but it is a very small amount $1200 a year or so.

Granted $1,200 per year isn't much. But it shouldn't be ignored either. For example, if he claims at age 62 instead of 70, he's forsaking $9,600.

1. 2% make not seem like a very large discount rate. But for a safe inflation-indexed annuity, I maintain it is. For example, Treasury Inflation Protected Securities (TIPS) which are also safe and inflation-indexed currently yield less than 1%. (See Daily Treasury Real Yield Curve Rates.) In this post from another thread, I look at the claiming ages from the perspective of the government and use a discount rate of only 1%.
2. For the joint column I assume a male/female couple both age 62. I also assume that the benefit will be 50% higher while both are alive.
3. The "% PIA" column shows how much of the Primary Insurance Amount would be paid for someone having a Normal Retirement Age (NRA) of 66 and 2 months. This is shown on the SSA web page, Effect of Early or Delayed Retirement on Retirement Benefits. I'm assuming the father was born in 1955 and therefore has an NRA of 66+2mo. ("he will be pulling the trigger on this soon" from this post.)

[House Blend]

The OP is also ignoring the taxation of SS benefits. Such taxation can be at a very high marginal tax rate for a single person.

For any given total of ordinary and SS income, you'd rather have more of it be SS income. You'll net more after tax that way.

Although we don't normally think of SS income as something that one has marginal control over, delaying SS by one month is something like that. (But it's complex to model properly, since delaying by one month means covering that month with other income, and less dependence on that other income in later months.)

In any case the marginal tax cost of an additional dollar of SS income is relatively benign. Your AGI cannot increase by more than $0.85 in that case, and if you are in the high end of the SS tax hump, it will only increase your AGI by $0.425. On the other hand, an additional dollar of ordinary income increases your AGI by at least $1, and perhaps as much as $1.85 if you are in the high end of the SS tax hump.

[cherijoh]

Bernstein's example is very helpful, for both sides of the issue in fact.

If you have $288,000 in real income to spend over the next 8 years, then do Twin A's plan.

But that's a lot of income! If you don't have that much income, you may have to go with Twin B's plan. But note that means you will permanently have less to spend than Twin A. But that's because Twin A had more savings, which is how the world works.

The point is Social Security deferral can be a good idea if you don't need the money right away, which is presumably because you have lots of other savings. If you don't have lots of other savings, and therefore do need the money right away, then deferring Social Security is not an option, so it is a moot point.

I agree that there are quite a few people who can't afford to delay their SS. But I recall a study that showed that the number of people taking SS early includes a fair number of people who fit Bernstein's "Twin A" profile. They want to collect before "SS goes bankrupt", they think they won't live to the "break-even" age, or they undervalue the benefit of SS's COLA.

[NiceUnparticularMan]

But I recall a study that showed that the number of people taking SS early includes a fair number of people who fit Bernstein's "Twin A" profile. They want to collect before "SS goes bankrupt", they think they won't live to the "break-even" age, or they undervalue the benefit of SS's COLA.

That is my understanding as well. I'd go so far as to say this is a classic behavioral "anomaly" which underscores how common are problems like myopic loss aversion.

[cherijoh]

Depends if you are looking at SS as trying to get your money back, in which case early withdrawal is probably best, or if you are looking at it as a hedge against losing ground to inflation and having such a long life that your savings dwindle.

+1
This is it in a nutshell. I am in the latter camp.

I will have a DB pension that will partially cover my expenses and will put me in the territory of having 85% of SS taxed as soon as I take it. I'll be living off that pension and withdrawals from my after-tax account while doing Roth conversions between retirement and taking RMDs. Taking SS early would just eat up more of my 15% marginal tax bracket and leave me with larger RMDs since less money will get converted to Roth.

I think my plan is fairly common amongst Bogleheads. But I think it is pretty rare in the general population based on discussions with retired and soon-to-be-retired friends.

[billthecat]

My dad is taking Social Security at 62, why would anyone not?

But actuarial tables apply to a group of people--the general population, in this case, not to individuals. For example, women live longer than men overall, but the calculations are the same for them.

That seems terribly unfair to men.

[2stepsbehind]

OP, your father may want to check out the following concerning potential claiming strategies:https://www.onefpa.org/journal/Document ... Shuart.pdf

Curious what people think about this article. In particular "Table 2" would suggest that if a widow(er) only has a $500 worker benefit, but a $2000 widow(er)'s benefit, they should take the worker's benefit for two years and then switch to the widow(er)'s benefit whereas I'm guessing the advice on Bogleheads would be to wait it out until full retirement age. Is there a website that would map out where the break even point is on that?

[SGM]

Given the likelihood that at least one of us will live past 90, I think we will be preserving our legacy by delaying to 70. We did Roth conversions prior to age 70 and will have no RMDs to deal with. Although we do not fit the profile of those who would benefit from annuitizing I am still considering an annuity ladder in the future. If I would get annuity I would not get a better one than delaying SS.

My reasons for delay include:
1. Longevity insurance especially for spouse.
2. Lowering income while doing Roth conversions.
3. I compared SS delay to treasury returns not stock investments.
4. Only 85% of SS benefit is taxed by the Feds.
5. Less of SS is taxed by the state.
6. SS annuity corresponding to the delay is better than what I can get on the open market.
7. We don't need the income currently.
8. Most of my assets are in stocks and I prefer to have more bond-like income than I have had in the past. I am more interested in steady income flows in retirement.
9. We also qualified for the file and suspend and restricted spousal benefit before the law changed.

[Diogenes]

This never fails to be an interesting topic. Let's try this:

My business partner will retire at age 62, about three years from now. Given his set of circumstances, he feels his spouse, who retired this year at age 59, should claim her SS at 62. We have discussed this a few times as he feels I should know the answer, but it seems hard to fault his logic. Here goes:

He: has a sizable full cola lifetime pension that he is collecting now from prior government service, plus partnership income that will end at retirement. Neither plan to need to touch their tax deferred portfolio until RMD requires it. Although he qualifies for SS due to work before and after that, due to WEP and GPO he plans not to file for SS until FRA. Because of the pension, he will not have low income years to do Roth conversions.
She: has a sizable SS benefit from a long private/ non-government career and tax deferred accounts, but wishes her 'own' money until RMD's at 70 1/2. Both are in good health.
Plan: she will take SS at 62, he will wait until FRA.

He asked me to point out something significant that he is missing. Since there is a nice dinner involved with this wager, I'm turning to my expert colleagues at BH to save me from picking up the check...
Is he overlooking something?

[itstoomuch]

^ @ Diogenes. Does it matter? Whatever the choice, appears like your friend has more than enough money.
I think I have wife moving towards the thinking of "use it or lose it". At age 59, I was fine with excellent health and height/weight ratio. At 61 prostate surgery. At 67, radiation treatments. I'd rather live life a bit freer than our past money constricted life prior to SS. I have long lived parents (95+), although with some aid from medical advances. However, my cousin who is a world renown heart specialist, @71 had a heart attack and he takes excellent care of himself.

You do know what Diogenes said, "https://www.brainyquote.com/quotes/auth ... genes.html"
DiogenesMMV

[Cruise]

I turned 62,,,,show me the money.
...
No regrets.
Enjoyed both spending and investing the money.

+1. I just turned 64...

I'm fortunate to not have a need for the SS money now (or presumably in the future). My calculus was that "On average," it does not make any difference, so I was not going to risk leaving money on the table. The SS income is being invested monthly (+20% return). It gives me satisfaction to know that if I croak, the money is there for my wife (who is getting half of my FRA amount while she defers her SS until when she retires).

The other factor that drove my (our) decision was that more money now is going to equate to more total enjoyment over our lifetimes. We've seen our parents age and die, and discovered that the older you are, the less you can do, and therefore, the less money you spend (on things other than healthcare).

Good luck with your Dad's situation. He has a good son!

[smitcat]

This never fails to be an interesting topic. Let's try this:

My business partner will retire at age 62, about three years from now. Given his set of circumstances, he feels his spouse, who retired this year at age 59, should claim her SS at 62. We have discussed this a few times as he feels I should know the answer, but it seems hard to fault his logic. Here goes:

He: has a sizable full cola lifetime pension that he is collecting now from prior government service, plus partnership income that will end at retirement. Neither plan to need to touch their tax deferred portfolio until RMD requires it. Although he qualifies for SS due to work before and after that, due to WEP and GPO he plans not to file for SS until FRA. Because of the pension, he will not have low income years to do Roth conversions.
She: has a sizable SS benefit from a long private/ non-government career and tax deferred accounts, but wishes her 'own' money until RMD's at 70 1/2. Both are in good health.
Plan: she will take SS at 62, he will wait until FRA.

He asked me to point out something significant that he is missing. Since there is a nice dinner involved with this wager, I'm turning to my expert colleagues at BH to save me from picking up the check...
Is he overlooking something?

The best method to win the bet is to load his information into any reasonable calculator/simulator and see what amount of funds he will be able to spend each year not the total amount if funds he will collect. Delaying SS will often yield higher returns in funds you can spend dependent upon the input that you provide the calculator - we like both IORP and the RPM but there are others that can do similar tasks.
Without loading the exact account details and variables for your business partner into a calculator there can be no comparisons.

[smitcat]

^ @ Diogenes. Does it matter? Whatever the choice, appears like your friend has more than enough money.
I think I have wife moving towards the thinking of "use it or lose it". At age 59, I was fine with excellent health and height/weight ratio. At 61 prostate surgery. At 67, radiation treatments. I'd rather live life a bit freer than our past money constricted life prior to SS. I have long lived parents (95+), although with some aid from medical advances. However, my cousin who is a world renown heart specialist, @71 had a heart attack and he takes excellent care of himself.

You do know what Diogenes said, "https://www.brainyquote.com/quotes/auth ... genes.html"
DiogenesMMV

This quote from your situation ....
"I'd rather live life a bit freer than our past money constricted life prior to SS."

Indicates you needed the funds earlier so taking SS early was a correct choice for you. Determining what the best choice is including taxes becomes the goal for many that can finance the early retirement in various ways.
I have found that one size does not fit all.

[radeon962]

What if part of your plan is to leave money to your kids. When both parents die and no children 16 or under, Social Security ends.

Your 401k or other retirement accounts go to your heirs.

If you defer SS to 70 you will be spending down your retirement accounts for 8 years reducing what might be available to your heirs when you pass.

[Toons]

I turned 62,,,,show me the money.
...
No regrets.
Enjoyed both spending and investing the money.

+1. I just turned 64...

I'm fortunate to not have a need for the SS money now (or presumably in the future). My calculus was that "On average," it does not make any difference, so I was not going to risk leaving money on the table. The SS income is being invested monthly (+20% return). It gives me satisfaction to know that if I croak, the money is there for my wife (who is getting half of my FRA amount while she defers her SS until when she retires).

The other factor that drove my (our) decision was that more money now is going to equate to more total enjoyment over our lifetimes. We've seen our parents age and die, and discovered that the older you are, the less you can do, and therefore, the less money you spend (on things other than healthcare).

Good luck with your Dad's situation. He has a good son!

+1
Bingo.
Same considerations here,,enjoy while you have the life energy to do so.

[smitcat]

What if part of your plan is to leave money to your kids. When both parents die and no children 16 or under, Social Security ends.

Your 401k or other retirement accounts go to your heirs.

If you defer SS to 70 you will be spending down your retirement accounts for 8 years reducing what might be available to your heirs when you pass.

Exactly our case - when we do the calculations the heirs will be much better off with delayed SS as our Roth conversions leave them with more 'spendable' money. Of course your calcs can come out differently dependent upon what year(s) you put down for your demise as well as all the other variables.
Especially sensitive if one spouse passes first and the SS benefit and subsequent taxes are figured for the remaining years.
If you do not run the simulators with your own data than you will not have the results you will need to make and see the comparisons.

[itstoomuch]

^ @ Diogenes. Does it matter? Whatever the choice, appears like your friend has more than enough money.
I think I have wife moving towards the thinking of "use it or lose it". At age 59, I was fine with excellent health and height/weight ratio. At 61 prostate surgery. At 67, radiation treatments. I'd rather live life a bit freer than our past money constricted life prior to SS. I have long lived parents (95+), although with some aid from medical advances. However, my cousin who is a world renown heart specialist, @71 had a heart attack and he takes excellent care of himself.

You do know what Diogenes said, "https://www.brainyquote.com/quotes/auth ... genes.html"
DiogenesMMV

This quote from your situation ....
"I'd rather live life a bit freer than our past money constricted life prior to SS."

Indicates you needed the funds earlier so taking SS early was a correct choice for you. Determining what the best choice is including taxes becomes the goal for many that can finance the early retirement in various ways.
I have found that one size does not fit all.

You are correct.
Now, we have more than enough and will leave heirs something or not. We also have LTCi.
Our Only doesn't need an inheritance and he can make his own choices. More importantly, We are free to make our own choice and he doesn't have make a choice for us
YMMV

[Peter Foley]

# Cruncher

The context of my earlier post was "why would anyone not," not the OP's father's situation. The following is from the BH Wiki pages which describe the taxation of SS benefits:

The examples below are based on tax numbers for 2017.[note 2] They illustrate how tax brackets and Social Security taxation interact, creating a 27.75% marginal tax rate for most taxpayers in the 15% tax bracket, and a 46.25% marginal tax rate for some single taxpayers but only married taxpayers with very high Social Security benefits at the bottom of the 25% bracket.

The point is that for certain individuals with other income there is an income range that has a very high marginal tax rate. Some single persons in this tax bracket might choose to delay SS benefits.

[celia]

But actuarial tables apply to a group of people--the general population, in this case, not to individuals. For example, women live longer than men overall, but the calculations are the same for them.

That seems terribly unfair to men.

... and to those who expect to have a shorter life expectancy (or died before starting SS) and to those who are poorer.

So that's where actuaries come in. They can calculate the averages although very few people fit the definition of "average". (Have you heard that the "average" family in the U.S. has 2.5 children? Personally, I don't know even one family like that. )

[#Cruncher]

The following is from the BH Wiki pages which describe the taxation of SS benefits:

... tax brackets and Social Security taxation interact, creating a 27.75% marginal tax rate for most taxpayers in the 15% tax bracket, and a 46.25% marginal tax rate for some single taxpayers ...

The point is that for certain individuals with other income there is an income range that has a very high marginal tax rate. Some single persons in this tax bracket might choose to delay SS benefits.

Peter, you're misinterpreting the Wiki's Taxation of Social Security benefits. The 27.75% and 46.25% rates refer to the tax resulting from additional non-Social Security income, not to additional Social Security benefits. To illustrate the 46.25% marginal rate refer to the Wiki's example for a single taxpayer with $20,000 of SS benefits. If non-SS income increases $1,000 from $35,568 to $36,568, federal tax would increase $463. However, if non-SS income remained at $35,568 and SS benefits increased $1,000 to $21,000, federal tax would increase only $106. [*]

Code: Select all

                 From      To    Increase
                ------   ------  --------
Non SS income   35,568   36,568    1,000
SS Benefit      20,000   20,000        0
Taxable SS      14,333   15,183      850
Federal tax      5,226    5,689      463 = 25% * 1850

                 From      To    Increase
                ------   ------  --------
Non SS income   35,568   35,568        0
SS Benefit      20,000   21,000    1,000
Taxable SS      14,333   14,758      425
Federal tax      5,226    5,333      106 = 25% * 425

The disparate tax increases result from the disparate effect on Taxable SS as pointed out by House Blend in this post.

* Taxable SS and federal tax calculated on the Compare sheet of my Marginal Tax Rates spreadsheet for a single taxpayer age 65+ in 2017 taking the standard deduction and one exemption.

[House Blend]

To #cruncher and Peter Foley,

Looking for common ground, I think the interesting question to explore (and it is implicit in Peter Foley's post) is whether ignoring tax costs understates the value of delaying SS benefits.

For example, suppose you are FRA, and your benefit would be $2000/mo if you claimed today. Wait one month, and it goes up by 2/3 of 1% or $160 per year. Would you be willing to spend $2000 up front (the missing month of benefits) in order to gain $160/yr of inflation-adjusted lifetime income?

That's without tax considerations.

Bringing tax into play, how much would it cost you to produce the after tax value of the one-time lump of $2000 of SS income by other means?

Suppose you have cash available to cover for the missing $2000 of SS income. (For example, perhaps you already have "too much" income, and can divert some of it instead of investing it in taxable.) This has no additional effect on income tax, and so you end up needing *less* than $2000 to cover the shortfall, because the $2000 SS income is not tax-free.

It is plausible that the marginal tax rates on the extra $160/yr of SS income and the one-time lump of $2000 SS income are the same. In that case, the net effect here is that taxes didn't distort the value of delaying SS. The $2000 and the $160/yr are both worth proportionately less after tax.

On the other hand, if you use tax-deferred assets as the source, then you clearly need to withdraw more than $2000. As noted before, an extra dollar of ordinary income always increases your AGI by more than the same dollar amount of SS income. So in this case, ignoring taxes does understate overstates the value of delaying SS.

[Peter Foley]

# Cruncher

I agree that the way the marginal tax rates is that an additional dollar of non SS can be highly taxed. However, am I wrong to suggest that a person with a pension at some level would not significantly increase the tax rate on their pension by taking SS benefits. (Perhaps Roth conversion income or IRA withdrawals are better examples?)

The decision would be made on the basis of:. Should I wait a year and receive 8% more in SS benefits forever, or should I take SS benefits now even though taking those benefits makes more of my other income taxable and perhaps pushes me into a higher tax bracket?

The 15% marginal rate also allows for tax free qualified dividends and long term capital gains.

I'm very interested in your reply as you have me questioning part of my own rationale for delaying.

[#Cruncher]

... if you use tax-deferred assets as the source, ... ignoring taxes ... overstates the value of delaying SS.

There may be instances where what you say is correct, House Blend, but here is a case where the opposite is true: ignoring taxes understates the return.

• Single individual can get $20,000 SS starting at age 62 or delay to age 70 and get $35,200 (20000 * 132 / 75).
• Requires $50,000 per year after federal tax to live on.
• Living expenses not funded by SS provided by withdrawals from traditional IRA (TIRA).

Here are the income, taxes, and after tax income as figured on a 2017 return for a single taxpayer taking age 65+ standard deduction with one exemption. [*] If SS is started at 62, one column applies to all years. If it's delayed to 70, one column refers to ages 62 - 69 and another to all years after that.

Code: Select all

                    Start 62   ---- Start 70 ----
                    62 - 100   62 - 69   70 - 100
                    --------   -------   --------
TIRA withdrawal      35,095     57,002    15,571
SS benefit           20,000          0    35,200
Total income         55,095     57,002    50,771
Federal tax          (5,095)    (7,002)     (771)
Income after tax     50,000     50,000    50,000

By delaying SS, $21,907 more (57002 - 35095) must be withdrawn from the TIRA for eight years. But after that, $19,524 less (15571 - 35095) needs to be withdrawn. Here are the cash flows shown on both a pretax and after tax basis along with the corresponding Internal Rates of Return (IRR):

Code: Select all

     --- Pre Tax ---     -- After Tax --
Age  Cash Flow    IRR    Cash Flow    IRR

Code: Select all

 62   (20,000)            (21,907)
 63   (20,000)            (21,907)
 64   (20,000)            (21,907)
 65   (20,000)            (21,907)
 66   (20,000)            (21,907)
 67   (20,000)            (21,907)
 68   (20,000)            (21,907)
 69   (20,000)            (21,907)
 70    15,200              19,524 
 71    15,200              19,524 
 72    15,200              19,524 
 73    15,200              19,524 
 74    15,200              19,524 
 75    15,200              19,524 
 76    15,200              19,524 
 77    15,200              19,524   (1.4%)
 78    15,200              19,524    0.0% 
 79    15,200   (0.6%)     19,524    1.2% 
 80    15,200    0.5%      19,524    2.2% 
 81    15,200    1.3%      19,524    3.0% 
 82    15,200    2.0%      19,524    3.6% 
 83    15,200    2.7%      19,524    4.2% 
 84    15,200    3.2%      19,524    4.7% 
 85    15,200    3.6%      19,524    5.1% 
 86    15,200    4.0%      19,524    5.5% 
 87    15,200    4.4%      19,524    5.8% 
 88    15,200    4.7%      19,524    6.0% 
 89    15,200    4.9%      19,524    6.3% 
 90    15,200    5.2%      19,524    6.5% 
 91    15,201    5.4%      19,524    6.7% 
 92    15,202    5.6%      19,524    6.8% 
 93    15,203    5.7%      19,524    7.0% 
 94    15,204    5.9%      19,524    7.1% 
 95    15,205    6.0%      19,524    7.2% 
 96    15,206    6.1%      19,524    7.3% 
 97    15,207    6.2%      19,524    7.4% 
 98    15,208    6.3%      19,524    7.5% 
 99    15,209    6.4%      19,524    7.6% 
100    15,210    6.5%      19,524    7.6%

Regardless of when the individual dies, the return from delaying SS is greater on an after tax basis than on a pretax basis.

... taking [Social Security] benefits makes more of my other income taxable and perhaps pushes me into a higher tax bracket?

Additional SS benefits may push you into a higher bracket. But they do not make any more of your non-SS ordinary income taxable (wages, pensions, traditional IRA withdrawals, or Roth conversions); it is already fully taxable.

House Blend may point out an error in my methodology above. Or he may describe some cases where considering taxes does reduce the advantage of delaying SS. But assuming he does not, my advice is that if delaying SS seems good for you on a pretax basis, it would probably also be as good or better on an after tax basis.

* I used the Compare sheet of my Marginal Tax Rates spreadsheet and the Excel's Goal Seek tool to back into the TIRA withdrawal needed to produce $50,000 after taxes.

[wander]

Suppose I have saved a lot of money and am ready to retire. The amount of SS does not affect me much so I do not need to wait until 70 to collect big checks, instead I will take SS money at 62 and spend it without thinking too much about the differences between getting it at 62 and 70.

[House Blend]

... if you use tax-deferred assets as the source, ... ignoring taxes ... overstates the value of delaying SS.

There may be instances where what you say is correct, House Blend, but here is a case where the opposite is true: ignoring taxes understates the return.

• Single individual can get $20,000 SS starting at age 62 or delay to age 70 and get $35,200 (20000 * 132 / 75).
• Requires $50,000 per year after federal tax to live on.
• Living expenses not funded by SS provided by withdrawals from traditional IRA (TIRA).

I think we are talking about different questions.

In any case, the way I would overlay your scenario on my question is to run two sets of calculations for generating $50,000/yr after tax: yours--call it "tax-deferred", plus a "Roth" scenario in which there are no income taxes to be paid. (If your income consists only of Roth withdrawals and SS benefits, you will pay 0 income tax.)

Then I would quantify how much better (or worse) delayed SS is compared to immediate SS in the tax-deferred scenario. Next do the same calculation in the Roth scenario.

Having done that, my question is whether the advantage of delaying in the Roth scenario looks better or worse than it does in the tax-deferred scenario.

[Hyperborea]

Suppose I have saved a lot of money and am ready to retire. The amount of SS does not affect me much so I do not need to wait until 70 to collect big checks, instead I will take SS money at 62 and spend it without thinking too much about the differences between getting it at 62 and 70.

I see it from the opposite side. I have saved a lot of money and have retired. The amount of SS doesn't really affect me even if it went away. So, I'm taking the insurance approach and planning to wait until I'm 70 to collect in about 18 years. That way if something bad happens to my investments or to me (senility) then I have a larger base amount to live on.

[David Jay]

One thing often missing in these discussions is the fact that one can start at any time after the age of 62. The phrase "why would anyone not" ignores a broad array of issues already detailed in this thread. Perhaps 66 is not the right age, nor is 70. 64 could even be the right answer given a specific set of circumstances.

Exactly - based on our goals (income stream + charitable giving + heirs) we are projecting age 68, but we are prepared to be flexible.

[wander]

Suppose I have saved a lot of money and am ready to retire. The amount of SS does not affect me much so I do not need to wait until 70 to collect big checks, instead I will take SS money at 62 and spend it without thinking too much about the differences between getting it at 62 and 70.

I see it from the opposite side. I have saved a lot of money and have retired. The amount of SS doesn't really affect me even if it went away. So, I'm taking the insurance approach and planning to wait until I'm 70 to collect in about 18 years. That way if something bad happens to my investments or to me (senility) then I have a larger base amount to live on.

If you saved a lot, then there should be no surprise with your investment. I think I rather treat that small amount of SS received at 62 for pleasure or for our children and grandchildren while we are still young. Or use for vacation expense as I think using this money for fun is more fun than taking from hard earned savings. But, I am still far away from ready to retire, I may think differently then when I have to make a choice.
However, if SS is my main income in retirement, then I will try to delay it to 70.

[Admiral]

Not to hijack but...

What about taking SS early, even if you don't need it, and investing the money? For arguments sake I think we can assume that you're unlikely to get the guaranteed 8% ROI that you get by delaying. But...

You do get to grow your nest egg while you are still alive (as opposed to waiting until 70 for a higher payment and then dropping dead the next year) and, if still working, you could plunk it into a Roth for your heirs.

EDIT to add: One thing that's odd about SS if you don't need the income is that the same argument works both ways: If you don't need the higher amount, you might as well take it early. And, if you don't need the lower amount, you might as well take it later.

[itstoomuch]

Very insightful, Admiral
Ymmv

[avalpert]

Not to hijack but...

What about taking SS early, even if you don't need it, and investing the money? For arguments sake I think we can assume that you're unlikely to get the guaranteed 8% ROI that you get by delaying. But...

You do get to grow your nest egg while you are still alive (as opposed to waiting until 70 for a higher payment and then dropping dead the next year) and, if still working, you could plunk it into a Roth for your heirs.

EDIT to add: One thing that's odd about SS if you don't need the income is that the same argument works both ways: If you don't need the higher amount, you might as well take it early. And, if you don't need the lower amount, you might as well take it later.

In that way it is a lot like questions over going 100% equities after they have all the money they need - you no longer need the risk but there is no cost to taking it. In this case, it is unlikely to matter what you choose, but I would suggest the prudent thing is to delay for the longevity insurance aspect as social security - the correct comparison, I think, would be to the cost of an inflation-adjusted annuity purchased with the proceeds of taking social security early.

[NiceUnparticularMan]

If you saved a lot, then there should be no surprise with your investment. I think I rather treat that small amount of SS received at 62 for pleasure or for our children and grandchildren while we are still young. Or use for vacation expense as I think using this money for fun is more fun than taking from hard earned savings. But, I am still far away from ready to retire, I may think differently then when I have to make a choice.

So once you structure an actual withdrawal plan in retirement, you will find out a very large constraint on how much you can spend in the short-term is the need to reserve enough money for the long-term. And you don't know long the long-term will be, nor the inflation rate, nor what returns will look like between early retirement and then, and so on. All that uncertainty forces you to spend a lot less in early retirement than you could if things work out about average, just in case things work out not-so-average.

The existence of Social Security helps enormously, because it last as long as you do, and it is indexed to inflation, and it doesn't depend on market returns. And the more Social Security you have, the more it helps.

This is why the studies usually conclude deferring Social Security allows you to spend more, not less, early retirement. That is because the more Social Security you get, the less you need to reserve out of your savings to provide against these not-so-average scenarios in the long-term.

In the end it is up to you. But the logic of deferral is ultimately about having more piece of mind AND more fun in early retirement, where fun can include spending not just on yourself but also on loved ones, giving to charity, and so on.

The only reasons not to do it are therefore if you actually just need the money right away to make ends meet, or if you feel like you already have enough piece of mind and fun, and you want to maximize the expected amount your heirs will get. And again, recall fun included giving money to loved ones and charities, so this alternative means the money they will only get when you are dead. So some people find there is an appeal to being able to give more while alive.

However, if SS is my main income in retirement, then I will try to delay it to 70.

How are you going to live in the meantime if it is your main income?

[wander]

So once you structure an actual withdrawal plan in retirement, you will find out a very large constraint on how much you can spend in the short-term is the need to reserve enough money for the long-term. And you don't know long the long-term will be, nor the inflation rate, nor what returns will look like between early retirement and then, and so on. All that uncertainty forces you to spend a lot less in early retirement than you could if things work out about average, just in case things work out not-so-average.

The existence of Social Security helps enormously, because it last as long as you do, and it is indexed to inflation, and it doesn't depend on market returns. And the more Social Security you have, the more it helps.

This is why the studies usually conclude deferring Social Security allows you to spend more, not less, early retirement. That is because the more Social Security you get, the less you need to reserve out of your savings to provide against these not-so-average scenarios in the long-term.

In the end it is up to you. But the logic of deferral is ultimately about having more piece of mind AND more fun in early retirement, where fun can include spending not just on yourself but also on loved ones, giving to charity, and so on.

The only reasons not to do it are therefore if you actually just need the money right away to make ends meet, or if you feel like you already have enough piece of mind and fun, and you want to maximize the expected amount your heirs will get. And again, recall fun included giving money to loved ones and charities, so this alternative means the money they will only get when you are dead. So some people find there is an appeal to being able to give more while alive.

However, if SS is my main income in retirement, then I will try to delay it to 70.

How are you going to live in the meantime if it is your main income?

Main income does's have to be 100%. I know bogleheads should have saved some for retirement. If you do not have much, then one year, two years e.t.c of expenses can help delaying SS. If you have no money at all (does not sound like a boglehead), your only choice is getting SS at 62. I those who take money at 62 have no regret and others take money at 70 are happy too. This depends on each individual.

[itstoomuch]

http://www.city-data.com/forum/investin ... ocial.html

My financial Investor told me to wait until I was seventy to collect Social Security. I had stopped working at age 61. Instead of collecting $1700 a month in early SS benefits at age 62-70, I pulled that money out of my investments to pay the bills.

Yesterday I did some analysis about how much money and investment earnings I had lost by taking the additional $1700 a month out of my 60/40 Mutual Funds for the last 8 years. It was shocking.

I had about One Million in my account and spent and lost $233,000. (A combination of extra withdrawals for not collecting SS at age 62-70 and investment losses by not investing the funds I withdrew. Based on an average 6% return on a blended 60/40 mutual fund in the last 8 years)

Because my SS at age 70 is about twice what I would have got at age 62, it will take me 137 months to come out ahead, if I live that long. ($233,000.00 divided by $1700 in additional SS payment due to waiting until I turned 70)

I feel terrible and don't think financially this is going to work out.

What out for the, sequence of events fortunate and unfortunate.

[nbseer]

How about this?

Retired, higher-earner DH starts SS at FRA of 66, allowing lower-earner DW to begin spousal benefits.

Do Roth conversions until RMDs start at 70 1/2, using the SS payments to pay the taxes.

With total SS for both around $42,000, and trying to live off just the SS, it's taxed at just 50%!

It's what we're trying to do... we'll see if we can do it until 70 1/2.

[NiceUnparticularMan]

Main income does's have to be 100%. I know bogleheads should have saved some for retirement. If you do not have much, then one year, two years e.t.c of expenses can help delaying SS.

I was assuming you meant 50%+ of income was going to be covered by Social Security. I'm not sure it is realistic or desirable for someone to cut their planned spending in half or more for 8 years in order to get more starting at 70.

This depends on each individual.

Absolutely, but I think we should be clear about how the tradeoffs work, particularly since it is somewhat counterintuitive in that deferring Social Security means being able to spend more in early retirement--if you have a lot of savings to begin with.

[smitcat]

http://www.city-data.com/forum/investin ... ocial.html

My financial Investor told me to wait until I was seventy to collect Social Security. I had stopped working at age 61. Instead of collecting $1700 a month in early SS benefits at age 62-70, I pulled that money out of my investments to pay the bills.

Yesterday I did some analysis about how much money and investment earnings I had lost by taking the additional $1700 a month out of my 60/40 Mutual Funds for the last 8 years. It was shocking.

I had about One Million in my account and spent and lost $233,000. (A combination of extra withdrawals for not collecting SS at age 62-70 and investment losses by not investing the funds I withdrew. Based on an average 6% return on a blended 60/40 mutual fund in the last 8 years)

Because my SS at age 70 is about twice what I would have got at age 62, it will take me 137 months to come out ahead, if I live that long. ($233,000.00 divided by $1700 in additional SS payment due to waiting until I turned 70)

I feel terrible and don't think financially this is going to work out.

What out for the, sequence of events fortunate and unfortunate.

Itstoomuch - I do not understand your strategy likely because there is no one place where you post all of the details. This is what I can see so far that appears very confusing....
- You took SS early
- Added annuities
- Did not convert to Roth
- Have 25% bracket
- Take the free cash and invest it at 1% or less

We are trying to maximize our spending capability and that includes taxes and the like.

[wolf359]

This is also the main reason that I am planning to buy an annuity sometime between 70 and 80 if I'm still here (I'm a few decades away still) with at least some of the portfolio.

I'm in this boat. There's a product called QLAC annuities which are pretty new, and there hasn't been much discussion on. If you currently have a sizeable traditional IRA, you could put up to $125,000 or 1/4 (whichever is smaller) into that QLAC, and defer it for 25 years. YMMV, but to ballpark it, buying a $125,000 QLAC at age 50, that lasts as long as you and your spouse will live, and that starts paying at age 75, will generate $1850/mo (or $22,200/year). This quote has the cash refund feature, whereas your heirs get the money back if you both die before age 75.

The benefit of getting it at 50 or 60 is that when you buy it and it's a few decades away, it's effectively a lower-fee deferred annuity, so it gets mortality credits, which boosts its return to around 7%. Not great, but guaranteed income for life after it activates.

The tax treatment is that the amount put into the QLAC does not count against your RMDs. From that respect, buying it so early negates some of that benefit. On the other hand, it takes $125K of my traditional off the table that I don't have to worry about converting to Roths.

For someone like the OP's father, the main benefit to delaying SS is to increase his payment. Now that he is no longer working, he has few opportunities to increase his income (which may be why he's looking forward to claiming his SS check at 62.) Waiting until 70 is the cheapest longevity annuity he can buy. The longer he waits, the less the chance that he'll outlive his money.

Or he can buy a QLAC, which will also provide that longevity insurance. The point of the exercise is that it puts a dollar amount on what that additional income boost costs. If he can afford a QLAC, he might buy that, claim SS early, and count on the QLAC to boost his income later in life in case his investments run out. If he can't afford a QLAC, he might use SS as his longevity insurance. His absolute cheapest alternative is the OP. The OP's Dad claims early, and if he runs out of money in the future, he moves in with his kids.

Edit: Background -- QLACs are "Qualified Longevity Annuity Contracts." They were proposed and put into law by the Obama Administration around 2014. That means that not that many companies have products, since the product category is only 2-3 years old. I believe Vanguard now has them available. I'm undecided on this product, but it is intriguing. If I get one, the lowest cost way would probably be through Vanguard.

[itstoomuch]

Itstoomuch - I do not understand your strategy likely because there is no one place where you post all of the details. This is what I can see so far that appears very confusing....
- You took SS early
- Added annuities
- Did not convert to Roth
- Have 25% bracket
- Take the free cash and invest it at 1% or less
We are trying to maximize our spending capability and that includes taxes and the like.

The cite is an example of sequence of events than can either make or break the backtesting decision of early SS or late SS. Beware of timing and statistics.

Yes we took SS early because we needed the immediate cashflow and because I wanted to give the Market a chance to recover (staythecourse).
We bought annuities in Nov 2008 (timing was important in the backtest) because I thought we needed portfolio insurance in the form of a "long straddle". We bought annuities to have a "pension" and a pension much like PERs tier 1. I realigned our total portfolio within the variable annuities and remaining assets, to 100% equity, no bonds, from a 60/40 which we had since our mid 30's. The realignment was a calculated-markettiming risk to buy equities near their lows, because we were by that time, deep in the hole looking at a possible bleak retirement.

I am ambivalent to conversions to Roth vs conversion to taxable in the Discretionary. I am doing some conversions mindful of taxation.
Discretionary taxables is relatively small and is mostly in dividend stocks, in a hold.
Discretionary IRAs is relatively large and currently high cash because I can't find value and because I just do not need to speculate anymore.
We had a fortunate sequence of events since Nov 2008 that increased our retirement INCOME both current in future. Even the VAs increased, net ~9% avg or liquidation value doubling in 8 years.
Because I established Income floors thru GLWB annuities and SS benefits, I was able to do some aggressive trading (2012-2016) or not (2017).
Discretionary is ~25% of retirement assets. Other buckets are ~25% each and are more like fixed assets, Income producing.
Our sequence, is investing in balanced funds from age ~35 to 63 (age of last RIF). At 58/61 (2008) moved half of assets to GLWB annuities. Began SS in 2010 (63) and 2012 (62). Began active trading in Discretionary in 2012. Acquired inheritance late 2015, and invested in rental condo.
YMMV, YMMV, YMMV

[Hyperborea]

This is also the main reason that I am planning to buy an annuity sometime between 70 and 80 if I'm still here (I'm a few decades away still) with at least some of the portfolio.

I'm in this boat. There's a product called QLAC annuities which are pretty new, and there hasn't been much discussion on.

Interesting,I hadn't heard of these before. I'll have a look at it in more detail in a couple of weeks (heading out on a trip later today). From a quick look I have an "issue" that probably make this product not for me though. While I am a US resident now, I am on my way out over the next year or so. I don't know exactly where I'm going to be living long term in my old age but it's not likely to be the US.

[rai]

Interesting discussion..

Regarding if you don't need the money (i.e. You have a large enough savings) say you were planning on a ~4% withdraw, could you in fact take ~5% for the first 8 years assume you retire at 62 and defer SS until you are 70. But then be able to withdrawal 3.3% (some number) and the higher SS payment would make up the difference to 4%? But be safer since the SS is indexed for inflation and the lower withdraw from 70 years plus would be safer too.

in this way you'd be taking a bit higher 5% for a short time so you could spend more in your younger retirement age period.

[delamer]

Interesting discussion..

Regarding if you don't need the money (i.e. You have a large enough savings) say you were planning on a ~4% withdraw, could you in fact take ~5% for the first 8 years assume you retire at 62 and defer SS until you are 70. But then be able to withdrawal 3.3% (some number) and the higher SS payment would make up the difference to 4%? But be safer since the SS is indexed for inflation and the lower withdraw from 70 years plus would be safer too.

in this way you'd be taking a bit higher 5% for a short time so you could spend more in your younger retirement age period.

Yes, this can work. But I would look at it differently. You really would have two retirement buckets -- the one you spend down completely from 62 to 70, and a second that you withdraw gradually beginning at 70.

The first bucket would be invested more conservatively because you are going to spend it all within the next 8 years. The second bucket would be invested more aggressively since you wouldn't touch it for 8 years and it needs to last longer.