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My Dad and I are always talking about money and investments. It is lots of fun and I learn a lot too.
He has been a very successful businessman and investor. He retired at age 60. Throughout my life, I remember him spending lots of time on his computer researching investment and money.
He has decided that he does not need the money from Social Security for his day to day financial needs but will still apply for it. He has given me a question/research project to investigate to help me learn about math, investing and money. Here is his question:
Which option is better to maximize the amount of money he can give to his three sons upon his death:
OPTION ONE: Apply for Social Security at age 62 and collect $1800 inflation-adjusted benefits until his death. Every cent of his Social Security would go directly into a total stock market mutual fund. (He will pay the taxes on the benefits and does not want to include tax considerations into this math problem, it would only cause confusion.)
OPTION TWO: Apply for Social Security at age 70 and start to collect $3800 in inflation-adjusted benefits until he dies. (The starting $3800 figure came from the 8% a year waiting bonus plus estimated inflation increases in the next 8 years.). Every cent of his Social Security would go directly into a total stock market mutual fund. (He will pay the taxes on the benefits and does not want to include tax considerations into this math problem, it would only cause confusion.)
For this math problem, he will live to 90 years old.
(I have started the research on websites that track past stock market returns and found that historically option one would always give us more money in all the countless date matches in the last 50 years due to good stock market returns. Am I wrong?)
if you delay to age 70 , by age 90 social security can provide a 5% real return (that is inflation adjusted and by age 95 it is 6% inflation adjusted . that is on par with a balanced fund in favorable outcomes .
if you take ss early and invest the money in a balanced portfolio that can also provide a 5-6% real return . if you go 100% equities potentially this could turn out better but no guarantee , especially if your dad will be spending some of this money . down markets ain't your friend when spending down from 100% equities . . .
in practice better longevity beyond 90 will favor delaying . better markets and rates will favor taking ss early .
take your pick as to which you think will play out better . they all can play out close .
I can't find it right now but saw on one website that over a twenty year period there was only a 10% chance that a total stock market fund would not give a 5% annual CAGR real return. (Based on historical returns with are no way guaranteed in the future.) With this math problem, the entire amount of his Social Security checks will be collecting for 28 years of deposits and investment returns. (From age 62-90.)
Quote:
Originally Posted by mathjak107
the balance could be identical ....
if you delay to age 70 , by age 90 social security can provide a 5% real return (that is inflation adjusted and by age 95 it is 6% inflation adjusted . that is on par with a balanced fund in favorable outcomes .
if you take ss early and invest the money in a balanced portfolio that can also provide a 5-6% real return . if you go 100% equities potentially this could turn out better but no guarantee, especially if your dad will be spending some of this money . down markets ain't your friend when spending down from 100% equities . . .
in practice better longevity beyond 90 will favor delaying . better markets and rates will favor taking ss early .
take your pick as to which you think will play out better . they all can play out close .
the problem is if he is going to be spending down some of this money average returns no longer work because of sequence risk .
He is not spending any of the returns. Every dime is going into a low fee total stock market mutual fund. (As I indicated in my first post.) Sequence risk is an issue but who knows what is going to happen. All I know from my initial research is historically even with periods of huge stock market troubles and even when the person started retirement at the start of a terrible bear market, at the end of 28 years-from age 62-90 in every case the person who started SS at age 62 came out ahead than the person who started at 70. (According to Portfolio Visualizer)
My Dad and I are always talking about money and investments. It is lots of fun and I learn a lot too.
Which option is better to maximize the amount of money he can give to his three sons upon his death:
For this math problem, he will live to 90 years old.
(I have started the research on websites that track past stock market returns and found that historically option one would always give us more money in all the countless date matches in the last 50 years due to good stock market returns. Am I wrong?)
I understand you're asking assuming he lives until 90 but that is a crucial error. If he delays to 70 and dies before that, sons get nothing. The risk reward is way skewed to the risk side. He's taking a huge risk for a slight benefit that only manifests if he lives a very long time. Even people genetically predispositioned to living to 100 can die much earlier by accident or infectious disease.
If I was the father there's no way I'd risk my sons getting nothing by taking a long shot on living a very long life.
He is not spending any of the returns. Every dime is going into a low fee total stock market mutual fund. (As I indicated in my first post.) Sequence risk is an issue but who knows what is going to happen. All I know from my initial research is historically even with periods of huge stock market troubles and even when the person started retirement at the start of a terrible bear market, at the end of 28 years-from age 62-90 in every case the person who started SS at age 62 came out ahead than the person who started at 70. (According to Portfolio Visualizer)
if he is not spending down 100% equities should work out okay with early ss . but no guarantees
seems like it would make more sense to gift the money annually to the 3 sons and remove the assets from his estate, let them decide where to invest it.
He is not spending any of the returns. Every dime is going into a low fee total stock market mutual fund. (As I indicated in my first post.) Sequence risk is an issue but who knows what is going to happen. All I know from my initial research is historically even with periods of huge stock market troubles and even when the person started retirement at the start of a terrible bear market, at the end of 28 years-from age 62-90 in every case the person who started SS at age 62 came out ahead than the person who started at 70. (According to Portfolio Visualizer)
be careful of how you define a retiree when it comes to portfolio's .
actually if spending down like a typical retiree would , 100% equities actually failed to last a few more cycles and has a lower success rate than 50/50 .
so you can't talk about retirees like you can those in the accumulation stage because if a retiree is not living off their portfolio then for them he pay check never really stopped .
so 50/50 has been the best if living off that portfolio as volatility works against you . it is no longer the higher equity level wins the game .
the last 18 years has actually seen 30/70 beat both 60/40 and 100% equities because of sequence risk .
100% equities at a 4% inflation adjusted draw has a 94% success rate . 50/50 clocks in at 96%. out of the 117 rolling 30 year periods we had to date 100% equities failed to last 2 more 2x than 50/50 did .
Last edited by mathjak107; 08-31-2018 at 07:47 AM..
I understand you're asking assuming he lives until 90 but that is a crucial error. If he delays to 70 and dies before that, sons get nothing. The risk reward is way skewed to the risk side. He's taking a huge risk for a slight benefit that only manifests if he lives a very long time. Even people genetically predispositioned to living to 100 can die much earlier by accident or infectious disease.
If I was the father there's no way I'd risk my sons getting nothing by taking a long shot on living a very long life.
Agree, 90 is optimistic unless he has long life spans in family history and like you said, no guarantee. Do you feel lucky OP?
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