they are talking seriously about it
And what is your math on the marginal value of the life annuity, to show that you are actually getting at least a 7.4% return?
AJ
2 Likes
https://retireearlyhomepage.com/betterdeal.html
" Looking at the difference in the monthly benefit between CASE 3 and CASE 4 in the table below, you’ll see that those 5 years of $9,000 annual FICA earnings and a total payment of of $4,844 in FICA taxes increased the monthly Social Security benefit by $26/month. Let’s compare this to the cost of purchasing an inflation-adjusted life annuity from an insurance company.
At current rates, a $100,000 premium would buy a 62-year-old about a $350/month benefit from an insurer with a high rating. That calculates to about $17/month for a $4,844 premium. The Social Security benefit I “bought” for $4,844 in FICA taxes is more than 50% higher than what an insurance company would offer.
[/snip]
Also, people in the Top 20% of the wealth/income pyramid tend to live 4 or 5 years longer than the average American. If I can buy an inflation-adjusted life annuity at a big discount to what a commercial insurer charges, it’s likely a good bet. Though not as good as “free Obamacare”. [LOL]
I checked my SS earning record, and the last year I paid any FICA was at age 58. So I haven’t run afoul of that age 60 rule that cuts off indexing earnings to inflation.
3 Likes
I still don’t see any math showing ‘at least’ a 7.4% return. I see a lot of hand-waving talking about how you are increasing your lifetime annuity cheaper than you could buy an annuity from a commercial insurer, but since we all know that you wouldn’t buy an annuity from a commercial insurer, there’s no actual math there to show your rate of return.
Again, you have no actual math to prove your declaration that you are earning at least a 7.4% marginal return on your ‘investment’. And while you may ‘tend’ to live 4 or 5 years longer, you aren’t discounting for the fact that you may also die earlier.
AJ
3 Likes
Same thing for any investment I make. There’s some probability I’ll make money, and some probability I won’t. You add the pluses and minuses and choose the path with the greatest expected result. If I die early, I won’t care. I’ll be dead.
For example, we know that the value of average home in the US barely keeps up with inflation, while over the long term, the stock market gives you inflation plus 6% to 7%. I made the judgement 40 years ago that you want to have as little money as possible invested in real estate and overweight the stock market – so far, so good.
An inflation-adjusted life annuity is the highest quality retirement asset a person can own. You don’t see too many retired military people looking to cash in their pension so that they can play with the money in the stock market.
If the Federal Gov’t gives me the opportunity to buy an inflation-adjusted life annuity at a big discount to what an insurer would charge, I’ll likely be a buyer. Especially since the Gov’t doesn’t account for “adverse selection” (i.e., the risk that only healthy people will buy the annuity.)
intercst
5 Likes
And still - no actual math to show your 7.4% marginal return.
AJ
8 Likes
Oh please. You reported the number to the 10th of a percentage point, implying confidence in the 7.4% to the tenth of a percent. You claim to be an engineer, and as such should understand significant numbers. It’s misleading to state on one hand that “you are earning at least a 7.4% marginal return,” implying precision to the tenth of a percent, and then waive your hands and say “You add the pluses and minuses and choose the path with the greatest expected result.” Misleading at best.
IP
6 Likes
How about a little reading comprehension?
Aj was the one who quoted a 7.4% return. I said it was about double. As an engineer who understands actuarial science, I know that the return on an inflation adjusted life annuity is dependent on when you die and the inflation rate during the period of time that the monthly benefit is being paid out.
I bought the annuity (by volunteering to pay FICA) at a discount to what an insurance company would charge at the time, and given the difference in life expectancy between the average SS beneficiary and those in the top 10% to 20% of the income pyramid, I expect to beat the SS “breakeven” age of 81 or 82 for delaying until age 70 by 5 or 6 years – let’s say I expect to live to age 87. Those are the assumptions. Input your guess for the inflation rate and you can calculate it to any many significant (i.e., “insignificant”) digits as you like.
intercst
1 Like
Let me waive my hands and pose a question.
SS itself says that every year of delayed SS causes the payout to grow by 8%.
So, every 100 dollars that SS says they gonna pay me, grows $8 for each each year of delay.
Each $1 generates $0.08.
This is COMPOUNDED every year of delay. At 8%.
The amount paid out INCREASES (COMPOUNDS!) year after year at 8%. You know - more $ to spend.
I see all the hand wringing (see, I’m keeping the hand theme going) about how big “it” is, but the bottom line is more $SS, compounding at 8% each year of delay.
You know - more $ compounding into MORE $. For me to spend, or turn over to the AL facility so I can have bread with my gruel.
THAT’S why I choose to delay.
Here’s the posed question:
Does “earned income” for a current year replace a “zero year” and add some $ to the potential payout? (Hint: in my case, back in 2015, a high current year income replaced a much lower 35-year-ago income year).
If so, do those “current” dollars compound at 8%?
Furthermore, SS announced about an 8% COLA a couple months ago.
Were only “selected” funds COLA’d or was the whole enchilada COLA’d?
Yall can argue about whose tree is bigger all you want.
But you seem to be losing sight of the forest (more $ when you start taking SS).
ralph
2 Likes
It depends on the size of your AIME (Average Indexed Monthly Earnings). You get a fantastic 90% credit up to the first bend point of $1,024/month ($12,228/yr), a 50% credit if your AIME is between $1,024/month and $6,172/month ($74,064/yr), but only a 15% credit above $6,172. I definitely wouldn’t be looking to “buy” an inflation-adjusted life annuity by volunteering for FICA if my AIME was high enough to be in the 15% category. It’s only a strategy for those with a lot of zeros in their earnings record.
As Aj pointed out, any earnings after age 60 are no longer indexed for inflation when calculating your SS benefit, but you would still get the 8% per year for waiting to age 70. You just won’t be getting the 8% per year plus the 8.7% inflation adjustment you’d be getting on your pre-age 60 earnings record.
And that’s why the dumbest thing you can do in America, tax-wise, is to work for wage & salary income.
intercst
LOLOLOLOL.
Understood.
Trees trees trees.
The overall point is that ANY increase to the monthly (or annual) payout increases at 8% each year (until age 70). And each incremental increase is compounded each year.
Yes. There are lots of DETAILS that affect the total. My take away from the details that affect me, today, is that it would indeed be DUMB to go back to work as a way of increasing my SS benefit.
ralph
I’m tracking at least 3 categories with topics in which the posters are arguing whose tree is more colorful.
Actually, I suggested a 3.7% marginal return. You claimed that it was ‘at least double’ that - which means you were claiming it was at least 7.4% I don’t see anything where you disputed this characterization of it being ‘at least 7.4%’ - but you never did provide any math to back up your claim.
Right - which is why you can’t actually back up your claim with any actual math. Your hand waving of saying it’s ‘at least double’ the actual calculated marginal benefit is just that - hand-waving.
I would disagree that you ‘volunteered’ to pay OASDI. Royalty income from authoring a book is reportable taxable self-employment income, whether you run it through an LLC or not. I suppose that you could try to say it was ‘hobby income’ but once you have a hobby that pays you for 2 or 3 years, that’s generally considered a business, on which you would pay self-employment tax. Since your theory was that you would get the income for 5 years, it seems pretty clear that you were running a business, whether or not you ran it through the LLC.
When calculating your marginal gains, did you account for the cost of setting up the LLC?
AJ
1 Like
Hi @rainphakir,
The benefit rises 8% each year starting at your FRA. Your FRA benefit has 8% added to it at FRA + 1. At FRA + 2, 16% is added to your FRA benefit. At FRA + 3, 24% is added to your FRA benefit.
It is a straight 8% of your FRA benefit amount each year, not compounded.
Also, it is actually adjusted for whole months, not annually, you get a .666% for each whole month after FRA which becomes 8% for 12 months.
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
https://community.fool.com/u/gdett2/activity (Click Expand)
5 Likes
No, I already had a business active from when I had to be “employed” as an engineering consultant to get my health insurance through a professional society. I actually just sent the renewal in this week for my New York license, so I’m good for another 3 years if the economy craters and I’m forced back into the workforce. [LOL]
1 Like
Thanks Gene 
. I’ll go back and reread the information.
ralph
I believe it is your PIA amount that is being increased by .666% for each month you delay claiming SSA benefits after your full retirement age. At least that seems to be what happened to me when I claimed SSA benefits after retiring at age 68. My full retirement age was 66.0.
Hi @MCCrockett,
Exactly. Your PIA is the benefit you would receive if you retire at your normal retirement age.
It is often referred to as Full Retirement Age (FRA) since it is considered the “full benefit amount” for a “normal retirement.”
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
https://community.fool.com/u/gdett2/activity (Click Expand)
a) It does not compound. It is a flat 24/36% per month increase for each month past your FRA.
The increase is # of months times 24/36. Does not compound.
b) The increase is not free. You give up the previous month’s benefit in order to get the increase. If your FRA benefit is $1000/mo, each month you give up $1000 in order to eventually collect and extra $6.67/mo for the rest of your life.
5 Likes
It is entirely possible that intercst is using a different definition of “voluntary” than you are. I’ve read and discussed his material for decades, and it could very well be he is referring to the very action that caused the income as being “voluntary”. He’s a big fan of keeping taxable income as low as prudent in order to enable ancillary savings, sometimes substantial. For example, keeping income under a certain amount enables ACA medical coverage at a cost of about $0/month instead of $300/mo, or $700/mo, or even $1200/mo in some cases.
So “voluntary” may mean “chose to take the action that resulted in the [FICA] taxable income”.
3 Likes
Wait! This hardly seems worth it. If you lose $1000 now to get an extra $6.67 later, then breakeven is about 12 1/2 years without accounting for time value of the payment stream.
2 Likes