Showing posts with label Present Value Analysis. Show all posts
Showing posts with label Present Value Analysis. Show all posts

Tuesday, December 17, 2013

Delaying Social Security Benefits Revisited

Roughly a year and a half ago, I wrote about my decision to delay the start of my Social Security benefits. In that article I argued that for those of us fortunate enough not to have to live off Social Security payments, we should  concentrate more on our risk of outliving our money rather than on the risk of dying too early and not spending all we could have. In the intervening months between the first article and this one a lot has happened politically and in the financial markets that make some question whether my decision to delay payments is still valid.

I think it is.

Politically, we are another eighteen months closer to running out of money in the Social Security Trust Fund with no hope of Congress acting in a manner to avert the problem. Many Republicans are back to ballyhooing their flawed idea of individual retirement accounts replacing traditional Social Security benefits (after all, the stock markets are hitting new highs) and Democrats are on this issue the “party of no”—as in they want no change, regardless of expert testimony that the current approach is unsustainable.

As each day passes, more Baby Boomers hit retirement age, making it harder to change their benefits. As a large demographic that votes, they can throw their weight around with targeted lobbying by organizations such as AARP. Given the demographics, it will take significant political will to make changes in Social Security. The 113th Congress has shown no political will or wisdom, and there is no reason to think the 114th will be better.

Congressional inaction continues to increase the risk of the Social Security Trust Fund running out of money. So with all that, why shouldn’t you do the Boomer thing of take the money and run.

Without Congressional action, the Social Security actuaries project the retirement Trust Fund will be empty around 2033. That does not mean Social Security benefits must stop. However, it does mean the benefits will become strictly pay-as-you-go: total payments (the benefit checks) can’t be more than the total income (the retirement portion of FICA taxes).

As I illustrated in the earlier blog, by deferring the start of Social Security payments until normal retirement age (66 for me, 67 for those born after 1959 and something in between for those born in 1955-1959) you maximize the portion of your assets indexed to inflation. Let’s say your Social Security normal retirement benefit starting at age 66 is $1,000 a month. If you begin payments at age 62, you will receive only $750 a month. Assume inflation runs at 3% every year (that won’t happen, but it could average out to about that). Here’s what you would get at various ages:

With Age 62 Retirement
With Age 66 Retirement

With Age 62 Retirement
With Age 66 Retirement






During the first four years you are unambiguously better off if you start your Social Security benefits at age 62. Over those four years you will receive around $37,500 in benefits. Assuming a risk-free return equal to the inflation rate, those payments would have an accumulated value of approximately $39,000. You’ll need that money to reimburse yourself for the greater normal retirement benefits you could have been receiving had you delayed your Social Security retirement. Your accumulated pot of money (continuing to grow with interest but shrinking with the make-up payouts) runs out around age 77. From then on you are less well-off compared to deferring Social Security retirement.

Because the Trust Fund will not run out of money until 2033, anyone born before 1956 who delays payments will have already reached their break-even point and thus be ahead of the game before the Trust Fund hits zero. Once the Trust Fund runs dry, and if there is no other change in Social Security, benefits must be cut by roughly 25% to balance benefit payments with FICA taxes. Note that if you delayed the start of benefits, you will continue to receive considerably more from Social Security each month compared to what you would get if you started benefits as early as possible because the cuts are proportional. Using Age 85 from the table above, if you took your benefits early a 25% cut reduces your monthly benefit from $1,480 to $1,110. The benefit those who deferred receive declines from $1,941 to $1,456.

Does that mean you can best hedge all political risk by deferring the start of Social Security retirement? Not necessarily. The scenario above assumes an across-the-board 25% haircut. While that’s what people are currently discussing, it is possible that the cuts could come from the top down by imposing a cap on the monthly benefit. Even in this take-from-the-rich-and-give-to-the-poor scenario, those my age are still better off delaying the start of retirement because the cut occurs after we have reached our break-even point. Younger folks will need to evaluate when it’s time for them to make the take early/defer decision. Also, Congress could enact this type of benefit cut earlier. It’s not likely, but it is possible, and if they did, it could delay the breakeven date, making it less attractive.

From my perspective at the end of 2013, the politics of the last year and a half have not changed my decision to continue to delay the start of my Social Security retirement benefits.

Recently someone smirked that if I had only taken early Social Security and invested those payments (after-tax) in the stock market, I would be monetarily far ahead. Investment gains would defer the break-even point—maybe even to eternity.

There are two problems with this argument. First, it uses an ex post facto analysis. When I made the decision to defer I did not know what the stock market would do. This looking at what actually happened and saying what I should have done is similar to saying that in December 2002, I should have sold my house, borrowed to the hilt, and invested it all in Apple at $14 bucks a share. Then, in perfect market timing, I should have sold the stock on December 17, 2012 at $700. [And even sold it short that day if I were so prescient.]

Social Security provides an almost risk-free investment. (It used to be risk-free until some Tea Party advocates decided having the US government default on its debt was acceptable.) Since my reason for delaying Social Security benefits is to insure against running out of money if I live too long, I should not then foul the comparison of a risk-free return and one investing early payments in a risky proposition such as equities. Doing so defeats the strategy of taking out longevity insurance. This faulty thinking is the same that caused many defined pension benefit plans to invest heavily in equities to “hedge” against morality risk. While stock markets rose, it looked brilliant, but in the recent past it proved disastrous for companies and governments alike. Some plan sponsors have frozen future benefits, and eliminated non-guaranteed benefits—not an option for an individual.

So unless I learn that I am suffering from a disease that significantly decreases my life expectancy, I plan to stick with my decision and defer the start of my Social Security benefits until I turn 70.

~ Jim

Wednesday, August 28, 2013

Services for Writers - Caveat Emptor

I recently came across two entities that want to sell their services to writers with payment models I found interesting.

the new online bookstore

The first is Bookstore Without Borders ( They correctly note that to make a sale one needs product, platform and exposure. An author’s e-book is the product; they propose to provide the platform (an online bookstore) and exposure.

The question I always like to address when it comes to services for writers is whether the value proposition is a good deal for the author. (I assume it’s good for the provider; otherwise, why are they doing it?)

Bookstore Without Borders (BWB from now on) offers an array of services; the only one I’ll address now is their platform for selling e-books. An author can list up to five e-books for the startup price of $395. There’s an introductory offer of $295 if you sign up before October 2013. Listing an extra book costs another $55. Annual renewals run $29.95.

BWB states that it only takes 80 books at $4.99 each to earn back your $395 cost. Their math is fine—as far as it goes, but it doesn't go far enough. The open question is how many extra sales their platform will drive. If all of the 80 sales are ones you would not have gotten except for the exposure they provide, then the math is fine—for a $4.99 book. If, for example, your book is priced at $2.99, it takes 133 new books before you’re in the plus column.

If they would guarantee brand new traffic for your book at least this large, it’s a clear winner. Of course they provide no guarantees. Even the testimonials on their website refer to the wonderful design and are silent about sales and profits.

They do have another selling point, however: they pay 100% royalties.

If you can sell someone your book through BWB instead of Amazon, B&N or wherever, you’ll make more money on that book because the royalty rate is higher. However, if you plan to pay for your start-up fee through this difference in royalties, you’ll need a lot more sales to break even. You were already going to earn something on those sales, so the net to you from joining BWB is the difference between the 100% royalty BWB pays and whatever royalty your current bookseller pays. E-book royalties keep changing, but let’s assume you can make 60% of list price on e-books you currently sell. Since 100% is better than 60%, you’d be interested in this deal if you sold enough books.

With your $4.99 e-book, you’ll need to sell 198 books before you break even. What happened to the 80-book target? That assumed joining BWB would bring new buyers who would never buy your book no matter where it was sold, because without BWB they’d never have made the purchase. We’re not talking about those people anymore. Now we’re talking about folks who would have bought your book somewhere, but because they prefer to pay money to authors rather than to Amazon and the like, these kind and generous souls now buy your book at BWB. The math works like this: For those 198 books at 60% royalty you would have earned $592.81. After paying BWB’s $395, when you sell 198 books through them, you’ll end up with $593.02, a gain of $0.21. After that, it’s all extra profit: you earn two bucks more a book.

Will your book sell 198+ books if you sign up with BWB? I have no clue. However, even if you tell people that’s the best place to buy your e-book, many potential readers will prefer to buy through Amazon or Barnes & Noble or their indie bookstore. I say this because I experienced a parallel situation. I suggested to someone who wanted to buy an e-book of Bad Policy that they could buy it through the publisher and save 35%. I figured that was a good deal for everyone except for Amazon, who would lose the sale since it was for a Kindle. That wasn’t how the reader saw it. The extra time it would take her to set up an account with the publisher, mess around with downloading the book to her computer and then transferring it to her Kindle was not worth the time and money. Despite the extra cost, she preferred to buy the book on Amazon with one-click, and have it automatically appear on her Kindle the next time she turned it on.

So, as a buyer of BWB’s services you also have to consider that even if people find your book because of BWB not all of them will actually buy the book there. If that assumption is correct, you’ll need even more sales to reach breakeven.
Of course, you may price your book at something other than $4.99. Using $2.99, the 198 threshold rises to 331. At a price of $1.99, you’ll need 497. With a more expensive book, the rewards come sooner.

If you are earning a royalty rate greater than 60%, you’ll need more books to break even; lower than 60% and you’ll need fewer books. As the saying goes, your mileage may vary.

In addition, there is an annual renewal fee – not a major cost ($29.95), but it will require another 15 books each year under the first scenario ($4.99/ book and standard 60% royalty) before you are ahead of the game.

BWB wins as soon as your payment clears. You only win if you can drive lots of sales through this particular bookstore.

Please note, I'm not saying or implying that this is a bad deal -- it's a different deal. For some authors it could be terrific; for others, it’s a waste of money. To fully understand how the proposition works for you, you’ll need to make these types of comparisons. I computed everything using a simple Excel spreadsheet. If you’d like a copy for yourself, send me an email and I’ll get it to you.


All writers need editors of one sort or another. There are many varieties and it is important to make sure you know what you are getting before making a commitment. Most publishers provide editing as part of their services; others do not. If you are self-published, you need to make sure to get competent assistance.

Some editors specialize in storyline issues, what are frequently referred to as developmental edits; others are copyeditors looking for grammar and spelling errors. Some do it all as was the case for a new provider that I recently ran across. They offered to do a complete edit (developmental, line/copy edit and proofread) for a flat fee of $200 plus $5 per page over 300.

The pricing structure struck me as very odd. The first 300 pages cost $0.67 per page and any pages over that cost $5.00? How does that make sense? For line/copy edit and proofing a page is a page is a page. Reading extra pages in a developmental edit actually is less expensive on a per page basis because that type of edit considers overall story issues, which do not increase linearly. A charge of $0.50 an extra page doesn’t seem out-of-line with the first 300-page pricing. Is this a typo or math error or what? Maybe the editor doesn’t want to work on anything but shortish books and this is a way of discouraging authors of longer works from applying.

Something else bothered me. Unless the story is close to perfect, it does not make sense to do a developmental edit at the same time one proofs. If major sections of the novel must be rewritten or even pitched and replaced, why would one carefully ensure that the deleted material met the Chicago Manual of Style?

I am using this particular Editor website as an example of why thinking carefully about the numbers is necessary before you sign on the bottom line. If this math stuff is all Greek to you, get someone who likes this kind of analysis to help you out.

With any provider, it’s also important to check references. I don’t know much Latin, but caveat emptor never goes out of style.

~ Jim