IMHO, this is the point that many people are missing. They are answering the question as if it is should you take it at age 32 or age 40. I’m sure there are people in their 80s and living fulfilling lives and I wish them well, but that is fairly rare. I would enjoy the money when you know you can enjoy it. It is gone otherwise.
Then I apparently misunderstood this part of it.
I thought you could earn ~$25k not counting your SS income without facing a tax penalty.
But you are saying that, if a person receives $24k a year from SS, and, say, another $15k from a pension and 401k withdrawals, any part-time working money he earns is basically going to be cut in half when all is said and done?
Not doubting, just clarifying.
mmm
True but there is the case of the person who has enough saved up to last them until their early 70s without SS. They should wait so they can get more when they have run out of regular money. There isn’t one correct answer and it’s dependent on many more things than life expectancy.
Ah, OK, I missed that it was combined income. But doesn’t that mean that - after the current full retirement age of 66, and up till the age of 70 - the amount you can earn without paying income taxes is $52k over four years?
That’s an amount that needs to be included too - it’s not a small amount of money, not in relation to the sums we’re talking about. It’s the equivalent of over ten years’ higher social security payments, based on the original 25k vs 35k.
There are two different issues. One is the benefit reduction for working where you lose $1 in benefits for every $2 you earn over $18,960 in 2021 if you are below your full retirement age. You don’t lose any benefits if you earn less than that amount, and you don’t lose any benefits if you are older than your full retirement age. There’s a different calculation for the year you reach full retirement age.
Taxability is a completely separate issue. At any age, for a single person if you get $24K from SS and $15K from a pension, your combined income would be $27K - which means that 50% of your SS benefit is taxable. But that doesn’t mean you lose half your benefit - it means when you file your tax return, your adjusted gross income will include half your SS benefit and your other taxable income . In this example, your adjusted gross income would be $12K SS benefits + $15K pension for a total of $27K. Then you get your standard deduction of about $12K which leaves about $15K of taxable income - and your tax on $15K will not be anywhere near 50%.
No - it means my that if I earn less than $52K ( from work or otherwise) over those 4 years my Social Security benefit is not taxable in that example. Whether my earnings are taxable is another story .If I earn $13K a year only the $600 or so left after the standard deduction would be taxable - but that’s true whether I’m taking SS or not. And for taxability age doesn’t matter- 85% of my social security benefits will be taxable if I live to collect until I am 103 because of my pension.
Yes, sorry, I meant that the social security benefits wouldn’t be taxable. So you get the full amount, basically.
If you end up paying tax on only $600pa, then that’s pretty close to actually having the $13k in your pocket every year, too. So it’s the equivalent of almost $38k every year, but working part time - quite possibly very part time.
The original example was talking about waiting the extra few years by various means, including working part time - not full time, but part time. So if you can earn large sums - more than $38k - working part time, then maybe it would be a good idea to draw on social security later.
I don’t think $38k is a large sum for a full time job, of course, but working full time wasn’t the suggestion. And high earners will usually have other sources of post-retirement income anyway, of course, some of which will also be taxable.
Basically my point is that, if the author’s suggesting working part time for a few years while delaying social security payments (after full retirement age), it should be taken into account that working part-time and collecting social security doesn’t necessarily mean you lose all your social security. I mean, a lot of professionals could do consulting work a few days a month, or work for a non-profit where they can use their skills and don’t have to worry about the pay, earn $13k, and still have nearly $38k a year tax-free to live on.
Does all that make sense?
Not quite. What matters is what you expect to be making on your assets if you don’t spend some of them. Let’s forget inflation and taxes (assume the assets are in a Roth.) If you expect to be making 4% a year on them, with low risk, the making 8% on the Social Security you don’t withdraw means spending your assets is a good decision, and your heirs will have more if you delay Social Security. If you can make more than 8%, taking SS early is good. Assuming you live reasonably long, of course.
I don’t have a pension - actually a fairly small one which is in an annuity, and which I haven’t touched so far. What really counts is not 100% assets, but how big those assets are. If you can live on the earnings, there is very little risk. If you have to spend down the assets to survive, the risk of having to sell in a down market is much greater.
The biggest thing I learned when I retired is that cash flow is everything.
Excellent points both. Thank you.
As to your first I’d emphasize the risk profile, which you do mention. In a good market it’s pretty easy to make 8% with low short-term risk. In a poor market that’s a very tall order. Which also ties in with your second point, that sequence of returns risk is the gorilla in the room between about retirement date minus 5 years to retirement date plus 5 years. Get that right and your “golden years” will be all that much more golden.
In a recent SS thread I wrote
Which details that the 8% figure is a bit of a historical fluke; the original intent was to offset actuarial risk only, such that statistically whether you took it at 62 or 70 you’d end up with the same total inflation-corrected payout (or more formally, any start date from 62-70 gave the same NPV at start under their assumptions). It was only with the collapse of interest rates that the chosen number turned SS into an almost-riskless yet high-return bond-like asset. Which makes a nice windfall for those able cashflow-wise to delay the gratification.
My subsequent post in that thread may also be of value to the OP. You and I also had a couple of excellent exchanges elsewhere in that thread.
Here is an interesting post by my favorite financial blogger written for CFPs about viewing SS as an annuity asset, because that’s exactly what it is:
All this is more evidence for the contention so many of us share here, that simply looking at SS as “What’s my cashflow breakeven age and do I feel lucky enough to get there?” is using tic-tac-toe strategy when the game is really chess. Assuming one is fortunate enough to have any choice beyond “Grab what I can get as soon as I can.”
I think that perhaps one of the reasons it wasn’t a suggestion was that it doesn’t work for a lot of situations and it’s not desirable in others. Lets say I’m a professional who can earn $13K working part-time - what are the chances I will want to live on a tax free $38K while working part-time? I can’t pull money out of my tax-deferred investments because those distributions will be counted when determining taxability of my SS. Once I start collection my pension, my SS will be taxable. If I have any money in bank accounts, the interest will be counted when determining taxability. Even tax-free interest income is counted to determine if benefits are taxable.
I’m not at all saying that a person can’t live on $38K - lots of people do in different situations. What I’m saying is that few people will want to live on a much lower income than they have to simply to avoid SS taxability - maybe I’ll keep my other income to 13K rather than $15K to avoid taxes , but I’m not going to keep my other income to $13K rather than $25K just to avoid taxes.
I treat my future social security benefits as part of my bond asset allocation. Were I to start to collect today I would pull in $2,900 per month for the rest of my life. A single payment immediate annuity that would return that would set me back around $500,000. Counting that half million as part of my bond allocation lets me be substantially more aggressive in the rest of my portfolio with correspondingly greater performance.
The same applies to pension benefits, those are counted as part of my bond allocation as well. If you don’t do it that way you end up bond and cash heavy and leave a lot of gains on the table.
That’s an excellent way to think of it. I do the same.
This is exactly the point made by the blog post I cited above. Which does an excellent job of explaining this rationale so both laymen and experts can follow along. His post contains, of course, further links to other posts of his on the topic of SS decision-making and its value as a hedge against problems in the other parts of one’s portfolio.
Late edit to my last post: That blog post was written in 2015 and current interest rates and current inflation have changed a bit since then. So his exact numbers aren’t correct for a calculation made today about today. But the future is yet young and either or both will change going forward.
This seems eminently sensible, which makes it weird that it’s not more widely taught. Seems like I only ever hear these discussions revolving around stocks, bonds, and age, with nary a mention of how SS or pensions might factor into that. Is this just a matter of advice-givers trying to keep financial advice painfully simple for the average joe (“this old = this much stocks + this much bonds”, without discussing present value of future payment streams)?
Hard to say. It’s a big and in some ways conservative industry. And many of their customers are so innumerate it’s amazing. As well, the advisors can be divided into broadly 3 categories:
- Drones who are simply reading the sales playbook provided by the big brokerage house they work for.
- People who are fundamentally salesman with no real understanding of what they’re selling.
- People who are actually finance minded and understand what they’re selling.
Group 3 people are a lot more amenable to more deeply thought-through perspectives on the whole universe of all things financial.
If you’re a personal finance nerd or want to become one, I strongly recommend starting to read this guy every week. His posts also contain extensive backlinks to earlier posts on key ideas and cites to publications in te field by others, so it’s easy to have one post take you to 5, which take you to 10 more, etc.
His audience is planners and advisors, not consumers, though many savvy consumers do read and comment on his stuff. The comments to the posts are almost always worth reading too; he attracts a learned and thoughtful audience. Most GQ-minded Dopers would be right at home there too.
Lots of his posts are mostly about advisors and how they can do a better job of presenting info to clients (= you and me). In so doing, you’ll get an education about what goes on in advisors’ heads. And their perception of the nature of the client base. He’s trying to teach advisors to do the right / smart thing here, not just “sell the rubes whatever is most profitable for the advisor.”
Many posts about practice management, marketing, and internal advisor tech are irrelevant to us schlubs. All in all it forms a guided tour of a fascinating and important industry. Given the somewhat sketchy history between retail investors and Wall Street firms and independent advisors, I like the idea of being well-educated on this stuff.
Advisers counsel people how to generate the cash flow from their portfolio that they need based on the decisions the person can make. If it’s a young working person, the retirement date and the date to start Social Security payments are part of the discussion with the adviser. With a retired person who has already started Social Security, those factors are set in stone and there is no decision to make or advice to give with respect to that.
Advisers then target a monthly budget and adjust it for inflation over time. One rule of thumb is for the targeted budget to replace 70-85% of the person’s income at the date of retirement and to grow with inflation. Then the advisers subtract the cash flows from the pension and Social Security, and assume the remainder is money that has to come from the portfolio. So the cash flows from Social Security and pensions are already accounted for - advisers aren’t ignoring them.
Advisers tweak the portfolio to try to attain those required cash flows with the minimum amount of risk. The tweaks they can make are allocations to stocks, bonds, cash, etc. So the bottom line advice for retirees is often “this much in stocks, this much in bonds…,” which is what you are reading about. Ordinarily today, advisers use Monte Carlo analysis to get a reasonable estimate of the likelihood that a given portfolio will meet the projected cash flow needs.
Taking the present value of Social Security doesn’t make a lot of sense because the present value of the Social Security payments are a function of their size, which is positively correlated with inflation, and negatively correlated with the discount rate, which itself is positively correlated with inflation. The inflation correlations largely cancel out - the real value of your Social Security payment is constant in real (inflation adjusted) terms. However, the inflation and discount rate assumptions you make can greatly change the calculated present value of the Social Security payments (see LSLGuy’s article for an example) even though person’s ability to fund their retirement with Social Security hasn’t changed at all. It is simpler to say “Your social security check will cover 40% of your estimated cash needs through retirement - regardless of what happens to inflation. Here is how we will meet the other 60%.”
Present value for Social Security does factor into the decision on when to take Social Security because most people want to maximize the value of their payments. But determining the present value of Social Security and treating it like a bond doesn’t change the part you actually need to adjust for - how much cash does my portfolio need to generate each month and what’s the best portfolio to accomplish that? All the asset allocation advice is intended to answer the second half of that question.
I think what you might be missing is that the author was suggesting that people work part-time while deferring their benefits, so I’m considering how that might work out.
I’m suggesting that an awful lot of people, especially those getting the lowest level of SS payments, won’t be earning $38 after tax part time. Also I suspect the vast majority of the population lives on that, or less than that - it’s only $2k less than the average median pre-tax wage. And a huge number of people have paid off their mortgages by the time they’re in their 60s, so their outgoings are lower.
So yes, I could see a lot of people choosing to only have $38k in the pocket and still have the routine and stimulation of part-time work.
I’m not sure what you mean about “once you start collecting your pension,” but I think that must be a UK-US language difference. For us, what we’re talking about is you collecting your pension.
In an earlier post you said
I mean, a lot of professionals could do consulting work a few days a month, or work for a non-profit where they can use their skills and don’t have to worry about the pay, earn $13k, and still have nearly $38k a year tax-free to live on.
What I’m trying to say is that I think it’s unlikely that a professional who could work a few days a month and earn $13K would be willing to forgo all other sorts of income such as withdrawing money from tax-deferred retirement accounts to live on $38K in tax free dollars just to avoid paying income tax on Social Security benefits. After all, someone who can earn $13K working a few days a month probably earned much more than the equivalent of $38K tax-free when they were working full time. The author seems to have been talking about working part-time instead of collecting SS for a select group of people- the audience for his book. Which is only going to be people who have some choice in the matter- the person who cannot retire without collecting SS is not going to be reading this book. The author is talking about people like my former dentist - who probably didn’t collect SS until he was 70 and semi-retired at around 60, working only two days a week. He worked because he wanted to work, not because he needed the money . He was certainly not worried about about collecting his SS and making sure his other income was low enough so that his SS wouldn’t be taxed. He probably got near the maximum SS payment which would be close to $48K a year at age 70 - he’s going to pay taxes if he has any other income at all, really. ( and remember, that other income includes investment income, distributions from tax-deferred retirement plans etc, in addition to wages earned from work). Because half of that SS benefit is very close to the the $25K income that makes half of your SS benefit taxable.
I’m not sure what you mean about “once you start collecting your pension,” but I think that must be a UK-US language difference. For us, what we’re talking about is you collecting your pension.
Some ( not all, not even most) people have a pension provided by their employer in addition to SS and whatever they have saved for retirement. My pension will be approximately 66% of my final salary - and it would be spectacularly stupid for me to forgo collecting tens of thousands of dollars a year just so my SS benefits aren’t taxable.
It could also be people who don’t earn a lot of money. You’re mistaken in thinking that they might not also try to plan for retirement. Also, like I said, it could be taking a lower wage by doing some work for a non-profit, doing a little teaching, all sorts of things. And not everyone is driven by maximum profits - $38k in your pocket a year, probably while not having a mortgage, is a pretty nice life.
Especially since you really can’t guarantee that you’ll get all that extra money from deferring back, if you don’t live long enough.
In the UK lots of people also have an employer-based pension and/or a private pension as well the state pension, but they’re all called pensions. So talk of not drawing your pension, while, well, drawing your pension, is a bit odd to me. Not really relevant to this thread, which is about the US, and probably interesting only to me!
I was going to write something like this, but you said it better.
The Monte Carlo analysis was the most useful thing our adviser did for us. And I think of how much cash flow do I need from investments after SS money. Just before I retired, we analyzed our spending for the year, since it seemed what we wanted to spend each year was a lot less than my income after taxes. Turns out we were saving the rest and our idea of our spending was spot on. Credit card statements and bank statements make this fairly easy.
We are getting SS now. Since my wife’s age 70 SS payment is less than half my age 66 one, she started hers and I’m collecting spousal benefits. Later this year when I hit 70 I’ll collect mine and she will collect spousal benefits. We did this before she turned 66. I ran a spreadsheet, and it turned out since she was effectively dying at 69 in terms of collecting, starting early made sense.
For younger USAians following along, this really neat do-si-doe maneuver with spousal benefit has since been closed off. Given the ages he reports, @Voyager and Mrs V got in just under the wire to make that work.
Us younger folks can’t do that [take spousal benefits while letting your own keep growing then switch once they’ve grown] trick.
I’m sort of in @doreen’s boat, or that of her dentist. Post- my fulltime work and post- my full retirement age any SS benefits I ever collect will be 85% taxable, period. Just because of where I sit on the SES scale. Any wages I earn doing something else won’t alter that.
But if I was farther down the scale where my post-retirement part-time work could create “bracket creep” as to SS taxability, there’s still a real narrow window where it’d make sense to forego current income to keep below a bracket border.
The fact SS is taxed at 0, 50%, or 85% of whatever SS you receive, with no phase-ins at the cutoffs, means there’s a narrow slice of income range just below each cutoff where earning enough to push you into that narrow range will leave you worse off after taxes until you’ve grown your income a little ways up beyond the edge of that range.
It’s smart to avoid those narrow windows. But if you can earn enough at your fun part-time gig to exceed the upper limit you might well enjoy that more than staying below the lower limit.
IOW It’s kinda hard to have a 2-day-per-month high wage PT job. It’s pretty easy to have a 2-day-per-week mid wage PT job.