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Delaying Social Security benefits until age 70.. Now I intend to start benefits next

#1
This is a bit of a read, but I think you will find it worthwhile.
 
There are SO many advantages to deferring benefits:
  1. Between ages 66 and 70, your benefit grows roughly 8% a year

  2. 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.

  3. 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.
 
  1. 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.

  2. 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.
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#2
The fact that the government wants you to delay should be reason enough to not delay.
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#3
If you take the money at 66, and put it something tax sheltered such as 401K, IRA, and invest in U.S. Treasuries, the breakeven is age 84 to 85. My father died at 79, and lost the bet. If you put it in Verizon (who has the safest coverage of their dividend of any other company in the S&P 500), and if they never raise the dividend again, the breakeven is age 114. Verizon has since its beginning raised its dividend steadily, averaging about 25% in each 10 year period. If they raise the dividend, the breakeven is never. The oldest man in the world is 114. You will have to beat that record before you hit the breakeven age. And if you really think SSA is not going to means test benefits, I have a bridge to sell you. Let's do the math. The max Social Security (age 66 level, not the age 70 level) is equal to the average pre-tax income in the U.S. And soon the ratio of payers to receivers will be 2. And you expect both of them to give you 50% of their pre-tax income? (using the age 66 level) And you'll graciously let them use the remaining 50% of their pre-tax income to pay income taxes, buy food, shelter, clothes, transportation, education, etc. They out vote you. And they WILL means test your benefits. Take the money and run!
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#4
CCCA, My situation is probably similar to yours. My wife was short 6 quarters from obtaining SS benefits on her own record. I started collecting at 66 and my wife started collecting spousal benefits at 62. I guess the only thing I would have done differently is have her start at 66.
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#5
What if the money (SS withdraw funds) falls below 0 return...-20% perhaps, maybe a bad market or a bad investment? In a great stock market, 0 or better is easy to realize/imagine; being the devil's advocate for a moment...markets correct and sometimes badly. Many say we are due for a correction; and sooner or latter it will drop. A bird in the hand is better than 10 in the bush. I'll keep my sure thing (SS) separate from investments and speculation.
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#6
hodedofme - thanks for the tip on Verizon.  And I agree with you that they will probably eventually means test as a way to cut benefits.
bigchrisb - I think the two things that I was oblivious to initially was the fact that the 8% annual increase for deferred benefits only compensated for lost payments between 66 and 70, not for the return you could have made on that money.  And also, spousal benefits get no deferral compensation after FRA.  So that is also money that gets 0% return on investment.  After running the numbers, I am struggling to understand how anyone can benefit from deferring until age 70.  And I used to be one of those people that would argue that deferred benefits were the way to go.
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#7
Definitely go ahead and take it. It doesn't matter if you invest the money or not. That will tend to happen naturally because the more monthly income you get, the less you will withdraw from your current investments.
 
After pondering this for a few years, I have come to the conclusion that most people should take it as early as possible. I did some spreadsheets with various assumptions, and they all point to taking social security as soon as you can as long as it doesn't affect other things. If someone retires early, and taking it at 62 doesn't affect their tax bracket, they should go ahead at 62. Sure, there is the small chance that they will live beyond the 79 year old or so breakeven point, but, like you said, the breakeven point does not take into account all the positive affects on your investments by receiving the earlier income; so the breakeven point is normally much later.
 
Another thing that makes the decision easier to take social security earlier, is the fact that if you change your mind before reaching 70, can suspend your benefits and take them later. This could be because your situation changed due to income coming in, going back to work for a while, your tax bracket is high right now, etc. You do not require a good reason for suspending; you just have to apply for the suspension. The point is, you are not 100% locked in to your decision.
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#8
"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."
 
I wonder if this has anything to do with an inflation assumption built into the SS benefit projection? Long term CPI projections are about 2% last time I checked....
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#9
I admire your dogged work figuring this out. I reached the same conclusion with a simple review of total payout over 10 years, age 63-73, vs what that money might return in the market (e.g., taking SS allowing a similar amount to remain invested in a tax-deferred account over that 10 year period).  Nothing is certain, but my investing history over 30 years suggests that a 5-7% ROI is likely, if not conservative. Thus the simple math showed that taking the benefit at 63 made sense. About +$50K, un-adjusted for inflation.
 
Actuarially, the government is correct in that no matter when you start taking benefits, you SHOULD reap the same amount in your projected lifetime. Trouble is, almost no one will fit that model precisely. Die early, sorry, you lost out. Live longer, eh, can't hurt as long as you have enough other assets. We're OK in total assets, so early SS is a bonus.
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#10
what if you invested your money in the lost decade under Bush 43, Social security gives you a sure thing. What if your wife divorces you, getting an 8% guaranteed return is impossible to beat in todays world.  Given the higher divorce rate in older couples over 65 among baby boomers, delaying still seem like a good option with 8% guaranteed return.  There have been too many time periods when the market returned 0%, i.e. the Bush43, years
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