Two Legged Stool [Figuring out when to take Social Security]

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jeffG
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Two Legged Stool [Figuring out when to take Social Security]

Post by jeffG »

My wife and I are getting ready to retire at 62 (same age, I'm the higher earner). I have been caught up in megacorp's doing away with pensions and all my retirement funding is in tax deferred accounts (mainly Wellington fund for the last 25 years). So if we take SS at 62, I can take out 4% from savings and meet expenses with some to spare. If we don't take SS, then I'm looking at taking 6.3% from my tax deferred savings to make ends meet until SS starts, and then I assume cut back to less than 4 (based on exactly when I get SS). I've read some of the"when to take SS" threads but none seem to specifically address my case of just the two choices. i.e.: no pension, no after tax savings, wife same age, higher earner is healthier, etc. Plus the threads all seem to break down into various camps and arguments two pages in. We are not from a long lived family (parents passed in late 70's early 80's) and my wife has more health issues than I. I'm really not asking when to take SS, I'm asking how is the best way to figure out when to take it!
mhalley
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Re: Two Legged Stool

Post by mhalley »

You might try running through the various SS scenarios using the I-orp calculator. Get the information on how much you would get at each different scenario and run multiple versions and see what gives you the highest probability of success.
http://i-orp.com/

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Bill M
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Re: Two Legged Stool

Post by Bill M »

Excel is a good tool for quick comparisons of strategies. If you delay SocSec until 66, you'll be pulling more from savings for the first four years, then pulling less from then onward. Likewise if you delay until 70 (doing the file&suspend at 66). Excel can give you a quick estimate of when the savings would run out, and how deep the drawdown would be. It is likely the savings would last longer if you delayed claiming SocSec, but there is a fair amount of "Sequence of Return" risk either way. It comes down to a question of whether you're comfortable with the initial drawdown in favor of longevity insurance.
The Wizard
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Re: Two Legged Stool

Post by The Wizard »

Excel is what I use each January to project my income and tax sheltered investment balance year by year for the first decade of retirement.
I retired at 63 and am delaying SS till age 70 or the next major stock crash, whichever comes first.
But the past two years, of course, my investment balance has increased even with a modest withdrawal amount each month.
Sequence of Returns indeed...
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Ninegrams
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Re: Two Legged Stool

Post by Ninegrams »

It's complicated( even with a two legged stool) because everyone's situation is different. Here's where paying someone with experience with this can pay off. That's what I intend to do( and I'm big on DIY) as my decision is looming.

http://wallstreetonparade.com/2014/03/a ... -your-ira/
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jeffG
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Re: Two Legged Stool

Post by jeffG »

Thanks I will play around more with the calculators.
curmudgeon
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Re: Two Legged Stool

Post by curmudgeon »

There's no one-size-fits-all answer. In part it depends on your need and tolerance for risk. There are a few definitely non-optimal strategies (both deferring to age 70 would be one; at least one spouse should claim spousal at FRA), but beyond that there's not an obvious answer. It can make sense to have the higher earner defer the longest, to build up the most delayed credits, because in the case of a death, the survivor gets the higher of the two benefits.

If you plan to defer taking SS, you might set aside in your IRA/401K enough funds, or at least a significant portion, to cover your expenses (including taxes) between now and when you plan to start taking SS. That money should be in something very low-risk; short-term bonds or the like. You can think of that money as buying yourself a higher SS income later. You can look at how much you would need to set aside for various claiming ages. The longest term strategy would have spouse claim spousal at 66, then both claim individual at 70. If that takes more of your 401K nest egg than you are comfortable with, you can look at various shorter term claiming options.

Keep in the back of your mind the potential for a future shortfall in the SS system. Even if I felt like we could live comfortably on our combined SS (delayed to age 70), as an example, I personally would be hesitant to spend down much more than half of my savings on deferring SS. I'm always happier keeping multiple options whenever I can reasonably do so.
joebh
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Re: Two Legged Stool

Post by joebh »

Try the Retirement Income Calculator at http://corecapinv.com/Calculators.aspx

It does a pretty good job modeling lots of scenarios. I think it could answer your question.
Enkidu
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Re: Two Legged Stool [Figuring out when to take Social Secur

Post by Enkidu »

One strategy that you should consider is:
Your wife (lower earner) filing at 62,
You filing a restricted application as her spouse at FRA (66),
Filing your own benefits at 70.

This reduces that draw on your assets while preserving longevity insurance. It is a strategy that many people should consider, especially when life expectancy for one partner may be lower than average and to preserve assets.

You may want to look at what happens under different "what if" scenarios:

Wife dies --- Husband dies
70 ---------------80, 90
80 ---------------70, 80, 90
90 ---------------70, 80, 90

Or use similar numbers that fit your expectations. The highest financial risk to the surviving partner is usually when one spouse dies early and the other lives longer than expected. Don't overlook the strong possibility that you may live far longer than your parents. It is also possible that your wife could outlive you.
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Peter Foley
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Re: Two Legged Stool [Figuring out when to take Social Secur

Post by Peter Foley »

As mentioned, there are a couple of on line apps that can perhaps help with the analysis. I personally would be inclined to delay at least your (high earner) SS until full retirement age. Drawing down a bit more now from tax deferred and a bit less later is a good strategy for those in a lower tax bracket and for those whose can control some of taxation of SS benefits.

If you have a lot in tax deferred and you are in the 15% Federal tax bracket (in terms of annual income needs), one strategy might be to delay both SS benefits for a couple of years and then have your wife file. Withdrawals from tax deferred with limited taxation could, in essence, create an after tax holding that would provide you with more options.

Some Roth conversions are another possibility to explore. Much depends on your income needs from your tax deferred accounts, the size of those accounts, and federal and state tax considerations.
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Aptenodytes
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Re: Two Legged Stool [Figuring out when to take Social Secur

Post by Aptenodytes »

I am going to focus on your framing of the question, which is what is the best way to figure out when to take SS. I'm going to ignore the issue of file-and-suspend combined with lower-income spouse taking spousal benefits. I assume you are taking care of that already and you just want to focus on the question of when the high-income spouse starts benefits for good.

I think it comes down to a simple branching tree:

1) If you wanted to defer SS to age 70, do you have savings on hand to permit you to do that? If no, you have no practical choice but to start early so you can stop here. If yes, continue.

2) Given the size of your portfolio and your assumptions about plausible futures for the market and for your spending needs, are you free of the risk of running out of money in old age? If yes, then your decision does not have any significant material impact and you can stop here and do whatever your instincts tell you to do. Actuarially they are all the same. If no, then continue.

3) Are you comfortable with the notion of insuring against a risk, knowing that the risk may not materialize after all? If yes, then delay SS to 70. If no, then start SS earlier.

The first two steps are straightforward and uncontroversial, I think. I think they sort a lot of people in clear ways. Where you get all the sturm und drang on this forum is among people who get past question 2 together but then diverge and are surprised why they diverge. As I read what people say I think that it boils down to attitudes toward insurance, so that's why I phrased it this way. Some people see a risk and are comfortable taking steps to insure against it, even knowing that at the end of their life it might turn out that if they had full foresight the insurance would not have been necessary. Other people contemplate that possibility and say "nuts to that" and seek an approach that gives them something like the most-likely route to greatest benefits. I think that's basically a part of one's mental outlook and psychological makeup, so you can't expect one single approach to work for all.

You could make question 3 more complicated or add more branching points, but in my view you just need this one. Delaying SS is such a bargain for those who are comfortable with a risk-insurance approach that I don't see any need to complicate it more. If you really wanted to you could lay out all the options you have for coping with longevity risk (moving in with children, scaling back spending, whatever) and then weigh all of them against each other.
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Re: Two Legged Stool [Figuring out when to take Social Secur

Post by JW-Retired »

jeffG wrote: We are not from a long lived family (parents passed in late 70's early 80's) and my wife has more health issues than I. I'm really not asking when to take SS, I'm asking how is the best way to figure out when to take it!
First of all understand what the different options are & mean. Maximum delay of 8 years buys you a 76% higher benefit than at 62. Early at 62 is 75% of PIA and late at 70 is 132% of PIA. Spousal benefit is 50% of the spouse PIA, not 50% of spouse's benefit. After FRA, survivor's benefit will be the full amount the deceased was receiving at the time of death (or would get if they filed on that date). After FRA, you can file and suspend, which keeps your own benefit's delayed credit clock going but allows spouse to claim spousal. Prior to FRA, you can't elect to make a claim restricted to only spousal without being "deemed" to have made a claim on your own account too. After FRA you can do spousal only. Know your two PIA amounts.

Once you do that you can compute gross SS income for various time periods and scenarios more or less on the back of an envelope. If lower earning wife claims at 62 and you claim spousal at 66 then that should significantly reduce the drawdown of your tax deferred account. Waiting your own SS until 70 may be pretty painless.

We have no idea of your tax bracket but realized that SS income has a large tax advantage over other income like RMDs, particularly if you live in a high tax state like CA that taxes everything but SS. Reducing tax-deferred account RMDs in favor of maximizing your SS will usually result in reduced taxes.
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jeffG
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Re: Two Legged Stool [Figuring out when to take Social Secur

Post by jeffG »

Aptenodytes wrote: 2) Given the size of your portfolio and your assumptions about plausible futures for the market and for your spending needs, are you free of the risk of running out of money in old age? If yes, then your decision does not have any significant material impact and you can stop here and do whatever your instincts tell you to do. Actuarially they are all the same. If no, then continue..
Well, I guess this is where my internal confusion lies.

We live in the Midwest where housing and living expenses are low. So I am not really worried about running out of money in retirement unless the apocalypse occurs. If I take SS at 62, it contributes less than 1/3 of our expenses, if I wait till 70, it's 1/2 ish. So to your point 2, either way I have to heavily depend on our savings.... So the main reason for waiting is to insure against a total melt down of the stock market and us contracting our living to half of what we expected to be spending (point 3).
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Aptenodytes
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Re: Two Legged Stool [Figuring out when to take Social Secur

Post by Aptenodytes »

jeffG wrote:
Aptenodytes wrote: 2) Given the size of your portfolio and your assumptions about plausible futures for the market and for your spending needs, are you free of the risk of running out of money in old age? If yes, then your decision does not have any significant material impact and you can stop here and do whatever your instincts tell you to do. Actuarially they are all the same. If no, then continue..
Well, I guess this is where my internal confusion lies.

We live in the Midwest where housing and living expenses are low. So I am not really worried about running out of money in retirement unless the apocalypse occurs. If I take SS at 62, it contributes less than 1/3 of our expenses, if I wait till 70, it's 1/2 ish. So to your point 2, either way I have to heavily depend on our savings.... So the main reason for waiting is to insure against a total melt down of the stock market and us contracting our living to half of what we expected to be spending (point 3).
To figure out the risk of running out of money you have to run some scenarios of future market performance and future spending needs. Knowing the percentage contribution of SS and portfolio withdrawals isn't enough. If you are correct that you have enough money to last forever, barring a total melt down of the stock market, then it doesn't matter what choice you make. But I wonder what the basis for that conclusion is, because what you are summarizing above isn't sufficient to support it.

Tools such as Firecalc let you play around with such scenarios and come up with an informed judgment about how big a risk you face of running out of money too early.

I hope your intuition is robust and you are in that happy circumstance where your decision as to when to start SS doesn't matter.
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jeffG
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Re: Two Legged Stool [Figuring out when to take Social Secur

Post by jeffG »

[quote="AptenodytesTo figure out the risk of running out of money you have to run some scenarios of future market performance and future spending needs. Knowing the percentage contribution of SS and portfolio withdrawals isn't enough. But I wonder what the basis for that conclusion is, because what you are summarizing above isn't sufficient to support it.

I hope your intuition is robust and you are in that happy circumstance where your decision as to when to start SS doesn't matter.[/quote]

I've been sitting here running scenarios on the CoreCap calculator (fairly easy to use). If I put in 6% expected return, 3% inflation, I die with more than I started with using all three SS points (62, 66 and 70) and using 20, 25 and 30 years in retirement. At 20 years expected of retirement, starting SS at 62 leaves the most money. at 25 years it's a wash between 62 and 66. At 30 years, taking it at 66 is best, followed by pretty much a tie between 62 and 70.

Lowering the expected return increases the benefit of delaying SS. So the real question gets to be, what is a reasonable savings return to use? I've had a significant chunk of my savings in vanguard wellington which averages 8%, but past performance....
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Aptenodytes
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Re: Two Legged Stool [Figuring out when to take Social Secur

Post by Aptenodytes »

jeffG wrote: I've been sitting here running scenarios on the CoreCap calculator (fairly easy to use). If I put in 6% expected return, 3% inflation, I die with more than I started with using all three SS points (62, 66 and 70) and using 20, 25 and 30 years in retirement. At 20 years expected of retirement, starting SS at 62 leaves the most money. at 25 years it's a wash between 62 and 66. At 30 years, taking it at 66 is best, followed by pretty much a tie between 62 and 70.

Lowering the expected return increases the benefit of delaying SS. So the real question gets to be, what is a reasonable savings return to use? I've had a significant chunk of my savings in vanguard wellington which averages 8%, but past performance....
Try a different calculator that runs multiple scenarios for you. FireCalc is an example. If every year is average that's one thing; but if you get stuck with a bad sequence that's another. I don't know CoreCap's calculator in detail, but glancing at the Web page it seems to just assume that returns and spending are all smoothed out.
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Miriam2
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Re: Two Legged Stool [Figuring out when to take Social Secur

Post by Miriam2 »

I'm not sure if you saw this recent thread on SS - "Kotlikoff:When should you take Social Security" viewtopic.php?f=2&t=159374
The thread is long, but several posters discussed the SS planning software they use, including ESPlanner, to assess their choices of taking SS or drawing down from their other accounts to bridge the gap.
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Miriam2
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Re: Two Legged Stool [Figuring out when to take Social Secur

Post by Miriam2 »

Aptenodytes wrote:I am going to focus on your framing of the question, which is what is the best way to figure out when to take SS.
I think it comes down to a simple branching tree:
1) If you wanted to defer SS to age 70, do you have savings on hand to permit you to do that? If no, you have no practical choice but to start early so you can stop here. If yes, continue.
2) Given the size of your portfolio and your assumptions about plausible futures for the market and for your spending needs, are you free of the risk of running out of money in old age? If yes, then your decision does not have any significant material impact and you can stop here and do whatever your instincts tell you to do. Actuarially they are all the same. If no, then continue.
3) Are you comfortable with the notion of insuring against a risk, knowing that the risk may not materialize after all? If yes, then delay SS to 70. If no, then start SS earlier.
Aptenodytes -
Could you please do everyone a HUGE favor and get with Oblivious Investor and put together a new book -"How to make Social Security decisions" in a nutshell using this very logical "if no then/if yes then" outline :D :D You two would make everyone VERY happy (and you might be able to add to your pot of :moneybag )
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Aptenodytes
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Re: Two Legged Stool [Figuring out when to take Social Secur

Post by Aptenodytes »

Miriam2 wrote:
Aptenodytes wrote:I am going to focus on your framing of the question, which is what is the best way to figure out when to take SS.
I think it comes down to a simple branching tree:
1) If you wanted to defer SS to age 70, do you have savings on hand to permit you to do that? If no, you have no practical choice but to start early so you can stop here. If yes, continue.
2) Given the size of your portfolio and your assumptions about plausible futures for the market and for your spending needs, are you free of the risk of running out of money in old age? If yes, then your decision does not have any significant material impact and you can stop here and do whatever your instincts tell you to do. Actuarially they are all the same. If no, then continue.
3) Are you comfortable with the notion of insuring against a risk, knowing that the risk may not materialize after all? If yes, then delay SS to 70. If no, then start SS earlier.
Aptenodytes -
Could you please do everyone a HUGE favor and get with Oblivious Investor and put together a new book -"How to make Social Security decisions" in a nutshell using this very logical "if no then/if yes then" outline :D :D You two would make everyone VERY happy (and you might be able to add to your pot of :moneybag )
You can already buy that book.
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Re: Two Legged Stool [Figuring out when to take Social Secur

Post by ShiftF5 »

I've always heard the "if you can afford to wait -- wait" advice.

Everyone's situation is different.
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Re: Two Legged Stool [Figuring out when to take Social Secur

Post by ObliviousInvestor »

Miriam2 wrote:
Aptenodytes wrote:I am going to focus on your framing of the question, which is what is the best way to figure out when to take SS.
I think it comes down to a simple branching tree:
1) If you wanted to defer SS to age 70, do you have savings on hand to permit you to do that? If no, you have no practical choice but to start early so you can stop here. If yes, continue.
2) Given the size of your portfolio and your assumptions about plausible futures for the market and for your spending needs, are you free of the risk of running out of money in old age? If yes, then your decision does not have any significant material impact and you can stop here and do whatever your instincts tell you to do. Actuarially they are all the same. If no, then continue.
3) Are you comfortable with the notion of insuring against a risk, knowing that the risk may not materialize after all? If yes, then delay SS to 70. If no, then start SS earlier.
Aptenodytes -
Could you please do everyone a HUGE favor and get with Oblivious Investor and put together a new book -"How to make Social Security decisions" in a nutshell using this very logical "if no then/if yes then" outline :D :D You two would make everyone VERY happy (and you might be able to add to your pot of :moneybag )
I have actually written a book about Social Security. If you don't think that one is a good fit for you, I would recommend either of these two:
http://www.amazon.com/Social-Security-E ... 499255233/
http://www.amazon.com/Social-Security-O ... 505396603/
Mike Piper | Roth is a name, not an acronym.
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jeffG
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Re: Two Legged Stool [Figuring out when to take Social Secur

Post by jeffG »

Apenodytes,
Firecalc was interesting in that taking at 62 or 66 makes very little difference in final accumulation average, but it does tighten up the scatter. 97 percent success for 62 and 100 percent at 66. I couldn't get any advantage from firecalc waiting till 70 over 66.

Certainly you can see that SS is pretty neutral if you live to the average age! Die early and taking ss early is better, die late and delaying is beneficial. But if you look at your retirement as an overall package, delaying SS is only beneficial if you live well into your 80's-early 90's (at least in my case). So then it comes around to the whole SS as insurance instead of income line of thinking. I guess I need to give that some thought!

Mike,
I'm going to go ahead and order your book today to get another perspective.
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Re: Two Legged Stool [Figuring out when to take Social Secur

Post by ObliviousInvestor »

jeffG wrote:I'm going to go ahead and order your book today to get another perspective.
Thank you. If you have any followup questions after reading the book, I'm happy to answer them.
Mike Piper | Roth is a name, not an acronym.
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Re: Two Legged Stool [Figuring out when to take Social Secur

Post by The Wizard »

jeffG wrote:
Aptenodytes wrote: 2) Given the size of your portfolio and your assumptions about plausible futures for the market and for your spending needs, are you free of the risk of running out of money in old age? If yes, then your decision does not have any significant material impact and you can stop here and do whatever your instincts tell you to do. Actuarially they are all the same. If no, then continue..
Well, I guess this is where my internal confusion lies.

We live in the Midwest where housing and living expenses are low. So I am not really worried about running out of money in retirement unless the apocalypse occurs. If I take SS at 62, it contributes less than 1/3 of our expenses, if I wait till 70, it's 1/2 ish. So to your point 2, either way I have to heavily depend on our savings.... So the main reason for waiting is to insure against a total melt down of the stock market and us contracting our living to half of what we expected to be spending (point 3).
You can file for SS in any month after age 62.
So do what I'm doing: postpone taking SS till age 70 unless a major stock market crash crunches your investment portfolio...
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Re: Two Legged Stool [Figuring out when to take Social Secur

Post by TomatoTomahto »

If you want to understand, I recommend Mike Piper's book, which you've already ordered. I have also started reading Kotlikoff's book, and can recommend it also for its tangents and asides.

I like ESPlanner, and use it annually, but if you just want a flexible tool to figure out the optimal time and manner in which to claim for SS, www.maximizeyoursocialsecurity.com is well worth the $40 and < one hour to get a strategy. Btw, I know very little of your situation, but both of you filing at the same is unlikely to be optimal.
I get the FI part but not the RE part of FIRE.
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Re: Two Legged Stool [Figuring out when to take Social Secur

Post by Timoneer »

Aptenodytes wrote: ...2) Given the size of your portfolio and your assumptions about plausible futures for the market and for your spending needs, are you free of the risk of running out of money in old age? If yes, then your decision does not have any significant material impact and you can stop here and do whatever your instincts tell you to do. Actuarially they are all the same...
Social Security may have been intended to be actuarially neutral but in implementation it is not, for several reasons.

1. SS is gender neutral, slightly favoring single women who delay and single men who claim early.

2. The SS actuarial tables are out of date, with current average life expectancies greater than when the tables were compiled. Advantage to those who delay.

3. The SS tables reflect the actuarial predictions for single people. Married couples get a big bonus with various options for spousal and survivor benefits. Generally provides a very significant actuarial advantage to those couples in which one person delays.
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Re: Two Legged Stool [Figuring out when to take Social Secur

Post by JW-Retired »

jeffG wrote:Apenodytes,
Firecalc was interesting in that taking at 62 or 66 makes very little difference in final accumulation average, but it does tighten up the scatter. 97 percent success for 62 and 100 percent at 66. I couldn't get any advantage from firecalc waiting till 70 over 66.

Certainly you can see that SS is pretty neutral if you live to the average age! Die early and taking ss early is better, die late and delaying is beneficial. But if you look at your retirement as an overall package, delaying SS is only beneficial if you live well into your 80's-early 90's (at least in my case). So then it comes around to the whole SS as insurance instead of income line of thinking. I guess I need to give that some thought!
Most of us think this analysis needs to be addressed as a couple. Maybe I missed something but I don't see how you could be doing that.

If you take SS early and die early that's financially fine for you, but your low SS earnings widow might need to live a long time on meager SS and not be so fine. Have you looked at what her SS income might be if that happens?
JW
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