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Old 03-31-2016, 09:58 AM
 
Location: Forests of Maine
30,679 posts, read 49,437,227 times
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Quote:
Originally Posted by akck View Post
... SS is potentially an unknown as the benefit may change to solve future problems.
Right

Around 1990 among my many assignments was to help some servicemembers who wanted to revoke their SS policies. I read the SS handbook and helped those men with the forms. In the process I noticed a way to possibly game the system when you turn 55. My Dw and I discussed, and we decided to try when we got to that age. Then when we reached 55, I checked again, and SS had completely changed their methods.

My point is that SS changes.
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Old 03-31-2016, 10:33 AM
 
6,876 posts, read 7,273,507 times
Reputation: 9785
Quote:
401k are funds that belong to you. SS is potentially an unknown as the benefit may change to solve future problems.

Let's do an example. Say you're saving $10,000 in your 401k. If you stop saving it, your SS benefit will increase by $1,500/yr or $125/mo in our simple example. Now, if you invest that $10,000/yr for 30 years and make a 5% return, it's value will be $664,388 and assuming another 30 years of withdrawals, you'd get $22,146/yr or $1,845/mo, assuming no further appreciation. For a fair comparison, you'd have an extra $10,000 in income. But, you'd also pay taxes and SS on it, so your net might be $6,880. $6,880 invested may get you $457,099, which amounts to $1,269/mo under the same scenario.

So, what would you prefer, $1,845 or $1,394?
Does that even take into consideration the likelihood having your Soc Sec taxed once you started receiving benefits? So you end up with even less net in your pocket….
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Old 03-31-2016, 11:34 PM
 
Location: San Francisco Bay Area
4,695 posts, read 2,542,465 times
Reputation: 9127
Quote:
Originally Posted by Maple47 View Post
What does make more sense: to maximize 401k contributions, or limit them to 5%, and maximize SS benefits?
I doubt there is a clear answer, although...
Maximize everything you possibly can.
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Old 04-01-2016, 12:08 AM
 
Location: RVA
2,164 posts, read 1,265,106 times
Reputation: 4451
Quote:
Originally Posted by akck View Post
401k are funds that belong to you. SS is potentially an unknown as the benefit may change to solve future problems.

Let's do an example. Say you're saving $10,000 in your 401k. If you stop saving it, your SS benefit will increase by $1,500/yr or $125/mo in our simple example. Now, if you invest that $10,000/yr for 30 years and make a 5% return, it's value will be $664,388 and assuming another 30 years of withdrawals, you'd get $22,146/yr or $1,845/mo, assuming no further appreciation. For a fair comparison, you'd have an extra $10,000 in income. But, you'd also pay taxes and SS on it, so your net might be $6,880. $6,880 invested may get you $457,099, which amounts to $1,269/mo under the same scenario.

So, what would you prefer, $1,845 or $1,394?
Except it doesn't and you don't. Where are you getting a guaranteed 5% a year for 30 years? Fantasy Island?
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Old 04-01-2016, 03:03 AM
 
71,511 posts, read 71,694,121 times
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yep , averages are different then reality because of sequence of returns .

100 bucks that goes up year 1 by 100% is 200 bucks and if the following year it falls 50% you are back to zero gains .

know what your average return shows you got over those same 2 years where your money didn't grow at all ? a whopping 25% per year average return . 100% gain -minus 50% loss divided by two years is 25% per year average return .

so averages do not work .
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Old 04-01-2016, 11:28 AM
 
13,880 posts, read 7,391,112 times
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Quote:
Originally Posted by UNC4Me View Post
Nope. 401K does not reduce the amount you pay in SS taxes and therefore does not reduce your future benefits. Look at your W2. The amount in Box 3 (SS Wages) is the total of your earnings and is what you pay SS on. Box 1 (Wages, tips and other compensation) is your earnings less any 401K contributions and the amount you pay on for federal taxes.
Correcto-mundo. There is no hiding from Social Security or Medicare contributions.
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Old 04-01-2016, 12:02 PM
 
Location: Alaska
5,356 posts, read 16,342,402 times
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Quote:
Originally Posted by Perryinva View Post
Where are you getting a guaranteed 5% a year for 30 years? Fantasy Island?
Never said it was guaranteed, but for comparative purposes, I've averaged 7-9% over my investing life. The range has been -50% to +30%.
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Old 04-01-2016, 12:28 PM
 
Location: Alaska
5,356 posts, read 16,342,402 times
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Quote:
Originally Posted by mathjak107 View Post
yep , averages are different then reality because of sequence of returns .

100 bucks that goes up year 1 by 100% is 200 bucks and if the following year it falls 50% you are back to zero gains .

know what your average return shows you got over those same 2 years where your money didn't grow at all ? a whopping 25% per year average return . 100% gain -minus 50% loss divided by two years is 25% per year average return .

so averages do not work .
Your sequence of returns is no more reality than any other. The fallacy in your example is timeframe. In fact, your sequence is less likely to continue over a long period of time, otherwise no one would have been able to retire.

In planning and examples, you have to use something, and using an average return is as good as anything else. What else would you suggest?

I will say that when I was planning for retirement, I didn't just use one return percentage. I was more interested in finding out what average return would cause my plan to fail, hence, my spreadsheet has multiple return rates. Based on the rate where my plan would fail, I adjusted my risk factors. That's not entirely true, I'm willing to take on more risk than what my plan called for. In retirement, my main interest is what is the lowest average return needed to ensure we won't run out of funds. That turned out to be 0-1%, but we do want to leave an inheritance so we'll strive for something more but not necessarily as high as pre-retirement.

So to reiterate, what do you suggest using in place of an average?
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Old 04-01-2016, 12:37 PM
 
71,511 posts, read 71,694,121 times
Reputation: 49088
actually it is not average returns that count in retirement when spending down , it is sequence risk that determines your outcome .

the exact same average return over a 30 year period can leave you with a difference of 15 years in how long your money lasts .

that is an amazing spread but yep , it is what is . if your spread sheet assumed the same average return every year with never a down year then your numbers are way off .

you can use firecalc or the fidelity rip planner for actual sequence risk effect .

when not spending down cagr takes sequence risk in to account and that typically knocks about 1-2% off the nominal average returns .
moshe milevsky's now famous paper sequence risk and retirement ruin brought that effect to the forefront in retirement planning .
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Old 04-01-2016, 12:44 PM
 
71,511 posts, read 71,694,121 times
Reputation: 49088
DR MOSHE MILEVSKY wrote a very interesting paper a few years ago , RETIREMENT RUIN AND THE SEQUENCE OF RETURNS.

he took an example of a constant 7% return year after year based on a 7% average return over 30 years and drew 7% or 950 a month out starting at age 65 . the money was exhausted by age 86. this is typical of what uninformed folks do in an excell spread sheet or reverse amortization calculator when they have to enter a growth rate so they use an average.

next he took the same 7% average return and made it happen in different orders.

he made year 1 up 7% ,year 2 minus -13% and year 3 up 27% and repeated that pattern . the same 7% average return went broke at 83.


again , same 7% average return ,making the first year up 7% , next year up 27% and 3rd year minus -13%. you went broke at age 90. your money lasted 7 years longer than the example above with the same 7% average return.


next he did first year minus -13% , 2nd year up 7% and 3rd year up 27% . you were broke by 81.

that is also the same 7% average return

lastly he made 1st year up 27% ,2nd up 7% and 3rd year down 13% , same 7% average return and you lasted until 95.

that is almost 10 years longer than just figuring a constant 7% year after year ,.

the variation on the same 7% average return in how long your money will last is largely controlled by the order of those gains and losses.

in this case the same 7% average return most folks just throw in an excell spreadsheet and spend down didn't last until 86.5 like the spread sheet said. they went broke based on the order of that 7% average anywhere from 81 to 95.

as you see being down early on can drastically reduce your failure age by a lot even though the average return over time is identical. it isn't just the sequence of returns that has this effect ,it is the sequence of inflation too. now you have the two working against each other as well altering outcomes even more.
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