I'm seeing recommended ages from the Social Security Optimization function that don't make sense to me, and I'm not sure if Pralana is missing something or I have an incorrect understanding of SS rules. My wife is two years older than me, and due to staying home to raise kids over the years, her SS benefit will be less than the 50% spousal benefit available to her once I start. It always seemed logical to me that she would claim as early as possible and then switch to 50% of my benefit once I start, whether that's two years later or as much as ten years later.
Pralana, in the variety of scenarios I've explored, has never suggested she start at 62. Does Pralana consider this approach when making its recommendation, or am I missing something important? Thanks,
Paul
Paul,
PRC definitely considers all possible start ages (62-70) when doing its optimization. One thing about your post seems like it might be a misunderstanding, though. You say that it has always made sense to you that she would claim as early as possible and then switch to 50% of my benefits. If she starts her spousal benefits prior to reaching her Full Retirement Age, her spousal benefits could be reduced by up to 30%. So, worst case, her benefits could be only 50% x (1 - 30%) of your benefit.
If you'd like to send me an export file (see Contact > Gold Problem Report) I'd be happy to take a look and see if I can offer any specific insight into what PRC is doing in your case.
Stuart,
After seeing your reply, I did some additional reading on the topic, and while there appears to be conflicting guidance out there, I found a recent article by Larry Kotlikoff that agrees with you and provides me with some clarity about how the SSA calculates the benefit: https://www.forbes.com/sites/kotlikoff/2021/01/24/ask-larry-can-my-wife-claim-social-security-spousal-benefits-on-my-record-if-she-files-at-62 . Thanks for your help,
Paul
SS optimization can be tricky! When I'm building retirement plans/analysis for clients, I include the output from the Open Social Security: Free, Open-Source Social Security Calculator. It returns similar results to Pralana, but the additional insight can be helpful to understand why a particular outcome is best.
Don't forget, these are calculating the "most money possible" scenario over the long-term. I look at it differently. Sure, you can get that 8% bump each year in your payment by waiting, but what of all the monthly payments for those years that you didn't get to receive, enjoy, perhaps leave to your heirs if you happen to pass early?
The actuaries at SS work the math to result in the same total payout no matter when you pass away. So if for nothing more than your enjoyment of retirement, consider collecting early. It can help prevent excessive retirement account withdrawals and is more tax-favored income than those, plus you're still getting the free growth.
If you don't need the income, you could invest it in diverse, ultra-low-fee index funds and likely do better than that 8% bump, and be able to leave it behind.
Let me add a clarification to Bill Hines' statement that these are calculating the "most money possible" over the long term. Some calculators give you the age to start collecting so that you maximize your SS benefits over the long term. In contrast, PRC calculates the age to start collecting so that you have maximum savings over the long term. That's a much more complex calculation and is fundamentally different because it takes into account the use of the (lower) benefit over a longer period of time. PRC's optimized result may result in lower lifetime SS benefits but a higher net worth at the end of your life. Equipped with this knowledge, you could then consider your options as Bill suggests.
Thank you both for the additional insight. PRC's ability to provide a broader perspective when making financial decisions is especially valuable, and one I use often. Long-term impact on net worth is useful, but since retiring last year, I've placed more weight on how a decision affects my success rate. It's great to have it all in one place!
Let me add a clarification to Bill Hines' statement that these are calculating the "most money possible" over the long term. Some calculators give you the age to start collecting so that you maximize your SS benefits over the long term. In contrast, PRC calculates the age to start collecting so that you have maximum savings over the long term. That's a much more complex calculation and is fundamentally different because it takes into account the use of the (lower) benefit over a longer period of time. PRC's optimized result may result in lower lifetime SS benefits but a higher net worth at the end of your life. Equipped with this knowledge, you could then consider your options as Bill suggests.
Wow, that's a huge point and fantastic feature! Something in the tool tips in the UI or in the doc led me to believe otherwise (or, could have just been late-night brain fog). I'd make that point readily apparent in the sales docs, it really sets Pralana apart.
Social Security rules and claiming strategies for married couples can be quite complex. For most people, the optimum claiming strategy will not be known until after death. Paid services such as "Maximize My Social Security" and "Social Security Solutions" can help identify specific claiming strategies that may not be obvious to most people including financial planners and Social Security employees. The modest cost for these services is money well spent for an unbiased 3rd party opinion given that a lot of money is at stake.
The general advise for most married couples is to have the lower earning spouse to claim as early as possible while the higher earning spouse defers benefits until reaching age 70. This strategy maximizes benefits for the surviving spouse while providing some income to couple until the high earning spouse reaches age 70. Of course this assumes married couples are of similar age. It rarely pays for both spouses to defer benefits until age 70 but general rules may not make sense for a specific couple.
Delaying benefits until 70 is likely to be more valuable to those who have not saved enough and are at risk of running out of money before they die. Social Security provides longevity insurance.
Any one who has accumulated substantial wealth in tax deferred accounts should consider opportunities for consuming tax deferred savings and doing Roth IRA Conversions at lower income tax brackets before Required Minimum Distributions kick in. Distributions from tax deferred accounts are taxed as ordinary income. The potential benefits of timing the receipt of Social Security benefits should be considered at part of this.
"the optimum claiming strategy will not be known until after death" I love it! When my clients ask me what's the best Social Security strategy, I usually ask them to tell me when they'll die, so I can figure it out. That breaks the ice, and makes a point.
PRC does do Roth conversion analysis. I need to dive into that today. It seemed to be doing it for either one spouse or the other, but not calculating the optimal for both?
Bill,
PRC's Roth optimization algorithm deals with both spouses simultaneously and with the same parameters for both, but never tries to optimize one at a time.
To James' point, Roth conversions and RMD's should also be considered, and I've found PRC to be invaluable for exploring all of those factors along with the timing of SS.
Perhaps my biggest concern when modeling all these things are potential dependencies between them based on the order in which I make changes and run an analysis or optimization. For example, should I run SS Optimization before or after adding Roth conversions, or before and after? When's the best time to run the Withdrawal Order tool relative to the other steps? The same questions come up when I update an input in PRC to reflect a real-world change: what analysis and optimization steps should I rerun and in what order?
Another thing I wonder about is how the Roth conversion settings relate to the MC analysis. I typically run the MC first and then adjust the Roth conversion settings. Do I need to rerun the MC analysis because adding Roth conversions may affect my probably of success? The documentation recommends rerunning the MC analysis, but is that only to reset the saved baseline, or do changes to Roth conversions affect the probability of success? I would find it useful for the Roth conversion graph to always show me the effect of the Roth conversion even after the saved baseline incorporates it, but I understand why it works the way it does.
Any guidance or perspective on the sequencing of these steps would be appreciated.
Paul
Paul,
I think an analysis (i.e., Monte Carlo or historical) should be run after any and all significant changes to the model to lock in a baseline (including the spending strategy) for comparison purposes and to examine the effect of recent changes on the range of outcomes. It doesn't affect the results produced by any of the optimization algorithms you might have run previously. This is particularly important for looking at Roth conversions or using the Sensitivities page because they present the results of the proposed changes by comparing the new fixed rate projection to the saved baseline which is established by running an analysis. A Roth analysis will reallocate your portfolio so an analysis should be run afterwards as well, though I'm pretty sure it'll only make things better because you probably wouldn't actually do a Roth conversion if the fixed rate results didn't show better results than the baseline. In any case, yes, a Roth conversion will affect your probability of success to some extent.
Roth conversion, SS start age and withdrawal order optimization are all interdependent and I doubt if there's a particular order that's correct for everyone. So, I'll just offer up a little food for thought. If you were to do Roth conversions prior to starting SS benefits, it seems like that would be beneficial because there would be more room in a given tax bracket and, thus, you could convert more dollars with a smaller tax burden. At the same time, delaying the start of SS benefits would yield a higher benefit. So, I think it generally makes sense to do optimize Roth conversions (with SS start age set sort of late) and then optimize SS start age. Another thing to realize is that PRC uses the withdrawal order in determining which account to use for covering all negative cash flows, even those triggered by Roth conversions. In other words, the taxes on Roth conversions are not necessarily paid out of the money being converted from tax-deferred to Roth. Therefore, I think it probably makes sense to plan the Roth conversion and then optimize the withdrawal order.
Two issues that impact the SS age which I don't believe the optimizer addresses - the first of which has wider application, while the second will apply to a few at best
1) The impact of means testing on your Medicare payment (and the risk of other possible future means testing applications).
2) it doesn't consider late life parents and the ability of minor children to collect SS until age 19 if the parent is collecting SS. This money would probably be tax free for the child and can be put toward their 529 plan. Depending on the age of the child, it would likely always results in age 62 as the optimum age for the parent to start collecting.
Lastly, if I start risking all the parameters, its so difficult for me to justify not taking SS at the earliest age possible.
Ken, I can confirm that you're correct. I do my best to keep PRC current but I never implement speculation about what Uncle Sam is going to do. When laws change, I implement them and I'll do the same with any future changes to Social Security. And there are definitely some fringe benefits to the Social Security program that are not included in the design, such as those you listed.
@brantferger608 This is why I always run a side analysis in the Open Social Security calculator. It's a specific, dedicated tool to one thing (SS optimization) that does incorporate scenarios like disability payments.
