People blow off SS as a resource in retirement like it’s some “gravy”. It’s a short sided perspective. If you FIRE the affect of SS is muted since your wage history is muted and your ability to claim is distant. If you retire in a normal time frame as a high wage earner it’s economic impact on your retirement income is massive.
When you FIRE you throw away some human capital. You also throw away a huge chunk of SS. PoF discusses the diminishing marginal rate of return in his bend point article, but the overall return across 40 years of retirement is massive. It’s not gravy, it’s the main course. SS to a post age 70 retirement portfolio can mean virtual immunity to SORR for example because of how it reduces WR. I built a spreadsheet using my own numbers and my wife’s numbers to explore various scenarios with an eye toward optimization in retirement.
The spreadsheet comes with assumptions like inflation and it has a built in 25% haircut in 2032, which is consistent with how the law is written. You can mess around with claiming strategy like if you claim at 62 v 70 or if your wife claims at 62 and you claim at 70 and the sheet will project expected SS income out to age 100. You can add provision in case a spouse dies and see what a survivor benefit does to the scenario, or a post haircut survivor benefit scenario. If you have a TIRA you can track the effect of RMD on your total income, and you can calculate your tax burden and then the surviving spouses tax burden along the way. You can vary the year a spouse dies and see the effect of early death or late death. Understanding SS is an important bit of data in procuring a sustainable life.
This is a picture of the sheet. It plots my life and my wife’s life based on age. She’s 7 years younger. It takes into account the 2032 25% haircut (blue line), 2% inflation. the 15% tax break. Income need is how much you budget per year inflation adjusted. It adds RMD data from a 500K 6% TIRA portfolio into the mix so you have a total yearly income number and a total taxable income number. It subtracts income from need to come up with a shortfall which is the amount you have to extract from the portfolio ie WR. It does not account for income from the portfolio like dividends which can have tax consequence and throw you into a higher bracket.
As you can see if I live to 99 my SS and RMD at an age 70 payout, that will pay me and my wife 3.3M during the course of 29 years. My shortfall is 1.22M which is what I would need from savings to pay for our life. My total needed in retirement for 29 years would be 4.55M. With a wife and a long life, and optimized pre-retirement earnings period SS and a small 500K TIRA, can provide about 70% of retirement need. I would never call that gravy. It’s the beef!
Let’s say I kick off at age 83. I created a separate column that tracks inflation adjusted survivor benefits so you can track the benefit pre and post the 25% haircut
I can pick off any year of death and know how much SS will pay my wife thereafter.
My wife claims 50% of my SS since that’s the larger of the two possibilities. We can either claim separately or she can claim 50% of my income. Upon my death then she would claim the inflation adjusted and haircut adjusted survivor benefit of my FRA benefit.
Here is an example of my death at age 83
Notice the blue block reflects the change from joint income to survivor. Notice how much less SS pays out once I die, 3,3 v 2.7. Notice how the need did not change. Notice the extra WR required from the portfolio. Notice also the S S + RMD taxable income (SS Taxable). Recall once a spouse dies one deduction is lost and the tax bracket expands so the needed income expands even more and must be considered.
So there ya go, a quantitative way to think about gravy. If you understand this, this can be the difference in portfolio failure for the 4% WR, and 100% success. Plan wisely