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delaying-social-security-benefits-retirement-planning/?A Siting from a 2024 Journal of Financial Planning article, Smith and Smith conclude: Our calculations do not support the presumption that the vast majority of people who choose to start their Social Security retirement benefits before age 70 are making a mistake. For example, … with a 4 percent real return, a person has to live to 89 for it to be beneficial to delay the start of benefits from age 67 to 70. However, 77 percent of 67-year-old males die before 89 as do 65 percent of 67-year-old females. Age 70 is not the most financially rewarding age to initiate benefits unless an individual has a low discount rate and/or is confident they will live several years past their life expectancy.
From the Author of the linked article at Kitces' website: Ultimately, the key point is that we need to move beyond simply thinking in terms of portfolio risk when assessing Social Security claiming analysis discount rates. Ideally, we should be thinking more in terms of utility and factoring in all risks, which changes the calculus significantly.
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Different strokes for different Folks.
Use your survivor benefits.
Added: With SS benefits to be cut in 2033, unless more money is found to finance it, may also play into your plans for when to take SS.
This is discussed in the piece as one of several risks in deferring:
https://www.kitces.com/blog/discount-rate-delaying-social-security-benefits-retirement-planning/#policy-risk
And here: https://www.kitces.com/blog/discount-rate-delaying-social-security-benefits-retirement-planning/#regret-risk
One way to read this piece is to skip to the bottom where two case studies are presented.
One is a case study of a couple with limited resources. They might take SS earlier and make better use of their smaller nest egg in their 60s while they can enjoy it.
They are also somewhat irrational (i.e. human). They would more regret the loss of SS income from dying early than they would enjoy getting extra from SS should they live long and prosper (more on that in Case 2). Especially since they don't anticipate a long life span (based on heredity).
https://www.kitces.com/blog/discount-rate-delaying-social-security-benefits-retirement-planning/#case-study-claiming-early-with-limited-assets
Case 2 is Mr. Spock and spouse. Larger nest egg easier so easier to fund expenses until drawing deferred SS. Long life expectancy, entirely rational. No regrets on what might have been - probabilities are just that.
https://www.kitces.com/blog/discount-rate-delaying-social-security-benefits-retirement-planning/#case-study-claiming-later-with-a-tips-strategy
Some people need to draw SS as soon as it's available because they need the cash flow. Others, like Spock, can make entirely cold, calculated decisions. Many people fall somewhere between the two (closer to case 1).
As yogi's chart above shows, a plurality of people take SS as soon as they are able to (age 62). They may be concerned about losing to the government by dying early, or they may be in need of cash flow.
There's a much smaller spike at age 70. Those people hope/expect to win their bet with the government that they will have a long life. And they are not strapped for cash before then.
The middle spike, not quite as large as the number of people taking benefits as soon as they are eligible, is at FRA (age 66). People might chose that age for a few reasons:
- This maximizes their spousal benefit. If their spouse gets the higher SS payments and dies first, they get that larger income stream. Except that this amount is reduced if they started SS before FRA. So waiting until FRA (but not later) has a benefit.
- This avoids a temporary reduction in SS benefits if they are still working and draw SS before FRA. The reduction is only temporary because the full amount of the reduction is added back (inflation adjusted) to their benefits once they reach FRA. Still, this is a temporary reduction in total cash flow ($1 reduction in SS for every $2 in earnings).
- FRA is perceived as the proper age to start drawing SS. That's when "full" benefits begin. Though what "full" means when there's a sliding scale between ages 62 and 70 is somewhat fuzzy.
ISTM that the reasons for taking benefits at age 62 or age 70 are more compelling than taking benefits at FRA, though selecting FRA does confer some benefits also. As others have said, each person's situation is different.
Life expectancy is an unknown. Dad lived to be 96. Mom lived to 81. I think my situation may be closer to my mother's. Split the difference and it would be around 88.
I could delay benefits and use taxable funds, paying lower LTCG. Or make bigger Roth conversions during those years. Splitting it in the middle ( 62 - 70) seems like a decent choice. Maybe not the optimal choice. But waiting would make me anxious, I think.
FRA = full retirement age, PIA = primary insurance amount
Wife spousal benefit (if less than her own benefit) =
1/2 (or less, if taken before her FRA) x your PIA (independent of when you take benefits).
Spousal benefit is reduced (below 1/2 of PIA) if spouse (here, wife) starts taking benefit before their FRA. But when you take doesn't matter. https://counterweightpw.com/insights/should-my-spouse-claim-early-understanding-social-security-spousal-benefits https://www.ssa.gov/oact/quickcalc/spouse.html
That links to this SSA definition of PIA (emphasis added): https://www.ssa.gov/oact/cola/piaformula.html
Finally, please don't rely on AI for help. Here's what Google's AI said (searching for spousal benefit half PIA early retirement): The first sentence appears correct - your spouse's benefit depends on your PIA (which is calculated as if at FRA). The second sentence is not - if you claim early, that reduces your benefit but not your PIA, which is defined as what your benefit would be at FRA. Thus it does not result in a lower maximum spousal benefit.
The breakeven point (assuming one gets the same after tax returns with investing as with inflation adjusted, state-exempt SS) is around 81, give or take, depending on which two ages are being compared. From Britanica:
Since you expect to live at least to the breakeven point, and possibly several years longer, waiting seems like a heads (long life) you win, tails (short end of expectations) you break even choice.
Having a larger income stream going forward (which can be viewed as either a bond or a cash investment) allows you to allocate more in your taxable account to equities. Thus returns are improved (over the 60/40 used in the Kitces piece); tax efficiency is also improved. The "bonds" (SS income stream) is state-exempt; another bonus.
The key seems to be the last sentence: "waiting would make me anxious, I think."
I don't dismiss such concerns. There's a reason why "Spock" was used as the prototype for "Case 2" in the cited piece. But one can still ask: anxious about what?
It sounds like you won't need the cash flow (you'll be investing it). If you die at, say, age 75, you leave a bit less cash to wife. OTOH, wife gets a larger survivor benefit income stream to partially compensate. And if wife outlives you by several years, with that greater cash stream she could actually come out better. This is why, for some couples, it is suggested that the lower earner claim at 62 and the higher earner wait until 70. Then the augmented SS income stream survives until both partners are deceased.
http://danielamerman.com/Images/Resources/BenefitAge/BenefitsL9.jpg
(image doesn't seem to display inline)
The Britanica graph above already uses constant dollars and shows the same breakeven point - its red and green lines cross (breakeven point) between 80 and 81, the same point where Amerman's red line crosses the x axis.
The COLA adjustment for SS was 0.0% in 2016, as it was in 2010 and 2011. That did trigger the Medicare Part B hold harmless provision as he described for 2016. The question is whether any of this is material now. Do people expect inflation to run near zero over the next few years?
Even if Medicare premiums rise significantly on a percentage basis, the dollar increase is going to be less than the dollar increase in most people's SS COLA adjustments. SS payments are so much larger than Medicare premiums that a small (but non-zero) increase in SS will more than cover the dollar increase in Medicare premiums.
The people most likely to benefit from the hold harmless provision are those beneficiaries who receive small SS checks. Those are the same people who are most likely to be taking SS early - not because they come out better, but because they need the cash now.
Which gets us back to what I was concluded with before - the main factors to consider are cash flow needs and expected longevity. (Marital status also comes into play if one is strategizing to optimize expected benefits.) IMHO most other considerations are secondary.
I'll clarify the last part first. The anxiety would emanate from wondering the entire time, if I was going to live long enough to break even. lol From wondering if I chose poorly. Not a big issue either way though. More of an afterthought.
Definitely not worried about income or our retirement funds lasting. More about making a "best" choice.
I am now a bit confused about the spousal benefit. If I am reading it correctly (probably not), my spouse still gets more than her current benefit (claimed at 65 and much lower earnings), when I claim at FRA and she switches to spousal benefits, just not as much as it might've been had she also waited until FRA. We are about the same age. Is that correct interpretation?
And the spousal benefit is half of my PIA, regardless of when I claim. Though she cannot switch to spousal, until I start my benefits? In layman's terms her spousal benefit is already fixed/determind before I decide to claim?
Also, it appears that the SSA is using the terms "FRA" and "normal retirement" interchangeably?
I have been vacillating on taking SS at FRA. You have given me something to consider.
@sfnative. A lengthy but valuable read. Thanks.
Based on what has happened thus far, the specter of cut SS benefits is not unrealistic. So, another unknown variable. And that suggests one should take the money and run.
I reread what has been posted and chose to delete my comment. Good day to all!
Yes.
And the spousal benefit is half of my PIA, regardless of when I claim. Though she cannot switch to spousal, until I start my benefits? In layman's terms her spousal benefit is already fixed/determind before I decide to claim?
Yes. When you claim (as opposed to when you stop working) affects when she can switch to spousal benefits but doesn't affect the amount of those benefits.
Though the longer you work, potentially the larger your PIA becomes, since it is based on your highest 35 years of earnings. And a larger PIA makes her spousal benefits larger. So to maximize spousal benefits, claim early (to start those benefits earlier) but continue working (to increase PIA).
Survivor benefits work the opposite way. The longer you wait before claiming (up to age 70) the larger your own benefits become. Consequently the larger her survivor benefits become (if/when you predecease her).
Having a spouse complicates life
Also, it appears that the SSA is using the terms "FRA" and "normal retirement" interchangeably?
That's certainly what it looks like. Here's an SSA table with a column labeled "Full (normal) Retirement Age". If I'm wrong about the NRA don't shoot me (ouch!).
the specter of cut SS benefits is not unrealistic. So, another unknown variable. And that suggests one should take the money and run.
If the government doesn't reduce benefits, you'll reach the break even point in about 14 years, i.e. at the end of 2039. If nothing is done, the government is predicted to cut benefits by about 1/4 after 2033. So for the last 6 years (2034-2039) you'll be catching up only 3/4 as fast as originally planned.
So rather than taking another six years after 2033 to catch up, you'll need another 8 years (4/3 x 6) to catch up. That makes your break even point the end of 2041 instead of 2039. Whether that extra two years tips the scales is up to you to decide.
The fact that SS is inflation adjusted makes the calculation above simple. It's all in real dollars so you don't have to worry about inflation or depreciating future dollars or present value. It's already baked in.
I know that a Roth conversion is a taxable event, of course. But, does it also count as unearned income, as it pertains to LTCG tax treatment. Or is it more of a "unique" event?
I've thought about delaying anywhere from 6 months to 24 months. And using that time to cash out some LTCG positions, perform Roth conversions and/or spend down some (taxable?) accounts.
I am playing with some tax calculators, trying to see what works best. Our spending needs will drop off significantly in 2026. We have been spending on home improvements, automobile upgrades, education, medical/dental, all in preparation for retirement over the past 6-7 years. All of that will be behind us at the end of this year.
We are about 62% tax-deferred, 5% Roth and 33% taxable. Our taxable accounts hold a great deal of LTCG and cash.
A few articles/calculators that I have squirreled away on retirement taxation:
https://www.kiplinger.com/article/retirement/t037-c032-s014-tax-efficient-retirement-withdrawal-strategies.html
https://www.irscalculators.com/tax-calculator
https://www.schwab.com/ira/ira-calculators/roth-ira-conversion
If you're asking about the 3.8% Net Investment Income Tax on investment income, that specifically excludes distributions (including Roth conversions) from IRAs (IRC Section 408). See Q #9 in the NIIT FAQ linked above.
However, a Roth conversion can implicitly be subject to the 3.8% surtax. Say your MAGI, excluding net investment income, is $240K and you have $15K in investment income. Only the last $5K of that investment income (the amount that pushes you over $250K) is subject to the 3.8% surtax.
But if you convert $10K, that brings your MAGI (excluding net investment income) up to $250K, so the full $15K of investment income (an extra $10K) is subjected to the 3.8% surtax. That's equivalent to saying that the $10K of Roth conversion income gets surtaxed.
Converting even more doesn't make a difference since at that point you're already surtaxing all of the investment income.
But, I believe that I found the answer - the Roth conversion counts as ordinary income and would make the CG taxable in that year. It all comes down to the "hierarchy" of taxation, so to speak. Thanks again.