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introducing-the-social-security-claiming-decision/Your Social Security benefits are a significant retirement asset, worth more than $1 million of lifetime benefits for many readers. The present value of Social Security benefits at retirement, which can total hundreds of thousands or even millions of dollars, joins home equity as the two largest assets available for most American retirees, easily dwarfing the value of their investment portfolios.
For many lower- and middle-income Americans, Social Security may end up providing the vast majority of retirement income. The Center for Retirement Research at Boston College notes an interesting statistic that Social Security provides 70% of the income for 70% of households aged 80 or over.
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Comment:
What the video misses is the fact that the dollar amount of a 5% withdrawal changes as the invested portfolio continues to be invested (during retirement). An investment needs to maintain its value over time. The best investments maintain their inflation adjusted value over time while also providing an income (withdrawal).
I fiddled with this scenario...please critique.
I assumed a 7% return investing after tax SS from age 62 to age 70, netting a portfolio balance close to $200K.
Now, if I died tomorrow my estate is worth $200K more taking SS early verses if I waited until 70 to take SS. This gets rid of "short-evity" risk (dying early). Also, I continue to work part time between ages 62-70 and add all of my SS funded contributions into a Roth IRA, (Roth 401K), Spousal Roth or through Roth conversions along the 8 year investment window (age 62-70). Since my SS income is $15K less at age 70, I take Roth withdrawals which are tax free. This seems to make good tax sense.
Using PV, I run three scenarios using different types of investments.
VWINX=Conservative Allocation
PRWCX = Moderte Allocation
PRBLX = Managed All Equity Fund - Aggressive Allocation
I start the simulation in 2001 to include two nasty downturns (Tech bubble and GFR) early on in the simulation.
Portfolio value is $200K (what was saved from SS). Year one pay out @ age 70 is $15,200 (the difference between early and late SS filing). This withdrawal will increase 2% a year for inflation going forward (COLA).
PRBLX & VWINX - Lost portfolio value throughout the 20 year time frame (70-90).
VWINX - Was ready to bust at age 90.
PRBLX - Was worth about half its orginal value $106K adjusted for inflation.
PRWCX - Lost portfolio value briefly during the GFR, but recovered and gained value.
PRWCX- Fared much better than the conservative allocation (VWINX) and the aggresive allocation (PRBLX).
PRWCX - At age 90, this portfolio had a inflation adjusted value of $200K...pretty good.
My PV Link
Different strokes 4 different folks, Derf
OJ
All I would say is such intricate plans are rarely followed over such a long stretch of time. Some might be disciplined enough but probably not me. And if followed, there are so many what-ifs that make this a 50:50 chance of succeeding, at best, (succeeding meaning you beat the system taking ss early) Heck, what if David Giroux retires next month. Does the scenario change?
I guess I'm in the same camp as what derf said, to many "assumes" for me. If everything has to go right, taking reduced benefits at 62 in order to win the SS game, I wouldn't want any part of it.
For the record, I plan to start SS on my 68th b-day month in 2022. I think I played a good game in waiting this long. To me the odds re 50:50 if that decision ends up the game winner (over waiting until 70).
Thanks for your efforts with this topic. The thinking process with be of benefit to someone here; and/or to pass along to their family or friends.
Remain curious,
Catch
https://www.ssa.gov/policy/docs/ssb/v76n2/v76n2p1.html
Here's the PV setup for 6%. Mouse over the graph for the 8 year (age 62-age 70) result.
On the withdrawal side (after age 70), the video makes two simplifying assumptions:
- You will die at age 90. 5% withdrawal x 20 years = 100%. That leaves longevity risk.
- The real rate of return of the portfolio is zero. This addresses @bee's point that the portfolio grows over time. The video's portfolio does grow in nominal returns at precisely the rate of inflation.
bee does a nice job with PV in showing how one might have invested in the past. Kudos for incorporating a couple of bear stock markets in the mix. That said, there are two implicit, and IMHO fairly aggressive, assumptions made:Source page: https://www.schwab.com/resource-center/insights/content/why-market-returns-may-be-lower-in-the-future
With respect to sheltering the portfolio from taxes via a Roth IRA: this assumes that the part time worker is not already putting that money into an IRA (and maxing out), else contributing more to an IRA might not be an option. In any case, one could not contribute even half the age 62 benefits to SS. $1400 x 12 mo = $16,800. Including the $1K catch up amount, the max that one can contribute to an IRA is $7K.
Looking at the Roth conversion option: let's assume one is in the 12% tax bracket, no state taxes. If one converted $140K and somehow managed to remain in the 12% bracket, then that would use up the $16.8K in SS, thus effectively adding that amount to the Roth IRA. In reality, that would move one into the 22% or 24% bracket; hardly a good strategy. Not to mention that this would make more of the SS benefits taxable. Further, in order to execute this plan for eight years, one would need to have $1.12M in a traditional IRA available for conversion.
This has a better chance of being feasible if one is in a higher tax bracket (that would reduce the amount of the conversion necessary to incur $16.8K in taxes). However, given the correlation between income and longevity, the higher income person is also more subject to longevity risk and thus would likely benefit more from the lifetime income guaranteed by SS.
Regarding the annuity option: we don't know where the cost figure comes from, or what type of annuity it is. Though I agree with what I think is @JonGaltIII's assumption - life only, no inflation adjustments. One can buy joint and survivor annuities, but they cost more. I don't believe there are any inflation adjusted fixed immediate annuities left on the market, but there should still be some that provide for annual increases of a fixed amount (say, 2%). Of course those also cost more.
If there is the possibility of a surviving spouse, that just makes SS look even better. With SS, if the spouse with the larger benefits dies first, the surviving spouse gets those benefits instead of one's own. Unless one expects both spouses to live past the break even point (~82 give or take), the optimal strategy is often for the lower benefit spouse to take SS early (62) and the higher benefit spouse to defer to age 70.
My wife was lucky enough to get a job in her field in another city. But two of my three careers would not have easily translated to the environment in our new town. Not to mention that the job market was rougher then.
I decided I would rather have the time to myself than work a crappy job that would pay me little more that my SS check, just because.
My back isn't what it used to be. I get cluster headaches at certain times of some years. I wouldn't hire me.
I'll be out in the garden. I think we had about twelve different species of butterflies this year. And then there are the native bees and wasps. I might start a photo log for next year.
I guess you could say that there is something like a strategy. I take some of the dividends from some of the funds in my taxable account. And I leave my IRA account alone. Haven't had to worry about tapping my wife's accounts.
We never borrowed money for anything but the house. And never took out anything but enough equity for a new roof. Simple stuff. But not easy.
When I post a graph, I usually try to give the page from which it comes:
Source page: https://www.schwab.com/resource-center/insights/content/why-market-returns-may-be-lower-in-the-future
But I did forget to give the source page for the life expectancy vs. income chart. That is:
https://news.harvard.edu/gazette/story/2016/04/for-life-expectancy-money-matters/
After I posted that chart, similar data (different source) was presented in an economics class I'm taking.
By the way, I congratulate you to find time to take more college class? Your knowledge on these financial matter really shows that contributed to the depth of discussion on this board. Thank you.
Since I've had to deal with these concepts at work I take them in stride. But by watching and listening to classmates I can see how assimilating them entails a fair amount of thinking and analysis. Just like any new idea.
I imagine that in courses like econometrics one does actually have to do all the statistical calculations that are presented only conceptually in other classes. Still, that's statistics, not calculus.
I'd say that if one is able to get a good handle on what alpha, beta, correlation, and confidence intervals are, one is already ahead of the game. Numeric ability, more than math subject matter knowledge, strikes me as what is most helpful.
As far as this particular class is concerned, a lot of the material comes from Prof. Chetty at Harvard. See here:
https://opportunityinsights.org/course/
To play with some of the data, see:
https://www.opportunityatlas.org/
Regards- OJ
We've been staying next to the Coastal Bend , TX. waters. Fishing when I get the urge & fish cooperating.
Sea Trout for supper, Derf