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odiousgambit
odiousgambit
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June 11th, 2017 at 5:20:57 AM permalink
I'm thinking that it is soon going to be common for two person *households* to have the equivalent of a million dollars in value with what their Social Security is worth, even though SS is not cashable.

What I'm doing is comparing the income generated by Social Security and comparing it to the income generated by the "rule of thumb" that says, for someone expecting to retire at the point where life expectancy is multi-decade, to figure being able to initially withdraw 4% of liquidatable assets and get an annual figure in income that should mean their money will not run out.

That 4% sounds like a low percentage is related to the provision that the amount to be withdrawn will be increased along with inflation while the principal has been decreasing - thus not much can be taken at first. But it strikes me that there is an element here similar to SS, which is also income that increases when there is inflation.

Now I do know that there are still plenty of differences between the two sources of income and that the rule of thumb is just that - there are no guarantees it will hold up [perhaps that also can be said of SS]. However, just keeping it simple here, it occurs to me that it's pretty easy to undervalue this SS income even for someone well off. Basically, $1,000,000 at 4% is $40,000 per year . I know there are some couples today taking that much in total from SS; are they usually too old to think 4% fits? Probably so, but probably quite a few can take in $20k each at age 62 now [not sure but can't be far off]. I'm thinking the 4% rule works pretty good for that age group. I don't get to look at what people draw in SS, but I'm ready to believe age 62 "SS millionaires" will be common soon.

There's nothing particularly profound about this, but I never see it discussed and I thought I'd bring it up. Or is there a flaw in my thinking?
"We thank with brief thanksgiving Whatever gods may be That no man lives forever, That dead men rise up never" Nor any gambler the long run see ever ........apologies to Swinburne for that last line
Wizard
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Wizard
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June 11th, 2017 at 6:46:23 AM permalink
Just a quick answer here. The full retirement age is 66. You get less if you apply early and more if you wait, up until age 70. A 65 year old male today can expect to live 17 more years and a woman 20. Ignoring the time value of money, either would make out better with a 25-year annuity, which is how long the nest egg would last taking out 4% at a time. However, Social Security benefits rise with inflation, while annuity payments would not. Yes, the interest on the remaining annuity would earn interest but you would be drawing it down over time so you wouldn't be earning interest on the full amount the whole time.

Given the low rates of inflation lately, I think the 4% results in more average earnings. However, Social Security will pay no matter how long you live so for most people would be the better safety net.

That's just scratching the surface. One could write pages about it.
It's not whether you win or lose; it's whether or not you had a good bet.
Johnzimbo
Johnzimbo
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June 11th, 2017 at 7:29:41 AM permalink
I was born in 1960 and full retirement age for me is 67 :(
odiousgambit
odiousgambit
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June 11th, 2017 at 7:57:55 AM permalink
Quote: Wizard

Just a quick answer here.



If I understand the 4% rule of thumb right, it adjusts for inflation by allowing increasing amounts of withdrawal, which is why initial withdrawal is 4% while a good investing strategy should still yield 4% 'plus' [assumes you can beat putting it in the bank]. If it was 4% withdrawal and you earned 4% of course you'd not touch the principal, but the r.o.t. assumes you get into the principal pretty heavily at some later point due to the increases.

I don't know much about annuities but wonder if it is a good comparison - I have gathered that typical annuities from insurance companies are rip-offs, I assume you mean something more fairly run than those.
"We thank with brief thanksgiving Whatever gods may be That no man lives forever, That dead men rise up never" Nor any gambler the long run see ever ........apologies to Swinburne for that last line
Wizard
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Wizard
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June 11th, 2017 at 11:21:32 AM permalink
Quote: Johnzimbo

I was born in 1960 and full retirement age for me is 67 :(



I was born in 1965 and it is 67 for me too. To be honest, I think they should raise it to 70 in an effort to save the program. Something drastic has to be done.
It's not whether you win or lose; it's whether or not you had a good bet.
Wizard
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Wizard
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June 11th, 2017 at 11:27:47 AM permalink
Quote: odiousgambit

If I understand the 4% rule of thumb right, it adjusts for inflation by allowing increasing amounts of withdrawal, which is why initial withdrawal is 4% while a good investing strategy should still yield 4% 'plus' [assumes you can beat putting it in the bank]. If it was 4% withdrawal and you earned 4% of course you'd not touch the principal, but the r.o.t. assumes you get into the principal pretty heavily at some later point due to the increases.

I don't know much about annuities but wonder if it is a good comparison - I have gathered that typical annuities from insurance companies are rip-offs, I assume you mean something more fairly run than those.



I probably shouldn't have used the word annuity, as those generally give a guaranteed revenue stream for x years. Sometimes they pay whatever is left to pay in a lump sum if the owner dies. I took a whole actuary exam about annuity math some 25 years ago.

Anyway, it sounds like you weren't talking about annuities, but putting the money in some kind of financial institution and taking out 4% of the initial amount per year.

Maybe it would help us talk about this if you told us why you were asking. Social Security is what it is. You can't just take out a lump sum and reinvest it.
It's not whether you win or lose; it's whether or not you had a good bet.
odiousgambit
odiousgambit
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June 11th, 2017 at 11:58:33 AM permalink
Quote: Wizard

Quote: odiousgambit

it sounds like you weren't talking about annuities



I did ask if my thinking was screwy is all.

The thing is, I am of an age and place where when I was young, to be a "millionaire" was almost a thing of fantasy. You had to be born "with a silver spoon in your mouth" as they said or be a fantastic businessman to get there starting with little. Professional people in our neck of the woods rarely became millionaires in those days. Maybe a few really successful real estate developers and someone who owned a jewelry store that did well for decades, that sort of thing. This standard has finally changed and it seems clear that if you want to think of a millionaire as 'well off' that is fine but it is not uncommon now to have those kind of assets today. Such a household hardly has it made, and I really think a young couple should not even think of retiring at this previously fantastic level.

Multimillionaire? There is a certain point there that compares to yesteryear, not sure where it is.

So, surely for many my age it is 'kind of something' that we can expect soon.............. "millionaire" Social Security households being common according to this unusual way of looking at it. Or maybe it is all wrong to look at it that way which is why I have to ask.
"We thank with brief thanksgiving Whatever gods may be That no man lives forever, That dead men rise up never" Nor any gambler the long run see ever ........apologies to Swinburne for that last line
lilredrooster
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June 11th, 2017 at 4:18:13 PM permalink
Quote: odiousgambit

expecting to retire at the point where life expectancy is multi-decade, to figure being able to initially withdraw 4% of liquidatable assets and get an annual figure in income that should mean their money will not run out.


instead of withdrawing 4% a year a person could easily find a conservative bond fund that would average about 4% per year considering the yield and likely appreciation. it wouldn't be risk free but it would be low risk. if there is panic in the bond market which sometimes happens there could be a bad year or two. but there would be the tremendous advantage of always having your principal there if you choose to change strategies or if you wish to bequeath a greater amount to your heirs. imho this strategy is vastly superior to withdrawing 4% per year in estimation of your life expectancy. if you end up not needing the entire 4% the bond fund would generate in any year the excess could go back into the fund to earn even more.
everybody wants to go to heaven but nobody wants to die
Ibeatyouraces
Ibeatyouraces
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June 11th, 2017 at 10:33:15 PM permalink
Quote: Wizard

Something drastic has to be done.


Abolish it and give everyone their money back! It's been a scam from the get go.
"And that's the bottom lineeeee, cuz Stone Cold said so!"
onenickelmiracle
onenickelmiracle
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June 11th, 2017 at 11:58:46 PM permalink
Quote: Ibeatyouraces

Abolish it and give everyone their money back! It's been a scam from the get go.

Bernie Madoff would tell you, not so easy. It wasn't really a bad program, as much as all the money was used before it was needed and now it's a hostage to the dollar along with all the debt. Being based on worker to retiree ratios is more about the debt isn't it.
Looks like sh!t just got imaginary!

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