The 4% rule/guideline and social security

[NaturallyHappier]

I read a lot about the 4% rule and retirement savings, but very few articles, if any, mention social security.  When I run the numbers in my spreadsheets for retirement projections I am typically needing as high as 6% of my savings in the early years between 55 (when I hope to fire) and  that drops to 2 or three percent when I start collecting social security.

My question is, "Does the 4% rule factor social security into it, of is that just the rule for purely living off your savings with no SS?

It seems to me that if I consider SS I could get away with a much higher percentage.

[2Birds1Stone]

The 4% rule does not factor in SS, Pensions, Side Income, Inheritance, etc.

If you are close enough to full retirement age where you can safely assume you will get at least 70% of your current "guaranteed" SS amount. It means you likely can draw more than 4% till SS kicks in, that goes for pensions, side income, etc.

[NaturallyHappier]

The 4% rule does not factor in SS, Pensions, Side Income, Inheritance, etc.

If you are close enough to full retirement age where you can safely assume you will get at least 70% of your current "guaranteed" SS amount. It means you likely can draw more than 4% till SS kicks in, that goes for pensions, side income, etc.

Thanks, that is what I thought the case was.

I downloaded the software from the SS website and plugged in my current earning and projections for now to FIRE and it looks like I would still get about 85% of my full benefits if I FIRE at 55.

[2Birds1Stone]

You are at the age where I would not be afraid to count on SS. I'm 40 years away from full retirement age, I'm less enthusiastic.

[MikeBear]

The 4% rule does not factor in SS, Pensions, Side Income, Inheritance, etc.

If you are close enough to full retirement age where you can safely assume you will get at least 70% of your current "guaranteed" SS amount. It means you likely can draw more than 4% till SS kicks in, that goes for pensions, side income, etc.

Thanks, that is what I thought the case was.

I downloaded the software from the SS website and plugged in my current earning and projections for now to FIRE and it looks like I would still get about 85% of my full benefits if I FIRE at 55.

Do you have a link to this software? I'm up on the site now, and I can't seem to find it. Thanks!

[NaturallyHappier]

The 4% rule does not factor in SS, Pensions, Side Income, Inheritance, etc.

If you are close enough to full retirement age where you can safely assume you will get at least 70% of your current "guaranteed" SS amount. It means you likely can draw more than 4% till SS kicks in, that goes for pensions, side income, etc.

Thanks, that is what I thought the case was.

I downloaded the software from the SS website and plugged in my current earning and projections for now to FIRE and it looks like I would still get about 85% of my full benefits if I FIRE at 55.

Do you have a link to this software? I'm up on the site now, and I can't seem to find it. Thanks!

http://www.socialsecurity.gov/OACT/anypia/anypia.html

[ulrichw]

One important note about the 4% rule is that the success rate is based specifically on 30 years of retirement. i.e., ending up with $1 after 30 years is considered "success" - this obviously would be a problem in the 31st year.

If you're planning for a longer timeframe, the % needs to be adjusted to get the same level of confidence.

[MikeBear]

The 4% rule does not factor in SS, Pensions, Side Income, Inheritance, etc.

If you are close enough to full retirement age where you can safely assume you will get at least 70% of your current "guaranteed" SS amount. It means you likely can draw more than 4% till SS kicks in, that goes for pensions, side income, etc.

Thanks, that is what I thought the case was.

I downloaded the software from the SS website and plugged in my current earning and projections for now to FIRE and it looks like I would still get about 85% of my full benefits if I FIRE at 55.

Do you have a link to this software? I'm up on the site now, and I can't seem to find it. Thanks!

http://www.socialsecurity.gov/OACT/anypia/anypia.html

Thanks!

[Retire-Canada]

One important note about the 4% rule is that the success rate is based specifically on 30 years of retirement. i.e., ending up with $1 after 30 years is considered "success" - this obviously would be a problem in the 31st year.

If you're planning for a longer timeframe, the % needs to be adjusted to get the same level of confidence.

You can use one of the simulation programs and try 4% against a longer timeframe.

Using cFIREsim I get:

4% over 30 yrs = 92%
4% over 40 yrs = 87%
4% over 50 yrs = 86%

That's with a constant 4% SWR.

If you vary the SWR from 3% to 8% depending on good vs. bad years you get 100% success in over 30-50 yr periods.

- Vik

[Eric]

www.cFIREsim.com has inputs for SS.  Run your numbers through there.

[Sid Hoffman]

www.cFIREsim.com has inputs for SS.  Run your numbers through there.

I was not aware of that, thank you for the info an the link!  Without boring everyone on my own figures, even a very conservative $14k/year of Social Security in my own scenario makes a huge difference for the worst case scenario years.  This gives me a lot more confidence.  It makes sense too, even $14k/year, which is below the median SS retired workers' payout could be enough to cover 40, even 50% of expenses depending on your housing situation and what else you have going on.  Obviously your retirement portfolio looks very different if you're withdrawing 40-50% less money from it every year.

[Retire-Canada]

Obviously your retirement portfolio looks very different if you're withdrawing 40-50% less money from it every year.

This is true. One issue I have noticed though was that in a longer that traditional retirement it was the investment performance and withdrawal rate in the early years that made the most difference. The impact of gov't benefits in the later years doesn't affect things nearly as much.

-- Vik

[Sid Hoffman]

This is true. One issue I have noticed though was that in a longer that traditional retirement it was the investment performance and withdrawal rate in the early years that made the most difference. The impact of gov't benefits in the later years doesn't affect things nearly as much.

Yes, although I wouldn't say it's the longer the retirement, it's the earlier before you take Social Security.  Like I built my plan around retiring at 50, taking SS at 62, so there's only a 12 year separation of the two events.  For many people, they may retire at 62, take SS at 67, so only 5 years separation of the events.  For the rockstars of early retirement, they may be retiring 30 years before they would take SS, and not even have many credits for SS to begin with, so yes, for them there's probably very little impact from SS income both due to how long it would take to kick in, as well as how little income they'd get from it.

[vivian]

The way I think about retirement and Social Security is this: There is always talk of reforming Social Security and while the plans vary, they almost always start with "no changes for anyone over 55". My takeaway is that until I reach age 55, I should not count on any specific amount from Social Security because the law could change. Once I hit 55 (although I'm a good bit away from it now), then I might start using the law at that time for retirement planning.

[Retire-Canada]

The way I think about retirement and Social Security is this: There is always talk of reforming Social Security and while the plans vary, they almost always start with "no changes for anyone over 55". My takeaway is that until I reach age 55, I should not count on any specific amount from Social Security because the law could change. Once I hit 55 (although I'm a good bit away from it now), then I might start using the law at that time for retirement planning.

In Canada they changed our SS [ie OAS] from a start of 65 to 67 years of age. The change only affects younger folks.

I'd expect this type of approach being taken by any gov't that wants to stay in power for any changes to old age benefits. Slow and gradual.

There may be changes, but it won't be now you have it now you don't.

-- Vik

[PatStab]

Just pulled hubbys SS estimate again haven't since 2013.

He is planning on taking it end of year unless job closes down before then, dependent on oil prices.

Right now would be $2683 a month, at age 70 would be $2953.  Just taking the amount and dividing
by the months left till 70 would be 17 months, so each month will increase about $16.50, so by year
end should be $2800 a month, not bad in my opinon. I don't care if the project closes down now.
We will be fine with other income added to it.

[retired?]

The way I think about retirement and Social Security is this: There is always talk of reforming Social Security and while the plans vary, they almost always start with "no changes for anyone over 55". My takeaway is that until I reach age 55, I should not count on any specific amount from Social Security because the law could change. Once I hit 55 (although I'm a good bit away from it now), then I might start using the law at that time for retirement planning.

My thinking is the same.  I don't include expected SS in my calcs.  I know what it is, but I consider it to be one of those safety cushions.  O am already semi-retired (meaning I am in that phase of figuring out what to do next), so not including SS doesn't delay my RE decision.  I have another 9 years for any grandfather clause for 55+ to take hold.

[NICE!]

I look at SS as a safety cushion, much like DW's plans to continue working even if I stop.

I will say that it has made me more psychologically comfortable with a low FI number.

[Bert The Turtle]

I see SS benefits as part of that "safety margin" that MMM has posted about so many times.  Don't count on it in your projections, but assume that it will be there in some form or another.

I'm one of those folks who is skeptical about the long term solvency of SS in its current form, but I don't believe it will go away short of a zombie alien invasion.  The thing is that even if it goes "bankrupt" due to demographic shifts or the gov't raiding the funds or Russian hackers stealing the password to the online account where we keep the funds, there will still be inflows from FICA/payroll taxes.  You may not get AS MUCH money as was originally promised to you, but since you're already not counting on SS to support you it's not a huge deal for you personally (the societal implications are something else entirely).

[retired?]

I see SS benefits as part of that "safety margin" that MMM has posted about so many times.  Don't count on it in your projections, but assume that it will be there in some form or another.

I'm one of those folks who is skeptical about the long term solvency of SS in its current form, but I don't believe it will go away short of a zombie alien invasion.  The thing is that even if it goes "bankrupt" due to demographic shifts or the gov't raiding the funds or Russian hackers stealing the password to the online account where we keep the funds, there will still be inflows from FICA/payroll taxes.  You may not get AS MUCH money as was originally promised to you, but since you're already not counting on SS to support you it's not a huge deal for you personally (the societal implications are something else entirely).

Yes, it won't go anywhere, but it will be taken care of by a) lowering benefits, b) requiring more $$ be paid in.....e.g. lift the cap, and/or the more destructive means c) inflate it away, which causes all those fixed incomes to devalue.

[SugarMountain]

How do FIRE folks estimate, though?  SSN's tool says, "Your estimates are based on the assumption that you will earn $XXX a year from now until retirement."  And I believe by "retirement" they mean when you start collecting.  They are assuming that when you start collecting and when you stop putting in are the same time.  If I stop putting in at 50 and start collecting at 70, it doesn't seem like there is a way to estimate that.

(And for my estimates including SSN in FIRECalc takes me from a small failure rate to a 0% failure rate with my current stache and spending.  Depending on how the day is going at work I either count SSN or I don't. lol)

[SugarMountain]

To answer my own question, it looks like I can use this: http://www.ssa.gov/retire2/AnypiaApplet.html, although it doesn't let you specify a different age than 62 to start receiving benefits if you target a <62 retirement.

[CheapskateWife]

It doesn't let you go below 62, but it does let you project zero earnings from 2015 on...that was really helpful for me to see if I FIRE right away, what the impact to my SSI might be when I am 62

[SugarMountain]

It doesn't let you go below 62, but it does let you project zero earnings from 2015 on...that was really helpful for me to see if I FIRE right away, what the impact to my SSI might be when I am 62

Right, that's basically what I was trying to see as well.  I wish they let you change your date of collecting to 67 or 70 to see that effect.  The interesting thing I found is that if I were to continue working at my current salary (I max SS) until I'm 62, or another 15 years, my benefit would only go up $300 a month, meaning between my and my employer's contributions I'd have dumped another $235k in and only get $3600/year more, pretty crappy rate of return and another argument for ER.

[Spork]

I might point out... even if nothing changes... SS is geared to dry up a little at a time.  The reason is that they've indexed the SS payments to inflation, while NOT indexing the taxation to inflation.  The result is over time you actually get to keep less of it.

No, it is not likely to go away.  Yes, it might provide you less than you expect.  The whole "don't count on it, but use it as a cushion" is probably best.

[SugarMountain]

But the tax side is indexed to inflation to a point.  If Sally makes $50k this year and then $51,500k next year (COL increase only, no real wage growth), she and her company will pay $210 more.  The maximum taxable has also increased over time - http://www.ssa.gov/policy/docs/policybriefs/pb2011-02.html.  I think it's now up to $112k.

The real problem with social security is driven largely by demographics and the fact that people are living a lot longer, but the age of starting benefits hasn't moved much.  Over the next 15-20 years shift the starting eligibility age up to 70 and most of the problems go away.

[NaturallyHappier]

It doesn't let you go below 62, but it does let you project zero earnings from 2015 on...that was really helpful for me to see if I FIRE right away, what the impact to my SSI might be when I am 62

The detailed calculator is what you are looking for, although it is a little bit of a challenge to use.  It will allow you to specify your retirement year and project your earnings to any year.

http://www.socialsecurity.gov/OACT/anypia/download.html

[Spork]

But the tax side is indexed to inflation to a point.  If Sally makes $50k this year and then $51,500k next year (COL increase only, no real wage growth), she and her company will pay $210 more.  The maximum taxable has also increased over time - http://www.ssa.gov/policy/docs/policybriefs/pb2011-02.html.  I think it's now up to $112k.

The real problem with social security is driven largely by demographics and the fact that people are living a lot longer, but the age of starting benefits hasn't moved much.  Over the next 15-20 years shift the starting eligibility age up to 70 and most of the problems go away.

I was referring to the withdrawal portion.  The the amount you get is indexed to inflation, but the formula for the taxation is not.  Example.

edit: grammar

[SugarMountain]

Ah, I see what you're saying.  I wasn't aware that Social Security payments had different tax treatment than normal income.  I'm not sure why it should, actually.

[stuckinmn]

Ah, I see what you're saying.  I wasn't aware that Social Security payments had different tax treatment than normal income.  I'm not sure why it should, actually.

The rationale for different tax treatment is because the contributions were already taxed when you put it in (i.e. they came out of post-tax money).  Right now it is like a Roth account that is partially taxed upon withdrawal.     

[Spork]

Ah, I see what you're saying.  I wasn't aware that Social Security payments had different tax treatment than normal income.  I'm not sure why it should, actually.

The rationale for different tax treatment is because the contributions were already taxed when you put it in (i.e. they came out of post-tax money).  Right now it is like a Roth account that is partially taxed upon withdrawal.   

That's the rationale... in fact, that was the original design -- that it would not be taxed.  The issue is the rules for taxing it are not indexed to inflation, such that every year the burden becomes larger.  In other words: you get bigger and bigger checks (because: inflation) but the tax formulas treat it the same as they did in 1983. 

To steal from another Scott Burns article as an example:  http://assetbuilder.com/scott_burns/the_stealth_tax_on_retiree_income

The retired couple hits the 28% marginal rate (or their SS) with an income of $65k.  A non-retired couple would have to have $146k to hit the 28% rate.