Author Topic: When To Collect Social Security As An Investment Decision  (Read 2635 times)

cool7hand

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When To Collect Social Security As An Investment Decision
« on: November 12, 2021, 11:57:34 AM »
I was thinking about the opportunity cost of delaying when one begins to collect social security from an investment decision perspective. I found this piece I thought others might find interesting: https://business.ucf.edu/wp-content/uploads/2017/04/Gilkeson_July16.pdf. It might serve as a starting out point for others to use their own asset mix, assumptions, etc.

terran

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Re: When To Collect Social Security As An Investment Decision
« Reply #1 on: November 12, 2021, 12:04:02 PM »
Claiming social security early to reduce withdrawals from a portfolio, thereby keeping that money invested, will on average result in higher expected total returns. I view social security as a worst case stopgap (many people call it longevity insurance). From that perspective I don't care about having the highest returns on average. I care about having the largest longevity insurance payment if I happen to live much longer than average, so I'll delay as long as I can, spending from my portfolio in the meantime. that way I know I'll have a decent standard of living even if I outlive my money. I have no need to leave a large estate if I happen to die before I claim social security.

MustacheAndaHalf

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Re: When To Collect Social Security As An Investment Decision
« Reply #2 on: November 12, 2021, 10:04:34 PM »
Claiming social security early to reduce withdrawals from a portfolio, thereby keeping that money invested, will on average result in higher expected total returns. I view social security as a worst case stopgap (many people call it longevity insurance).
I also want to delay it as longevity insurance, but I wanted to confirm a calculation with you.  Social security increases by 8% per year you delay it - but it's 8% of a base amount, not compounded.  It's like a $1000 bond paying $80/year.

The stock market compounds.  So over 8 years, 6.5% compounds to a total return of +65.5%, while 8% without compounding becomes +64%.  So the market, by my calculations, only has to return 6.5% per year to beat social security (assuming you delay payments at age 62 until age 70, or 8 years).

wageslave23

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Re: When To Collect Social Security As An Investment Decision
« Reply #3 on: November 13, 2021, 05:18:47 AM »
Claiming social security early to reduce withdrawals from a portfolio, thereby keeping that money invested, will on average result in higher expected total returns. I view social security as a worst case stopgap (many people call it longevity insurance).
I also want to delay it as longevity insurance, but I wanted to confirm a calculation with you.  Social security increases by 8% per year you delay it - but it's 8% of a base amount, not compounded.  It's like a $1000 bond paying $80/year.

The stock market compounds.  So over 8 years, 6.5% compounds to a total return of +65.5%, while 8% without compounding becomes +64%.  So the market, by my calculations, only has to return 6.5% per year to beat social security (assuming you delay payments at age 62 until age 70, or 8 years).

The payments are going up, but you are actually losing out on payments for years 62-70 that you will never get back.  Use a future value calculator and plug in the actual monthly payments and expected life remaining and mess around with the interest rate in order to figure out what returns you would need to come out ahead.  IMO the stock market isn't a good comparison because one is almost risk free vs the other having a lot of volatility/risk.  The real risk is longevity risk. If you die at 65 compared to 105 that's going to make a far bigger difference.

geekette

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Re: When To Collect Social Security As An Investment Decision
« Reply #4 on: November 13, 2021, 09:05:37 AM »
Another things some don't consider is spousal benefits. 

I'm the lower (by far) wage earner.  From what I understand, I can collect spousal benefits on his record of up to 50% of his benefit (up to his FRA benefit, not the amount he'd get if he waits until he's 70).  If I collect before my full retirement age, it reduces the spousal benefit per this chart.

I'm still uncertain if he needs to start collecting before I can collect on his record or not (he's a year older, so his FRA is later than mine).  It's a bit confusing.

mistymoney

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Re: When To Collect Social Security As An Investment Decision
« Reply #5 on: November 13, 2021, 09:13:22 AM »
I plan to collect as soon as I am eligible, but may reassess when I am 62.

I'm not that concerned about living too long, although both parents lived past 95. I'm just not concerned about being poor when I'm 90 or older, I'll be very content with very little. A tiny apt with kitchenette in a senior complex with 2 cats and I'm good.

terran

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Re: When To Collect Social Security As An Investment Decision
« Reply #6 on: November 13, 2021, 09:10:37 PM »
I'm still uncertain if he needs to start collecting before I can collect on his record or not (he's a year older, so his FRA is later than mine).  It's a bit confusing.

It used to be possible for a spouse to collect spousal benefits on the earners record while the earner was delaying their own social security, but that's no longer an option, so you'll have to wait until your spouse starts collecting to collect spousal benefits on his record.

Zamboni

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Re: When To Collect Social Security As An Investment Decision
« Reply #7 on: November 13, 2021, 09:28:20 PM »
I wish it wasn't all so complicated to the point that academics conducting detailed studies arrive at different conclusions.

alienbogey

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Re: When To Collect Social Security As An Investment Decision
« Reply #8 on: November 14, 2021, 12:09:31 AM »
I wish it wasn't all so complicated to the point that academics conducting detailed studies arrive at different conclusions.

Government

JoePublic3.14

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Re: When To Collect Social Security As An Investment Decision
« Reply #9 on: November 14, 2021, 01:26:11 PM »
Claiming social security early to reduce withdrawals from a portfolio, thereby keeping that money invested, will on average result in higher expected total returns. I view social security as a worst case stopgap (many people call it longevity insurance).
I also want to delay it as longevity insurance, but I wanted to confirm a calculation with you.  Social security increases by 8% per year you delay it - but it's 8% of a base amount, not compounded.  It's like a $1000 bond paying $80/year.

The stock market compounds.  So over 8 years, 6.5% compounds to a total return of +65.5%, while 8% without compounding becomes +64%.  So the market, by my calculations, only has to return 6.5% per year to beat social security (assuming you delay payments at age 62 until age 70, or 8 years).

6.5% is pretty large….for a portfolio that is not 100% equities. I’d assume one is something closer to 60% equity and see what that does. And maybe using the 40% not equity position to fund spending during those bridge years.

PDXTabs

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Re: When To Collect Social Security As An Investment Decision
« Reply #10 on: November 14, 2021, 01:29:13 PM »
I would add that depending on your situation there is the potential that starting at 62 you could live entirely off of your SS, leaving 100% of your stash to compound for the rest of your life.

blue_green_sparks

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Re: When To Collect Social Security As An Investment Decision
« Reply #11 on: November 14, 2021, 01:41:49 PM »
And then there is this....
Quote
As of right now, the worst-case scenario would be that the trust funds run out in 2034 and benefits are cut by 22%.

mistymoney

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Re: When To Collect Social Security As An Investment Decision
« Reply #12 on: November 14, 2021, 04:00:34 PM »
Another thought - I think it's a really easy call to get ss asap if you are reitred and the market is really far down so you don't have to sell as many shares.

If market is up - it could go either way I think. Selling isn't hurting overall protfolio, but then again collect the ss to let as much as you can ride the good market.

MDM

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Re: When To Collect Social Security As An Investment Decision
« Reply #13 on: November 14, 2021, 10:50:03 PM »
I wish it wasn't all so complicated to the point that academics conducting detailed studies arrive at different conclusions.
It's not complicated.  All you need to know is your personal return on investment, when you'll die, and future government policy.  ;)

Many of those detailed studies start with different assumptions, so it's no surprise if they then arrive at different conclusions.

MustacheAndaHalf

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Re: When To Collect Social Security As An Investment Decision
« Reply #14 on: November 15, 2021, 12:22:24 AM »
The stock market compounds.  So over 8 years, 6.5% compounds to a total return of +65.5%, while 8% without compounding becomes +64%.  So the market, by my calculations, only has to return 6.5% per year to beat social security (assuming you delay payments at age 62 until age 70, or 8 years).
The payments are going up, but you are actually losing out on payments for years 62-70 that you will never get back.  Use a future value calculator and plug in the actual monthly payments and expected life remaining and mess around with the interest rate in order to figure out what returns you would need to come out ahead.  IMO the stock market isn't a good comparison because one is almost risk free vs the other having a lot of volatility/risk.  The real risk is longevity risk. If you die at 65 compared to 105 that's going to make a far bigger difference.
The missed payments are a good point that is missing from my calculation.  I was trying to compare the alternative of keeping money invested in an IRA and taking social security, versus withdrawing and delaying social security.


The stock market compounds.  So over 8 years, 6.5% compounds to a total return of +65.5%, while 8% without compounding becomes +64%.  So the market, by my calculations, only has to return 6.5% per year to beat social security (assuming you delay payments at age 62 until age 70, or 8 years).
6.5% is pretty large….for a portfolio that is not 100% equities. I’d assume one is something closer to 60% equity and see what that does. And maybe using the 40% not equity position to fund spending during those bridge years.
I should have used a traditional 60/40 portfolio of stocks and bonds.  Plugging in 60/40 to Portfolio Visualizer shows a 9% annual return from 1972-2021.  The risk with social security is much lower (there has been concerns of reduced payments for decades, it's not new).  But if someone has two choices: take money from investments or take social security, then I think it's worth noting portfolios compound in a way I believe social security does not (correct me if I'm wrong).

Dicey

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Re: When To Collect Social Security As An Investment Decision
« Reply #15 on: November 15, 2021, 12:50:29 AM »
Posting to follow along. I have no idea what we're going to do, but the time is fast approaching...

vand

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Re: When To Collect Social Security As An Investment Decision
« Reply #16 on: November 15, 2021, 01:40:40 AM »
Here in the UK we have the option to delay SS payment for a 1% linear uplift (not compounded) every 9 weeks its delayed. A 1 year is therefore equivilent to a 5.8% uplift.  This is all inflation linked, so we are talking about real rates.

A 5.8% uplift will mean you finally claw back the income you have foregone and end up "ahead" after 17.2 years.

If you took the SS money and put it into a vehicle earning 4.1%pa then you'd have exactly the same amount of wealth after 17 years.

It's not a great deal, imo, given the uncertainty of the market and average life expectancy is only 20 years beyond the commencement of SS payments (SS age will be 67 when I eventually qualify) as there is a fair chance that you might not live to the point where you end up ahead.

MDM

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Re: When To Collect Social Security As An Investment Decision
« Reply #17 on: November 15, 2021, 01:48:16 AM »
Posting to follow along. I have no idea what we're going to do, but the time is fast approaching...
Open Social Security: Free, Open-Source Social Security Calculator is worth a look.

JoePublic3.14

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Re: When To Collect Social Security As An Investment Decision
« Reply #18 on: November 15, 2021, 04:34:49 AM »
Posting to follow along. I have no idea what we're going to do, but the time is fast approaching...
Open Social Security: Free, Open-Source Social Security Calculator is worth a look.

But I think the premise/issue from the OP is that one shouldn’t look at that type of calculation in a vacuum. That does a good job of maximizing SS payments….but at what cost relative to having to draw down investments.

MDM

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Re: When To Collect Social Security As An Investment Decision
« Reply #19 on: November 15, 2021, 01:02:22 PM »
Posting to follow along. I have no idea what we're going to do, but the time is fast approaching...
Open Social Security: Free, Open-Source Social Security Calculator is worth a look.

But I think the premise/issue from the OP is that one shouldn’t look at that type of calculation in a vacuum. That does a good job of maximizing SS payments….but at what cost relative to having to draw down investments.
And what extra cost there is for Roth conversions if taking SS, compared with the lower cost if not yet taking SS.

Yes, there are many moving parts to all of this....

blue_green_sparks

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Re: When To Collect Social Security As An Investment Decision
« Reply #20 on: November 15, 2021, 02:00:17 PM »
Quote
And what extra cost there is for Roth conversions if taking SS, compared with the lower cost if not yet taking SS.
Yes, there are many moving parts to all of this....

I was just working all sorts of scenarios like that yesterday and felt like some sort of strategic war planner. Having a good understanding of the effects of all those moving parts (Age, family situation, health, ACA subsidies, SS, pension, IRA/401k balance/returns, and taxes) and monitoring the situation are the important takeaways. RMD + SS+ pension will be a fairly lofty income for this old fogey, should I make it to my 70s.

dandarc

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Re: When To Collect Social Security As An Investment Decision
« Reply #21 on: November 15, 2021, 02:16:37 PM »
The other factor that I haven't seen mentioned yet in this thread is if you're working between 62 and full retirement age - you can make some money, but not a whole lot before the SS benefits start going away at pretty high rates if you've decided to draw.

Withdrawing SS early for the express purpose to let investments run only works if you actually get the whole, or at least a large portion of, the SS payment.

ETA: unless that has changed and I missed it - last time I really looked at it,  that was the case.

Rdy2Fire

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Re: When To Collect Social Security As An Investment Decision
« Reply #22 on: November 15, 2021, 04:00:25 PM »
I plan to collect as soon as I am eligible, but may reassess when I am 62.

I'm not that concerned about living too long, although both parents lived past 95. I'm just not concerned about being poor when I'm 90 or older, I'll be very content with very little. A tiny apt with kitchenette in a senior complex with 2 cats and I'm good.

I am of the same thinking. I have no idea how long I will live (nor does anyone) and I do understand many will say if you have enough then why collect i.e it's a social program for the greater good.

With that said, I feel as though I have paid into this system, as we all have, so I'd prefer to take some of my money back, as soon as I can, for as long as I can (could be a year or ?? years) and give it to a charity of my choice. Of course I too plan to reassess as I close in on 62

SpareChange

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Re: When To Collect Social Security As An Investment Decision
« Reply #23 on: November 16, 2021, 12:12:36 PM »
The other factor that I haven't seen mentioned yet in this thread is if you're working between 62 and full retirement age - you can make some money, but not a whole lot before the SS benefits start going away at pretty high rates if you've decided to draw.

Withdrawing SS early for the express purpose to let investments run only works if you actually get the whole, or at least a large portion of, the SS payment.

ETA: unless that has changed and I missed it - last time I really looked at it,  that was the case.

I believe the rule is something like a $1 decrease for every $2 earned over about $19k, in any year before your FRA. Good to know, but I suspect it doesn't come up much because we're all planning on being retired before then :). 

boarder42

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Re: When To Collect Social Security As An Investment Decision
« Reply #24 on: November 16, 2021, 12:17:28 PM »
I plan to collect as soon as I am eligible, but may reassess when I am 62.

I'm not that concerned about living too long, although both parents lived past 95. I'm just not concerned about being poor when I'm 90 or older, I'll be very content with very little. A tiny apt with kitchenette in a senior complex with 2 cats and I'm good.

I am of the same thinking. I have no idea how long I will live (nor does anyone) and I do understand many will say if you have enough then why collect i.e it's a social program for the greater good.

With that said, I feel as though I have paid into this system, as we all have, so I'd prefer to take some of my money back, as soon as I can, for as long as I can (could be a year or ?? years) and give it to a charity of my choice. Of course I too plan to reassess as I close in on 62

agreed it should be taken at 62 by all calcs i do today.  leaving money invested is great and you can never make up for what you lost.  it just doesnt win.  SOR obviously plays a role here but assuming linear returns you take the money as soon as you're 62

dandarc

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Re: When To Collect Social Security As An Investment Decision
« Reply #25 on: November 16, 2021, 12:52:39 PM »
The other factor that I haven't seen mentioned yet in this thread is if you're working between 62 and full retirement age - you can make some money, but not a whole lot before the SS benefits start going away at pretty high rates if you've decided to draw.

Withdrawing SS early for the express purpose to let investments run only works if you actually get the whole, or at least a large portion of, the SS payment.

ETA: unless that has changed and I missed it - last time I really looked at it,  that was the case.

I believe the rule is something like a $1 decrease for every $2 earned over about $19k, in any year before your FRA. Good to know, but I suspect it doesn't come up much because we're all planning on being retired before then :).
Definitely manageable for most of us, but then some retirees tend to have money that is subject to FICA just find them. I think of it as the often unsaid "if your traditional IRA contributions are deductible" part of Roth vs. Traditional discussion - seems obvious, but we still have to say it, because not everyone is aware that tIRA is not always deductible.

DaTrill

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Re: When To Collect Social Security As An Investment Decision
« Reply #26 on: November 30, 2021, 06:48:06 PM »
Generally if Regular IRA balance low, take SS at 62.  if IRA balance high, do ROTH Rollovers to minimize future RMDs.  The tax function of this calculation overwhelms any investment return differential. 

cool7hand

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Re: When To Collect Social Security As An Investment Decision
« Reply #27 on: December 01, 2021, 08:39:49 AM »
Generally if Regular IRA balance low, take SS at 62.  if IRA balance high, do ROTH Rollovers to minimize future RMDs.  The tax function of this calculation overwhelms any investment return differential.
Interesting @DaTrill. Can you explain in more detail? With math? Or point us in the direction of any resources?

dandarc

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Re: When To Collect Social Security As An Investment Decision
« Reply #28 on: December 01, 2021, 05:36:41 PM »
Generally if Regular IRA balance low, take SS at 62.  if IRA balance high, do ROTH Rollovers to minimize future RMDs.  The tax function of this calculation overwhelms any investment return differential.
Interesting @DaTrill. Can you explain in more detail? With math? Or point us in the direction of any resources?
I too would like to see the numbers because after being concerned about RMDs before I had much of anything invested at all, I now think RMD "problems" are generally overblown. This is the kind of claim that just begs to be proven with a spreadsheet.


hooplady

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Re: When To Collect Social Security As An Investment Decision
« Reply #30 on: December 01, 2021, 06:05:23 PM »
I have a slightly different wrinkle in my decision - I was able to qualify for a small pension when I retired, but there's an automatic offset when I'm "eligible" for Social Security. I'm not sure if that means early eligibility (age 62) or full benefit eligibility (age 67). Can't find a clarification in the Summary Plan Description so I guess I'll have to place a call to the Benefits folks.

clifp

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Re: When To Collect Social Security As An Investment Decision
« Reply #31 on: December 01, 2021, 07:51:01 PM »
It seems to me the most important thing to remember about when to collect SS, is that most in cases the benefits are designed to be actuarially neutral. Meaning no matter what you choose, it is not a bad choice.

The main exception is the younger wife, who made less money than her husband. Given her much longer life expectancy (nearly 3 years at 65) plus age difference, being able to collect his full retirement upon his passing is big deal.

Personally, I'm waiting until 70 not only for longevity insurance but also as protection against elder abuse.   My grandparent's estate was looted for a least a million, by a crooked trust officer who took advantage of my grandmother's dementia to steal millions.  I figure without kids or a spouse, I'm particularly vulnerable, but even if I had both there are no guarantees.  So while it is possible some gold digger, could loot my assets, it is a lot harder to steal my social security check.
« Last Edit: December 02, 2021, 12:29:49 AM by clifp »

terran

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Re: When To Collect Social Security As An Investment Decision
« Reply #32 on: December 01, 2021, 09:28:24 PM »
It seems to me the most important thing to remember about when to collect SS, is that most in cases the benefits are designed to be actuarially neutral. Meaning no matter what you choose, it is not a bad choice.

This is a good point, but another thing to remember is that it's actuarily neutral for the average US social security participant. If you think you're healthier than the average American then you'd be better off waiting (on average) and vice versa.

hooplady

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Re: When To Collect Social Security As An Investment Decision
« Reply #33 on: December 02, 2021, 09:01:38 AM »
I have a slightly different wrinkle in my decision - I was able to qualify for a small pension when I retired, but there's an automatic offset when I'm "eligible" for Social Security. I'm not sure if that means early eligibility (age 62) or full benefit eligibility (age 67). Can't find a clarification in the Summary Plan Description so I guess I'll have to place a call to the Benefits folks.
I'm quoting myself because this might affect others who are receiving some type of pension. The answer is, my pension will automatically be reduced starting when I'm first eligible, which is age 62 regardless of whether I decide to start taking my SS payments at that age. Kind of a bummer but at least I know.

gardenstash

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Re: When To Collect Social Security As An Investment Decision
« Reply #34 on: December 02, 2021, 02:13:55 PM »
Unless there's a especially compelling reasons for you due to unique circumstances, personally I would collect as soon as possible because you could die tomorrow and nobody will inherent your SS money and it's possible you'll never see a dollar of your SS money. I would want to ensure I get something of what I paid in back. I think my Dad collected for about 9 months before passing. He had opted to get his earlier. No spousal benefit to consider because he wasn't married long enough.

DaTrill

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Re: When To Collect Social Security As An Investment Decision
« Reply #35 on: December 02, 2021, 03:58:11 PM »
Generally if Regular IRA balance low, take SS at 62.  if IRA balance high, do ROTH Rollovers to minimize future RMDs.  The tax function of this calculation overwhelms any investment return differential.
Interesting @DaTrill. Can you explain in more detail? With math? Or point us in the direction of any resources?

Money Guide Pro (and I only think the Elite level) will provide detailed calculations regarding this. 

https://www.moneyguidepro.com/ifa/

The most important variable in this calculation is the return of the regular IRA balance between 62 and 72 and tax rate that is generated  by RMDs (and now stretch inherited IRA).  I advised my parents and we converted 50% regular into ROTH and maintained this balance.  I was not as aware of the "tax torpedo" or that the market would rip over the past 7 years, but if I had a time machine, I would go back and postpone SS for my parents, and convert as much of the regular balance as possible.  This is mostly due to the market ripping from age 62-72+ and regular IRA balance increasing 4x and now instead of paying 15% on the LTCG on these investments we will pay 24% and will only go up higher in the future. 

General rules:
Low Regular/Roth balance, low or average returns from 62-72 take SS early
High regular balance/ROTH, high returns from 62-72 convert and take SS as late as possible. 

I believe many are trying and believe they are providing a valuable service when doing endless spreadsheet calculations with this decision, but any estimate is meaningless and almost dangerous in providing certainty when the estimates are 100% dependent on returns and volatility from age 62 and 72.