Social Security Benefit

So last night me & the Mrs attended a seminar/lecture by a couple of financial planners, all about Social Security.  They put up all sorts of slides and charts, but failed to present THE ONE PIECE of data that matters, in my opinion.

So I ran the numbers this morning.  Turns out, if you accept the reduced benefit by starting to draw early at age 62, for the next 16 years (until age 78) you're money ahead from starting to draw at the standard FRA (full retirement age) of 66.  It you delay until age 70, you have to live to age 82 (12 years) to start coming out ahead.

That's the only figure that matters, isn't it?

And considering that average life expectancy, according to one of their slides, is 82 for men and 85 for women, it's rather an important figure.

Various places keep saying that you're better off waiting, but it all depends on your circumstances. If your health (therefore life-expectancy) doesn't look good, or if you are struggling financially and need the money right now, it absolutely makes sense to start taking it ASAP. More and more people these days are living into their 80s, so if you can afford to wait and expect a long retirement, waiting is probably right. But there are bunches of people for whom that's not the right idea.

On the contrary. I'm thinking if you DON'T need the money it makes more sense to draw early. If you invest the benefit instead of spending it, you make interest and that's compounded and that turns the curves into exponential instead of linear. I'm guessing you would NEVER catch up by waiting.

I'll have to run the figures.

Of course everything's taxable, but that doesn't change anything. I don't think?

I *believe* this seminar was underwritten by the SSA (we had to turn in our registration sheets so they could submit them to SSA). Of course it's to their benefit to convince people to wait.

I did all the math when I was 61, and it came out to be advantageous - for me - to start collecting my SS at 62. Your mileage may vary.

Generally speaking, you can expect to draw the same total amount of SS regardless of the age at which you begin receiving it.

The crossover point, where everything equals out, is between 78-82.

Not only will your mileage vary, but your longevity.

I will have to live longer than I expect to just to break even with what I get back from SS compared with what I paid in. For most of my life I was self employed, and so paid both the employee and employer parts of SS tax. Until the last year or two that I was self employed, the employer part of the tax was not deductible. So I have paid income tax on nearly all of my money that has gone to SS. Now that I am taking it out, I am paying income tax on it once again. May or may not break even some day. If I considered inflation, there's no way I will break even.

Fucking IRAs are also problematic. For the past 14 years, I have been moving money from savings to my IRA and taking a deduction from our income tax bill. This year I have to start moving it from the IRA to the savings account. Not only will we lose the deduction, but we will also have to pay income tax on the amount I move. Not earning a penny, but paying thousands more in taxes. Shit!

Yeah IRAs and 401ks are little better than Ponzi schemes, mandated by the government, administered by Wall Street. Thank you Richard Nixon.

Neither are mandated by the government. IRAs are 100-percent voluntary. 401ks were designed for a specific purpose: to get some taxes from about 200 highly-paid individuals who were receiving tax-deferred salaries. It was not designed to be a retirement plan for employees. Nor was it designed to benefit Wall Street or as a Ponzi scheme.

If an individual elects to put his/her IRA or 401k funds in stocks or bonds, then Wall Street is involved, but it's all voluntary. The same as if you put your regular savings into the market. I think that large companies should go back to company-funded and -guaranteed retirement plans.

Properly handled, and in the right circumstances, IRAs and 401k plans can be very beneficial.

The old-fashioned defined-benefit pension plans put the investment risk on the employer - companies have to monitor their pension plan to make sure there is money to pay out. If they screw up their investments, or don't put enough money in to begin with, they can get caught with a nasty bill to pay when a group of employees retires. 401ks and the like transfer the risk to the individual employees. If somebody screws up their investments, they are just SOL for retirement, and the employer doesn't have to care. That's a major attraction (probably the biggest) why companies prefer to offer 401ks rather than a pension.

richard09 wrote:

...the employer doesn't ... care.

That's the most significant statement in your post, and the reason that causes many companies to switch to 401k plans. This is part and parcel of the primary reason for switching: 401k plans are cheaper and can be changed at the employer's whim. They are not as good for the employees (except for one thing) but as you said, the employer doesn't care.

A great many companies offer little or no matching funds, so the cost to them is quite low. Many have onerous vesting schedules that save the company money. Many are now making their matching contribution in a lump sum at the end of the year or after the first of the following year. With most vesting plans this deprives employees of the year's matching funds when they leave the company.

We have seen many companies of late - even very profitable companies - declare bankruptcy, and through that process they cut or eliminate the pension payments and medical insurance they owe their retirees through contracts with unions or individuals. This shows the one real benefit to employees of having 401k plans: when they retire they take all of the money with them, preventing the company from fucking them out of their retirement funds retroactively.

Until the stock market crashes again. Which it is due to do in June 2016.

Individuals should not be in the stock market. It is designed to take advantage of them.

_Howard wrote:

Individuals should not be in the stock market. It is designed to take advantage of them.

Which is exactly why 401(k)s suck.

No. That is why the stock market sucks.

You are not required to put your 401k money in the market. You can keep it in a savings account. Investing in the market is only an option.

I do not believe that is true.

It's a matter of risk and reward. The plans are sold on the basis that you can make your money grow. Putting it into some fixed income investment is safe, but won't grow it very fast. Betting on stocks is a flat-out gamble: it can be a big winner, but can also be a big loser. In-between solutions like mutual funds introduce yet more third parties taking their cut.

Generally speaking, the individual investor gets screwed.

NoCoPilot wrote:

I do not believe that is true.

Admittedly, it does depend on your employer and how the 401k plan is administered. Some plans have few investment options, while others are very flexible and include money market funds, which are little more than savings accounts. Some brokerage firms sell CDs which you can invest in through your 401k.

NoCoPilot wrote:

On the contrary. I'm thinking if you DON'T need the money it makes more sense to draw early. If you invest the benefit instead of spending it, you make interest and that's compounded and that turns the curves into exponential instead of linear. I'm guessing you would NEVER catch up by waiting.

I'll have to run the figures.

If you add a modest 3% growth rate from investing your SS, if you start drawing early at age 62 you're money ahead (over FRA) until age 82. If you wait until 70 to start drawing, you don't make up the difference until age 86.

In either case, the end result -- calculated out to age 92 -- is within 12%. Between 82 and 89 they're virtually identical.

Response from my financial advisor this morning.

David wrote:

You are correct in your assumption. I have a software program called "social security timing" that I use for clients as we near the decision to elect or not. Typically when I run scenarios for "life expectancy" for both husband and wife the delayed benefit does come out ahead, but you are right in assuming that it can take until your late 70's or early 80's to catch up with the age 62 election. I am happy to run a report for you.

This report provides the net total benefit (over life expectancy, which I can also change to a specific age) and the exact age that you both would catch up with the age 62 early benefit. There is another feature of the software, which demonstrate whether either of you should choose to "restrict" your benefit and take advantage of the "spousal" benefit instead.

The last thing that I would say on this subject is that, part of the equation requires you both asking the question, "how do we envision retirement"? I recently demonstrated to a husband and wife that they could receive $80,000 or more in their lifetime by postponing their SSA benefit. However, it wasn't until his age 81 that they would "catch up" and start to exceed annual income. They both felt that the advantage of having an earlier benefit would give them more freedom to travel and be active in early retirement and that they would likely slow down in their 80's, therefore needing less monthly benefit. So for them, the combination of an early election and his pension seemed to be the right decision.

Again, I am happy to go over this subject when time allows. Hope all is well with you both.