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3 out of 4 retirees receiving reduced Social Security benefits
I have been following this extensive discussion only loosely since I retired almost 2 decades ago. That needed to be said since what I’ll now propose just might have already been suggested – but I doubt it.
For the most part, the earlier postings have told some very personal and appealing stories. Many are fascinating, but are somewhat unique given their one-off situations and circumstances. They’re useful to a future retiree with a critical Social Security decision compounding a retirement decision because they singularly add to his experience base.
That’s hard learning because the decision is complex with a host of moving parts, each with its own set of uncertainties. These moving parts include such elements as expected total wealth, portfolio value and investment style, guesstimated portfolio returns, savings habits, anticipated expenditure rates, inflation, inheritance plans, and especially life expectancy. That’s why I earlier posted an “It Depends” assessment.
When uncertainty dominates a planning problem, that is a signal for a Super Spreadsheet to explore options in a cost and time efficient manner. I know you guys are tired of me repeating this recommendation, but I’m obliged to make it once again. Please do some analyses and scenario “what-ifs” using Monte Carlo simulators that are available for free on the Internet.
Some rather extensive and solid studies on the Social Security (SS) now or later issue have been made by reliable research sources. Please consult them to supplement the discussions and recommendations made on this MFO exchange. Both have a place prior to any final decision. Here is a Link to a nice Morningstar study that defines and explores many SS issues:
The Morningstar paper is extensive and presents much hard data. In so doing, many parameters were necessarily fixed (like the type of investment portfolio and what its future returns were likely to be). The fixing of parameters is necessary to permit the analysis to proceed, but it is limiting in specifics.
A study that is more tailored to the specific requirements of each retiree is a more refined approach. So, I once again recommend a visit to the Flexible Retirement Planner site. Here is the Link to the Monte Carlo code that this organization developed:
If you don’t trust my assessment of this specific tool, here is a Link to an independent study that basically endorses the tool I did plus a Vanguard and another product:
Please give one of these Monte Carlo tools an experimental try. It will NOT fully resolve the SS problem since the future is uncertain. But it does provide a feeling for the possible impact of these unknowable “what-if” happenings on your specific portfolio.
Let me close by emphasizing the significance of your portfolio survival likelihood when making any retirement/SS decision.
Many of the SS issues examined in the literature quote “break even” projections between the immediate and delayed SS drawdown options, Sure that’s of some interest. But the salient concern is the overall survival probability of your entire portfolio. That’s the Big Picture issue. That’s the distinction between a comfortable retirement and a trip to the poor house.
I encourage near-term retirees to play “what-if” scenarios using these powerful Monte Carlo codes. It’ll help in the complex and coupled retirement/SS decision.
There have been some terrific MFO submittals to this issue already. I hope you find the Links I suggested additionally useful.
Good luck to everyone.
Thank you for these observations.
Take care.....up north
I think he was implying individual stocks and all equities, not bonds only.
I myself dispute it even if that is what he was implying.
15y is long in my book and practice. But I may be more firmly equity-oriented than many retirees.
>> Kitces' reference to "superior risk-adjusted returns" have not been documented.
Good grief, how much documentation do you need?
>> He has not analyzed for us the risks of owning different types of equities,
Everyone else has, in spades.
>> or different types of bonds,
He is talking equities only, as the very next clause made clear.
>> or tried to quantify for us the risks of potential drastic changes in either tax policy or SS structure
How could anyone quantify such risks? Quite apart from the potential drastic changes never happening, he is dealing with things as they are now. Not so delicate and cart.
>. somewhat incidental to the referenced article ... but part of the consideration is whom you would rather have in control of that sum of money, yourself or the government?
You do not have control of that sum of money, and never will. Missing/ignoring the point.
Who ever woulda thought anyone would object to this bland and entirely self-evident pointing out of fact?
>> ultimately, delaying Social Security benefits provides superior risk-adjusted returns to equities and portfolio investing in the long run. ... Obviously, this is not true in the short run – as noted earlier, it takes more than 15 years to break even at all.
The chief counterarguments arise either from the hard reality of needing it earlier without question, or from fantasies involving profound government distrust and crippling future anxiety. That's cool, whatever floats your paranoia, but it's not a prudent way to plan and make thoughtful money decisions.
I think, as others have said, for most retirees they need the SS$ to live. For the rest of us it is about how to maximize our investments.
As I said in this thread, I'm now thinking about delaying SS so that I can get a Obamacare subsidy on health ins. Another variable for those who can play the game.
Over the last few days, a tennis buddy, Ralph, tried the Monte Carlo simulator that I recommended for the very first time.
Although he is certainly not mathematically illiterate, Ralph is not especially sophisticated in the odds calculation arena. Truth be told, he is a terrible gambler, but a terrific tennis partner. Vegas comps him lavishly. Until yesterday, he had never run a Monte Carlo code. He called me today to register a complaint.
Ralph made a sequence of runs with identical inputs. He was shocked that the projected portfolio outcome success percentages slightly changed with each simulation. He questioned the reliability of a code that produced different end results on each trial.
I assured him not to worry, and neither should you guys. I suspect many of you know the reason.
A Monte Carlo code randomly selects numbers given the programmed model (Gaussian or a modified form thereof) and the statistical input parameters (mean annual return, standard deviation). Therefore, although typically a thousand random individual cases are computed for each input scenario, it would be shocking if the end outputs were identical for each scenario. Ralph was a happier warrior when he said good-by.
Also, users should be cautious when interpreting probabilities expressed as percentages (as in the Flexible Retirement Planner format) or as a frequency. Percentages are more abstract; frequencies seem more concrete. Folks are swayed in their decision making by the output format according to behavioral wizards.
Folks are likely to make better decisions when the probability of success is quoted as 80 out of 100 cases than when presented as an 80% success probability. Also, if fear generation is a presentation goal, more fear will be induced if the results are given as a 20% failure rate rather than an 80% success ratio. So much for rational decision making!
Please try a few simulations yourself to explore the likelihood of your portfolio’s survival rate, not its failure odds.
In 1983 or so, some Japanese CD company, after Sony and its CDP101, did an early release of a fancy CDP model with this new feature --- random play. (You might see where this is going.) When you pushed that button, the CD was played randomly. Meaning track 1,3,2,1,1,1,4,6,3,3,5,5.
It was only a matter of months before the units were returned enough by consumers to be recalled, and thus was born shuffle play.
I run the calculator on a range of returns. This way if the market is up only 2% for one particular year I can come up with the amount I can safely withdraw. I'm not quite in retirement yet but very soon. These calculators take all the guess work out of the equation. For this subject on SS, they are an invaluable tool.
I don't trust the government, but we can't do without some kinda government. And I don't trust for-profit Health Care ANYTHING. The government can be relied upon to screw up the simple task of pouring piss out of a boot, with instructions written on the boot-heel. I still think Single Payer would be simpler and more comprehensive. Have any of you other guys ever attempted to navigate Romneycare in MA? (No need to answer. You get my point.)
More news: another waiver requested.
Jeez. You need to meet more public sector employees maybe, like a cop or a schoolteacher or a DoD proposal writer or a Darpa PM. Or a highway worker. It is not like the gov is something other than individuals. Of course, if you really don't trust it, then don't bother.
Has anyone here been in a line only to have the person handling that counter put up a closed sign and instruct us to go to another line. It's happened to me.
Immigration is possibly the worst. Policies written by "pencil neck bureaucrats" like having you fill out a form that tells them that you did fill out another form. Only in the government.
The back office policy writers cause a lot of this but there are plenty of drones who act like they are doing you a favor just by being there.
Yes, but I can't almost blame them if they are sullen. It's about "worker productivity." Which is to say: squeezing out every last little moment from the employee, as if they were machines. I just never learned the lesson that the employer OWNED me while I was on the job.
Yes, immigration is dreadful. Website said the Consulate was open in Cebu from 8-11. Wonderful. Let's go early and do what we need to do, and have the rest of the day to do what we WANT to do...
.......Only.... um......... It's true: the Consulate DOORS are open from 8-11 a.m. But the Consul does not arrive until 11. So nothing gets done until 11, after the doors are locked.
The wonderful CONSUL explained to me that he's an American businessman in Cebu, and is "doing the government a favor" by taking a stipend or small wage or salary to fill the very part-time post of Consul there. When I approached the service window after an hour or two of sitting on my ass, and a couple of others did the same, the FABULOUS employees simply said: "Please ask the Consul when he gets here." And they were more than likely instructed to say that. Talk about a totally ludicrous state of affairs.
The problem is systemic. And brainless geeks put it together in such a way as to make everything as difficult as possible, rather than to SERVE the public.
Such bullshit. Such.
Fwiw, I had a few phone interactions in my recent SS filings, and it went unbelievably smoothly and responsively and with callbacks, even. Names and contact info, one person. I admit I was a little surprised. And everything got done correctly. 35yo wedding forms mailed and returned. Dates hit. Confirmations. The whole nine, and ten, yards.
Same with Medicare.
I must add I did have to be patient. More than once. And hold.
That need to be patient however threw me into this total libertarian rage and I vowed then and there never to deal with SS again ever, and refuse to open their mail, and I have been glued to AM talk radio ever since, the one true set of messages. No, wait.
I have always had a professional experience with SS and Medicare. I had several follow-up questions with a lady at the SS office. She was always very prompt and knew her business. She received a thank you card, from me, for her efforts, as well as a big thank you for each of three visits to her office. None of the visits were for problems or delays from SS, but for other requests that I had. Yes, she was doing her job that she was paid to do; but her attitude was always superior. I say a thank you more often than not for those who take care of their customer. My experience shows that very few folks ever have a thank you from a customer.
My thank you is always genuine, if deserved. The majority of folks are usually surprised, as I am sure they rarely hear a thank you.
most SS beneficiaries die before receiving, in cumulative monthly payments, the amount of money they have paid into the SS system.
Now, this fact could change for baby boomers, since we fancy that we "reinvent" everything, and perhaps the age-specific mortality rates for our demographic may be different. Too early to tell, I suspect, but we should have a pretty good idea in 5-10 yrs how things are gonna "trend" on that score. We may nudge our Bell Curve up a tiny bit, but as far skewing the Bell into a distorted 90s bulge.... I think not.
These are a couple of things I put into my Monte Carlo and smoke, as I whistle past the graveyard.
Max - Relax. They're trained to work with "the lowest common denominator."
Since most here are playing with at least a half-deck, you shouldn't expect any problems!
ONE GOV. agency (SS) that did their JOB..
( but don't get me started on the IRS)
No. It's really not personal to you. They're following a bunch of regs/laws and policies/procedures. Not chopbusting or toying with you on account of principle.
I have good (meaning efficient, accurate, helpful) phone experiences with the IRS, several. Long waits and fear on my part, naturally.
Yeah, the SSA and CMS people I have spoken are always startled to be thanked. I can well imagine what they usually get.
>> most SS beneficiaries die before receiving, in cumulative monthly payments, the amount of money they have paid into the SS system.
They, or they plus their employers? Can you give range examples or typical scenarios? Or some links? I had thought part of the problem was that pay-ins were not large enough. This is an interesting assertion, and I am ignorant of the math. Googling and not having much luck. Thanks.
Fascinating, and generally quite contradictory of your assertion.
Where did you get your information?
Really long post. If you don't care at all about the reasoning or calculations, skip to the final three paragraphs, following the clearly marked break (====)
Everything that follows is in constant (inflation-adjusted dollars). This removes inflation as a factor (until the end), it removes complex adjustments on SS payments (which remain fixed if measured in constant dollars).
Rather than discuss break even point, I'm going to use average life expectancy. If taking money early and investing comes out better for an average life span (i.e. average for a person reaching age 62), then that's the better path on average. If deferring the money comes out better for an average life span, then that's the better path.
Finally, what does it mean to come out better? If you take money at age 62, you invest it for four years. Then starting at age 66 (assuming that's FRA, and you are comparing with starting SS at that age), you use some of the invested money to make up the shortfall on your SS checks (you'd be getting larger ones by waiting until age 66). The remainder of the money you keep invested, to grow and to keep making up monthly shortfalls. If you come out with investment money left over when you reach the average life expectancy, you win. Otherwise, deferring (at least until age 66 wins).
The amount of money you have invested each month =
last month's balance * (1 + montly real rate of return) * (1 - monthly tax rate).
Let's call this multiplier net real rate of return (NRRoR).
Before age 66, you also add in the amount of the check you get from SS (age 62 monthly check).
After age 66, you subtract the shortfall (age 66 check amount minus age 62 check amount).
I put all this in a spreadsheet. I used $1000 as the FRA, $750 for the age 62 amount, and $1320 for the age 70 amount. All after tax values.
The tax rate on SS doesn't matter, so long as it remains constant. You can divide by (1 - tax rate) to get the SS check amounts.
Here's SSA's life expectancy table At age 62, a male is expected to live to just short of 82 years of age, on average. Females to age 84.6.
Comparing taking money at age 62 vs. 66, and investing to break even just before age 82, we need to achieve a net real rate of return of 3.0%. (One runs out of investment money about age 81 years, 10 months). For females, we need to have that investment last until age 84.6, and that requires a net real rate of return of 4.2%.
Here's where you get to say how good an investor you are. I look at that 3% real rate, and think that one might target a 3% inflation rate, a 7% nominal rate of return (4% real), a 15% annual tax (not completely tax efficient, but taxed on capital gains).
That gets us to 3% net real rate of return. 15% tax on a nominal 7% rate of return bleeds about 1% off of the return. So we have a 4% real return less 1% in taxes, or 3%. To get that 4.2% real return with 3% inflation would require about a 8.5% nominal return (bleeding 1.3% in taxes, leaving 7.2% nominal, or 4.2% real).
That's an admirable target. Now factor in risk, since we're comparing a sure rate of return with SS (i.e. like an interest rate) with a volatile and uncertain market return.
It's a bit better if one compares age 62 with deferring until age 70. Then, you have more years to invest the money before having to make up shortfalls, and fewer shortfall years (only a dozen years until the men die - on average - at age 82).
Now, one needs only a 2% net real rate of return for the average male to come out ahead (money left over after age 81, 10 months), and 3% for the women to come out ahead. In other words (assuming 3% inflation, 15% tax annually), 5.75% nominal return for males, 7% nominal for females.
The bottom line here is that if you've got an average life expectancy, then it looks like you need to be able to invest for around a 7% nominal rate of return with zero risk to do as well as by deferring SS. The more uncertainty there is in achieving this rate of return, the higher that rate needs to be to beat SS on a risk adjusted basis.
It's interesting that people who advocate taking SS early often state that they're taking the "bird in the hand". But when it comes to comparing the certainty of a fixed (real) income stream with the vagaries of the marketplace, they'll go for the uncertain "two in the bush".
That may be a matter of perception - people may feel they don't have control over how long they'll live, but they have control over their investments. I respectfully submit that if anything, the reverse is true. Live a healthy lifestyle, and you can increase your odds of a longer life. But you have no control over the market, which seems to be what has the most effect on how investments perform in general.
All in hindsight of course, but those of us in my boat who began taking SS early at age 62 at/near the market bottom in early 2009 have *easily* achieved more than a 7% annualized nominal rate. I mean in 2009 alone the average junk bond fund returned over 40%. Better to be lucky in your timing than smart as they often say. msf, your recent posts have been among the best and most enlightening I have seen on this forum or its predecessor's. Thanks for the time you spend posting.
I think as time goes on the number of people who have the option to ponder when to take SS will decline.
Another variable to ponder is he value of SS$ to a younger more active person vs later in life. Let's call it the age deflator. If taking SS$ earlier allows you to spend more on your enjoyment of life, taking SS$ should have a higher value then later in life. That could mean you have more money, so you do more. Or you are less worried about your investments so you feel better spending more so you do more.
I'd look at the deflator this way:
Take SS at:
66 - 90%
and subtract 3% per year.
70 - 78%
75 - 63%
Summing up, the evaluation can be by the numbers only. Or it can be a evaluated on the emotional, quality of life, and needs in life. So far, my spending over the 8.5 years I've been retired have been fairly constant. I'm guessing as we age spending on travel/etc will decline and other expenses will increase.
I'm still leaning to earlier is better - If you can afford to do it.
Doesn't some portion of the inflation factor get offset by SS COLAs that a 63-69 year old receives. These COLAs are cumulative over these 8 years. Seems to me COLAs act a little like compounding interest...the sooner you start getting them the greater their impact.
Also, there is no death benefit with SS. If taking SS early helps to reduce the draw down of other assets and those other assets have a death benefit (value after death) I see this as a worthy consideration.
Thank you for formulating, executing, and summary posting your original analysis approach to the SS drawdown decision issue.
A tidal wave of submittals offer opinions, some very insightful and helpful. But many are anecdotal and are difficult to reliably extend into a diverse set of possible scenarios and circumstances. Experience is only one part of the decision equation. Your model and analysis transcends that shortcoming and completes the equation.
Congratulations; your analysis is a volunteer job that is very well done. You made some simplifications, but all models are simplifications.
I certainly agree that changing the target goal away from the standard breakeven point criterion is a more illuminating modification to better frame the problem. That’s good thinking. It’s thinking rather than blinking to the conventional wisdom.
Your post presents facts, and not just feelings. We need more of that on MFO.
It is not important if others (like myself using Monte Carlo) might use different methods to explore and finally reach a conclusion. In fact, it’s better if alternate approaches are presented; that allows for comparison competition which offers a decision-maker multiple choices. All that’s goodness.
I admire your effort and your work. Once again, many thanks.