09-14-2018, 09:26 AM
This is a bit of a read, but I think you will find it worthwhile.
There are SO many advantages to deferring benefits:
But a couple of hours banging around in an Excel spreadsheet changed my mind. Everyone is different and “your mileage may vary”, but you might find my results interesting. I have come to understand that a key factor in my situation (but not unlike many others) is that my wife has a limited work history and is only eligible for spousal benefits on my work record. I have always read that the “breakeven” age (the age where you catch up on lost benefits when claiming later) is typically the early 80’s. But in my situation this was not the case. My breakeven age was 88. And it didn’t matter what Full Retirement Age benefits I used in the spreadsheet. If I used a 0% return on investment, the breakeven age was always right at 88. If I used a 2% return on investment, the breakeven age was always right at 94. If I used any return great than 2%, neither I nor my wife could possibly live long enough to recoup the loss of waiting to claim at age 70.
Profuse head scratching brought me to two realizations.
So then I began doing “what ifs” to see how increased age 70 spousal benefits would affect the breakeven age. To my amazement I could die at any age between 70 and 95 and it would not affect the breakeven age at all. If my assumed return was 0%, breakeven age was 88. If my assumed return was 2%, breakeven age was 94. This defies conventional logic … but I cannot find an error in the calcs.
The next thing I did was use my tax spreadsheet to compare ending (age 95) portfolio value using age 66 benefits vs age 70 benefits. This would tell me how not being able to maximize Roth conversions for the next 4 years would affect my situation. After a bit of spreadsheet modeling I determined that taking benefits at age 66 was less desirable if my assumed investment return was less than 2%. Any return greater than 2% made taking benefits at age 66 more desirable. 2% is a pretty low hurdle even for me.
So there you have it. Even as stubborn as I am, I have changed my mind about when to start taking SS benefits. Probably the most important takeaway is “Don’t assume … do the math”. I would really love it if one of you other spreadsheet geeks (chuckfinn?) could corroborate or refute my findings.
There are SO many advantages to deferring benefits:
- Between ages 66 and 70, your benefit grows roughly 8% a year
- I could use those 4 deferral years to maximize my Roth conversions which would reduce the amount of taxes that I paid on my SS benefits later because my RMDs would be less.
- If I died before my wife, she would receive higher survivor benefits if I claimed at age 70 instead of age 66.
But a couple of hours banging around in an Excel spreadsheet changed my mind. Everyone is different and “your mileage may vary”, but you might find my results interesting. I have come to understand that a key factor in my situation (but not unlike many others) is that my wife has a limited work history and is only eligible for spousal benefits on my work record. I have always read that the “breakeven” age (the age where you catch up on lost benefits when claiming later) is typically the early 80’s. But in my situation this was not the case. My breakeven age was 88. And it didn’t matter what Full Retirement Age benefits I used in the spreadsheet. If I used a 0% return on investment, the breakeven age was always right at 88. If I used a 2% return on investment, the breakeven age was always right at 94. If I used any return great than 2%, neither I nor my wife could possibly live long enough to recoup the loss of waiting to claim at age 70.
Profuse head scratching brought me to two realizations.
- When the IRS says that you will receive the same amount of lifetime benefits regardless of the age that you claim (assuming you die when the tables say you should), they mean exactly that. But what they don’t say is that the increased benefit at age 70 does NOT compensate you for the time value of money. It only compensates you for the four years of missed benefits, not the compound rate of return that you could have gotten on those benefits.
- Spousal benefits max out at age 66. They do NOT increase at 8% a year between ages 66 and 70 like workers benefits. So by deferring until age 70, our total benefit is not 32% higher but only 21% higher (or slightly over 5% a year).
So then I began doing “what ifs” to see how increased age 70 spousal benefits would affect the breakeven age. To my amazement I could die at any age between 70 and 95 and it would not affect the breakeven age at all. If my assumed return was 0%, breakeven age was 88. If my assumed return was 2%, breakeven age was 94. This defies conventional logic … but I cannot find an error in the calcs.
The next thing I did was use my tax spreadsheet to compare ending (age 95) portfolio value using age 66 benefits vs age 70 benefits. This would tell me how not being able to maximize Roth conversions for the next 4 years would affect my situation. After a bit of spreadsheet modeling I determined that taking benefits at age 66 was less desirable if my assumed investment return was less than 2%. Any return greater than 2% made taking benefits at age 66 more desirable. 2% is a pretty low hurdle even for me.
So there you have it. Even as stubborn as I am, I have changed my mind about when to start taking SS benefits. Probably the most important takeaway is “Don’t assume … do the math”. I would really love it if one of you other spreadsheet geeks (chuckfinn?) could corroborate or refute my findings.