AssetBuilder Inc. Registered Investment Advisor - Simple Investing. Smart Future.

I retired recently. I am single so spousal benefits are not an issue. My IRA balance is $2,500,000 which I expect is more than enough to last my lifetime since my withdrawal rate is less than 4%. If I start Social Security at my "full retirement" age (66), I will receive $2127 per month. I calculated net present values for several scenarios which differ only in the age at which I begin taking social security benefits, varying from age 66 to age 70. I assumed that I would live to age 100. In each case, not taking Social Security benefits requires withdrawing an amount equal to the Social Security benefit from my IRA. I keep coming up with the same answer: The NPV is essentially independent of the age at which I beginning taking Social Security benefits. My conclusion is that I should begin taking Social Security benefits at age 66. Any comments?

Hi Curious.

I have tried to do similar calculations, but I have found that NPV is extremely sensitive to the necessary ASSUMPTIONS about earnings rates on the IRA and future inflation.  Have you tried the calculations with varying earnings rates and inflation (discount) rates? 

 Also, many advisers recommend more conservative investments as we age and are less able to manage our financial affairs, and this would lead us to expect a lower rate of return as we get older. 

 I know that the inflation adjustment in SS is extremely valuable, but I don't know how to factor it into the NPV equation

 I also believe that since we are concerned more with after tax spendable income than about gross income, and since SS income is still partially tax sheltered, that we also need to make assumptions about future tax rates and rules.   

Bryan

I think the NPV approach is a can of worms, largely for the reasons cited in the first response. Here are the realities:

• First, with your IRA balance you can be certain that you'll have maximum Social Security benefit taxation. That means, however, that 85 percent of your SS benefits will be subject to the federal income tax which is less than 100 percent. So SS income is still a bit better than ordinary income.
• Second, the inflation-adjustment that comes with Social Security is a really valuable add-on, regardless of whether we are considering single or joint life annuities. When you price inflation-adjusted life annuities you'll find that they cost about 50 percent MORE than a fixed life annuity.
• Third, with no heirs and a surplus of investment assets, deferring taking Social Security not only increases your future benefits but it may also slightly decrease your future RMDs.
• Fourth, If giving up $1 of highly taxable SS benefits for a year gives you an increase in future benefits that would cost $1.50 to buy, deferral is a slam-dunk investment. Most people can't make this trade-off because they need income and they need it now. That need explains why so many people resist the idea and insist on assuming that they will be on the short side of the actuarial stick and die young.
• Finally, you can test out the alternatives by pricing inflation-adjusted life annuities on the Vanguard website.

Scott

I tried a different approach after considering your comments regarding NPV. I ran several simulations using the Retirement Income Planner available on the Fidelity Investments website. This is a Monte Carlo simulation based on historical stock market/bond market performance. I evaluated various ages for starting Social Security, from 65 through 70. The best case was delaying the start of Social Security benefits to age 68.