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
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
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
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
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)
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]
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.
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”.
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.
Plus if you invest that money you get into anything, even a few percent certificate of deposit, which then compounds, your break even is a few years more. My break even without accounting for investing the money or inflation is in my 80s AND there is a risk that something will be changed. So for example by the time I collect, it may be reduced by 25% if our gov decides to do so and I have learned that everything is possible. On the other hand, if I am already collecting, there is close to guarantee that it won’t be reduced and the worst that may happen is lower COLA increases.
Not exactly correct. When you claim Social Security benefits, all years of insured earnings before the year you turned 60 are adjusted by the Average Wage Index (AWI) for the year you turned 60. Starting at your age 60, your insured earnings are not indexed for inflation.
All the years that you did not have earnings before you entered your claim for Social Security benefits are included in determining your Average Indexed Monthly Earnings (AIME). the 35 years with the highest earnings are summed and divided by 420 to produce your AIME.
The PIA is calculated by applying the AIME bend points in effect when you entered your claim for benefits to the AIME. The PIA amount is then adjusted for early or late retirement. See Early or delayed retirement for the percentage of adjustment. The table is missing the columns for age 68 and 69.
After the PIA has been adjusted for early or late retirement, the COLA earned for each year starting with the year you turned 62 until the year that you claimed your Social Security benefit to yield your monthly Social Security benefit amount.
Which AIME bend points (i.e., the bend points for which year) are use for calculating AIME. Age 62, FRA, or the year in which benefits are applied for? This issue has been less than clear to me for some time. I finally understood the inflation adjustments and that they stop once one turns 60?
Regards, JAFO
I don’t know. I have yet to find anything on Social Security’s web site that provides a definitive answer. My assumption is that the AIME bend points used are for the year you claimed your benefits.
At least the web site is clear on inflation adjustments stopping at age 60. This implies that no COLA adjustments are made for earnings for the years you were 60 and 61. COLA adjustments are only made between the ages of 62 and the your age when you claim benefits.
The bend points in the year 2023 PIA formula, $1,115 and $6,721, apply for workers becoming eligible in 2023. Social Security Benefit Amounts
See the table of bend points for the bend points applicable in past years. Id.
a Year of eligibility; that is, the year in which a worker attains age 62, becomes disabled before age 62, or dies before attaining age 62.
Reading together, for most people the year they turn 62 is the relevant year for determining bend point unless the person dies or becomes disabled before age 62.
Regards, JAFO
They are the bend points for the year in which you ‘first become eligible’ which, unless you die or become disabled before then, is 62. You can see that from the example for “Person B” on this SS website page Social Security Retirement Benefit Calculation (ssa.gov)
The worker in case B is first eligible in 2019 (the year case B reached age 62). Thus the case-B PIA is the case B amount computed above truncated to the next lower dime and increased by cost-of-living adjustments, or COLAs, for 2019 through 2022. These COLAs are 1.6 percent, 1.3 percent, 5.9 percent, 8.7 percent, respectively. The resulting PIA is $3,627.10.
When you look at the bend point calculation for Person B from that page
you can see that the bend points that were used in their calculation were the ones from 2019 from the table of bend points here Benefit Formula Bend Points (ssa.gov)
Your assumption appears to be incorrect based on the referenced example.
I’ve heard this assumption before and tend to disagree with it. First of all, there is no COLA adjustment needed for the year that you turn 60, since that’s the base year for your wage indexing. Therefore, all of your wages in your AIME are being adjusted for the year in which you turned 60, so your wages for that year are already indexed and don’t need a COLA. Then for the years after you turn 60, your wages are counted as-is, with no adjustment but if there was wage inflation from the year when you turned 60, presumably, you would have participated in that wage inflation, so, in theory, your wages would have increased, and the wage inflation would have been accounted for. I understand that not everyone participates in wage inflation equally, so, depending on your specific circumstances, the wage inflation that you received for your wages when you were 61 may be better or worse than the average indexing that could have been applied to it.
AJ
