Turning 62 and SS alternatives

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restingonmylaurels
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Turning 62 and SS alternatives

Post by restingonmylaurels » Tue Feb 11, 2020 6:30 am

I am turning 62 later this year and am staring at the decision on when to start SS.

Because all starting options are supposed to be actuarially neutral, it seems the decision is one of balancing the risk of living longer than expected versus the risk that benefits will be reduced in the future.

Assuming it is better to start at FRA for other reasons (DW), I would need to replace that SS PIA stream from another source, likely investments. I have identified three investment sources (T-IRA, bond fund dividends, bond fund sales) and looked at advantages/disadvantages of each:

Sources:
IRA capital: Regular income tax rates on withdrawals; save later on RMD taxation; no return on withdrawn capital
BF income: Regular income tax rates on dividends; no impact on RMD taxation; regular returns on all capital
BF capital: LTCG tax rates of sales; no impact on RMD taxation; no return on withdrawn capital

Are these the main decision criteria to evaluate the SS replacement sources and how best to weight them?

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JoeRetire
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Re: Turning 62 and SS alternatives

Post by JoeRetire » Tue Feb 11, 2020 6:53 am

restingonmylaurels wrote:
Tue Feb 11, 2020 6:30 am
I am turning 62 later this year and am staring at the decision on when to start SS.

Assuming it is better to start at FRA for other reasons (DW), I would need to replace that SS PIA stream from another source, likely investments.
Why do you need to replace the SS PIA stream?
Since you aren't yet 62, you aren't using that stream now.

explore: https://opensocialsecurity.com/

and consider:
"Nonetheless, the decision to delay Social Security can be evaluated based on the implicit rate of return it creates by choosing to delay, and over longer time horizons – when clients may “need the money most” as they have more years of retirement expenses to cover in the first place – the return of the Social Security delay becomes quite compelling. In fact, the return is generally far superior to any risk-adjusted returns that can be achieved over comparable time periods by the available alternatives, whether investing in risk-free bonds, growth equities, or buying a commercially available annuity. And because the system is indexed to inflation, its real returns will be maintained even if inflation rises, and will only become better if longevity continues to increase as well. In fact, ultimately the decision to delay Social Security delivers the best results when there is either unexpected inflation, unusually long longevity, or especially bad market returns, which are the exact three scenarios that traditional portfolios are the least effective at managing, making the decision to delay Social Security the ultimate form of “anti-fragile” triple hedge!"

https://www.kitces.com/blog/how-delayin ... y-can-buy/
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Re: Turning 62 and SS alternatives

Post by ObliviousInvestor » Tue Feb 11, 2020 7:46 am

restingonmylaurels wrote:
Tue Feb 11, 2020 6:30 am
Because all starting options are supposed to be actuarially neutral
This is a pervasive myth/misunderstanding.

The system was only designed to be actuarially neutral for a very specific set of circumstances (i.e., for an unmarried person in what was average health in the early 1980s and when market interest rates approximate those baked into the calculations). But life expectancies generally increase over time; market interest rates rise and fall; and some people happen to be married.

Now if a forward-looking analysis turns out to be actuarially neutral for a given person, it's only by coincidence. (Given today's interest rates and life expectancies, such coincidental circumstances are most common to arise for the lower earner in married couples and for unmarried people in somewhat worse than average health.)

Edited for grammar.
Last edited by ObliviousInvestor on Tue Feb 11, 2020 1:02 pm, edited 1 time in total.
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tennisplyr
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Re: Turning 62 and SS alternatives

Post by tennisplyr » Tue Feb 11, 2020 8:15 am

For me there was the psychological factor....am I OK with drawing down my assets from 62 to 70 (plus waiting years for breakeven) with the notion of possibly being a little ahead late in life. My answer was no, we took SS early.
Those who move forward with a happy spirit will find that things always work out.

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Re: Turning 62 and SS alternatives

Post by suewolf » Tue Feb 11, 2020 9:35 am

Agree that waiting probably will make sense given longer longevity these days and difficulty in finding alternative risk free 8% returns. One factor to consider, however is if SS benefits will be reduced in the future. The current system is not sustainable in the long term given current demographics. While our politicians continue to delay a political decision, eventually there will simply not be enough people paying in vs those taking the money out. Therefore there's a probability that future benefits will be reduced at some point (35% reduction is current estimate), or the full retirement age will be increased or more SS will be taxed or some combination. To the extent that you want to be grand fathered into the current benefit scheme and avoid potential future benefit reductions, you might opt to start taking SS early.

Having said that, my plan is to delay SS as long as possible. Delaying allows me to convert more of my IRA and 401k to Roths to fill up the lower tax brackets as much as possible. Plus tax rates right now are relatively low - future rates will likely be higher (see $27 trillion debt) so converting those now makes sense.

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Re: Turning 62 and SS alternatives

Post by wolf359 » Tue Feb 11, 2020 9:55 am

suewolf wrote:
Tue Feb 11, 2020 9:35 am
Agree that waiting probably will make sense given longer longevity these days and difficulty in finding alternative risk free 8% returns. One factor to consider, however is if SS benefits will be reduced in the future. The current system is not sustainable in the long term given current demographics. While our politicians continue to delay a political decision, eventually there will simply not be enough people paying in vs those taking the money out. Therefore there's a probability that future benefits will be reduced at some point (35% reduction is current estimate), or the full retirement age will be increased or more SS will be taxed or some combination. To the extent that you want to be grand fathered into the current benefit scheme and avoid potential future benefit reductions, you might opt to start taking SS early.

Having said that, my plan is to delay SS as long as possible. Delaying allows me to convert more of my IRA and 401k to Roths to fill up the lower tax brackets as much as possible. Plus tax rates right now are relatively low - future rates will likely be higher (see $27 trillion debt) so converting those now makes sense.
The current estimate is a reduction of 23% if no action is taken. This reduction is by current law, and is across the board. There is no grandfathering. In fact, if you take the reduced amounts for claiming early, you may get an additional 23% reduction of that amount in 2034. Source: 2019 SS Trustees Report https://www.ssa.gov/OACT/TR/2019/

The Trustees report recommends possible fixes, and notes that changing the law sooner reduces the severity of the changes by spreading it across more generations. This includes raising the full retirement age, increasing social security taxes, and reducing benefits. However, the current system is sustainable because it is pay-as-you-go -- it just won't pay all the currently promised benefits. The system is designed to reduce payments so that payments reflect the income once the trust fund is depleted. It's only if Congress/President act to change the law that they might grandfather certain groups in the new law.

Edit: According to the Trustees report, the amount paid out starts exceeding the amount paid in this year (2020). If this projection holds true, the trust fund starts getting depleted, and will run out in 2034. The trust fund is the result of previous years surplus.

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JoeRetire
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Re: Turning 62 and SS alternatives

Post by JoeRetire » Tue Feb 11, 2020 12:58 pm

suewolf wrote:
Tue Feb 11, 2020 9:35 am
The current system is not sustainable in the long term given current demographics.
Sorry, that is incorrect.

If/when the Social Security trust fund is depleted, whatever money is collected in social security taxes will be paid out in benefits. That is the current system, and it is completely sustainable.
Therefore there's a probability that future benefits will be reduced at some point (35% reduction is current estimate)
Again, no. There is no credible source indicating a 35% reduction.
or the full retirement age will be increased or more SS will be taxed or some combination. To the extent that you want to be grand fathered into the current benefit scheme and avoid potential future benefit reductions, you might opt to start taking SS early.
Sorry, no. The current system has no provision for being "grand fathered in". Anything like that would require changes to the law/current system.
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Re: Turning 62 and SS alternatives

Post by restingonmylaurels » Tue Feb 11, 2020 1:00 pm

JoeRetire wrote:
Tue Feb 11, 2020 6:53 am
restingonmylaurels wrote:
Tue Feb 11, 2020 6:30 am
I am turning 62 later this year and am staring at the decision on when to start SS.

Assuming it is better to start at FRA for other reasons (DW), I would need to replace that SS PIA stream from another source, likely investments.
Why do you need to replace the SS PIA stream?
Since you aren't yet 62, you aren't using that stream now.
I am talking about an income stream that replaces SS PIA from 62 to FRA, as I would look to some source of income during that interval. So I am looking to do a proper analysis based on the three possible sources I suggested.

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JoeRetire
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Re: Turning 62 and SS alternatives

Post by JoeRetire » Tue Feb 11, 2020 1:03 pm

restingonmylaurels wrote:
Tue Feb 11, 2020 1:00 pm
I am talking about an income stream that replaces SS PIA from 62 to FRA, as I would look to some source of income during that interval.
I understand that. But you are obviously not depending on that income stream today.

So why would you need to depend on it from 62 to FRA (or 70)? What changes such that you need the income stream starting at 62?
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Re: Turning 62 and SS alternatives

Post by restingonmylaurels » Tue Feb 11, 2020 1:24 pm

JoeRetire wrote:
Tue Feb 11, 2020 1:03 pm
restingonmylaurels wrote:
Tue Feb 11, 2020 1:00 pm
I am talking about an income stream that replaces SS PIA from 62 to FRA, as I would look to some source of income during that interval.
I understand that. But you are obviously not depending on that income stream today.

So why would you need to depend on it from 62 to FRA (or 70)? What changes such that you need the income stream starting at 62?
The obvious example would be stopping active income (work). So then would turn to a different source of funding for expenses.

What I am looking for is some thoughts on alternative possible sources, as explained in the original post:

"I have identified three investment sources (T-IRA, bond fund dividends, bond fund sales) and looked at advantages/disadvantages of each:

Sources:
IRA capital: Regular income tax rates on withdrawals; save later on RMD taxation; no return on withdrawn capital
BF income: Regular income tax rates on dividends; no impact on RMD taxation; regular returns on all capital
BF capital: LTCG tax rates of sales; no impact on RMD taxation; no return on withdrawn capital

Are these the main decision criteria to evaluate the SS replacement sources and how best to weight them?"

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JoeRetire
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Re: Turning 62 and SS alternatives

Post by JoeRetire » Tue Feb 11, 2020 1:27 pm

restingonmylaurels wrote:
Tue Feb 11, 2020 1:24 pm
JoeRetire wrote:
Tue Feb 11, 2020 1:03 pm
restingonmylaurels wrote:
Tue Feb 11, 2020 1:00 pm
I am talking about an income stream that replaces SS PIA from 62 to FRA, as I would look to some source of income during that interval.
I understand that. But you are obviously not depending on that income stream today.

So why would you need to depend on it from 62 to FRA (or 70)? What changes such that you need the income stream starting at 62?
The obvious example would be stopping active income (work). So then would turn to a different source of funding for expenses.
So you are working now, but planning to retire at 62?
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WoodSpinner
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Re: Turning 62 and SS alternatives

Post by WoodSpinner » Tue Feb 11, 2020 10:27 pm

restingonmylaurels wrote:
Tue Feb 11, 2020 1:24 pm
JoeRetire wrote:
Tue Feb 11, 2020 1:03 pm
restingonmylaurels wrote:
Tue Feb 11, 2020 1:00 pm
I am talking about an income stream that replaces SS PIA from 62 to FRA, as I would look to some source of income during that interval.
I understand that. But you are obviously not depending on that income stream today.

So why would you need to depend on it from 62 to FRA (or 70)? What changes such that you need the income stream starting at 62?
The obvious example would be stopping active income (work). So then would turn to a different source of funding for expenses.

What I am looking for is some thoughts on alternative possible sources, as explained in the original post:

"I have identified three investment sources (T-IRA, bond fund dividends, bond fund sales) and looked at advantages/disadvantages of each:

Sources:
IRA capital: Regular income tax rates on withdrawals; save later on RMD taxation; no return on withdrawn capital
BF income: Regular income tax rates on dividends; no impact on RMD taxation; regular returns on all capital
BF capital: LTCG tax rates of sales; no impact on RMD taxation; no return on withdrawn capital

Are these the main decision criteria to evaluate the SS replacement sources and how best to weight them?"
OP,

I would also consider:
- Possible impacts of MAGI on IRMAA thresholds
- Estate planning goals for heirs and/or charities
- Type of Bonds currently held — Not a fan of High Yield or lower quality Corporates
- Rebalancing opportunities to purchase Bonds in the IRA and get them out of Taxable
- Overall Tax picture, Marginal Tax Rates, LTCG Rates, NIIT Eric.

WoodSpinner

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Re: Turning 62 and SS alternatives

Post by PaulF » Tue Feb 11, 2020 11:19 pm

Can I see if I understand your question?

I infer that you are retiring at 62, and wish to delay filing for SS until later. (You mention FRA, but perhaps you should consider age 70.)

You keep referring to "replacing SS," which I think is confusing the matter. Essentially, I infer you are asking which of the saving vehicles you have accumulated is the best to spend down first? Should you spend taxable first or tax-deferred first? And should you incur capital gains, or harvest dividends? Are these the questions you are trying to ask?

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Re: Turning 62 and SS alternatives

Post by Dottie57 » Tue Feb 11, 2020 11:39 pm

PaulF wrote:
Tue Feb 11, 2020 11:19 pm
Can I see if I understand your question?

I infer that you are retiring at 62, and wish to delay filing for SS until later. (You mention FRA, but perhaps you should consider age 70.)

You keep referring to "replacing SS," which I think is confusing the matter. Essentially, I infer you are asking which of the saving vehicles you have accumulated is the best to spend down first? Should you spend taxable first or tax-deferred first? And should you incur capital gains, or harvest dividends? Are these the questions you are trying to ask?
+1

Op needs to fund retirement from the day of retirement to first SS check.


I am funding retirement for this period with tax deferred and taxable accounts.

Planning on taking SS at age 70.

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Re: Turning 62 and SS alternatives

Post by restingonmylaurels » Wed Feb 12, 2020 1:58 am

PaulF wrote:
Tue Feb 11, 2020 11:19 pm
Can I see if I understand your question?

I infer that you are retiring at 62, and wish to delay filing for SS until later. (You mention FRA, but perhaps you should consider age 70.)

You keep referring to "replacing SS," which I think is confusing the matter. Essentially, I infer you are asking which of the saving vehicles you have accumulated is the best to spend down first? Should you spend taxable first or tax-deferred first? And should you incur capital gains, or harvest dividends? Are these the questions you are trying to ask?
I infer you are asking which of the saving vehicles you have accumulated is the best to spend down first? Yes

Should you spend taxable first or tax-deferred first? Yes

And should you incur capital gains, or harvest dividends? Yes

Are these the questions you are trying to ask? Yes

Paul F, yes, you have got all of my questions correct. Which of the three possible sources, IRA, taxable bond fund (through sales), and taxable bond fund (through dividends), is the optimal source for funding the period from 62 to FRA?

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Re: Turning 62 and SS alternatives

Post by restingonmylaurels » Wed Feb 12, 2020 5:53 am

JoeRetire wrote:
Tue Feb 11, 2020 6:53 am
restingonmylaurels wrote:
Tue Feb 11, 2020 6:30 am
I am turning 62 later this year and am staring at the decision on when to start SS.

Assuming it is better to start at FRA for other reasons (DW), I would need to replace that SS PIA stream from another source, likely investments.
Why do you need to replace the SS PIA stream?
Since you aren't yet 62, you aren't using that stream now.

explore: https://opensocialsecurity.com/
Thanks for this link, it looks helpful. One thing I could not find, even in the advance options, was how to assume the DW's SS options were wholly dependent on the primary beneficiary starting to receive benefits (she has no independent work history).

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JoeRetire
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Re: Turning 62 and SS alternatives

Post by JoeRetire » Wed Feb 12, 2020 7:01 am

restingonmylaurels wrote:
Wed Feb 12, 2020 5:53 am
JoeRetire wrote:
Tue Feb 11, 2020 6:53 am
restingonmylaurels wrote:
Tue Feb 11, 2020 6:30 am
I am turning 62 later this year and am staring at the decision on when to start SS.

Assuming it is better to start at FRA for other reasons (DW), I would need to replace that SS PIA stream from another source, likely investments.
Why do you need to replace the SS PIA stream?
Since you aren't yet 62, you aren't using that stream now.

explore: https://opensocialsecurity.com/
Thanks for this link, it looks helpful. One thing I could not find, even in the advance options, was how to assume the DW's SS options were wholly dependent on the primary beneficiary starting to receive benefits (she has no independent work history).
Enter $0 for her PIA.
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Re: Turning 62 and SS alternatives

Post by JoeRetire » Wed Feb 12, 2020 7:06 am

restingonmylaurels wrote:
Wed Feb 12, 2020 1:58 am
PaulF wrote:
Tue Feb 11, 2020 11:19 pm
Can I see if I understand your question?

I infer that you are retiring at 62, and wish to delay filing for SS until later. (You mention FRA, but perhaps you should consider age 70.)

You keep referring to "replacing SS," which I think is confusing the matter. Essentially, I infer you are asking which of the saving vehicles you have accumulated is the best to spend down first? Should you spend taxable first or tax-deferred first? And should you incur capital gains, or harvest dividends? Are these the questions you are trying to ask?
I infer you are asking which of the saving vehicles you have accumulated is the best to spend down first? Yes

Should you spend taxable first or tax-deferred first? Yes

And should you incur capital gains, or harvest dividends? Yes

Are these the questions you are trying to ask? Yes

Paul F, yes, you have got all of my questions correct. Which of the three possible sources, IRA, taxable bond fund (through sales), and taxable bond fund (through dividends), is the optimal source for funding the period from 62 to FRA?
You haven't indicated the numbers in each bucket, how much income you need, nor your tax bracket. Those would be important data points to consider when deciding where you should get your income.

Most likely, the optimal solution is to continue working beyond 62.

This might help: "How To Withdraw Retirement Money The Right Way" https://www.forbes.com/sites/lawrenceli ... dc62fa3d4e
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Re: Turning 62 and SS alternatives

Post by restingonmylaurels » Wed Feb 12, 2020 7:33 am

JoeRetire wrote:
Wed Feb 12, 2020 7:01 am
restingonmylaurels wrote:
Wed Feb 12, 2020 5:53 am
JoeRetire wrote:
Tue Feb 11, 2020 6:53 am
restingonmylaurels wrote:
Tue Feb 11, 2020 6:30 am
I am turning 62 later this year and am staring at the decision on when to start SS.

Assuming it is better to start at FRA for other reasons (DW), I would need to replace that SS PIA stream from another source, likely investments.
Why do you need to replace the SS PIA stream?
Since you aren't yet 62, you aren't using that stream now.

explore: https://opensocialsecurity.com/
Thanks for this link, it looks helpful. One thing I could not find, even in the advance options, was how to assume the DW's SS options were wholly dependent on the primary beneficiary starting to receive benefits (she has no independent work history).
Enter $0 for her PIA.
I see, OK I did that. Although I have read the linked articles, I am unclear about the Real discount rate, which is set initially at 0.14%. Is that a monthly or annual amount? And because inflation affects people differently, I am more interested in the nominal discount rate. So what then, 20 Treasuries?

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Re: Turning 62 and SS alternatives

Post by restingonmylaurels » Wed Feb 12, 2020 7:36 am

JoeRetire wrote:
Tue Feb 11, 2020 6:53 am
restingonmylaurels wrote:
Tue Feb 11, 2020 6:30 am
I am turning 62 later this year and am staring at the decision on when to start SS.

Assuming it is better to start at FRA for other reasons (DW), I would need to replace that SS PIA stream from another source, likely investments.
and consider:
"Nonetheless, the decision to delay Social Security can be evaluated based on the implicit rate of return it creates by choosing to delay, and over longer time horizons – when clients may “need the money most” as they have more years of retirement expenses to cover in the first place – the return of the Social Security delay becomes quite compelling. In fact, the return is generally far superior to any risk-adjusted returns that can be achieved over comparable time periods by the available alternatives, whether investing in risk-free bonds, growth equities, or buying a commercially available annuity. And because the system is indexed to inflation, its real returns will be maintained even if inflation rises, and will only become better if longevity continues to increase as well. In fact, ultimately the decision to delay Social Security delivers the best results when there is either unexpected inflation, unusually long longevity, or especially bad market returns, which are the exact three scenarios that traditional portfolios are the least effective at managing, making the decision to delay Social Security the ultimate form of “anti-fragile” triple hedge!"

https://www.kitces.com/blog/how-delayin ... y-can-buy/
My post is really not about deciding to delay SS or not. It is about the best funding mechanism to use when delaying SS. I have listed three options, which have different tax treatments short and long term. That is what I want to get an answer to.

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Re: Turning 62 and SS alternatives

Post by ObliviousInvestor » Wed Feb 12, 2020 7:36 am

restingonmylaurels wrote:
Wed Feb 12, 2020 7:33 am
JoeRetire wrote:
Wed Feb 12, 2020 7:01 am
restingonmylaurels wrote:
Wed Feb 12, 2020 5:53 am
JoeRetire wrote:
Tue Feb 11, 2020 6:53 am
restingonmylaurels wrote:
Tue Feb 11, 2020 6:30 am
I am turning 62 later this year and am staring at the decision on when to start SS.

Assuming it is better to start at FRA for other reasons (DW), I would need to replace that SS PIA stream from another source, likely investments.
Why do you need to replace the SS PIA stream?
Since you aren't yet 62, you aren't using that stream now.

explore: https://opensocialsecurity.com/
Thanks for this link, it looks helpful. One thing I could not find, even in the advance options, was how to assume the DW's SS options were wholly dependent on the primary beneficiary starting to receive benefits (she has no independent work history).
Enter $0 for her PIA.
I see, OK I did that. Although I have read the linked articles, I am unclear about the Real discount rate, which is set initially at 0.14%. Is that a monthly or annual amount? And because inflation affects people differently, I am more interested in the nominal discount rate. So what then, 20 Treasuries?
It's the annual yield on 20-year TIPS, because that is the asset type with risk most comparable to Social Security.

The calculator does everything in real terms. Mixing a nominal discount rate with all of the other math in real terms will just lead to meaningless results.
Mike Piper, author/blogger

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Re: Turning 62 and SS alternatives

Post by restingonmylaurels » Wed Feb 12, 2020 7:45 am

tennisplyr wrote:
Tue Feb 11, 2020 8:15 am
For me there was the psychological factor....am I OK with drawing down my assets from 62 to 70 (plus waiting years for breakeven) with the notion of possibly being a little ahead late in life. My answer was no, we took SS early.
How far into retirement are you now? Would you change your decision looking back on it now?

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Re: Turning 62 and SS alternatives

Post by tennisplyr » Wed Feb 12, 2020 7:50 am

restingonmylaurels wrote:
Wed Feb 12, 2020 7:45 am
tennisplyr wrote:
Tue Feb 11, 2020 8:15 am
For me there was the psychological factor....am I OK with drawing down my assets from 62 to 70 (plus waiting years for breakeven) with the notion of possibly being a little ahead late in life. My answer was no, we took SS early.
How far into retirement are you now? Would you change your decision looking back on it now?

I've been retired for 9 years. Would not have changed my decision. Fortunately for us, I retired in a bull market, so the money I would have withdrawn to live on was in the market working for me. It would have been worse to have withdrawn in bear years! All is good :sharebeer
Those who move forward with a happy spirit will find that things always work out.

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Re: Turning 62 and SS alternatives

Post by restingonmylaurels » Wed Feb 12, 2020 7:53 am

ObliviousInvestor wrote:
Tue Feb 11, 2020 7:46 am
restingonmylaurels wrote:
Tue Feb 11, 2020 6:30 am
Because all starting options are supposed to be actuarially neutral
This is a pervasive myth/misunderstanding.

The system was only designed to be actuarially neutral for a very specific set of circumstances (i.e., for an unmarried person in what was average health in the early 1980s and when market interest rates approximate those baked into the calculations). But life expectancies generally increase over time; market interest rates rise and fall; and some people happen to be married.

Now if a forward-looking analysis turns out to be actuarially neutral for a given person, it's only by coincidence. (Given today's interest rates and life expectancies, such coincidental circumstances are most common to arise for the lower earner in married couples and for unmarried people in somewhat worse than average health.)

Edited for grammar.
OK. Then would it not be possible to specify a set of forward-looking alternatives are actuarially positive for a given type of situation (e.g. married couple, DW, same ages), without each person having to go through the analysis themselves?

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Re: Turning 62 and SS alternatives

Post by restingonmylaurels » Wed Feb 12, 2020 8:02 am

wolf359 wrote:
Tue Feb 11, 2020 9:55 am
suewolf wrote:
Tue Feb 11, 2020 9:35 am
Agree that waiting probably will make sense given longer longevity these days and difficulty in finding alternative risk free 8% returns. One factor to consider, however is if SS benefits will be reduced in the future. The current system is not sustainable in the long term given current demographics. While our politicians continue to delay a political decision, eventually there will simply not be enough people paying in vs those taking the money out. Therefore there's a probability that future benefits will be reduced at some point (35% reduction is current estimate), or the full retirement age will be increased or more SS will be taxed or some combination. To the extent that you want to be grand fathered into the current benefit scheme and avoid potential future benefit reductions, you might opt to start taking SS early.

Having said that, my plan is to delay SS as long as possible. Delaying allows me to convert more of my IRA and 401k to Roths to fill up the lower tax brackets as much as possible. Plus tax rates right now are relatively low - future rates will likely be higher (see $27 trillion debt) so converting those now makes sense.
The current estimate is a reduction of 23% if no action is taken. This reduction is by current law, and is across the board. There is no grandfathering. In fact, if you take the reduced amounts for claiming early, you may get an additional 23% reduction of that amount in 2034. Source: 2019 SS Trustees Report https://www.ssa.gov/OACT/TR/2019/

The Trustees report recommends possible fixes, and notes that changing the law sooner reduces the severity of the changes by spreading it across more generations. This includes raising the full retirement age, increasing social security taxes, and reducing benefits. However, the current system is sustainable because it is pay-as-you-go -- it just won't pay all the currently promised benefits. The system is designed to reduce payments so that payments reflect the income once the trust fund is depleted. It's only if Congress/President act to change the law that they might grandfather certain groups in the new law.

Edit: According to the Trustees report, the amount paid out starts exceeding the amount paid in this year (2020). If this projection holds true, the trust fund starts getting depleted, and will run out in 2034. The trust fund is the result of previous years surplus.
I wish SSA would be a little clearer about this. On their Retirement Estimator page, it states "Payroll taxes collected will be enough to pay only about 80 cents for each dollar of scheduled benefits." One would assume their SS PIA would only be reduced by 20%. But as you point out, the OASI cut is supposed to be to 77% of benefits, it is only when combined with DI that is averages out to 80%.

BTW, is your handle about the red dwarf star or the battle in Star Trek?

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Re: Turning 62 and SS alternatives

Post by JoeRetire » Wed Feb 12, 2020 8:03 am

restingonmylaurels wrote:
Wed Feb 12, 2020 7:36 am
It is about the best funding mechanism to use when delaying SS. I have listed three options, which have different tax treatments short and long term. That is what I want to get an answer to.
The best funding mechanism is employment.

You haven't provided enough details to determine what would be most beneficial tax-wise.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.

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Re: Turning 62 and SS alternatives

Post by restingonmylaurels » Wed Feb 12, 2020 8:06 am

WoodSpinner wrote:
Tue Feb 11, 2020 10:27 pm
restingonmylaurels wrote:
Tue Feb 11, 2020 1:24 pm
JoeRetire wrote:
Tue Feb 11, 2020 1:03 pm
restingonmylaurels wrote:
Tue Feb 11, 2020 1:00 pm
I am talking about an income stream that replaces SS PIA from 62 to FRA, as I would look to some source of income during that interval.
I understand that. But you are obviously not depending on that income stream today.

So why would you need to depend on it from 62 to FRA (or 70)? What changes such that you need the income stream starting at 62?
The obvious example would be stopping active income (work). So then would turn to a different source of funding for expenses.

What I am looking for is some thoughts on alternative possible sources, as explained in the original post:

"I have identified three investment sources (T-IRA, bond fund dividends, bond fund sales) and looked at advantages/disadvantages of each:

Sources:
IRA capital: Regular income tax rates on withdrawals; save later on RMD taxation; no return on withdrawn capital
BF income: Regular income tax rates on dividends; no impact on RMD taxation; regular returns on all capital
BF capital: LTCG tax rates of sales; no impact on RMD taxation; no return on withdrawn capital

Are these the main decision criteria to evaluate the SS replacement sources and how best to weight them?"
OP,

I would also consider:
- Possible impacts of MAGI on IRMAA thresholds
- Estate planning goals for heirs and/or charities
- Type of Bonds currently held — Not a fan of High Yield or lower quality Corporates
- Rebalancing opportunities to purchase Bonds in the IRA and get them out of Taxable
- Overall Tax picture, Marginal Tax Rates, LTCG Rates, NIIT Eric.

WoodSpinner
WoodSpinner, thanks for the heads up about IRMAA. Have spent zero time on Medicare analysis to date.

Not familiar with the acronym NIIT Eric. Can you write that one out?

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Re: Turning 62 and SS alternatives

Post by restingonmylaurels » Wed Feb 12, 2020 8:07 am

Dottie57 wrote:
Tue Feb 11, 2020 11:39 pm
PaulF wrote:
Tue Feb 11, 2020 11:19 pm
Can I see if I understand your question?

I infer that you are retiring at 62, and wish to delay filing for SS until later. (You mention FRA, but perhaps you should consider age 70.)

You keep referring to "replacing SS," which I think is confusing the matter. Essentially, I infer you are asking which of the saving vehicles you have accumulated is the best to spend down first? Should you spend taxable first or tax-deferred first? And should you incur capital gains, or harvest dividends? Are these the questions you are trying to ask?
+1

Op needs to fund retirement from the day of retirement to first SS check.

I am funding retirement for this period with tax deferred and taxable accounts.

Planning on taking SS at age 70.
Thanks Dottie. Which do you fund with first, tax deferred or taxable accounts?

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Re: Turning 62 and SS alternatives

Post by ObliviousInvestor » Wed Feb 12, 2020 8:09 am

restingonmylaurels wrote:
Wed Feb 12, 2020 7:53 am
ObliviousInvestor wrote:
Tue Feb 11, 2020 7:46 am
restingonmylaurels wrote:
Tue Feb 11, 2020 6:30 am
Because all starting options are supposed to be actuarially neutral
This is a pervasive myth/misunderstanding.

The system was only designed to be actuarially neutral for a very specific set of circumstances (i.e., for an unmarried person in what was average health in the early 1980s and when market interest rates approximate those baked into the calculations). But life expectancies generally increase over time; market interest rates rise and fall; and some people happen to be married.

Now if a forward-looking analysis turns out to be actuarially neutral for a given person, it's only by coincidence. (Given today's interest rates and life expectancies, such coincidental circumstances are most common to arise for the lower earner in married couples and for unmarried people in somewhat worse than average health.)

Edited for grammar.
OK. Then would it not be possible to specify a set of forward-looking alternatives are actuarially positive for a given type of situation (e.g. married couple, DW, same ages), without each person having to go through the analysis themselves?
Given that interest rates change regularly and given that a particular household can have any number of possible complicating factors (e.g., government pension, minor or adult disabled children, one or more people still working beyond age 62), it's hard to make generalized statements. Here's about the best I can do:

Given today's interest rates:
1) It's roughly actuarially neutral for the lower earner in a M/F married couple, if the two are the same age and in average health.
2) It's somewhat actuarially advantageous to delay, for an unmarried person in average health. (Usually delaying is advantageous, but not necessarily all the way until 70.)
3) It's super actuarially advantageous for the higher earner in a married couple to delay.

With regard to "going through the analysis yourself" I've done my best to give people a (free) tool to hopefully do that reasonably quickly.
Mike Piper, author/blogger

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Re: Turning 62 and SS alternatives

Post by restingonmylaurels » Wed Feb 12, 2020 8:36 am

JoeRetire wrote:
Wed Feb 12, 2020 8:03 am
restingonmylaurels wrote:
Wed Feb 12, 2020 7:36 am
It is about the best funding mechanism to use when delaying SS. I have listed three options, which have different tax treatments short and long term. That is what I want to get an answer to.
The best funding mechanism is employment.

You haven't provided enough details to determine what would be most beneficial tax-wise.
Sure, employment would always be, but I am looking to the post-employment life and deferring SS to FRA.

Let's say my expenses are $50k, my after-tax income from my taxable bond fund is $50k.

My options:
1. I can use draw the $50k from my IRA without any penalty.

2. I can use the $50k of dividend income to pay my expenses.

3. I can sell long-term shares in my taxable bond fund to raise $50k

All options can be repeated every year from 62 to FRA.

The difficulty is choosing is not the near-term tax analysis, which is clear enough but the longer term impact of reducing investment capital through options 1 and 3 mixed in with the reduction in RMDs in option 1. Not clear how all these interact over the longer term.

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Re: Turning 62 and SS alternatives

Post by restingonmylaurels » Wed Feb 12, 2020 8:48 am

ObliviousInvestor wrote:
Wed Feb 12, 2020 8:09 am
Given today's interest rates:
3) It's super actuarially advantageous for the higher earner in a married couple to delay.
Thanks for that. I have focused on one part of what you have said to ask a few questions. Is the super actuarially advantageous delay for the higher earner based on the annual 5-8% increases for delaying or is it because of longevity of the beneficiary or both?

Also, does this rule of thumb hold for both periods from 62 to FRA and FRA to 70?

And, although I know you are not involved in this part of the thread, do you have any thoughts on, again only as a very high level rule of thumb, what the funding preference order for those delaying should be, given the three funding sources are: T-IRA, taxable bond fund LTCG sales, or taxable bond fund dividends?

I am interested more in the long-term implications of reduced future return from a smaller investment capital based and reduced future RMDs.

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Re: Turning 62 and SS alternatives

Post by wolf359 » Wed Feb 12, 2020 8:49 am

restingonmylaurels wrote:
Wed Feb 12, 2020 8:02 am
wolf359 wrote:
Tue Feb 11, 2020 9:55 am
suewolf wrote:
Tue Feb 11, 2020 9:35 am
Agree that waiting probably will make sense given longer longevity these days and difficulty in finding alternative risk free 8% returns. One factor to consider, however is if SS benefits will be reduced in the future. The current system is not sustainable in the long term given current demographics. While our politicians continue to delay a political decision, eventually there will simply not be enough people paying in vs those taking the money out. Therefore there's a probability that future benefits will be reduced at some point (35% reduction is current estimate), or the full retirement age will be increased or more SS will be taxed or some combination. To the extent that you want to be grand fathered into the current benefit scheme and avoid potential future benefit reductions, you might opt to start taking SS early.

Having said that, my plan is to delay SS as long as possible. Delaying allows me to convert more of my IRA and 401k to Roths to fill up the lower tax brackets as much as possible. Plus tax rates right now are relatively low - future rates will likely be higher (see $27 trillion debt) so converting those now makes sense.
The current estimate is a reduction of 23% if no action is taken. This reduction is by current law, and is across the board. There is no grandfathering. In fact, if you take the reduced amounts for claiming early, you may get an additional 23% reduction of that amount in 2034. Source: 2019 SS Trustees Report https://www.ssa.gov/OACT/TR/2019/

The Trustees report recommends possible fixes, and notes that changing the law sooner reduces the severity of the changes by spreading it across more generations. This includes raising the full retirement age, increasing social security taxes, and reducing benefits. However, the current system is sustainable because it is pay-as-you-go -- it just won't pay all the currently promised benefits. The system is designed to reduce payments so that payments reflect the income once the trust fund is depleted. It's only if Congress/President act to change the law that they might grandfather certain groups in the new law.

Edit: According to the Trustees report, the amount paid out starts exceeding the amount paid in this year (2020). If this projection holds true, the trust fund starts getting depleted, and will run out in 2034. The trust fund is the result of previous years surplus.
I wish SSA would be a little clearer about this. On their Retirement Estimator page, it states "Payroll taxes collected will be enough to pay only about 80 cents for each dollar of scheduled benefits." One would assume their SS PIA would only be reduced by 20%. But as you point out, the OASI cut is supposed to be to 77% of benefits, it is only when combined with DI that is averages out to 80%.

BTW, is your handle about the red dwarf star or the battle in Star Trek?
I think they're doing the best they can, using projections that are 15 years out. I've been reading those reports every year for a while, and they change the numbers as the economy improves or worsens.

The last time they did a major reform on Social Security was in the 1980's. I wasn't paying attention to the politics at the time, but I believe that they waited close to the last minute to fix the system then, too. That's when they raised the full retirement age for younger generations, and started taxing part of Social Security benefits, both of which were unthinkable in the past. I have no idea what will happen this time. Either they will fix it, or they won't. If they don't, the current law dictates what will happen -- the system will continue with lower payouts.

They've been predicting which year the deficit spending will start. I remember when that date was still years out. Now they're still wording that projection the same way, but the year named is this year. It feels weird.

My handle is about the battle in Star Trek. I was riding high in tech stocks at the time, doing lots of individual stocks and actively traded funds. Good times -- I enjoyed about another ten years of great returns. Then I ran into the buzzsaw of the tech crash. The Battle of Wolf 359 was the last stand of Star Fleet when it was wiped out by a single Borg cube. The handle is a reminder that good times end, and to be ready for disaster.

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Re: Turning 62 and SS alternatives

Post by Dottie57 » Wed Feb 12, 2020 8:52 am

restingonmylaurels wrote:
Wed Feb 12, 2020 8:07 am
Dottie57 wrote:
Tue Feb 11, 2020 11:39 pm
PaulF wrote:
Tue Feb 11, 2020 11:19 pm
Can I see if I understand your question?

I infer that you are retiring at 62, and wish to delay filing for SS until later. (You mention FRA, but perhaps you should consider age 70.)

You keep referring to "replacing SS," which I think is confusing the matter. Essentially, I infer you are asking which of the saving vehicles you have accumulated is the best to spend down first? Should you spend taxable first or tax-deferred first? And should you incur capital gains, or harvest dividends? Are these the questions you are trying to ask?
+1

Op needs to fund retirement from the day of retirement to first SS check.

I am funding retirement for this period with tax deferred and taxable accounts.

Planning on taking SS at age 70.
Thanks Dottie. Which do you fund with first, tax deferred or taxable accounts?
I fund from taxable and tax deferred. Taxable is smaller tax bite. Then am doing Roth Conversions too. Expenses for next 2.x years are 48k. Then a 9k drop. My goal is to have about 80 k taxable income which gives me a reasonable Fed tax bite as a Single tax filer.

I use Taxcaster app on iPad to do a simple forecast of my Fed taxes. There is a web app too. Interesting to see how different scenarios play out.

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Re: Turning 62 and SS alternatives

Post by PaulF » Wed Feb 12, 2020 9:17 am

restingonmylaurels wrote:
Wed Feb 12, 2020 8:36 am
JoeRetire wrote:
Wed Feb 12, 2020 8:03 am
restingonmylaurels wrote:
Wed Feb 12, 2020 7:36 am
It is about the best funding mechanism to use when delaying SS. I have listed three options, which have different tax treatments short and long term. That is what I want to get an answer to.
The best funding mechanism is employment.

You haven't provided enough details to determine what would be most beneficial tax-wise.
Sure, employment would always be, but I am looking to the post-employment life and deferring SS to FRA.

Let's say my expenses are $50k, my after-tax income from my taxable bond fund is $50k.

My options:
1. I can use draw the $50k from my IRA without any penalty.

2. I can use the $50k of dividend income to pay my expenses.

3. I can sell long-term shares in my taxable bond fund to raise $50k

All options can be repeated every year from 62 to FRA.

The difficulty is choosing is not the near-term tax analysis, which is clear enough but the longer term impact of reducing investment capital through options 1 and 3 mixed in with the reduction in RMDs in option 1. Not clear how all these interact over the longer term.
I think to make progress on this question, you will need to estimate how large your RMDs will be with and without earlier drawdown of the IRA. Most people concur that a good (perhaps even optimal?) path is to try to levelize your taxable income, that is, arrange your spending so that you receive the same taxable income before and after SS and RMDs. (Although see comments below, too.) And perhaps it would help if you just came out and told us how big your stashes are and/or what tax bracket you are in. We don't even know what rate your dividends and capital gains will be taxed at.

But first help me to understand: Your bond fund is in taxable right? So it is going to throw off the taxable dividends regardless of whether you draw down capital from your accounts. What will you do with the excess funds?

Other comments: A hidden concern is that it is likely that one of you will be filing taxes as a single person eventually. If one of you will have large RMDs after the other passes, the tax burden will be higher than one might naively think.

Have you considered making Roth conversions? This is a prime route to levelizing your income.

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Re: Turning 62 and SS alternatives

Post by ObliviousInvestor » Wed Feb 12, 2020 9:20 am

restingonmylaurels wrote:
Wed Feb 12, 2020 8:48 am
ObliviousInvestor wrote:
Wed Feb 12, 2020 8:09 am
Given today's interest rates:
3) It's super actuarially advantageous for the higher earner in a married couple to delay.
Thanks for that. I have focused on one part of what you have said to ask a few questions. Is the super actuarially advantageous delay for the higher earner based on the annual 5-8% increases for delaying or is it because of longevity of the beneficiary or both?

Also, does this rule of thumb hold for both periods from 62 to FRA and FRA to 70?

And, although I know you are not involved in this part of the thread, do you have any thoughts on, again only as a very high level rule of thumb, what the funding preference order for those delaying should be, given the three funding sources are: T-IRA, taxable bond fund LTCG sales, or taxable bond fund dividends?

I am interested more in the long-term implications of reduced future return from a smaller investment capital based and reduced future RMDs.
The "super actuarially advantageous to delay" point is the result of the fact that when the higher earner delays, it increases the amount the couple receives as long as either person is still alive. In other words, they're buying a second-to-die joint life annuity, at what was originally intended to be the price of a single life annuity. And given today's life expectancies and interest rates, they're buying a second-to-die joint life annuity at roughly the price of a first-to-die joint life annuity -- which is an even more advantageous price.

As far as the tax planning questions, retirement tax planning is very case-by-case. Taking tax-deferred distributions to at least use up the standard deduction is obviously a safe bet. And in the pre-SS years, harvesting capital gains up to the top of the 0% rate is also a safe bet. (And if you don't have sufficient unrealized LTCGs to hit that threshold, then doing Roth conversions to reach that threshold often makes sense.)

Again though, it's very case-by-case. Using TurboTax or similar for modeling various ranges of hypothetical scenarios is super useful here, IMO.
Mike Piper, author/blogger

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Re: Turning 62 and SS alternatives

Post by Monster99 » Wed Feb 12, 2020 9:37 am

NIIT - net investment income tax. It is a tax that applies to MAGI above certain levels.

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Re: Turning 62 and SS alternatives

Post by restingonmylaurels » Wed Feb 12, 2020 9:41 am

wolf359 wrote:
Wed Feb 12, 2020 8:49 am
restingonmylaurels wrote:
Wed Feb 12, 2020 8:02 am
BTW, is your handle about the red dwarf star or the battle in Star Trek?
My handle is about the battle in Star Trek. I was riding high in tech stocks at the time, doing lots of individual stocks and actively traded funds. Good times -- I enjoyed about another ten years of great returns. Then I ran into the buzzsaw of the tech crash. The Battle of Wolf 359 was the last stand of Star Fleet when it was wiped out by a single Borg cube. The handle is a reminder that good times end, and to be ready for disaster.
I thought it might be. But Star Fleet only suffered significant losses because they had Locutus of Borg (a kidnapped Jean Luc). Benjamin Sisko lost his family there as I recall and did not forgive Picard. At least one other Trek name here, as I think there is a BHer with a Spock handle as well.

Really enjoy the creativity of the handles BHers use, especially those from my youth, such as the person going online here as MaynardGKrebs.

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Re: Turning 62 and SS alternatives

Post by restingonmylaurels » Wed Feb 12, 2020 9:45 am

Monster99 wrote:
Wed Feb 12, 2020 9:37 am
NIIT - net investment income tax. It is a tax that applies to MAGI above certain levels.
Thanks for that. It was listed in the post as "NIIT Eric," so perhaps the second word was a signature and not part of the acronym.

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Re: Turning 62 and SS alternatives

Post by PaulF » Wed Feb 12, 2020 9:50 am

I would like to point out that the reason you have not gotten an answer to your question is that it is absolutely not answerable with the information we have in front of us. As you point out, there are multiple factors, and they interact.

Upthread, I spoke of levelizing income. That is just a crude first pass, of course. Off the top of my head, here are the factors you will need to consider to answer this question (most of which have been mentioned already):

-IRMAA
-taxation of SS (google "tax torpedo")
-filing MFJ vs. single
-qualified vs. non-qualified dividends
-tax treatment of your capital gains
-will the tax brackets revert in 2025, or will the law change?
-NIIT
-Roth conversions as a means to affect many of the above
-when to take SS
-will SS payments decrease in ~2032, or will the law change?


There is a tool called i-orp meant to help with some of these questions. Have you played with it? https://www.i-orp.com

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Re: Turning 62 and SS alternatives

Post by SGM » Wed Feb 12, 2020 9:57 am

We delayed to 70. I used the time when I was retired or working part-time to convert traditional tax deferred accounts to Roth IRAs. I would have had to take RMDs this year. My Roth accounts have increased by 50% since I stopped conversions. My first RMD would have been 7.3% of the amount I had in Roth accounts at the time of the last conversion. Earlier conversions were done when the totals were even lower. Meanwhile I lowered my taxable account a little bit by paying taxes for the conversions out of taxable accounts. However, my taxable accounts have increased greatly over the same period.

Now I am quite pleased to have a higher SS deposit every month and have no unneeded RMDs. We were able to use the spousal benefit that allowed both our age 70 benefits to grow. The law has changed somewhat, but a friend recently took her spousal benefit as her husband had been collecting his own SS benefit. Her age 70 benefit will continue to grow.

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Re: Turning 62 and SS alternatives

Post by WoodSpinner » Wed Feb 12, 2020 10:41 am

restingonmylaurels wrote:
Wed Feb 12, 2020 8:06 am
WoodSpinner wrote:
Tue Feb 11, 2020 10:27 pm
restingonmylaurels wrote:
Tue Feb 11, 2020 1:24 pm
JoeRetire wrote:
Tue Feb 11, 2020 1:03 pm
restingonmylaurels wrote:
Tue Feb 11, 2020 1:00 pm
I am talking about an income stream that replaces SS PIA from 62 to FRA, as I would look to some source of income during that interval.
I understand that. But you are obviously not depending on that income stream today.

So why would you need to depend on it from 62 to FRA (or 70)? What changes such that you need the income stream starting at 62?
The obvious example would be stopping active income (work). So then would turn to a different source of funding for expenses.

What I am looking for is some thoughts on alternative possible sources, as explained in the original post:

"I have identified three investment sources (T-IRA, bond fund dividends, bond fund sales) and looked at advantages/disadvantages of each:

Sources:
IRA capital: Regular income tax rates on withdrawals; save later on RMD taxation; no return on withdrawn capital
BF income: Regular income tax rates on dividends; no impact on RMD taxation; regular returns on all capital
BF capital: LTCG tax rates of sales; no impact on RMD taxation; no return on withdrawn capital

Are these the main decision criteria to evaluate the SS replacement sources and how best to weight them?"
OP,

I would also consider:
- Possible impacts of MAGI on IRMAA thresholds
- Estate planning goals for heirs and/or charities
- Type of Bonds currently held — Not a fan of High Yield or lower quality Corporates
- Rebalancing opportunities to purchase Bonds in the IRA and get them out of Taxable
- Overall Tax picture, Marginal Tax Rates, LTCG Rates, NIIT Eric.

WoodSpinner
WoodSpinner, thanks for the heads up about IRMAA. Have spent zero time on Medicare analysis to date.

Not familiar with the acronym NIIT Eric. Can you write that one out?
Oops, was supposed to be NIIT etc.

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Re: Turning 62 and SS alternatives

Post by restingonmylaurels » Wed Feb 12, 2020 11:15 am

PaulF wrote:
Wed Feb 12, 2020 9:50 am
I would like to point out that the reason you have not gotten an answer to your question is that it is absolutely not answerable with the information we have in front of us. As you point out, there are multiple factors, and they interact.

Upthread, I spoke of levelizing income. That is just a crude first pass, of course. Off the top of my head, here are the factors you will need to consider to answer this question (most of which have been mentioned already):

-IRMAA
-taxation of SS (google "tax torpedo")
-filing MFJ vs. single
-qualified vs. non-qualified dividends
-tax treatment of your capital gains
-will the tax brackets revert in 2025, or will the law change?
-NIIT
-Roth conversions as a means to affect many of the above
-when to take SS
-will SS payments decrease in ~2032, or will the law change?

There is a tool called i-orp meant to help with some of these questions. Have you played with it? https://www.i-orp.com
Thanks for the link. I will check it.

In thinking about this, perhaps the simple answer to my query is that, between using taxable bond fund dividends and taxable bond fund sales, it is better to use the dividends, because using taxable bond fund sales would create a second set of taxable transactions each year.

Withdrawing from a t-IRA seems like the third best option, if LTCG rates are lower than marginal income tax rates, as it also creates a second set of taxable transactions each year. It does lower RMDs in the future, starting in 10 years but the present value of that may be small.

FYI, I have no 0% LTCG available any year and won't do Roth conversions. Of your other factors to consider, I need to think about IRMAA and NIIT.
Last edited by restingonmylaurels on Wed Feb 12, 2020 11:30 am, edited 1 time in total.

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Re: Turning 62 and SS alternatives

Post by calmaniac » Wed Feb 12, 2020 11:17 am

restingonmylaurels wrote:
Wed Feb 12, 2020 8:48 am
Is the super actuarially advantageous delay for the higher earner based on the annual 5-8% increases for delaying or is it because of longevity of the beneficiary or both?
As Mike Piper noted, the longevity of the couple taken as a unit really drive the "super actuarially advantageous delay". A married couple with a younger female spouse with a lower SS benefit at full retirement age is the text book case for waiting until age 70 to maximize the probability of receiving the highest total payout.

A corollary of that: In situations in which a man has a substantially (say >5 years*) younger wife and where the man takes SS at age 62, in most of these cases the man is short-changing the wife of SS benefits.

*I pulled the 5 year figure out of thin air, YMMV.
62 yo, 1-3y til retire. AA 70/30: 30% S&P, 16% value, 14% intl, 10% EM, 30% short/int govt bonds. DW & my Fed pensions now ≈60% of expenses. Taking SS @age 70--> pension+SS ≈100% of expenses.

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Re: Turning 62 and SS alternatives

Post by restingonmylaurels » Wed Feb 12, 2020 11:22 am

SGM wrote:
Wed Feb 12, 2020 9:57 am
We delayed to 70. I used the time when I was retired or working part-time to convert traditional tax deferred accounts to Roth IRAs. I would have had to take RMDs this year. My Roth accounts have increased by 50% since I stopped conversions. My first RMD would have been 7.3% of the amount I had in Roth accounts at the time of the last conversion. Earlier conversions were done when the totals were even lower. Meanwhile I lowered my taxable account a little bit by paying taxes for the conversions out of taxable accounts. However, my taxable accounts have increased greatly over the same period.

Now I am quite pleased to have a higher SS deposit every month and have no unneeded RMDs. We were able to use the spousal benefit that allowed both our age 70 benefits to grow. The law has changed somewhat, but a friend recently took her spousal benefit as her husband had been collecting his own SS benefit. Her age 70 benefit will continue to grow.
Thanks for that. Out of curiosity, did you fund your expenses from 62 to 70 by working part-time or from your taxable accounts or from your tax deferred accounts or all of these?

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dwickenh
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Re: Turning 62 and SS alternatives

Post by dwickenh » Wed Feb 12, 2020 11:41 am

Dottie57 wrote:
Wed Feb 12, 2020 8:52 am
restingonmylaurels wrote:
Wed Feb 12, 2020 8:07 am
Dottie57 wrote:
Tue Feb 11, 2020 11:39 pm
PaulF wrote:
Tue Feb 11, 2020 11:19 pm
Can I see if I understand your question?

I infer that you are retiring at 62, and wish to delay filing for SS until later. (You mention FRA, but perhaps you should consider age 70.)

You keep referring to "replacing SS," which I think is confusing the matter. Essentially, I infer you are asking which of the saving vehicles you have accumulated is the best to spend down first? Should you spend taxable first or tax-deferred first? And should you incur capital gains, or harvest dividends? Are these the questions you are trying to ask?
+1

Op needs to fund retirement from the day of retirement to first SS check.

I am funding retirement for this period with tax deferred and taxable accounts.

Planning on taking SS at age 70.
Thanks Dottie. Which do you fund with first, tax deferred or taxable accounts?
I fund from taxable and tax deferred. Taxable is smaller tax bite. Then am doing Roth Conversions too. Expenses for next 2.x years are 48k. Then a 9k drop. My goal is to have about 80 k taxable income which gives me a reasonable Fed tax bite as a Single tax filer.

I use Taxcaster app on iPad to do a simple forecast of my Fed taxes. There is a web app too. Interesting to see how different scenarios play out.
This is my first year as single(widower) so I will be using Tax Caster numerous times to get the most out of my taxable, IRA, and Roth conversions.
My situation is very similar to yours, but I am likely taking SS at FRA next year. I would like to forgo it to 70 for Roth Conversions, but I think my IRA level will be low enough to keep the tax hit from being too bad.

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

22twain
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Re: Turning 62 and SS alternatives

Post by 22twain » Wed Feb 12, 2020 11:44 am

restingonmylaurels wrote:
Wed Feb 12, 2020 11:15 am
between using taxable bond fund dividends and taxable bond fund sales
Do you not have any stock funds in your taxable account?

You're going to pay taxes on taxable bond (or stock) fund dividends regardless of whether you spend them or not, so you might as well spend them. Would they cover your expenses until SS starts, or would you also have to sell shares? If you need to sell something, then you have the question of whether to sell from your taxable account or from your TIRA.
My investing princiPLEs do not include absolutely preserving princiPAL.

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Will do good
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Re: Turning 62 and SS alternatives

Post by Will do good » Wed Feb 12, 2020 11:48 am

JoeRetire wrote:
Tue Feb 11, 2020 12:58 pm
suewolf wrote:
Tue Feb 11, 2020 9:35 am
The current system is not sustainable in the long term given current demographics.
Sorry, that is incorrect.

If/when the Social Security trust fund is depleted, whatever money is collected in social security taxes will be paid out in benefits. That is the current system, and it is completely sustainable.
Therefore there's a probability that future benefits will be reduced at some point (35% reduction is current estimate)
Again, no. There is no credible source indicating a 35% reduction.
or the full retirement age will be increased or more SS will be taxed or some combination. To the extent that you want to be grand fathered into the current benefit scheme and avoid potential future benefit reductions, you might opt to start taking SS early.
Sorry, no. The current system has no provision for being "grand fathered in". Anything like that would require changes to the law/current system.
+1, thank you for pointing out the facts.

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restingonmylaurels
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Re: Turning 62 and SS alternatives

Post by restingonmylaurels » Wed Feb 12, 2020 11:57 am

calmaniac wrote:
Wed Feb 12, 2020 11:17 am
restingonmylaurels wrote:
Wed Feb 12, 2020 8:48 am
Is the super actuarially advantageous delay for the higher earner based on the annual 5-8% increases for delaying or is it because of longevity of the beneficiary or both?
As Mike Piper noted, the longevity of the couple taken as a unit really drive the "super actuarially advantageous delay". A married couple with a younger female spouse with a lower SS benefit at full retirement age is the text book case for waiting until age 70 to maximize the probability of receiving the highest total payout.

A corollary of that: In situations in which a man has a substantially (say >5 years*) younger wife and where the man takes SS at age 62, in most of these cases the man is short-changing the wife of SS benefits.

*I pulled the 5 year figure out of thin air, YMMV.
The two features for spouses, one to get a separate benefit even without a work history and the other to allow the surviving spouse to step up to the higher PIA benefit, are very generous under SS.

I am wondering, if both spouses are the same age and only live to a normal life expectancy, does this super actuarially advantageous delay have a big impact, or is only if at least one lives beyond a normal life expectancy?

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restingonmylaurels
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Re: Turning 62 and SS alternatives

Post by restingonmylaurels » Wed Feb 12, 2020 11:59 am

22twain wrote:
Wed Feb 12, 2020 11:44 am
restingonmylaurels wrote:
Wed Feb 12, 2020 11:15 am
between using taxable bond fund dividends and taxable bond fund sales
Do you not have any stock funds in your taxable account?

You're going to pay taxes on taxable bond (or stock) fund dividends regardless of whether you spend them or not, so you might as well spend them. Would they cover your expenses until SS starts, or would you also have to sell shares? If you need to sell something, then you have the question of whether to sell from your taxable account or from your TIRA.
I think you are reiterating the point I made above, that because the bond funds will generate interest in any case, selling the bond funds will generate a second taxable event, so best just to use the bond fund dividends if sufficient.

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Re: Turning 62 and SS alternatives

Post by ObliviousInvestor » Wed Feb 12, 2020 12:10 pm

restingonmylaurels wrote:
Wed Feb 12, 2020 11:57 am
I am wondering, if both spouses are the same age and only live to a normal life expectancy, does this super actuarially advantageous delay have a big impact, or is only if at least one lives beyond a normal life expectancy?
If both live to precisely an average life expectancy, it will turn out to have been slightly advantageous (see my comments above about unmarried people).

But even if they are in average health, there's a considerably greater than 50% chance that at least one lives beyond life expectancy. Consider four possible scenarios:
1) Both die prior to life expectancy
2) Spouse A dies prior to life expectancy, Spouse B lives beyond life expectancy
3) Spouse B dies prior to life expectancy, Spouse A lives beyond life expectancy
4) Both live beyond life expectancy

If we assume they are exactly the same age and have equal life expectancy (and we assume that mortality is evenly distributed around the mean, which it isn't quite, but it's very close for people of retirement age), then each of those scenarios would have a 25% probability. So there would be a 75% chance that at least one person lives beyond life expectancy.

And conversely there would be only a 25% chance that they both live beyond life expectancy.

That's why, if the system were actuarially neutral for an unmarried person (which it no longer is, because life expectancies have gone up and interest rates have gone down), it would be worse than neutral for the lower earner in a married couple to delay and better than neutral for the higher earner in a married couple to delay.

(It's also why Open Social Security uses year-by-year mortality calculations by default rather than forcing the user to select a specific assumed age at death.)
Mike Piper, author/blogger

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