Social Security and Your Safe Withdrawal Rate

If you have read recent reports of the future of Social Security its sounds dire and we won’t be able to count on this for our retirement planning.  The news uses terms like “insolvent” and “bankrupt,” implying that Social Security will run out of money long before we can access it benefits.    Is this true and what can we plan for in our retirement? 

We are planning to FIRE in the near future but won’t be eligible for Social Security benefits at the soonest for another 12 years and more likely for full benefits in 17 years.  Should we account for this benefit in our planning?  And if we do, does it change our retirement plans and estimated safe withdrawal rate?

If you are a more “mature” FIRE age, like us, Social Security can make a positive impact on your Safe Withdrawal Rate and ability to Retire Early!

As in our other articles, this covers the research we did for our own financial situation and may not be right for you.  This is also not meant to be a full study on Social Security.  There is a wealth of information online related to Social Security, some we include in our Reference section.  Please review our DISCLAIMER AND POLICIES section on the website.

Can We Count on Social Security?

On June 5, the 2018 annual reports on the state of U.S. Social Security and Medicare were published. The 78th annual Social Security Report (1) presents the financial results and forecasts for the program.    News outlets used this report to publish their dire outcomes of the program going “bankrupt”.  What did the reports actually state?

In the Message to the Public summary of the report, it states:

Social Security’s total cost is projected to exceed its total income (including interest) in 2018 for the first time since 1982, and to remain higher throughout the projection period. Social Security’s cost will be financed with a combination of non-interest income, interest income, and net redemption of trust fund asset reserves from the General Fund of the Treasury until 2034 when the OASDI reserves will be depleted.

2018 annual reports on the state of U.S. Social Security (1)

Based on their projections, the Social Security fund will be depleted by 2034.  Perfect timing for my full retirement benefit age in 2035!

All is Not Lost!

When the news states the program will go “bankrupt”, they are referring to the point where the reserve and ongoing taxes can’t cover all the expenses.  The Social Security program is funded by a payroll tax that no one expects to be repealed, so it has ongoing and recurring revenue.  As long as money continues to be collected, Social Security is going to be available.  The question is how much benefit can we expect?

Per the same report,

Thereafter, scheduled tax income is projected to be sufficient to pay about three-quarters of scheduled benefits through the end of the projection period in 2092.

2018 annual reports on the state of U.S. Social Security (1)

So even without any changes, who knows when congress will actually be able to accomplish anything meaningful again, we can plan on at least 75% of the benefits for the next 74 years.  

Some people take the outlook that uncertainty around Social Security means they should not count any benefits.  If you are younger than us and may be looking at 30+ years before accessing Social Security this may be reasonable. 

Calculating Your Social Security Benefits

In our case we could use the benefit in the next 12-20 years, depending on what age we choose to access the benefit (between 62-70 years old).  Using the forecast of 75% available benefit sounds like a reasonable assumption for our retirement planning.

There are plenty of online tools provided by the Social Security administration to estimate your Social Security benefits.   The SSA has an online tool that even can access your full work history and projects your future benefit.   They do assume you will earn at least as much in the future as your last full year of employment till your full benefit retirement age.  For many of us that is 67 years old.

If you plan to retire early, you should make some adjustments to the planning tool to account for no income in future years.  Social Security bases your retirement benefit on the highest 35 years of work history.  If you retire very early, you may not have that many work years and some of those years may be at a much lower level.  Be careful with the calculations tools since in general they will use your last years full income through your full retirement age.

To use the more detailed calculators (2) you need to make sure you have not frozen your credit reports.  Since we did not want to mess with unfreezing our reports we used the basic online tool.  Note: In this tool you do have to manually enter your income history (3).

Calculator Settings

Three setting to allow us to add the future Social Security benefit in our Simulation tool:

 1) Used age 67 as our Age at Retirement.  This is the full retirement age per Social Security and we can use this to estimate the payout from age 62 to 70.

Setting Age at Retirement

 2) When asked about our future earning, we just entered zero so it would not calculate any future income.  We may have one or two more years of income so this will provide us with a more conservative estimate.

Enter $0.00 for Future Earnings

3) Use the results in Today’s dollars since our simulation will model future inflation (and COLA increases)

 Use Today’s Dollars

Our Social Security Estimate

Based on our work history we can expect a monthly benefit of about $2,500.00 at age 67 (in today’s dollars).  My wife would be a little lower at $2,200.00.

Our retirement simulator tool will allow adjustment for the benefit at different ages between 62 and 70 to see if there is any benefit for waiting.  So now we have the estimated amount for collecting Social Security at age 67 and we have a reasonable risk adjustment of 75% benefit for our situation.

Spousal Benefit Considerations

There is a special benefit for a spouse with Social Security.  If the higher income spouse dies, as a spouse, you can claim a Social Security benefit based on your own earnings record, or you can collect a spousal benefit that will provide you 50 percent of the amount of your spouse’s Social Security benefit as calculated at their full retirement age. (3)

We will add this into our own analysis since we assume Mrs. FoF will outlive me.

What Age Should We Access the Benefits?

There are many studies online on when is the best time to access your Social Security benefit.   The Social Security Administration also has a nice article that outlines some of the considerations (4).  Many articles recommend waiting as long as practical for your situation since the benefits increase the longer you wait (up till age 70).
In our case, we are planning to use it as a backup safety net for our retirement savings, basically a future annuity.

In the previous model, where we included sequence risk (with dividend yields), showed our savings has a ~ 97 % chance to last 30 years (to 80 years old).  A 4% withdrawal rate holds up well for a 30-year retirement even with high sequence risks.

Test Cases

Our goal is to have a 55 year retirement so adding in Social Security as a backstop should have some positive impact on our withdrawal rate.  Since our current plan looks solid to age 80, we can wait to claim our benefits and receive a higher benefit amount.

To test our own situation, we will test multiple cases in the simulation for our Social Security Benefit Age:

 1) Both at 62
 2) Both at 70
 3) Primary at 70 and spouse at 62
 4) Primary at 62 and spouse at 70

Monte Carlo Retirement Simulation with Social Security

Here is a summary of our Social Security benefits and considerations we will add to our retirement simulator.  These are what work for us, your numbers will likely be different.

 1) Expected benefit of $2,500.00 and $2,000.00

 2) Plan for only 75% of the benefit

Updating the Retirement Simulation Tool

We added the following features to our Excel based Monte Carlo Simulator.

 1) Updated the Monte Carlo Engine to add in the benefits for Social Security for two spouses at their individual SS retirement age

 2) Includes COLA adjustment for benefits based on inflation

 3) Calculates the increase or decrease in benefit based on planed SS retirement age

4) Include Spousal benefit in calculation

Simulation Results

Back to the our baseline,  we have the following inputs and used the same inflation and investment performance.  To align with prior simulations we use a 50/50 mix in retirement using 50 yr data.

Simulation Baseline Results

Input Baseline (Retirement Simulator Version 10)
Options Baseline (Retirement Simulator Version 10)

Our initial withdrawal rate is 4%,   Baseline without SS – 81.5% (re-run prior to adding SS) which suggests that 4% SWR may be too risky for us when considering higher sequence risk in retirement.   As we discussed in prior articles, sequence risk is the assumption at today’s high market valuation the performance will be below average for the next ten years.

Simulation Baseline Without Social Security (4% WR – 81% Success Rate)

Adjusting the Withdrawal Rates

We also modeled at 3.75% and 3.5% as well and though looks better even at 3.5% we are still at only 93.4% this is just outside our goal for 95% .

Simulation Baseline Without Social Security (3.75% WR – 88% Success Rate)

Simulation Baseline Without Social Security (3.5% WR – 93.4% Success Rate)

Option 1 Results – Benefits at Age 62 and 62

First scenario we ran is taking the Social Security benefits early, both when we hit age 62.  Mrs. FoF is 4 years younger so this would not be the same year.

Simulation Option 1:  Age 62/62

Simulation Output 1:  Age 62/62 (98.2% Success!)

Amazing,  Adding in the Social Security benefits increased our success with 4% withdrawal rate to 98%.  This is even reducing the expected benefits by 25%. 

In our case, Social Security makes a significant difference for our expected Safe Withdrawal Rate.

Option 2 Results – Benefits at Age 62 and 70

The second option is to have Mrs. FoF wait for her benefits since we expect her to live longer.  

Simulation Option 2:  Age 62/70

Simulation Output 2:  Age 62/70

This has a slight improvement in success over Option 1 at 98.7%.

Option 3 Results – Benefits at Age 70 and 62

The third option that is recommend is to wait for age 70 for the primary retiree and then take the benefits as early as possible for the second retiree.

Simulation Option 3:  Age 70/62

Simulation Output 3:  Age 70/62

The results to option 3 are very similar to Option 2 at 98.8%

Option 4 Results – Benefits at Age 70 and 70

The last option is to wait as long as possible to access the benefits as our safety net.

Simulation Option 4:  Age 70/70

Simulation Output 4:  Age 70/70

Option 4 has the best performance at 99% success.

The Results Summary

Interesting results!  Any combination of SS increases our success to >98% with a marginal improvement the longer we wait.    This has a better result than even reducing our withdrawal rate to 3.5% without considering Social Security.

Since we want to have this as our safety net backup, we plan to use the 70/70 plan but have the option to access SS at an earlier age, if needed.

Simulation Results Summary Table

Use SS Benefit WR Spouse 1  SS Age Spouse 2 SS Age Success %
No 4.0% 81.5 %
No 3.75% 88.0 %
No 3.50% 93.4 %
Yes 4.0% 62 62 98.2 %
Yes 4.0% 62 70 98.7 %
Yes 4.0% 70 62 98.8 %
Yes 4.0% 70 70 99.0 %

In our situation, Social Security looks like it will provide a very good safety net over for our retirement savings.    Even adding in ten years of poor returns in our initial retirement due to Sequence Risk, we have a >98% chance of success.  

As we discussed earlier, this is one more piece of data to use for our planning. We really don’t know for sure what the future has in store but can use this information to help manage our planning and reduce our risks. 

As with all the models the real world may not cooperate, so stay flexible in your plans. We really can’t predict the future, but we can model scenarios and plan accordingly.

Retirement planning is a marathon and not a sprint, and over time priorities and personal situations change.  Stay flexible and don’t get stuck on specific number or date.

Get a Free Copy of the Retirement Simulator!

Our basic version (8.0) of the simulation tool can be found on our website. Version 10 update will be released very soon with the revised sequence risk calculations, Social Security Benefits, as well as many other new features. It is a major update to the tool. If you would like a copy of this just subscribe to our website and we will let you know when it is available.

Sign Up Today!

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(1) A SUMMARY OF THE 2018 ANNUAL REPORTS, Social Security and Medicare Boards of Trustees  

(2) Online Calculator

(3)  Social Security Spousal Benefits Explained

(4) When to Start Receiving Retirement Benefits 2018 

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