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
6 Replies to “SS Mashup”
OMG and that is how it is done.
I only started looking at true retirement income planning less than 2 yrs ago. Government benefits which are guaranteed and indexed to inflation are precious.
Trying to get guarantees (retirement income) from probabilities (SWR) is tricky science.
I surely would not want to “wing it” when I am 80.
SS is pretty much totally predictable. The only real variable is death of a spouse. The law is written and could be changed but probably won’t be especially for the worse, so the estimate in my opinion is conservative.
Very cool breakdown.
Do you happen to have a template that we can individually tailor for our own breakdown?
It’s not completely automatic. Some things require cut and paste and some things like RMD requires hand entry. I have a server but don’t really want to open it up to file downloads beyond he blog
Your thinking on the death adjustment from MFJ to single filer of surviving spouse combined with tax hit from increased RMD continue to make a big impact of my future plans.
I tend to count less on SS (as distinct from discounting it completely, which I’d never do) because I view the benefits as uncertain and likely to be reduced for Gen Xers like me.
The law states a 25% (27%) reduction at this point projected in 2034. So I just include that in my projections. It will affect gen Xers more but still affect boomer considerably. It will mean a significant drop in GDP and will be deflationary so the economy will contract and corporations will loose even more pricing power. This means equities will falter. In fact we are in a deflation right now which is why there is no inflation despite zero rates. Every body is in so much debt that as soon as the fed raises people can’t cover their debt and start to fail. The solution in my opinion is a larger pile of money spread across as many different diversified categories as possible. In my portfolio I start with SS, and build from there. SS starts with an optimized maximum at age 70 with the presumption of a long life. When the cut comes you will cut a bigger amount and when you die if your wife takes survivor benefits her payment will be bigger and the cut will also produce a bigger post cut amount. In addition SS is tax advantaged money, so I want bigger tax advantaged income. The remainder is built around how to generate the best tax advantaged income for the remainder of my need. I look at something like TLH as a variable annuity because it essentially pays me tax free cash back scheduled according to my need, but you can’t claim the annuity unless you have a TLH motor. The government considers you rich at the 22% bracket and the mantra is soak the rich, so tax management in retirement IMNO is key.