Optimizing Social Security Benefit withdrawal

I'd agree with you, Elle, but this is how many topics here seems to gravitate. In our 40's, it's starting to seem irresponsible to put any number for SS in my retirement budget, but at 62 when the OP's client(s) are asking about a decision they need to make, at least the numbers are far less fuzzy. Scott (Burns) can give his view along with the numbers, and Cal (here) who, having been in the insurance industry actually carries more clout for me on this issue, has a different response.

I think this is the nature of money, and forecasting. JOE

To add one other reason to my decision: my IRA becomes part of my estate, SS payments end at death. The less I need to take out of my IRA means the more I can leave to my wife, should she outlive me, and children.

Ah, I should have saved the reference. A couple of economists studied optimal social security strategy for actuarially average people. Results (as best I recall): men should start at age 62 (if their earned income allows); single women should wait until full retirement age; married women should start at 62 because the reduced benefits don't last forever -- only until their husband dies!

You can see the logic: the actuarially average man dies young relative to the AA woman, the AA married woman has benefits less than those of her spouse, and so on.

The difficulty is of course that specific cases differ greatly. Do you earn so much that in effect you must wait until full retirement age to take SS? Did your parents live forever and are you in good health, so that you expect to recoup the cost of waiting till full retirement age or later? And of course it helps if you don't need the money and so are free to optimize.

David

Put it another way, longevity risk is a big factor.

Given the progress of medical science, it's quite possible we will live a lot longer than our parents. 70 was once a normalish age to die, and yet now I seem to be surrounded with relatives who are pushing 100.

SS is the only pure hedge against longevity (other than being very wealthy).

My own sense of the benefits debate is this:

- taxes will rise eg by increasing the 'cap' against which SS taxes are payable (President Bush has already sent signals along these lines)

- benefits will be cut by increasing the amount of SS income which is taxable

- benefits will be cut by increasing the retirement age over time beyond 67

- the payroll tax may be increased at some point (much more politically contentious, would require a compromise on something else eg private accounts)

Each of these solutions is politically possible, improves the financial position of the SS system (the second by increasing the income of the US Federal government as a whole, which can be used to repay SS treasury debt), and doesn't require an obvious grab from people whose only or main source of income is SS.

By contrast I expect COLA indexation to stay, and benefits for current recipients to be otherwise unchanged.

On Feb 9, 8:09 pm, "Gil Faver"

I stated elsewhere in this thread that I intend to start taking my benefit later this year when I turn 62, choosing to not spend my IRA. However, this position from Skip, Scott Burns, Alicia Munnell, has made me rethink my position. The women in my family (on both sides) tend to live a very long time, and I've no reason to think I will be an exception. The decision about my husband's SS benefit is several years hence, but my sense is that we may wait a bit for his benefit, too. I doubt I will be a widow, or at least not for long, but it still makes sense for us to maximize his benefit, too.

Thanks, kastna, for starting this thread. It has been very informative.

Elizabeth Richardson

Elizabeth

I think the advice here is the reverse?

As a married woman, you only get the higher SS benefit *until your husband dies*?

(question, not assertion) In which case, you want to maximise the time period you draw the higher benefit level?

I stress I am no expert on this, just what I read/ inferred here.

Not wishing to be harsh, men (speaking as one), have a terrible record for just dying a lot earlier than their female partners. I can think of endless cases in my family where the women have lived into their

90s, and the men have died in their early to mid 70s. Testosterone seems to wreck an awful toll both in heart disease and cancer. So I wouldn't assume, if you are long lived, that you are not likely to be a widow even if your partner is some years younger.

r?

Ah, I should have saved the reference. A couple of economists studied optimal social security strategy for actuarially average people. Results (as best I recall): men should start at age 62 (if their earned income allows); single women should wait until full retirement age; married women should start at 62 because the reduced benefits don't last forever -- only until their husband dies!

Darkness again:

This was the source of my confusion about your strategy. The implication is, unless your husband is much younger, that you probably maximise your returns from SS by collecting it early-- when he dies, your SS income will rise to his level in any case.

I am, personally, all for delaying gratification in life as long as possible, eg by taking SS later. But balanced against this is the loss of savings, which are your own and can be passed on to your estate.

Well, yes, my husband is much younger - 9 years. So, if I live to be 95 and he lives to be 85, I'm a widow for only a year; only 6 years if he dies at

1. I don't think that's long enough to make up the difference in my taking benefits early. And, there's enough of an age difference, there's every bit of a chance I'll go first. Also, the difference in our benefits isn't very much, although, admittedly, his will be a bit higher.

Elizabeth Richardson

Thank you for the clarification and sorry to pry into your personal life!

My own strategy in pondering uncertainty is to 'minimise regret'. Regret as an emotion in life.

My observations about regret are:

- in the short run we regret the things we did do, that went wrong

- in the long run, we regret most the things we never did do

Long term regret is of course far more important to me than short term regret-- I live in the long term!

So I try to have fun (aka spend money) as I go along, but always with an eye to value for money. I try to defer gratification when prudent, but not to live a life wholly of denial.

In the case of your SS benefits, this may mean you wish to start taking them, if not at 65, perhaps at 64. Your total benefits will be less (depending on the crossover point) but this might give you more options to enjoy life whilst you are healthy.

Conversely, you have deferred gratification by a couple of years over taking it at say, 62. So you have not entirely robbed Peter to pay Paul. Whichever way it goes, one will be somewhat wrong, but not wholly so.

I have considered this scenario. My Normal Retirement Age is 66. It is entirely possible I may not defer taking benefits quite that long. The calculators at the SSA website are very good, and I used one to forecast my benefit at 6 month intervals, whereas the very good annual report gives you either age 62 or full retirement. I liked being able to see the interim - or longer.

Elizabeth Richardson

Sorry Skip, this is somewhat OT, but it could have a big effect on financial planning so I think the story needs to get out.

Would you believe someone has actually applied for a patent for a process to analyze when to take Social Security benefits?

Think of that! Alongside tax-strategy patents these seem to really go overboard. I think these are setting bad precedents that could deprive consumers of the ability to get answers to common benefits and tax questions. If the patent is granted, you'd need to pay a licensing fee to do an analysis for a client that was deemed to be "infringing" the method covered by the patent. Not just planners -- imagine a web site, like Fidelity's, or Yahoo, or heck the SSA, that tries to put up planning pages where you can input some assuptions -- it seems a patent could limit the scope of that.

I'm no patent lawyer but the claims seem to read broadly. It discusses postponing SS, and getting temporary income (they call it "income bridge") from annuities, CDs, mutual funds, and on and on - basically everything but "getting a paper route" - and optimizing the after-tax value of all of this. If granted, I wonder how far it could be used against others attempting to help retirees answer this question.

The patent summary is below, the full thing is available on the uspto.gov site. Mahaney is with Prudential Financial. How do I know about this? He sent me junk mail and the brochure talked about a "patent applied for" process and after I fell out of my chair, I went to the uspto web site and looked it up. I also found out that yes, it's way too late to file an opposition.

-Tad

United States Patent Application 20050177509 Kind Code A1 Mahaney, James I. ; et al. August 11, 2005 Method for maximizing retirement income using financial bridge products and deferred social security income

Abstract

The present invention provides a method for maximizing retirement income using bridge annuities and deferred Social Security income. Financial information about a client is gathered, in addition to financial information about the client's spouse, if applicable. A variety of income scenarios are modeled using the financial information and a plurality of income models, each model including income from a bridge product and deferred Social Security income. Alternate funding approaches are projected using the financial information, and the modeled scenarios are compared to the alternate funding approaches to determine the optimal scenario for maximizing retirement income. The client can then purchase a bridge product in accordance with the optimal scenario.