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Useful. One question - does this analysis take into account possibility of starting to take the benefits at say 62 and putting them into a diversified conservative allocation fund (say) till 70, and assume a reasonable return (say 6%)? I assume most of us have some nest eggs for retirement and the question is how much of that you start drawing at 62 vs. getting it from SS.
Kaspa does make a point , but a return of 8 % for last 4 years would be hard to top ! On the other hand using IRA, etc. would lower your RMD's thus saving some on taxes & S.S. tax. Derf
One question - does this analysis take into account possibility of starting to take the benefits at say 62 and putting them into a diversified conservative allocation fund (say) till 70, and assume a reasonable return (say 6%)?
Well phrased question; I fleshed it out a little and then did a few calculations.
The first observation is that SS is in constant dollars. That tends to make the calculations simpler, not harder.
I like the assumption that the investment is changed at age 70. What I did was assume that the money would be put into TIPS, paying a real rate of zero. (Since January 2011, their real return has been under 1%.) The TIPS would be used to augment the SS checks after age 70 to get the monthly payments back up to where they would have been had they been deferred to age 70.
The question is then: how many months will the extra cash last until one can no longer get the same total income?
6% may be a reasonable nominal return, but not so reasonable a real return. For an estimate of the latter, I found this Vanguard paper: Recessions and balanced portfolio returns. It says that through thick and thin the average annualized real returns of a 50/50 portfolio from 1926 to 2009 have been 5.26% (recession) and 5.59% (expansion).
I used a constant 5% annual real return (0.4074% monthly) instead. 6% nominal less say, 2% inflation would be just 4%. And bond yields will be below average for several years to come. So 5% real return seemed fair.
The monthly check at age 62 will compound at 0.4074% for 96 months. The monthly check at 62 years and 1 month will compound for 95 months, and so on.
Start drawing benefits at age 62, and you'll get 75.42% of full benefits. Start drawing at age 70, and you'll get 132%. SS calculator here.
If you take early benefits and invest until age 70, you'll have 117.67 times your monthly check in constant dollars. (If you'd invested in TIPS paying 0% real interest, you'd have had 96 times your monthly check - merely preserving the value of each of the 96 checks over 8 years.)
To make calculations simple (it doesn't affect the results), let's assume that your FRA check would have been $100/month. Your check starting at age 62 is $75.42. Your check starting at age 70 is $132. So you need to make up $56.58 in real dollars each month.
You've got 117.67 x $75.42 = $8874.67 from those early checks and earnings. Divided by $56.58, that extra money will last about 157 months, or about 13 years past age 70.
So you still break even around age 83. Worse, you've lost some guarantees: that you won't run out of money if you live longer, that you'll get your money even through a prolonged recession.
One can tweak my figures - assume better returns, lower inflation, more aggressive (and risky) investments - to push the break even point out a few years. But to ensure that one won't run out of money, one still needs to set aside more money in a safe investment. IMHO that's the biggest cost to not deferring benefits.
1. The Vanguard study on real returns curiously used 1926 as a start point. In ‘29 equities began a free fall that, by some accounts, resulted in a 90% loss of value. http://eh.net/encyclopedia/the-1929-stock-market-crash/. So that ‘26 starting point appears a bit suspect. And the ‘09 ending date was right near the end of the ‘07-‘09 Great Recession. Talk about a skewed reporting period!
2. If the retiree / SS recipient is carrying a lot of debt at 62 having a high rate of interest (like many consumer / credit card loans) than he or she still might be better off taking SS early and paying off that debt.
3. While it’s hard to assign a value, one’s having “control” over the money is worth something. It certainly affords more flexibility in planning (ie - a phenomenal investment opportunity arises during the time span). In deferring SS you are assigning to government the control over those (deferred) monies - and relinquishing a certain degree of flexibility you’d otherwise enjoy.
Personally, I took SS at 62 and than used the extra income to convert a sizable portion of my Traditional IRAs to Roths near the ‘09 bottom. Covered the tax hit. You just never know what opportunities will come along.
that usage of early SS moneys may turn out to be lastingly smart (sending luck vibes your way)
I delayed SS amap myself, but maybe 20y ago (can it be?) we converted all (I think) trad iras to roths, paid the taxes, and in my retirement the last few years have had more than one trust atty and financial planner say Wow, how ever did you wind up with so much in roths?
Comments
On the other hand using IRA, etc. would lower your RMD's thus saving some on taxes & S.S. tax.
Derf
The first observation is that SS is in constant dollars. That tends to make the calculations simpler, not harder.
I like the assumption that the investment is changed at age 70. What I did was assume that the money would be put into TIPS, paying a real rate of zero. (Since January 2011, their real return has been under 1%.) The TIPS would be used to augment the SS checks after age 70 to get the monthly payments back up to where they would have been had they been deferred to age 70.
The question is then: how many months will the extra cash last until one can no longer get the same total income?
6% may be a reasonable nominal return, but not so reasonable a real return. For an estimate of the latter, I found this Vanguard paper: Recessions and balanced portfolio returns. It says that through thick and thin the average annualized real returns of a 50/50 portfolio from 1926 to 2009 have been 5.26% (recession) and 5.59% (expansion).
I used a constant 5% annual real return (0.4074% monthly) instead. 6% nominal less say, 2% inflation would be just 4%. And bond yields will be below average for several years to come. So 5% real return seemed fair.
The monthly check at age 62 will compound at 0.4074% for 96 months. The monthly check at 62 years and 1 month will compound for 95 months, and so on.
Start drawing benefits at age 62, and you'll get 75.42% of full benefits. Start drawing at age 70, and you'll get 132%. SS calculator here.
If you take early benefits and invest until age 70, you'll have 117.67 times your monthly check in constant dollars. (If you'd invested in TIPS paying 0% real interest, you'd have had 96 times your monthly check - merely preserving the value of each of the 96 checks over 8 years.)
To make calculations simple (it doesn't affect the results), let's assume that your FRA check would have been $100/month. Your check starting at age 62 is $75.42. Your check starting at age 70 is $132. So you need to make up $56.58 in real dollars each month.
You've got 117.67 x $75.42 = $8874.67 from those early checks and earnings. Divided by $56.58, that extra money will last about 157 months, or about 13 years past age 70.
So you still break even around age 83. Worse, you've lost some guarantees: that you won't run out of money if you live longer, that you'll get your money even through a prolonged recession.
One can tweak my figures - assume better returns, lower inflation, more aggressive (and risky) investments - to push the break even point out a few years. But to ensure that one won't run out of money, one still needs to set aside more money in a safe investment. IMHO that's the biggest cost to not deferring benefits.
you can always try and calc or assume that you will beat a known path, but SS is good until death
1. The Vanguard study on real returns curiously used 1926 as a start point. In ‘29 equities began a free fall that, by some accounts, resulted in a 90% loss of value. http://eh.net/encyclopedia/the-1929-stock-market-crash/. So that ‘26 starting point appears a bit suspect. And the ‘09 ending date was right near the end of the ‘07-‘09 Great Recession. Talk about a skewed reporting period!
2. If the retiree / SS recipient is carrying a lot of debt at 62 having a high rate of interest (like many consumer / credit card loans) than he or she still might be better off taking SS early and paying off that debt.
3. While it’s hard to assign a value, one’s having “control” over the money is worth something. It certainly affords more flexibility in planning (ie - a phenomenal investment opportunity arises during the time span). In deferring SS you are assigning to government the control over those (deferred) monies - and relinquishing a certain degree of flexibility you’d otherwise enjoy.
Personally, I took SS at 62 and than used the extra income to convert a sizable portion of my Traditional IRAs to Roths near the ‘09 bottom. Covered the tax hit. You just never know what opportunities will come along.
I delayed SS amap myself, but maybe 20y ago (can it be?) we converted all (I think) trad iras to roths, paid the taxes, and in my retirement the last few years have had more than one trust atty and financial planner say Wow, how ever did you wind up with so much in roths?