Author Topic: Does Social Security make your 4% target feel safer?  (Read 4865 times)

NathanDrake

  • 5 O'Clock Shadow
  • *
  • Posts: 75
Does Social Security make your 4% target feel safer?
« on: October 24, 2015, 01:53:37 PM »
Madfientist made a good post on why the 4% rule is extremely safe, and most will likely end up with more than twice their initial balances even factoring in inflation adjusted 4% withdrawals.

http://www.madfientist.com/safe-withdrawal-rate/

Most people here do not factor in social security, and obviously there may be changes over the years that could impact what you receive, but there's little chance it goes away completely. So instead of factoring in social security, does it at least make you feel less likely to reach for lower SWR's such as 3-3.5% when you will likely have some stream of income later in life?

Also, is there any good way of estimating what your current SS payout would be based upon your age and how much your total income has been over your early working career?

shuffler

  • Bristles
  • ***
  • Posts: 478
Re: Does Social Security make your 4% target feel safer?
« Reply #1 on: October 24, 2015, 02:19:49 PM »
Also, is there any good way of estimating what your current SS payout would be based upon your age and how much your total income has been over your early working career?
Here's how it is calculated:  https://www.ssa.gov/pubs/EN-05-10070.pdf
You can do your own extrapolation for your future income, and see where you end up.

DaveR

  • Stubble
  • **
  • Posts: 243
Re: Does Social Security make your 4% target feel safer?
« Reply #2 on: October 24, 2015, 02:31:39 PM »
I was thinking about the same thing a few weeks back: http://forum.mrmoneymustache.com/ask-a-mustachian/did-you-save-an-extra-12-4-last-year-and-didn't-even-know-it/msg818306

I've always included SS in my numbers. It may not be something that can be perfectly modeled, but very little is. Depending on time between FIRE date and when SS kicks in, you might be able to stash 10% less and have a 4% annual withdrawal rate.

NathanDrake

  • 5 O'Clock Shadow
  • *
  • Posts: 75
Re: Does Social Security make your 4% target feel safer?
« Reply #3 on: October 24, 2015, 03:32:57 PM »
Interesting posts.

So if I've earned roughly 500K, I divide that by 420 and this will approximately be my average monthly income from SS at age 65? This would be $1200, or equivalent to my current monthly living expenses.

Not sure how much this would alter my FIRE plans.

myhotrs

  • Stubble
  • **
  • Posts: 136
  • Age: 42
  • Location: Los Angeles
Re: Does Social Security make your 4% target feel safer?
« Reply #4 on: October 24, 2015, 03:59:37 PM »
It'll be so long until SS for me that my portfolio will either have failed or will survive forever making SS irrelevant. Same for inheritance, I'll get quite a bit someday, but again its too far away to make or break retirement.

MDM

  • Senior Mustachian
  • ********
  • Posts: 10659

Left

  • Handlebar Stache
  • *****
  • Posts: 1157
Re: Does Social Security make your 4% target feel safer?
« Reply #6 on: October 24, 2015, 05:43:19 PM »
I try not to count on SS...

because I plan to work 15-20 years, the last 10-15 years will be all zeros... and as it is now, I'm not a high earner so my SS won't be very much anyways.

But I will take it, my plan is retire in 40s, and take pension at 60 (or early if I take penalty but I'm planning not to), then delay SS until 70. Waiting until 70 is to increase it but it also gives me more time to drain my 401k and roll it into roth so I don't have to take RMD + SS + pension + taxable invstments...

DaveR

  • Stubble
  • **
  • Posts: 243
Re: Does Social Security make your 4% target feel safer?
« Reply #7 on: October 24, 2015, 06:03:42 PM »
So if I've earned roughly 500K, I divide that by 420 and this will approximately be my average monthly income from SS at age 65? This would be $1200, or equivalent to my current monthly living expenses.

Yep. If $1200/mo is enough for you, then save up $288k and RE@45. That stash will be enough to get you from 45 to 65 at $1200/mo, then SS kicks in. Toss your $288k in TIPS to cover inflation and you are looking at $1200/mo (inflation adjusted) for life. The risk is that the SS benefit is reduced (doubtful it will go away entirely) and so you get to 65 only to find your payment is $1000 instead of $1200.

As a comparison, $1200/mo at a 4% SWR is a $360k stash. In order for it to work and stay ahead of inflation, you invest the money in stocks (vs TIPS above). Greater risk/volatility means you need $72k in extra cushion.

And you if really want to live on the edge, you can start with a $175k stash, invest in stocks, and take out a constant $1200/mo (inflation adjusted) dollars a month (roughly 8% withdrawal in the early years). If the market behaves, you won't run out of money before SS kicks in. A higher risk strategy, but works often enough that it is a valid approach.

Spork

  • Walrus Stache
  • *******
  • Posts: 5747
    • Spork In The Eye
Re: Does Social Security make your 4% target feel safer?
« Reply #8 on: October 24, 2015, 06:04:39 PM »
I try not to count on SS...

because I plan to work 15-20 years, the last 10-15 years will be all zeros... and as it is now, I'm not a high earner so my SS won't be very much anyways.

But I will take it, my plan is retire in 40s, and take pension at 60 (or early if I take penalty but I'm planning not to), then delay SS until 70. Waiting until 70 is to increase it but it also gives me more time to drain my 401k and roll it into roth so I don't have to take RMD + SS + pension + taxable invstments...

I don't either.

I think SS will always exist.  But I have a suspicion it might be in a different form -- i.e. different retirement ages, means testing, etc.    It might be EXACTLY what it is today.  If so: that's just bonus cash.  I tend to be pessimistic on future predictions.

zolotiyeruki

  • Magnum Stache
  • ******
  • Posts: 4219
  • Location: State: Denial
Re: Does Social Security make your 4% target feel safer?
« Reply #9 on: October 24, 2015, 07:36:30 PM »
I think it's worth reiterating that 4% is already very safe. It's a built-in safety margin.

Like many others, I assume I will get nothing from SS.  We *do* know that without changes, the trust fund is expected dry up in the 2030's and SS contributions will only fund 75% of normal benefits paid.  I also have a small pension I can expect to receive from my first employer when I hit some magical number, but I don't count on that either.  Inheritance?  I'm not going to count my chickens before they hatch, and it's not my money anyway.

In short, I'm pretty confident.  Any SS or pension or inheritance will be gravy.

Roland of Gilead

  • Handlebar Stache
  • *****
  • Posts: 2296
Re: Does Social Security make your 4% target feel safer?
« Reply #10 on: October 24, 2015, 09:11:06 PM »
SS will be around and it doesn't matter a lot if you have zeros.

Retiring at 45, I have paid in enough to get $1700 or so at FRA (in today's dollars) and around $2000 at age 70.  I fully expect to get somewhere close to that amount.

There are some pretty easy fixes they will eventually be forced to enact.   Removing the cap on amount of income subject to SS tax and having benefits be fully taxed just like withdrawals from non Roth 401K and IRAs are.  They might raise FRA to 67 or 68 eventually for people born after 1990 or some such date.

All this other talk about running out of money is just scare tactics usually done to win some political point here or there.

NathanDrake

  • 5 O'Clock Shadow
  • *
  • Posts: 75
Re: Does Social Security make your 4% target feel safer?
« Reply #11 on: October 24, 2015, 09:49:14 PM »
I think it's worth reiterating that 4% is already very safe. It's a built-in safety margin.

Agreed. After reading that Madfientist post, 2/3rds of the time  people withdrawing 4% annually had twice what they put in after 30 years in real terms.

SS is too crucial and embedded in our society for it to not still be around. Which, if you add this to your 4% withdrawal rate calculations, essentially makes doubting the 4% rule to be foolish in my mind.


etotheix

  • 5 O'Clock Shadow
  • *
  • Posts: 34
Re: Does Social Security make your 4% target feel safer?
« Reply #12 on: October 24, 2015, 10:04:17 PM »
There are some pretty easy fixes they will eventually be forced to enact.   Removing the cap on amount of income subject to SS tax and having benefits be fully taxed just like withdrawals from non Roth 401K and IRAs are.  They might raise FRA to 67 or 68 eventually for people born after 1990 or some such date.

Totally agree.  Even if the Congress does nothing (which in the long term is unlikely), SSA projects they will be able to pay about 75% of the currently defined benefit in 2037 -- and per Chart 8 in the link below this would continue for 40 years or so before it shrunk further.

https://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html

SwordGuy

  • Walrus Stache
  • *******
  • Posts: 8098
  • Location: Fayetteville, NC
Re: Does Social Security make your 4% target feel safer?
« Reply #13 on: October 24, 2015, 10:32:26 PM »
When my wife goes on SS in 16 months it will allow us to retire without having to pull out much, if anything, out of our stock portfolio or 401ks.   That's huge!

Every year we do that increases the odds significantly that we won't have a problem with pulling out too much from our stocks.   

Medicare is a biggie.  I've seen what elder care hospital costs are.  So far my mom's medicare and BC/BS gap coverage have kept her medical bills at almost nothing.   I'm hoping it stays that way.

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5241
Re: Does Social Security make your 4% target feel safer?
« Reply #14 on: October 25, 2015, 04:35:14 AM »
For those of you that have not played with the SSA calculators, you might want to, especially if you are over 40.  Fill out the year by year worksheet to see how much each year of employment has contributed to the "pot" that is the basis for your PIA.

Social Security is progressive, it replaces a higher percentage of income for low earners than for high earners.  There are two "bend points" that are important to note.  After a certain point, you are working for very little in additional annuity, although you continue to pay the tax at the same rate.  At that point, your taxes are largely subsidizing other recipients.

I have a lot of zeros in the later years, as I retired early a number of years ago.  That has not had a huge effect for two reasons.  One is the bend points, but the other is the indexing under the National Average Wage Index.  It's not what you earn over your lifetime, it's the indexed amount of what you earn.  For the positions I held in the early years of my career, that indexing has been a huge factor.   The indexed amount of income from those positions is actually much more than what they pay today.  Yay, general wage inflation!  I wonder if the NAWI calculations will covertly reduce the annuities for younger folks, because they did not live through the inflation of the late 70's and 80's, when wages kept up with inflation.  Filling out the worksheet year by year and multiplying your taxable earnings for Social Security by the NAWI factor will tell you if you are benefiting from wage inflation and by how much.

There's a lot of discussion of SWR's considering the impact of Social Security over at early-retirement.org.  One idea is you can use a higher withdrawal rate and draw down more assets in the early years of retirement because the Social Security annuity replaces the need for some of these assets later on.  That might work if you are a few years out from collecting, but I would not make that bet if I were much younger than that.

I'm going to be collecting the annuity in the not too distant future.  It is not enough to live on in HCOL Silicon Valley, but if I waited until FRA, it would be more than what the MMM family spends in a year, even after Federal income tax on 85 percent.    YMMV.