## MONEY: Social Security: Does it pay to delay? (Part2 — continued)

If you missed Part 1, go here: http://tinyurl.com/yrl957

It would NOT make a lot of sense to dive right into Part2!

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Here’s Vanguard’s table, where they want to urge you to delay taking benefits until you capture the higher benefit. But it ignores how inflation rots your money!

*** begin quote ***

If you begin collecting Social Security benefits at And your monthly benefit* is By age 75, you will have received By age 80, you will have received By age 85, you will have received By age 90, you will have received
Age 62 \$1,200 \$187,200 \$259,200 \$331,200 \$403,200
Age 66 \$1,600 \$172,800 \$268,800 \$364,800 \$460,800
Age 70 \$2,200 \$132,000 \$264,000 \$396,000 \$528,000

*** end quote ***

Able immediately collects 1200 at 62
Baker waits 3 years and collects 1600 at 65
Charlie waits 8 years and collects 2200 at 70

We need to consider that they die in each year until age 90, or elapsed time of 28 years. Then come up with what’s the average impact on their wealth.

We can assume that they will “save” it since premise #1 is if the need it then they would take it and use it.

If we assume that investment returns will sort of match inflation, then we can ignore that factor.

Able at age 62 gets his first check for 1200. Those dollars are different in purchasing power than Charlie’s first check for 2200 eight years later. So we have to do all calculations in constant dollars assuming 5% inflation.

So, in year one, a dollar received is worth 95 cents. In year 30, that dollar is worth 0.226 in constant dollars.

(See spread sheet below as a I run the numbers!)

Wow!!

Stunning as it may sound, in constant dollars, Able is the clear winner. This says that regardless of when they actually die, Able is always a winner.

It highlights another question. What about taxes? Factoring taxes, say 25% on the ½ of ssi payment is that enough to overcome Able’s head start in collecting?

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Year Discount Able Baker Charlie
1 1.000 14400
2 0.950 13680 28080 0 0
3 0.903 12346 40426 18240 0
4 0.857 10585 18240 51012 33879 0
5 0.815 8622 15639 59633 46616 0
6 0.774 6671 12738 66305 56472 0
7 0.735 4904 9856 71209 63718 0
8 0.698 3425 7245 18436 74634 68777 18436
9 0.663 2272 5060 12231 76906 72134 30667
10 0.630 1432 3357 7709 78337 74249 38376
11 0.599 857 2116 4615 79195 75516 42991
12 0.569 488 1267 2625 79683 76236 45616
13 0.540 264 720 1419 79946 76626 47035
14 0.513 135 389 728 80081 76826 47763
15 0.488 66 200 355 80147 76923 48118
16 0.463 31 97 165 80178 76968 48283
17 0.440 13 45 72 80191 76988 48355
18 0.418 6 20 30 80197 76996 48385
19 0.397 2 8 12 80199 77000 48397
20 0.377 1 3 5 80200 77001 48402
21 0.358 0 1 2 80200 77001 48403
22 0.341 0 0 1 80200 77001 48404
23 0.324 0 0 0 80200 77002 48404
24 0.307 0 0 0 80200 77002 48404
25 0.292 0 0 0 80200 77002 48404
26 0.277 0 0 0 80200 77002 48404
27 0.264 0 0 0 80200 77002 48404
28 0.250 0 0 0 80200 77002 48404
29 0.238 0 0 0 80200 77002 48404
30 0.226 0 0 0 80200 77002 48404

80200 77002 48404
# # # # #

 Year Discount Able Baker Charlie

## 10 thoughts on “MONEY: Social Security: Does it pay to delay? (Part2 — continued)”

1. Depends upon what you calculate / guesstimate the inflation rate is? I was thinking that one should take it and buy gold. You also have to figure in the risk of default. (imho) The Federal Government may not be able to make the Social Security payments. If so, again imho, it will means-test it turning it into a dole. Like welfare. With income and asset tests, to minimize the amount of money it does have to pay out. Similarly with Medicare and all “insurance” programs. So, it’s a very hard question to answer. As long as you’re not earning money and hit the offsets, I think you take it. Get it saved before inflation hits and the sovereign defaults.

2. I wonder if this thread is still good. The last entry is 2 yrs old. Anyway, I see 5% inflation is assumed. Hmmm. what about a deflationary environment? also stock returns for the last decade are flat or even negative, so 0% return. T bill interest is also minimal. The last 2 yr auction was 0.8%.. so we do a constant dollar calculation with 1 or 2% return per annum. It looks like the late taker does far better. your thoughts?

3. >One of the deciding factors is the rate of your state income tax on social security payments.

Well, taxability, both federal, state, and possibly local are factors. As well as, the excludability if any. And how it impacts incrementally.

For me, personally, when it come time in two years for my wife to collect, then we’ll have to make some decisions.

My analysis was really focusing on a “dollar” ain’t a “dollar” year over year. It’s might look the same, but inflation is running at some number that is at best a guess. So, as in any economy in hyperinflation has demonstrated, the holder of paper currency buys anything that will retain value into the next day. My thought was that take the discounted social security and buy gold coins. That preserves the value that it represents.

Interesting, but too bad it’s too important.

4. Joe B says:

I’ve done similar spreadsheets. One of the deciding factors is the rate of your state income tax on social security payments. I live in Oregon which does not tax social security benefits. This makes spending down other assets that are taxed by Oregon more attractive to use to gain defered larger social security benefits. A smaller factor is the maximum federal taxable amount of social security benefits is 85% of the benefit. Other income is taxed at 100% of that income if it is interest or a distribution from a tax defered asset such as an IRA or 401K. Conversely, if the money used to defer collecting social security comes from capital gains, these are taxed at a lower rate than social security so it may be beneficial to defer the capital gains and take the social security earlier.

This topic is far from simple. Obviously, if social security goes belly up all calculations become irrelevent. I would bet on social security issues being solved (do you want YOUR mother living with you or do YOUR children want you living with them?) . If social security is not fixed, there will be a lot of angry grandmothers camped out in Washington DC.

5. reinkefj says:

I’ll start cranking out spreadsheets now. I gotta be the first injineer to win a Nobel Prize for Social Security debunking!

6. N. B.: Posted from Prof Dallton’s email
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Hi Fjohn,

Thanks for your email. As you know – for academics it is publish or perish. So I’m working on another Social Security article now and would like to write a few more. As I get closer to 62 the topic gets more interesting. Your email and blog have a lot of food for thought. I’m going to take some time to work through your ideas. You appear to have thought through some of the issues more than I have. I may shoot some ideas to you as I go along.

Oh . . . don’t disparage them thar injineers. They developed most of the original analysis techniques used in cost accounting and managerial decision making. Accountants just refined the techniques a little and took most of the credit.

Tom

7. Dear Professor Dalton,

Kudos for moving against the herd. Like you, I’m not so sure about everyone’s advice about delaying.

A reader of my blog brought your article to my attention. I wanted to call your attention to my thoughts, which are in comparison to yours — lame at best.

But then it reflects that you’re an academic CPA and “i r an injineer”. We doesn’t do that there rithmatic stuff 2 gud! :-)

My objection is around the NPV of accelerated collection as opposed to normal or delayed. As you can guess I’m a gold bug.

Where both our analysis could use some improvement imho is in the area of spousal taxation both Federal and State. While the 2 for 1 penalty applies if the collector works, what happens to the calculation if you have a joint taxpayer? In my specific case, my wife has a reduced life expectancy. She, sans any calculation at all, wants to start collect asap. I, being the analytical type, said “maybe I should run some numbers”. Initially my concern was that higher tax bracket. My initial results say however everyone should grab as soon as they can based on dollar depreciation. My concern now is still taxation. If she collects while I stay working, will her income be substantively offset by our collective higher federal and state taxes. Ouch! That requires more Assumptions and Swags.

Luckily, I have two years to work out the right answer for us. You probably have less time. After all, you wouldn’t want to be edged out of your Nobel Prize in Economics by an illiterate old injineer. :-)

Just thought I’d point out how “democratizing” the inet makes wisdom available. (I was referring to your article; not my blog post. I’d call mine “noise”.)

Regards,
fjohn

(Maybe I can get your prof TD to weigh in?)

8. Jiri says:

I, too have been intrigued by the Vanguard recommendation ( I send them an email on the subject). Subsequently, I Googled SC delays and to my surprise I found that nearly all entries have agreed with Vanguard. Yours, being an exception (along with T. Dalton, professor of accounting and taxation).
http://www.nysscpa.org/cpajournal/2006/606/essentials/p42.htm
If Vanguard only asked any student of accounting about Present Value they might have gotten it right.

9. Because they are part of vast gooferment conspiracy to defraud the Ponzi scheme victims even further? Seriously, it’s probably because there is nothing that they offer, that pays them a commission, where they can store value. Inflation is not only the biggest tax we pay; it’s also the biggest financial hazard we face. The gooferment perpetrates the fraud that a 1977 dollar and a 2007 dollar are the same. And the sheep believe it. Argh! The problem is that you have to adjust for taxes AND that you then have to have something you can invest these early payouts in that preserves the value. Other than bullion coins, I don’t have anything. But as they say on Wall Street, “better a small loss than a complete loss”.

10. Jiri says:

Congratulations! Why is it that even most financial advisers do not grasp the concept of present value of money and advise people to delay SC payments?