Thaler: Getting the Most Out of Social Security

[richard]

So here is a bit of good news. There is a simple, easy way to convert a portion of your wealth into a fairly priced, inflation-adjusted annuity. Simply delay when you start receiving Social Security benefits.

Participants are first eligible to start claiming benefits at age 62. For those who wait, the monthly payments increase in an actuarially fair manner until age 70. The claiming formula is designed to make the economic value of the stream of benefits the same, regardless of when you start. The longer you wait, the greater your monthly benefits when you start getting checks, because you will not receive them for as long a period. If you wait from 62 to 66 to start, your payments go up by at least a third, and if you wait all the way until 70 to start claiming, your benefits go up by at least 75 percent. (I say “at least” because if you delay claiming and keep working it is possible that you can qualify for an even higher benefit level.)

With these rules, waiting is the cheapest way to buy more annuity coverage. However, few take advantage of this opportunity. Currently, about 46 percent of participants begin claiming at 62, the first year in which they are eligible, the government says. Less than 5 percent of participants delay past age 66. This is unfortunate. If you are in good health and you can afford to wait, my advice is that you should wait as long as possible. The greater is your guaranteed lifetime income, the easier it will be to organize your retirement budget, and the less you will worry about living “too long.”

http://www.nytimes.com/2011/07/17/busin ... th-it.html

[Cut-Throat]

Yup!

[chaz]

Good advice.

[BBSpartan]

I'll be waiting until 70, but 85% of it will still be taxed by Uncle Sam. And now there's discussion of switching CPI basis. I certainly see why 95% elect to take Social Security while it's still there for them.

[Cut-Throat]

but 85% of it will still be taxed by Uncle Sam. And now there's discussion of switching CPI basis.

Which has no bearing on the decision to take it at 62 or 70........

[Sidney]

but 85% of it will still be taxed by Uncle Sam. And now there's discussion of switching CPI basis.

Which has no bearing on the decision to take it at 62 or 70........

Even if your tax rate from 62-69 is a lot less than 70+ ?

[earlyout]

but 85% of it will still be taxed by Uncle Sam. And now there's discussion of switching CPI basis.

Which has no bearing on the decision to take it at 62 or 70........

Even if your tax rate from 62-69 is a lot less than 70+ ?

If your tax rate from 62-69 is a lot less than it will be at 70+, it might be a good time to spend some of that traditional IRA or convert it to a Roth. Either one will lower your RMDs and lower your overall tax bill after you reach 70.

EO

[alec]

Has anyone actually looked into the reasons why 46% of people take SS at 62? I would imagine that a good portion of the population cannot delay taking SS because they never made enough to save enough money to delay SS until age 70.

A more pertinent stat for Thaler would be to look at those people who could delay until 70 [because they had the funds to do so] but didn't.

[cinghiale]

I think of Richard Thaler the same way I think of Bill Bernstein and Jack Bogle. When they speak, I listen.

If you can hang in there until age 70, the SS system does pretty well by you.

[555]

Also you can do more Roth conversion while staying in a particular tax bracket, before RMD's kick in. You should delay any pension or annuity until at least age 70 for the same reason.

[Uninvested]

Has anyone actually looked into the reasons why 46% of people take SS at 62? I would imagine that a good portion of the population cannot delay taking SS because they never made enough to save enough money to delay SS until age 70.

A more pertinent stat for Thaler would be to look at those people who could delay until 70 [because they had the funds to do so] but didn't.

I can. Because that's how people are. Why wait till tomorrow what you can get today?

Who knows if the 85% taxable amount will remain? It could go to the full 100% or more for all I know.

[ThePrune]

Thanks for posting the link to Richard Thaler's article. As usual, he is able to give straight-forward guidance in an area that, to many people, appears complicated.

I have run my family retirement financial models using a large number of Internet-based program. I also have my own custom spreadsheet that is personalized for family peculiarities. Every time I have done the analysis, I always observe that delaying Social Security until age 70 for both of us leads to the best outcome. This outcome might change for us if the ability to combine "File and Suspend" with "Spousal Only" SS benefits is eliminated within the next 10 years.

As others in this posting stream have already pointed out, delaying Social Security enables more years of Roth IRA Conversions at a potentially lower income tax bracket. That's certainly the case for us! As I remember, the free Internet program Optimal Retirement Planner http://www.i-orp.com can help anyone sort out the best combination of Roth conversions and SS start age while maximizing after-tax resources. If you've never used this program, I strongly suggest giving it a try.

[MWCA]

Has anyone actually looked into the reasons why 46% of people take SS at 62? I would imagine that a good portion of the population cannot delay taking SS because they never made enough to save enough money to delay SS until age 70.

A more pertinent stat for Thaler would be to look at those people who could delay until 70 [because they had the funds to do so] but didn't.

I can. Because that's how people are. Why wait till tomorrow what you can get today?

Who knows if the 85% taxable amount will remain? It could go to the full 100% or more for all I know.

You right no one knows. So you base your choice on the facts now. I would image most take it early because they have no other choice.

[cycleProf]

You right no one knows. So you base your choice on the facts now. I would image most take it early because they have no other choice.

Or because their retirement savings balance represents security. Folks I know who've started or plan to start SS benefits @62 don't want to tap that nest egg. Their decision may be emotional and not supported by the math. People feel they are leaving money on the table, that they should take what they can get now.

It's not easy to start spending what we've worked to save. SS offered as an immediate monthly income stream is an opportunity to preserve it.

David

[StoneReader]

In uncertain situations, mathematics tends to give an unwarranted feeling of certainty. It may be a mistake to base a decision solely on the quantitative factors and ignore qualitative ones.

For Social Security, the main risk (aside from dying early) is the "Social Risk" involved with changing laws, eligibility, taxes and Medicare premiums taken from directly from Social Security payments, etc.

Because of the large cohort of Baby Boomers that are now retiring and the large federal budget deficit, the "Social Risk" involved with delaying Social Security payouts will only increase with time. Moreover, people getting the highest payments from the system may be the most exposed to such changes.

So take your money and run while you can.

[HomerJ]

Has anyone actually looked into the reasons why 46% of people take SS at 62? I would imagine that a good portion of the population cannot delay taking SS because they never made enough to save enough money to delay SS until age 70.

A more pertinent stat for Thaler would be to look at those people who could delay until 70 [because they had the funds to do so] but didn't.

I can. Because that's how people are. Why wait till tomorrow what you can get today?

Who knows if the 85% taxable amount will remain? It could go to the full 100% or more for all I know.

Yep...

Plus you don't even make more money delaying unless you live past 79... I'd rather enjoy an extra 20k a year in my 60s for a couple of nice vacations a year than have more money in my 70s and 80s...

Screw future Homer... Present Homer is taking the money!

[wilson08]

In uncertain situations, mathematics tends to give an unwarranted feeling of certainty. It may be a mistake to base a decision solely on the quantitative factors and ignore qualitative ones.

For Social Security, the main risk (aside from dying early) is the "Social Risk" involved with changing laws, eligibility, taxes and Medicare premiums taken from directly from Social Security payments, etc.

Because of the large cohort of Baby Boomers that are now retiring and the large federal budget deficit, the "Social Risk" involved with delaying Social Security payouts will only increase with time. Moreover, people getting the highest payments from the system may be the most exposed to such changes.

So take your money and run while you can.

Amen.....the sentiment to delay seems to take it
for granted that you will live as long as you expect
and policies will remain unchanged, just patiently
wait and collect the bigger reward....maybe it will
work that way maybe not....I can see convincing
arguments on both sides of take-it-at 62 vs
wait-for-bigger-payout-later, in the end a person
has to do what they perceive is best for them.


Wilson

[Frugal Al]

I don't see much new or amazing by the article. The one interesting point is the questioning of the SS terminology used for "full" and "normal" retirement age. It probably would be a good idea to rethink those terms.

[BigFoot48]

Plus you don't even make more money delaying unless you live past 79... I'd rather enjoy an extra 20k a year in my 60s for a couple of nice vacations a year than have more money in my 70s and 80s...

Screw future Homer... Present Homer is taking the money!

Doh! Yep, we're going to enjoy the $30,000 Uncle Sam sends us for the next seven years. Allowed us to drop our withdrawal rate from 4% to 1.5%, and as a bonus, have little or no Federal income taxes.

And with the ratio of people I've known who have died prior to age 80 vs. those who made it to 90 running about 10 to 1, I'm thinking we'll be in that big group too.

But, no doubt people with marginal financial situations and good health should wait as long as possible, keeping the living-below-your-means going to make it to 70 and the bigger payday,.

[yobria]

Thanks for the link. This guy continues to make statements that are the complete opposite of my particular reality, eg:

Traditional pensions are a form of annuity, and people who have them usually seem to love them

"Usually seem to love them" - not a lot of science behind that comment.

In fact, when people on this board ask "should I take the lump sum or the annuity" the answer is almost always - "Take the lump!"

Regarding delaying social security, I agree that it sometimes makes sense to delay payments, depending on your tax situation, and more importantly on how long you expect to live.

A lot of people die between 62 and the point at which delaying "wins" - age 85 or so. Even a basic article like this needs to discuss the break even point.

Nick

[Aptenodytes]

I don't see much new or amazing by the article. The one interesting point is the questioning of the SS terminology used for "full" and "normal" retirement age. It probably would be a good idea to rethink those terms.

What I found novel and useful was demonstrating that delaying SS benefits was equivalent to purchasing an annuity, something many people fail to do in part out of uncertainty over how the thing works, which company to trust, and other unknowns. Delaying SS benefits is comparably simpler to grasp but provides the exact same benefits.

[mickeyd]

Currently, about 46 percent of participants begin claiming at 62, the first year in which they are eligible

One of the many differences between we Bogleheads and others.

[Cut-Throat]

Yep...

Plus you don't even make more money delaying unless you live past 79... I'd rather enjoy an extra 20k a year in my 60s for a couple of nice vacations a year than have more money in my 70s and 80s...

Screw future Homer... Present Homer is taking the money!

It's not about 'making more money', It's about spending more money. The delay of Social Security will let you spend more money in your 60s because you have a larger payout coming in your 70s, 80s and 90s.... if you live that long.

Think of delaying S.S. as 'old age' insurance. The vacations that you speak of in your 60s are not sacrificed at all by delaying S.S.......in fact they can be increased!

[HomerJ]

Yep...

Plus you don't even make more money delaying unless you live past 79... I'd rather enjoy an extra 20k a year in my 60s for a couple of nice vacations a year than have more money in my 70s and 80s...

Screw future Homer... Present Homer is taking the money!

It's not about 'making more money', It's about spending more money. The delay of Social Security will let you spend more money in your 60s because you have a larger payout coming in your 70s, 80s and 90s.... if you live that long.

Think of delaying S.S. as 'old age' insurance. The vacations that you speak of in your 60s are not sacrificed at all by delaying S.S.......in fact they can be increased!

Ah, I see your point!

But that's not how I'll handle it I'm afraid... I won't be able to spend more of my "real money" in my 60s counting on replacing that money with larger SS checks when I turn 70...

I'd rather take the checks at 62 and let more of my "real money" grow untouched, even though the equivalent SS growth between 62 and 70 is much larger...

Emotional I guess. Not good reasoning.

But I just don't trust SS... Maybe I'll trust it more when I'm actually 62, and can judge better how likely it is to survive 20-30 more years.

[dgm]

If you wait from 62 to 66 to start, your payments go up by at least a third, and if you wait all the way until 70 to start claiming, your benefits go up by at least 75 percent. (I say “at least” because if you delay claiming and keep working it is possible that you can qualify for an even higher benefit level.)

http://www.nytimes.com/2011/07/17/busin ... th-it.html

wait what? Your benefits can keep increasing if you delay SS beyond 70?

[archbish99]

No -- that comment was saying that if you not only delay claiming, but also keep working later, you increase the salary amount that your social security is based on.

[Wannaretireearly]

Has anyone actually looked into the reasons why 46% of people take SS at 62? I would imagine that a good portion of the population cannot delay taking SS because they never made enough to save enough money to delay SS until age 70.

A more pertinent stat for Thaler would be to look at those people who could delay until 70 [because they had the funds to do so] but didn't.

I can. Because that's how people are. Why wait till tomorrow what you can get today?

Who knows if the 85% taxable amount will remain? It could go to the full 100% or more for all I know.

Exactly...*guarantee* that I will live to 85, then delaying SS is more compelling...

[Christine_NM]

Maybe Thaler's waitie-katie strategy will pan out. I hope so for the sake of those who try it. I prefer saving on my own and being able to do fine without an SS benefit.

For me, "a bird in the hand is worth two in the bush" applies in spades to Social Security. If I waited till 70 I would have gotten almost twice the benefit. I started at 62 because at that time there was too much noise about privatization, and even if that didn't happen, I know the rules will not get better than they are now. Those least likely to be affected by changes would be current recipients of lowish amounts, so that's the group I chose to be in.

I have a pension and an annuity as well as the age-62 SS, and have not drawn anything from my portfolio in 7 years of retirement. I'm still saving. My spreadsheet says that if I live to age 90 I'll have over 4 million.

Maybe I have a different perspective because I have a good pension and most of my income has been taxpayer money, so I've already squeezed quite a lot out of the government. I don't feel much need to maximize Social Security.

[AzRunner]

I've built a spreadsheet based on the the Reichenstein and Jennings' book, Integrating Investments and the Tax Code Table 11.7 to analyze our Social Security situation. Given that we are both in good health, the numbers suggest that my wife starts taking her benefit at age 62 and I delay until age 70. When I hit 66, I file and defer benefits. This works in our situation since my wife's benefit is roughly 60% of mine.

The real benefit to me is that this is similar to a second to die insurance policy where the surviving spouse ends up with the a relatively higher monthly check.

Norm

[Cut-Throat]

I'm still saving. My spreadsheet says that if I live to age 90 I'll have over 4 million.

Yup, delaying S.S. is only for those that want to enjoy spending their nest egg. Your heirs are lucky!

[Cut-Throat]

I've built a spreadsheet based on the the Reichenstein and Jennings' book, Integrating Investments and the Tax Code Table 11.7 to analyze our Social Security situation. Given that we are both in good health, the numbers suggest that my wife starts taking her benefit at age 62 and I delay until age 70. When I hit 66, I file and defer benefits. This works in our situation since my wife's benefit is roughly 60% of mine.

The real benefit to me is that this is similar to a second to die insurance policy where the surviving spouse ends up with the a relatively higher monthly check.

Norm

Do you have to file at 66, if want to defer to age 70?

[desertdug08]

A bit off topic, but won't my non-working DW benifit if I wait until 70? I plan on delaying SS until 70...for now. She gets my benefit when i kick the bucket, if I read the rules correctly. Of course, I am assuming women tend to out live their spouses. Also will lose 1/2 of my military retirement pension, so I thought it would help to balance it out.

I would like to add a big "Thank You" to our SS expert posters for helping myself and so many others wade through all the confusing SS issues!

Cheers,

DUG

[Christine_NM]

I'm still saving. My spreadsheet says that if I live to age 90 I'll have over 4 million.

Yup, delaying S.S. is only for those that want to enjoy spending their nest egg. Your heirs are lucky!

It's all going to a scholarship fund. Don't worry, I am not going to corrupt anyone by leaving them a large amount that I don't feel the need to spend.

[Cut-Throat]

A bit off topic, but won't my non-working DW benifit if I wait until 70? I plan on delaying SS until 70...for now. She gets my benefit when i kick the bucket, if I read the rules correctly. Of course, I am assuming women tend to out live their spouses. Also will lose 1/2 of my military retirement pension, so I thought it would help to balance it out.

I would like to add a big "Thank You" to our SS expert posters for helping myself and so many others wade through all the confusing SS issues!

Cheers,

DUG

Yup, another reason to delay if your spouse is drawing a lesser amount. She would get the larger SS amount upon your death.

[AzRunner]

Do you have to file at 66, if want to defer to age 70?

I don't think so, but I'm 61, so haven't crossed that bridge yet. What I've read is that you need to contact Medicare before turning 65 and contact SS before you turn 66 if you want to defer and collect your spousal benefit (assuming you have a spouse).

Norm

[mcblum]

no one seems to have mentioned the reasons why people are taking SS at the earliest moment. There has been a great fear in this country (warrented) that SS will not be there are be radically modified in some way. Then, there are the millions of people who have either lost their jobs or are in ,otherwise, financial straits because investments have tanked. All are taking what they can get to stay afloat.
marty

[earlyout]

A bit off topic, but won't my non-working DW benifit if I wait until 70? I plan on delaying SS until 70...for now. She gets my benefit when i kick the bucket, if I read the rules correctly. Of course, I am assuming women tend to out live their spouses. Also will lose 1/2 of my military retirement pension, so I thought it would help to balance it out.

I would like to add a big "Thank You" to our SS expert posters for helping myself and so many others wade through all the confusing SS issues!

Cheers,

DUG

Don't forget that your DW can receive a spousal benefit in addition to her widow's benefit. If she is the same age or older than you, you may want explore the "file and suspend" option. This would allow your DW to collect her spousal benefit (which would be 50% of your FRA benefit) and you would continue to collect delayed retirement credits until you start at age 70.

EO

[mickeyd]

Deferred Retirement Credits (CRC) accrue at a rate of 8% annually from age 66 to 70 with SS. To have a guarantee 32% increase in anything in today's poor economic climate is difficult to ignore. Oh yea, and it's COLAd.

[HomerJ]

Deferred Retirement Credits (CRC) accrue at a rate of 8% annually from age 66 to 70 with SS. To have a guarantee 32% increase in anything in today's poor economic climate is difficult to ignore. Oh yea, and it's COLAd.

Yep, 8% real return (well kind of real, since the government is planning to muck with the inflation rate used) is pretty awesome...

Dying at 78, you still end up with less money...

I'd just rather have $20k through my 60s, 70s, 80s than $30k through my 70s and 80s

[BigFoot48]

I'd just rather have $20k through my 60s, 70s, 80s than $30k through my 70s and 80s

I'm with you, but I decided to run my numbers through the Retirement Planning Calculator at http://www.sscalc.net just to re-check my decision.

It showed, just like when I first did it 18 months ago, that starting at 62 for both me and the spousal-unit resulted in the highest Total Net Worth (discounted) at age 90, as compared to both starting at 66 or 70. In fact, for my numbers, taking at age 70 had the lowest Net Worth result at age 90, with age 66 being the highest for 92-100 for the long-livers. EDIT - These results have changed due to a model error found by Epsilon Delta. See later post for update.

But with the three alternatives I examined (out of nine available), all the Net Worth results were reasonably close to each other, and with so many variables involved, indicates to me that any choice would be just fine for the average Boglehead. YMMV!

[musbane]

It's a fairly easy decision for me. My wife is almost ten years younger than me and would have little of her own SS to draw on. So since she will likely outlive me by many years, I am delaying till 70 so that she will enjoy the increased benefit.

I agree that with the expectation of a larger future benefit, we can spend more of our savings now.

We are maxing out the 15% bracket for Roth conversions now. I THINK that delaying SS helps with that.

I am as distrustful of government meddling with SS as anyone I know, but they could as easily meddle with my savings. Perhaps even in a Roth. None of us knows. Saving your boodle at the expense of having lower but earlier ss payments could, for all I know, be dodging INTO a bullet.

FWIW, I am 63 - retired for ten years with no pension or other income and thanking the Lord that I found this site.

[Epsilon Delta]

I'd just rather have $20k through my 60s, 70s, 80s than $30k through my 70s and 80s

I'm with you, but I decided to run my numbers through the Retirement Planning Calculator at http://www.sscalc.net just to re-check my decision.

This calculator is incorrect. It does not account for SS COLA before you start collecting SS. Using the default COLA of 2.5% this underestimates the value of delaying to FRA by 10% and delaying to 70 by 21%.

[BigFoot48]

This calculator is incorrect. It does not account for SS COLA before you start collecting SS. Using the default COLA of 2.5% this underestimates the value of delaying to FRA by 10% and delaying to 70 by 21%.

Your finding appears to be correct. One would have to pre-calculate the FRA and age 70 benefits with the assumed escalator before inputting them into the model. I'll email them and see if they confirm this flaw and can fix it, or include it in the instructions.

[HomerJ]

I am as distrustful of government meddling with SS as anyone I know, but they could as easily meddle with my savings. Perhaps even in a Roth.

Good point.

[graveday]

Wow, a thread on SS and no SScritic.

[musbane]

Wow, a thread on SS and no SScritic.

So we're probably getting it all wrong

[BigFoot48]

The Retirement Planning Calculator I've used to model SS alternatives allows 10 free uses before they require a small fee for further use. I was able to correct the input amounts for my FRA and age 70 SS benefits to include a COLA adjusted - an apparent modeling error as pointed out by Epsilon Delta above - on my last free use. (There may be additional calculating problems in the model as noticed by ED, but I was unable to confirm before using up my 10 tries.)

The results appear to indicate a small benefit in deferring SS to FRA or 70 in my case. The Discounted Net Worth at age 90 was only 4.8% greater if benefits were started at FRA, rather than 62, and only 6.3% if started at age 70. Certainly a benefit if one's retirement assets are limited, but in my case not particularly important. As usual, YMMV.

[Erwin]

Plus you don't even make more money delaying unless you live past 79... I'd rather enjoy an extra 20k a year in my 60s for a couple of nice vacations a year than have more money in my 70s and 80s...

Screw future Homer... Present Homer is taking the money!

Doh! Yep, we're going to enjoy the $30,000 Uncle Sam sends us for the next seven years. Allowed us to drop our withdrawal rate from 4% to 1.5%, and as a bonus, have little or no Federal income taxes.

And with the ratio of people I've known who have died prior to age 80 vs. those who made it to 90 running about 10 to 1, I'm thinking we'll be in that big group too.

But, no doubt people with marginal financial situations and good health should wait as long as possible, keeping the living-below-your-means going to make it to 70 and the bigger payday,.

Same here!

[mickeyd]

Wow, a thread on SS and no SScritic.

I was thinking the same thing. Is sscritic allowed vacation? Are we implying that he is the "Taylor" of SS? I think so.

[YDNAL]

"If you are in good health and you can afford to wait, my advice is that you should wait as long as possible.”

http://www.nytimes.com/2011/07/17/busin ... th-it.html

Duh!

1. Many (most?) people CAN'T afford to wait. Have you seen savings rates in the US recently?
2. Others can't afford PLUS have health issues.
3. Yet others don't care to have extra money from 70-90 when they are less likely to spend the money in enjoyable fashion - if at all.

The rest are some Bogleheads! :lol: