UnThreaded | Threaded | Whole Thread (49) | Ignore Thread Prev | Next
Author: eldynamite Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76397  
Subject: Re: social security planning Date: 3/16/2000 9:07 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
I've read the entire thread (Which I'm sorry to say, I missed originally), and there is one consideration that nobody has even hinted at. It takes quite a long post to explore this, for which I apologize, so here goes.

To start with, if one is contemplating retirement at age 62, then that person is necessarily reasonably well off. If this were not the case, then the argument for continuing working would be overwhelming. (I'm assuming that finding a job or continuing a job is not a problem. Not a bad assumption in today's economy.)

A reasonably prosperous retirement implies a constantly rising net worth. Obviously, a falling net worth will leave the retiree in dire straits if he/she lives too long. And, if we read between the lines of the Trinity study, any attempt to maintain one's net worth (or retirement nest egg) at a constant level is perilous at best. Just exactly maintaining a constant net worth leaves one in danger of going broke during the next sustained bear market.

So, the prudent route is to adopt a plan in which net worth is constantly rising. The more money you have, the better positioned you are when the bear market arrives. And if it never comes, you have more with which to enjoy life.

If I (successfully) follow this strategy, my income, in terms of real purchasing power, will continue to rise. Indeed, in the Trinity study, the result of most successful strategies is considerable wealth. The natural result of a successful retirement strategy is to become wealthier as one grows older. The unacceptable alternative is to become poorer. Exactly maintaining the same standard of living throughout retirement is next to impossible.

In a properly executed retirement strategy, the overwhelming probability is that my net worth will increase. I could get unlucky, and retire just before a sustained bear market -- bad luck for me. But, more likely, the market will continue to give me reasonable returns over the long haul.

If I become wealthier as I grow older, the advantage of a higher Social Security benefit decreases because my SS benefit becomes a smaller part of my income every year. If I execute my strategy correctly, my SS benefit will be unimportant during later life. So, I conclude that it's best to take the money early and run.

Let's shift gears a bit. Many posters have attempted to answer the question posed by this thread by calculating how old one must get to break even, but this is the wrong way to look at the question, IMHO. Instead, let's suppose that the question is whether to retire at age 65 with (say) $1000 monthly, or to retire at 64 and 11 months with $4.63 less per month. (That's 5/9 or 1% of $1000). You could invest your one month of early benefits ($995.37) at, say, 8%/year and earn $6.64 per month, bringing your monthly benefit up to $995.37 + $6.64 or $1002.01 You will therefore benefit by retiring a month early by $2.01 per month.

So, It turns out that taking benefits early will be to your advantage if your market returns can beat an interest rate that starts at around 6.67% for the first month, and rises to about 8.33% at 36 months (i.e. age 62)

Actually, tax considerations come into play, because SS benefits are not taxed at the same rate as the ordinary income you would earn by investing the money. Moreover, they are at least partially protected from inflation. But even in the most extreme cases, it looks like taking early benefits will always gain if your investments get a 10% return (or greater). If your investments gain between 6.67% and 10% per year, you have a close decision.

Finally, it seems to me that having a higher net worth is preferable to having an increased income stream, because you have more money to meet emergency needs. And, of course, your heirs will no doubt appreciate it if you opt for the higher net worth avenue.


Tim




Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (49) | Ignore Thread Prev | Next

Announcements

The Retire Early Home Page
Discussion on accelerating retirement day.
Foolanthropy 2014!
By working with young, first-time moms, Nurse-Family Partnership is able to truly change lives – for generations to come.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Post of the Day:
Macro Economics

Economic Implications of Cuba
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement