Intrigued by the Retirement Income Style Awareness® Profile developed by Wade Pfau, Alex Murguia and Bob French at RetirementResearcher.com, I looked for a way to take the RISA questionnaire (
described here). I was hoping it could better define some of the behavioral quirks leading me to want to claim Social Security early. Unfortunately, the questionnaire was not available to the general public, but the site said they'd keep me informed of any future availability. As luck would have it, within a week or two, the next Retirement Income Challenge was announced, and I signed up for it, free of charge. The 4-day challenge took place this week.
The RISA Profile was very interesting, and it seemed to have me accurately pegged to a surprisingly degree. (Strong preference for safety-first, together with a strong preference to preserve spending flexibility, or optionality.)
But what became even more interesting was the opportunity to play around with their Funded Ratio tool for a few days. Though I have nothing to compare it to, the funded ratio analysis at RetirementResearcher.com seems outstanding. It's capable of handling a wide range of circumstances, and it seems accurate. I didn't test the tax accounting, but from what I saw, it seemed very reasonable. So I took the opportunity to test out various Social Security claiming ages, to see how it would affect the bottom line funded ratio. I was absolutely amazed at how consistent the quantitative funded ratio analysis was to the general direction this thread was headed.
As I looked past my thumb and squinted into the distance, I estimated that my essential expenses would just about be covered by SS and the pension, but that it might be close. It seemed as though waiting until at least 65 to claim would improve the likelihood of meeting all essential expenses with a reliable income stream. That's exactly what the funded ratio analysis revealed!
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SS Claiming Age 62 64 65 66 67 70
Overall Funded Ratio 113% 114% 115% 116% 117% 120% (PV of Assets/PV of Liabilities)
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Essential Expense 98% 99% 101% 102% 103% 108% (PV of (SS+Pension)/PV of Essential Expenses)
Funded Ratio
Percent of Essential 31% 33% 35% 36% 37% 42% (PV of SS Only/PV of Essential Expenses)
Expenses Covered by SS
Discretionary & 138% 138% 138% 138% 138% 138% (Current Portfolio/PV of Discretionary Expenses)
Legacy Funded Ratio
Contingency Funded 217% 217% 217% 217% 217% 217% (PV of Reserves/PV of Contingency expenses)
Ratio
Assumptions:
Plan to Age 95 (~35 Years)
2% Nominal Return
2% Inflation
0% Real Discount Rate
Withdrawal Order: Taxable, Tax-deferred, Tax-free
Current tax brackets persist
100% of tax liabilities added to Essential Expenses category
Retirement Researcher Overall Funded Ratio Breakpoints:
FR<95% = “Underfunded”
95%<FR<105% = “Stressed”
105%<FR<115% = “Constrained”
115%<FR = “Excess Funding”
It probably looks like I played around with the inputs until I got the results I hoped for, but that's not how it went at all! My expenses are very well defined by now, and I used the same total of essential + discretionary expenses throughout, only shifting $5k from "essential" to "discretionary" after the first run. But the "essential expenses" are still comfortably padded. They basically include all normal expenses plus all envisioned big ticket expenses, like cars, major home repairs, etc. About the only thing the "discretionary expenses" need to cover is a big vacation/recreation budget, one that I honestly doubt I'll ever come close to using. The runs above included a $100k Home Improvement in 1 year (discretionary expense) and 3 years of LTC Expenses added at the end (contingency expense).
Then I stress-tested the above base scenario with the following concurrent risks:
— 20% drop in portfolio (corresponding to a roughly 31% equity market drop)
— 20% drop in pension income
— Additional $25k/yr. added to LTC contingency expenses
The results were not as good, but not nearly as terrible as I expected:
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SS Claiming Age 62 65 67 70
Overall Funded Ratio 99% 101% 103% 105% (PV of Assets/PV of Liabilities)
Essential Expense 90% 93% 96% 99% (PV of (SS+Pension)/PV of Essential Expenses)
Funded Ratio
Percent of Essential 33% 37% 40% 44% (PV of SS Only/PV of Essential Expenses)
Expenses Covered by SS
I realize there could be a wide range of interpretations of the above funded ratio analysis, but to me it provides further confirmation through an objective metric that claiming Social Security at 65 or 66 would be a reasonable course of action for me, financially. And it accommodates my behavioral quirks way better than waiting longer.
Any other thoughts about how to interpret the above analyses? Would you still recommend a bigger factor of safety by waiting longer to claim Social Security?
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein