Calculation of Social Security

And would postponing SS until 65 or 70 have kept you from being able to take that cruise?

Good question. I don’t really know. We spent around $250,000 on cruises. The SS we got from 62 to 70 was around $300,000.

I think you missed what was being asked. Would you have been able to afford to take those cruises without your SS such that collecting it early actually did make a difference to you? If not, then you needed to be collecting that SS to do more. However, some of us like me would not be spending any additional money if we collect early, and so it does nothing to increase the standard of living as it seems it may have done for you.

I can agree with you that if collecting SS before 70 allows you to do more while you are younger, then go ahead and collect. But, as in my case, if it just means it’s going to sit in the bank or a brokerage account because you are already not spending to the budget, then collecting earlier does nothing to improve your standard of living. Hence, I can treat it as longevity insurance and wait until 70.

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This ignores the “longevity insurance” value of SS. … It’s not just about whether you breakeven or not.

Just how much is this “longevity insurance” worth?

As SnootFool said, You hang out here & at Bogleheads.org too long and you tend to forget you’re swimming in a upper middle class/high net worth pool, for the most part.

How much is this “longevity insurance” worth to those in a upper middle class/high net worth pool?
Is it even worthwhile?

I get what intercst says about deferring SS is cheaper than the equivalent commercial annuity. But does it matter? If you are in a upper middle to high net worth pool, would you even be considering such an annuity in the first place?

It’s like, going to the day-old bread store. Yes the bread is cheaper there…but does it matter to you financially? To poor people, yes. We used to go there all the time when we were young and poor.

I wish somebody, like intercst, would compute a real set of figures for a couple of scenarios of “person in upper middle to high net worth”, instead of all the handwaving.

Maybe assumptions like: slightly above average – $1m retirement portfolio, 20% above average SS benefit.
Well above average – $2m or $4m retirement portfolio, SS benefit midway between average and maximum.

Maybe also: What is the minimum retirement portfolio that would comfortably allow someone to defer to 70?

Being reasonable. No assuming they run the portfolio down to $zero during the deferal period.

Sadly, I suspect this is a futile hope on my part. I suspect that nobody will bother to do any such computation. Handwaving is so much easier.

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Is he hand waving or are you?

It costs nothing in terms of time, energy or effort to live well on what you do have while your inflation adjusted life annuity with full widow’s benefit rises in value by 8% per year.

Plus you can always change your mind whenever you want.

That still seems like an easy way for the spouse with the higher benefit to maximize your family assets with no additional effort at all. Especially since there is a better than 70% chance that one of the two spouses will outlive the break even point which is calculated on the life expectancy of only the higher earning spouse.

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It’s the same thing. Isn’t it? I’m pretty sure it is.

When you take money out of a TIRA, it gets added to your taxable ordinary income (except for things specifically exempted, like QCD).
Same if you withdraw the money and spend it as if you convert it to a Roth. It gets added to your taxable income when it comes out of the TIRA.

But when you pay for the taxes for a Roth Conversion from a taxable account and convert the full transfer of the TIRA to the Roth, it’s like being able to deposit the taxes paid from your taxable accounts into the Roth, even though no longer having earned income. This has the result of protecting the additional Roth balance from excessive taxation.

For example, we have been making Roth Conversions to the tune of about $250K per year in the past years post retirement. This brings us to the top of the 24% Federal tax bracket. Taking the current balances in our retirement accounts and compounding them by a very conservative 4% rate of return, one we are sure to exceed, over the number of years until we are forced to take RMDs, we are facing a tax rate of minimally 28% when RMDs are, well, mandatory. This assumes that taxes neither increase or decrease, (and I highly doubt they will decrease,) and that we are still both alive at the time and able to file MFJ vs the single tax rate, which would be considerably higher than 28% tax rate for the same income we would have received as a couple. And that is just for the first year of RMDs. As we get older, the taxes get bigger as the RMDs get bigger.

Add onto this the Trump tax brackets that if not made permanent will change back to the 2017 rates in 2025. Not a lot of years to take advantage of the bloated 24% Trump tax bracket. Worst case scenario is that we will not have hurt ourselves by paying taxes early via Roth Conversion. Best case scenario is that it will save us a considerable amount of money. It sure as heck will save our kids a considerable amount of money if we do not live long enough to spend our nest egg down. We travel together almost all the time post retirement, and correspondingly our risk of being taken out together on the interstate by a tractor trailer is not small, leaving the kids with a nest egg to inherit. Given the elimination of the stretch IRA for non-spouses, and the fact that at least one of our kids is in a higher tax bracket than 24%, Roth Conversions are a win from the inheritance POV. Not sure I would do this without taxable accounts to pay the taxes, but I did not investigate that option.

That said, since DH turns 63 this year and there is a 2 year look back period for Medicare, we may have made our last conversion. We will continue to track our income via spreadsheet and re-evaluate whether or not to do a Roth Conversion in December. I have investigated the impact of the higher income on Medicare expenses and will plug that into the analysis.

We can not control much in terms of income at this point other than the size of our RMDs. The roughly $60K we pay earlier than necessary in Federal taxes from our taxable accounts is now in our Roth and no longer taxable, (until of course it is, given the always possible changes to the tax law.)

I am far from saying that this is an approach for everyone, but everyone should run their numbers and evaluate their own situation by thinking outside the box. From what I’ve seen from you posting on the boards, unless it is all hot air and no substance, I would be shocked to find out that you could not benefit from Roth Conversions. Or perhaps it is too late already. And that is OK too, but I will continue to bang the drum to get people to look at their specific numbers in order to make an informed decision. I know that I was surprised when I ran ours, and just very happy that I did it as early as I did. It does no good to anyone to suggest they simply stick their head in the sand.

FWIW,
IP

needing to watch a movie now…

1 Like

Rayvt-
<<I wish somebody, like intercst, would compute a real set of figures for a couple of scenarios of “person in upper middle to high net worth”, instead of all the handwaving.
Maybe assumptions like: slightly above average – $1m retirement portfolio, 20% above average SS benefit.
Well above average – $2m or $4m retirement portfolio, SS benefit midway between average and maximum.

Maybe also: What is the minimum retirement portfolio that would comfortably allow someone to defer to 70?
Being reasonable. No assuming they run the portfolio down to $zero during the deferal period.

Sadly, I suspect this is a futile hope on my part. I suspect that nobody will bother to do any such computation. Handwaving is so much easier.>>

I’m a History major- figuring out a tip maxes out my math abilities, so don’t expect any computing in this post.

This article is somewhat dated (2013), but it cites a study where retirees with $200K to $600K IRAs withdrew money to bridge the gap until taking SSI at 70.
You’d have to increase the IRA to account for inflation since 2013, but, in principle, the scheme should still work.
https://www.kiplinger.com/article/retirement/t051-c000-s004-…

<<The biggest beneficiaries of this strategy are retirees with portfolios of between $200,000 and $600,000, according to research by William Reichenstein and William Meyer, principals of consulting firm Social Security Solutions. For these retirees, Social Security represents a larger share of retirement resources than wealthier retirees, so delaying could have a stronger impact on a portfolio’s longevity.>>

Part of the benefit of delaying SSI & withdrawing only IRA money in your 60s is avoidance of the SSI ‘tax torpedo’ in your 60s that’s caused by mixing SSI money with IRA money, producing higher taxation of SSI due to how ‘provisional income’ calculation causes the SSI taxable percentage to rise from zero to 50% to 85%.

<<In this scenario, claiming early causes multiple costly problems. The reduced benefit means the retiree will have to withdraw more from his IRA, and since every dollar withdrawn is taxed, he’ll have to withdraw even more to cover the tax bill. “It’s a double whammy,” Meyer says. “You are getting reduced Social Security benefits, and because you need to withdraw more from your tax-deferred account, it kicks up your provisional income and more of your [SSI] benefits are taxable.”>>

Example of how delaying SSI to 70 increases the ratio of SSI to IRA income and reduces taxation in your 70s & beyond:

<<Consider this example from Mahaney. The Smiths and the Jacksons are 72-year-old couples who each have $69,000 in income. The Smiths, who claimed their Social Security early, take $45,000 from an IRA and collect $24,000 in SSI benefits each year. The Jacksons, who delayed claiming, get $39,000 in SSI benefits and take just $30,000 from their IRAs.

The Smiths’ provisional income is $57,000 ($45,000 [IRA] and $12,000 [SSI]); the Jacksons’ is $49,500 ($30,000 [IRA] and $19,500 [SSI]). Because the Smiths have more IRA income than the Jacksons, they have more income exceeding the tax triggers and a higher adjusted gross income. Assuming a 25% federal income tax rate, the Smiths will pay $6,060 in taxes each year, compared with $2,854 for the Jacksons.>>

What the article doesn’t make clear is what withdrawal rate would the Jacksons (delaying SSI couple) have to use in their 60s to bridge the gap. If they start with a $700K IRA, the initial $69K is about 10% per year, well above the 4% SWR rule of thumb.

Psychologically, I think most retirees would need a lot of explaining & handholding before they’d commit to a plan that involved giving their IRA a 10% haircut for eight years straight, even if the math was solid.

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Rayvt asks,

Maybe also: What is the minimum retirement portfolio that would comfortably allow someone to defer to 70?

The people who’ve studied this suggest it makes sense to spend down half your retirement savings to defer to age 70. For 2022, the max benefit at age 62 is $2,364/month – $28,368/yr. You can increase that to $45,552/yr if a spouse is collecting benefits on the other partners SS earnings record.

So for someone getting the max SS check, you’d need about $800,000 in retirement savings to defer for the 8 years age 62 to 80, if you’re spending down the $400,000.

If you only have $200,000 in retirement savings, it still makes sense to spend half of that to delay for as long as you can, maybe that $100,000 only gets you from 62 to 64 before you need to start benefits. It’s still worth it when you compare taking a 4% SWR from a stock portfolio to an inflation-adjusted life annuity that you’re purchasing at half-price from the SS Administration. Just like “free Obamacare”, you’re taking advantage of a pricing discrepancy in the system. But it’s only available to those that understand the arithmetic.

intercst

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I wish somebody, like intercst, would compute a real set of figures for a couple of scenarios of “person in upper middle to high net worth”, instead of all the handwaving.

It’s pretty easy to do this at https://cfiresim.com/. I ran a few scenarios with specifics for myself and found that delaying was enough better that I am waiting until 70 to claim.

Here’s one pair of scenarios. $1M portfolio, SS for 2 people is $3000/mo at FRA, at age 62 get $2113, at age 70 get $3720, 95% success rate, historical data:

  • retire at 62, take SS at 62, you get an annual inflation adjusted spending of $66,074
  • retire at 62, take SS at 70, you get an annual inflation adjusted spending of $69,505

So for the same risk, waiting until 70 to take SS lets you spend $3431 more per year, every year. This is 5.2% more spending.

This kind of analysis focuses on the worst case scenario, the safe withdrawal rate. Waiting to take SS means withdrawing more from your portfolio in the early years, reducing the growth of the portfolio in the average and best case scenarios. The median final portfolio value taking SS at 62 is $1,652,055, while the median final portfolio value taking SS at 70 is $1,357,273, about $200K less. You’ve spent about $100K more so the cost of waiting is, on average, about $100K for your heirs. This highlights how waiting to take SS is a form of insurance, it’s better in the worst situations but otherwise costly.

I would be interested in the results if others run their own scenarios. Maybe there are situations where waiting is a loser in terms of safe withdrawal rate.

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Thanks, SnootFool.

The biggest beneficiaries of this strategy are retirees with portfolios of between $200,000 and $600,000 … For these retirees, Social Security represents a larger share of retirement resources than wealthier retirees, so delaying could have a stronger impact on a portfolio’s longevity.

Ooooh, I would consider that range to be “barely able”. 4% annual withdrawal on $600,000 is only $24,000.

“tax torpedo.” This occurs when IRA withdrawals trigger the taxation of Social Security benefits.

Okay, I have a problem here. When your AGI + 1/2 of SS benefit is more than $44,000 then your SS is 85% taxed. $44,000 is far below what a middle-upper income would be. So financially successful people are going to be above that and the “tax torpedo” is here.

Playing with some numbers, Avg SS benefit is $19,884, max is $38,880 (at FRA). Max is $50,328 for filing at 70.

Assuming middle-upper (or would that be upper-middle) is getting halfway between the ave and the max, that’s $29,382.
Double that for a couple gets to $58,764.

Half that is $29,382. So other income more than $16,618 will push a couple into the 85% SS taxed. Upper-middle people most probably have much more other income than $16K.

What the article doesn’t make clear is what withdrawal rate would the Jacksons (delaying SSI couple) have to use in their 60s to bridge the gap. If they start with a $700K IRA, the initial $69K is about 10% per year, well above the 4% SWR rule of thumb.

Another thing the article doesn’t make clear is where the Jacksons got the money to live on in the years they deferred. Both got $69K of income. Smiths got $45K from IRA and $24K SS. Jacksons have to have gotten $69K from IRA.

If each started with $700K IRA at 62, Jacksons withdrew $192,000 more than Smiths did to 70.

At 70, (assuming 0% growth in the IRA) Smiths IRA balance is $340,000. Jacksons is $148,000.

Psychologically, I think most retirees would need a lot of explaining & handholding before they’d commit to a plan that involved giving their IRA a 10% haircut for eight years straight, even if the math was solid.

Jacksons IRA balance at 70 is 21% of what they started with. A 79% haircut.

So for someone getting the max SS check, you’d need about $800,000 in retirement savings to defer for the 8 years age 62 to 80, if you’re spending down the $400,000.

Very few people get the max SS check. A more realistic amount would be midway between average and max.

If you only have $200,000 in retirement savings, it still makes sense to spend half of that to delay for as long as you can,

NOBODY is going to voluntarily spend down half their IRA to defer SS. Nobody. Especially people that only have $200,000 to start with.

It’s still worth it to [take] an inflation-adjusted life annuity that you’re purchasing at half-price from the SS Administration.

Could you provide some real & realistic numbers instead of just handwaving?
Like, how much does this annuity pay you. Is that amount large enough to be worth bothering with?

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Rayvt asks,

<<intercst: It’s still worth it to [take] an inflation-adjusted life annuity that you’re purchasing at half-price from the SS Administration.>>

Could you provide some real & realistic numbers instead of just handwaving?
Like, how much does this annuity pay you. Is that amount large enough to be worth bothering with?

spinning just posted this firesim site that allows you to run any scenario you like

It’s pretty easy to do this at https://cfiresim.com/. I ran a few scenarios with specifics for myself and found that delaying was enough better that I am waiting until 70 to claim.

Here’s one pair of scenarios. $1M portfolio, SS for 2 people is $3000/mo at FRA, at age 62 get $2113, at age 70 get $3720, 95% success rate, historical data:
- retire at 62, take SS at 62, you get an annual inflation adjusted spending of $66,074
- retire at 62, take SS at 70, you get an annual inflation adjusted spending of $69,505

So for the same risk, waiting until 70 to take SS lets you spend $3431 more per year, every year. This is 5.2% more spending.

If you know you’re going to get a bigger SS check at age 70 and have more money to spend over your lifetime, you can still take that expensive cruise at age 62.

intercst

I know intercst is adamant about this. And your sim supports it.

But what about opportunity cost? If you take SS earlier, you could use that money earlier and in the long run come out ahead. You’re talking 5.2% more spending, but my market returns on my portfolio is a lot more than that most years. I could end up with a lot more money than what SS would be paying me if I delayed.

Just playing devil’s advocate. Probably delaying is the “safe” route because it’s a guaranteed return.

1poorguy

1poorguy,

But what about opportunity cost? If you take SS earlier, you could use that money earlier and in the long run come out ahead. You’re talking 5.2% more spending, but my market returns on my portfolio is a lot more than that most years. I could end up with a lot more money than what SS would be paying me if I delayed.

Yes. If you take SS at age 62 and invest it in the stock market, there’s a chance that you’ll get a higher return, but it’s not guaranteed.

The reason the SWR is 4% instead of 10% is because of the variability of stock market returns.

At some purchase price, an inflation adjusted life annuity is an attractive retirement asset. If someone is willing to sell me one for 50% off what a commercial insurer would charge me, I’m a buyer.

I suspect that you’d find few military retirees who would be willing to cash in their pension so that they could play with the money in the stock market.

intercst

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But what about opportunity cost? If you take SS earlier, you could use that money earlier and in the long run come out ahead. You’re talking 5.2% more spending, but my market returns on my portfolio is a lot more than that most years. I could end up with a lot more money than what SS would be paying me if I delayed.

Just playing devil’s advocate. Probably delaying is the “safe” route because it’s a guaranteed return.

The issue is sequence of returns risk. The sequence of returns is even more important that the eventual rate of return. Delaying SS backstops a bad sequence in the early years, which means you can “safely” spend more money each year.

I did the same investigation that spinning did on cFIREsim a while back (don’t have the numbers handy, sorry) for my personal situation and found the same thing: Delaying means you can spend more money.

Now, it seems reasonable that taking it early might work in other situations. But I’m confident that for me delaying is the better option.

This is somewhat backstopped by a financial advisor, which my wife gets access for free through work. For the various retirement he presented he always used the assumption of taking SS at 70. Once scenario was for us to retire right now, which I don’t think my wife is buying into.

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This thread has been interesting to read; however, it hasn’t had much impact on those that think that 62 is the ideal age to claim Social Security Workers benefit and those that think 70 is the best age.

I could have claimed my Social Security Workers Benefit at age 62. I didn’t because I wasn’t ready to quit working and retire. Had I claimed at 62, I would have received no benefits until FRA at age 66 due to my salary as a Software Engineer. I didn’t get around to retiring until after I turned 68 and my wife turned 66. This resulted in me having over 35 years of wage inflation adjusted income exceeding the cap on Social Security income.

They were several commenters mentioning SSI in this thread. The Supplemental Security Income (SSI) is an assistance program run by the Social Security Administration to assist families and individuals that are disabled and unable to work. This has nothing to do with Social Security retirement benefits.

Also, there were several comments about “break even points” in this thread. It is a somewhat meaningless exercise as earned but unclaimed COLA is applied after your PIA is calculated to arrive at your Social Security benefit. In my case by retiring at 68, my Social Security benefit was increased after applying earned COLA to mt PIA amount by 15.3% making my benefit essentially equal to what Social Security estimated my PIA amount would be at age 70. It only took 8 years for my cumulative benefits to exceed what I would have received by retiring and claiming at 62.

As several have said in this thread, you need to make your own calculations to determine what is the best age for claiming Social Security benefits.

1 Like

MCCrockett-
<<They were several commenters mentioning SSI in this thread. The Supplemental Security Income (SSI) is an assistance program run by the Social Security Administration to assist families and individuals that are disabled and unable to work. This has nothing to do with Social Security retirement benefits.>>

Guilty as charged! Didn’t mean to muddy the waters, I just was trying to abbreviate Social Security Income without getting carpal tunnel syndrome. I didn’t realize that abbreviation had been claimed already.
Social Security must be staffed a lot of ex-military types- the acronyms & abbreviation would choke a goat. My bad.

Rayvt-
<<“tax torpedo.” This occurs when IRA withdrawals trigger the taxation of Social Security benefits.

Okay, I have a problem here. When your AGI + 1/2 of SS benefit is more than $44,000 then your SS is 85% taxed. $44,000 is far below what a middle-upper income would be. So financially successful people are going to be above that and the “tax torpedo” is here.

Playing with some numbers, Avg SS benefit is $19,884, max is $38,880 (at FRA). Max is $50,328 for filing at 70.

Assuming middle-upper (or would that be upper-middle) is getting halfway between the ave and the max, that’s $29,382.
Double that for a couple gets to $58,764.

Half that is $29,382. So other income more than $16,618 will push a couple into the 85% SS taxed. Upper-middle people most probably have much more other income than $16K.>>

Plug some numbers into one of these Social Security Taxable Benefits Calculators-
https://www.dinkytown.net/java/social-security-taxable-benef…
https://www.covisum.com/resources/taxable-social-security-ca…
With $50K SSA income & $20k ‘other’ income, $6,850 of Social Security is taxable.
Flip those numbers ($20k SSA & $50K ‘other’ income)= $17,000 of Social Security is taxable.

The ratio matters- lots of Social Security & a smaller amount of ‘other’ income results in low taxation of Social Security.
Reverse the ratio & it gets uglier.

Get to $70K with $35K of SSA & $35K other income, $13,225 of SSA money is taxable.

Of course, in the real world, most people who receive an above average Social Security PIA, also have some combination of dividend/cap gains, rental income, pensions, TIRA distributions, etc. as to make it tough to avoid higher taxation of Social Security.

But, at least theoretically, by living off TIRA distributions from 62 to 70, you avoid all SSA taxation for eight years by the simple expedient that you don’t have any Social Security income.
After 70, your increased PIA (theoretically) allows for lower taxation of Social Security because your ‘other’ income now makes up a smaller ratio of the whole with your 24%-32% juiced up benefit.

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I wish somebody, like intercst, would compute a real set of figures for a couple of scenarios of “person in upper middle to high net worth”, instead of all the handwaving.

Maybe assumptions like: slightly above average – $1m retirement portfolio, 20% above average SS benefit.
Well above average – $2m or $4m retirement portfolio, SS benefit midway between average and maximum.

Maybe also: What is the minimum retirement portfolio that would comfortably allow someone to defer to 70?

That would absolutely depend on your expenses, which are not the same for anyone.

The first time we sat down with a financial planner that wanted our business we told him our goal of retiring in our 50’s. “You can’t do that.” he said. “Why not?”, I asked. “You need 85% of your current income in retirement.” “But we don’t spend that much now, so why should we need it when retired?” By that time we were saving about 50% of our income, which is not really that tough when you are content with life and have banked your bonuses and raises rather than raise your standard of living to outpace your income. “Run the numbers.”, I told him.

Sure enough he came back a week later and lo and behold we could indeed retire in our 50’s. I wasn’t surprised, but he was.

RUN YOUR NUMBERS. YOUR numbers. It’s been discussed many times on this board and others just how to do that. Why do you care about someone else’s? It’s got nothing at all to do with yours.

IP,
really not understanding the problem with that

Sorry, resubmitted with proper formatting.

I wish somebody, like intercst, would compute a real set of figures for a couple of scenarios of “person in upper middle to high net worth”, instead of all the handwaving.

Maybe assumptions like: slightly above average – $1m retirement portfolio, 20% above average SS benefit.
Well above average – $2m or $4m retirement portfolio, SS benefit midway between average and maximum.

Maybe also: What is the minimum retirement portfolio that would comfortably allow someone to defer to 70?

That would absolutely depend on your expenses, which are not the same for anyone.

The first time we sat down with a financial planner that wanted our business we told him our goal of retiring in our 50’s. “You can’t do that.” he said. “Why not?”, I asked. “You need 85% of your current income in retirement.” “But we don’t spend that much now, so why should we need it when retired?” By that time we were saving about 50% of our income, which is not really that tough when you are content with life and have banked your bonuses and raises rather than raise your standard of living to outpace your income. “Run the numbers.”, I told him.

Sure enough he came back a week later and lo and behold we could indeed retire in our 50’s. I wasn’t surprised, but he was.

RUN YOUR NUMBERS. YOUR numbers. It’s been discussed many times on this board and others just how to do that. Why do you care about someone else’s? It’s got nothing at all to do with yours.

IP,
really not understanding the problem with that

1 Like

So financially successful people are going to be above that and the “tax torpedo” is here.

+++
+++

That’s a minor flesh wound compared to what “IRMAA”

https://www.google.com/search?client=firefox-b-1-d&q=soc…

will do to your monthly Social Security direct deposit!

AND, if that isn’t bad enuff for ya, run the income tax numbers as single (as opposed “married filing jointly”) which will happen when one spouse dies.

Yup, the only guarantees in life: Death & Taxes.

sunrayman
part-time pessimist

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But what about opportunity cost? If you take SS earlier, you could use that money earlier and in the long run come out ahead. You’re talking 5.2% more spending, but my market returns on my portfolio is a lot more than that most years. I could end up with a lot more money than what SS would be paying me if I delayed

The media 96 month (8 years) S&P 500 return 1950 to 2017 was 10.2%.
Including inflation, the media was 6.0% above inflation.

Worst case 8 years was -4.6% or -6.9% above inflation. So it is possible to come out worse.

Maximums were 20.8% and 16.2% above inflation.

At 6.0% above inflation, the break-even point is age 98.

Just playing devil’s advocate. Probably delaying is the “safe” route because it’s a guaranteed return.

Guaranteed…until the SSA cuts benefits because they ran out of money. Currently projected in 2035.
… and/or until Congress changes the laws relating to SS.

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… “the median was 6.0% above inflation.”