Multi-Year Projection

You may want to think twice about both of those.

High-income individuals pay a punitive surcharge for Medicare in the second year following. For instance, if you do a large Roth conversion in 2020, your Medicare premiums in 2022 will be increased. If you're planning to convert significant IRAs to Roths, you probably want to do it more than two years before age 65 -- in other words, pretty much now since you said you're 62.

And you probably already know that, if you expect to live past age

82, you are better off to wait till age 70 to start taking Social Security benefits.

But I'm going to suggest again -- talk to a professional about your whole retirement strategy. I know bits and pieces as they apply to me, but your situation is different and you should take my advice as worth just what it costs.

The Medicare Part B surcharge is only about $650 a year for incomes between $85,000 and $107,000, so if you go through that whole range it's around 3%. At my current income level, each dollar of MAGI up or down increases or decreases my Obamacare subsidy by 18%. So it would be more expensive to do it now. Obviously the Medicare Part B surcharge factors into my calculations. That's just another example of why this whole question is so complex.

The question of when to claim social security is one of the most widely mis-analyzed issues I've ever seen. One way of looking at it is that if benefits increase 8% a year and you use a discount rate of 8%, it is mathematically automatic that you should take as early as possible. My calculations are that with a 4% discount rate and options limited to claiming at 62, 64, 66.5, 68, and 70, you should claim at 62 if you will die by age 80, at 64 if you will die between 81 and 91, 68 1/2 if you will die between 92 and 96, and 70 if you will live to be at least 97. These disregard the effects of taxes, the retirement test if you claim prior to normal retirement age, and any effect of a spousal benefit.

That seems right if your goal is to maximize the NPV of your SS payments, but that doesn't strike me as a very good metric. My goal is not to run out of money before I die, which may be a problem since my father lived to 97, so I'm inclined to postpone SS as long as I can live on my other income.

I sort of see your point. But there's a different way of looking at it. If you claim prior to your "target" age, you can always segregate and invest the money, and then use that to supplement your benefits when you would have begun collecting them. Especially if you have heirs, that potentially leaves an increment to your estate.

In an extreme case, where you assume you can earn 8% tax-free and risk-free, you could never lose by claiming early. That's unrealistic of course but it provides a useful benchmark.

Also, the possibility of benefit cuts when the trust fund is exhausted is a wild card, and clearly beyond the scope of this post.

A counter to my point is that the increment in your benefits is in effect tax-deferred and risk-free. You won't find a risk-free investment with this kind of return.

However, the decision is closer than is made out to be by many so-called "Social Security Calculators" and heavily influenced by tax considerations, which will vary greatly from one person to another. For example, if your other taxable income is sufficiently low, you might be able to avoid taxes entirely by claiming a smaller benefit at an earlier age. (If that's because all your other money is in Roth IRA's, kudos. If that's because you have no other income or assets, sympathies.)

========================================= MODERATOR'S COMMENT:

Roger, please include what you are responding to in addition to what you write (and write it below what you are responding to). Your submissions have been rejected in the past for not including context, so people don't have to go back and read prior messages to know what you are talking about. If you do that, your submissions won't be rejected.

I said that the point of SS is to avoid running out of money, so it makes sense to defer it as long as possible.

In article you write:

Not really. This situation has asymmetrical risks. If the market does well and you die young, your heirs get a slightly larger estate, which is OK. If the market tanks and you live a long time, you run out of money which is very not OK.

Hence the benchmark isn't the expected value, it's the range of values and in particular what the low side looks like, comparing the annuity from later larger Social Security to the annuity that you might get from your early claim income. Given that you're likely to be in a higher tax bracket if you claim early than you'll be when you need the money, it's hard to see how that could ever be a good bet.

The SS trust fund will indeed exhaust eventually. That was the plan since it was only a place to park extra FICA revenue during the baby boomers' prime earning years. The long-term design of SS has always been for it to pay benefits out of current revenues. The tax adjustments needed to bring them back into balance are not large, and since old people tend to vote in large numbers, I'm confident they'll happen. (And no, it's not a Ponzi plan because governments and individuals are not the same.)

If you don't claim early, you are automatically (and with zero effort) segregating and investing your funds. The government keeps the money and eventually uses it to 'buy' you a larger Social Security benefit. Whether this is a good deal depends on how much it costs you in foregone benefits (easy to calculate) plus earnings on the foregone benefits (10 yr TIPS are 0.22% today so inflation adjusted, low-risk earnings are minimal) vs how much it would cost you to purchase on your own the incremental Social Security equivalent benefits. At it's most basic, the Social Security retirement benefit is an inflation indexed immediate annuity. The inflation indexed part is valuable and difficult and/or expensive to duplicate outside of Social Security. Every time I have priced out buying an inflation indexed annuity at age 70 that would bring my Full Retirement Age SS benefit up to the age 70 level, it cost more than the SS benefits + earnings I would have accumulated by claiming at FRA. Wait until age 70 to claim SS benefits has always been the conclusion.

If you die before claiming, your heirs will get the other assets you didn't have time to spend and they will get their inheritance much sooner than expected. Their disappointment in your sub-optimal Social Security claiming strategy is likely to non-existent or minimal - and you won't be around to care. If you delay claiming and live a very long time, the larger Social Security payments will make the likelihood of eventually having inadequate financial resources and becoming a burden on your heirs lower. To me, the qualitative risk/reward on when to claim SS benefits also seems skewed toward claiming at age 70.

I don't mean to prolong this and expand beyond a reasonable scope. I'd simply make the points that:

a) You must consider time value of money and taxes when choosing when to claim SS benefits; and b) Many SS calculators that are out there (including, for example, the one on the Fidelity Investments website and, I think, one affiliated with Quicken) fail to reflect time value of money. Reflecting taxes is probably too complicated to expect.