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Case for taking SS early (62)?
Old 05-20-2013, 01:26 PM   #1
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Case for taking SS early (62)?

I know there's a lot of controversy over this, and everyone's situation is different. But I was running my numbers, and in my case it seems taking social security early at 62 rather than waiting to 66 makes more sense. But I'd like to see if there are any holes in this approach from members here that I might have missed.

First, I'm accepting that social security benefits over a lifetime are actuarially neutral (whether starting at 62 or 66). In my case, age 81 is the break even point. Who knows if I'll live longer than that or not. Assumimg 81 is my life expectancy, I'll recieve the same amount of money from social security whether I start at 62 or 66.

SS benefits start to be taxed when income reaches 32k per year. Half the benefits are taxed proportionally if total income is between 32k-44k (assuming only pension, investment, and SS income). Above 44k, 85% of benefits are fully taxed.

If my retirement income (pension, investment, and half my early SS benefit) equals around 32k, I wouldn't have to pay SS tax (or very little). If I wait to 66 for the higher benefit, I'll approach 44k and will then be taxed on 85% of my benefit.

In this case, doesn't it make sense to take SS early and avoid being taxed on the benefit? Anyone else encounter this? (As can be seen, I plan to live frugally on my income.)
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Old 05-20-2013, 01:58 PM   #2
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I am in Canada and am facing a similar dilemma. All the indications are that my income taxes, which will initially be very modest, will increase significantly when I am 71 due to RMDs, and that OAS (old age security) will be clawed back. I may not be able to avoid the OAS clawback but I want to reduce the tax hit if possible. I have a feeling I will not be a nonagenarian (of course, who knows?) and for me the breakeven between starting CPP (Canada Pension Plan) at 60 or 65 is at 72 years. The increased incremental value to me in my 60s may be more than the deferred satisfaction of higher payments (on which I would be taxed heavily) later on. However, if I were less financially secure, and expecting to live to 100, I would look at CPP as an annuity and postpone it as long as possible (till 70).
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Old 05-20-2013, 02:04 PM   #3
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I have 392 days to take SS at 62 (not that I"m counting). I think the bigger consideration is spousal benefits which in my case DW gets about the same as me and will wait 'till maybe 70.

So, there are a lot of moving parts to this but that's my plan. YMMV.

In answer to your question, I"m not sure if it is a 'cliff' or a 'slope' tax-wise at the $44K point. If it is a slope you might consider paying just a few bucks in taxes if it works out for you.

T Rowe Price has a slick SS tool here: Social Security Benefits Evaluator - T. Rowe Price
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Old 05-20-2013, 02:37 PM   #4
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From my understanding it's a slope, but you can run the scenario with your tax program to make sure.

I question that delaying from 62 to 66 jumps you from 32K to 44K+ combined income. As I understand it you only use 1/2 of the SS income for that calculation, so that's an increase of $24K in SS benefits, which I don't believe. Again, plug numbers into a tax program to check this if you can't figure it out from the tax publications, and check your SS income protections at 62 and 66.

I would believe that you'd push yourself into having some of your SS benefit taxed. I'd probably look at what the actual tax is, and decide if that's worth the longevity insurance in case you live well over 81.

Also look at what happens if you take more investment income from 62 to 66 (or 70), such as harvesting capital gains or doing partial conversions to a Roth. You might not have to pay taxes on even the higher SS income taken later if you have less or 0 investment income.
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Old 05-20-2013, 03:11 PM   #5
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Good observations and input from all, thanks much.

To the previous, waiting to 66 wouldn't be as drastic of a jump as I portrayed (I didn't use half of that additional amount, but rather factored all of it). But it would be an income jump nevertheless, and still a greater percentage of SS would then be taxed.

I'll run all this through my tax software. But in initially estimating the numbers, it appears to be a valid tax consideration for taking benefits early.
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Old 05-20-2013, 04:26 PM   #6
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One reason for deferring SS to 66 or even 70 is so you can spend down your IRAs and reduce the amount of your RMD, but the main reason is the big step up in benefit check you get by waiting, it's an excellent return, and for insurance that you'll have a sizable income in later retirement should something go wrong with the rest of your portfolio.

By simply calculating the break even age you miss the longevity/portfolio disaster insurance aspect of deferring.
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Old 05-20-2013, 04:52 PM   #7
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Lots of folks take it at age 62. A good deal? Maybe, but too many independent variables most of which the OP has not disclosed.
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Old 05-20-2013, 05:27 PM   #8
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Thanks for the advice on deferring SS. But I'd offer that it's a better deal to take it early for a few important reasons:

1) You can leave your investments and nest egg alone to keep growing.
2) Less tax on your early lower SS benefit (per original post).
3) Statistical life expectancy and break even point (79-81 for most). Actuarially, SS payout is neutral based on this average (it's the same).
4) Quality of life (how much are you going to enjoy that deferred benefit when old, possibly bed-ridden, and feeble - especially starting at 70?)

And no, the OP is not intentionally hiding any details.
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Old 05-20-2013, 06:45 PM   #9
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If you want to take SS at 62, go ahead. That's your business. And you may be onto something with the tax benefit, but your original post was flawed and I'm not convinced there aren't ways to juggle income around that, per my previous post. I'm not going to spend any more time beyond this post trying to convince someone who's already made up their mind.

I'm hoping not to be bed-ridden and feeble in my 80s, but even if I am, I'd rather be making myself more comfortable with about an ~80% (quick guess, may not be accurate) larger SS check. I think that'll make up for using some of my other investments between 62-70. Even if I can't get out much I'd like to be able to be able to afford to keep my home warm in winter and cool in summer, eat properly, and hire at least some help as needed.

I'm also very very confident that my financial plan works if I die before or at that break even point. It's living well into my 90s or past 100 that has me slightly worried about outliving my assets, but less so with a larger SS check. If I pass early, I'll have received less benefits, but I can live die with that.

I'm only basing my case on a single person. Marrieds may have a different strategy.
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Old 05-20-2013, 07:22 PM   #10
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To each his own, and you're entitled to your view. I don't believe what I stated on higher SS tax as a result of larger benefits is flawed at all. Finally, if you want to wait to very old age for your benefits, that's your choice.
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On average life expectancy & actuarial neutraily..
Old 05-20-2013, 07:39 PM   #11
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On average life expectancy & actuarial neutraily..

Richard8655,

If you are basing your analysis on average life expectancy and actuarial neutrality then I would want to explore why you think this applies to you.

I believe that life expectancy is positively correlated with education level/social-economic status/wealth/access to health care etc. From what I have seen here, it seems that the majority of members would fall into the above average side of the field in many of these categories.

The US, as a whole, is very stratified in terms of who we interact with, so personal perception on this can easily be distorted .

On the other hand, if you have a family history of early death or you have medical problems yourself, then this may negate the factors that I have alluded to above.

-gauss
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Old 05-20-2013, 08:01 PM   #12
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Thank you, gauss... you make a very good and valid point. I've also read that education and socio-economic status do matter for longevity. It factors into better nutrition, exercise, and overall healthier lifestyle.

But I do worry about the uncontrollable aspects of life expectancy... genetics, accidents, and other unavoidable events of life. Some if not most of this can't be predicted. So it is still a gamble.

But either way, in almost every case, people slow down as they get older (healthy or not), have less energy, and aren't quite able to enjoy their later retirement years in being active as they could in their earlier years.

Personally, my spouse and I don't have great familty histories of longevity, so my planning might apply even more to me. But nevertheless, I think there's still something to be said for quality of life with when to take one's SS benefits. But your point is well-taken too.
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Old 05-20-2013, 08:11 PM   #13
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I am much more worried about running out of money in my old age than saving taxes (though I am very interested in saving taxes). I plan to take SS at age 70 since it will provide the highest benefit for both me and DW so in effect is is a joint life annuity. Plus as nun observed, I can draw down on my IRAs from 59.5 to 70 so my RMDs won't have a big tax bite.

My understanding is that SS is actuarial neutral for singles, but not for couples. In my case, my SS is much higher than DW's so the longer I wait the bigger the benefit for her assuming that she outlives me.

Have you looked into socialsecutiry solutions.com? I am many years away from 62 but when the time comes I plan to seek out an analysis. Also, given our family histories, I expect to live well beyond the break even point of 81 you mention.
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Old 05-20-2013, 08:37 PM   #14
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We run spreadsheets with all the different variations. We have years to decide, but for now we are both like the taking it at 62 numbers the best and not running down the portfolio. We still have years to go so we will just wait and see what business or part time income we might have then and what the tax laws look like before we make a final decision.
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Old 05-20-2013, 10:30 PM   #15
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I think it comes down to what you want to save yourself for.

I'd rather live on SS in my early years and keep the nest egg (investments) intact until I have to use it. Others would rather draw down their nest egg early for a larger SS payout later.

Neither is right or wrong, as it depends on individual goals, priorities, and expectations.
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Old 05-21-2013, 06:22 AM   #16
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Quote:
Originally Posted by Richard8655 View Post
I think it comes down to what you want to save yourself for.

I'd rather live on SS in my early years and keep the nest egg (investments) intact until I have to use it. Others would rather draw down their nest egg early for a larger SS payout later.

Neither is right or wrong, as it depends on individual goals, priorities, and expectations.
Yep, there is more than one way to skin a cat. I have a little more than 3 years before I am eligible for SS, but right now I am thinking I will delay it for a bit. Probably not until 70, but maybe in the 64-66 range. Never been an either or type of guy on this topic so I will probably split the difference.
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Old 05-21-2013, 10:07 AM   #17
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Originally Posted by Richard8655 View Post
I know there's a lot of controversy over this, and everyone's situation is different. But I was running my numbers, and in my case it seems taking social security early at 62 rather than waiting to 66 makes more sense. But I'd like to see if there are any holes in this approach from members here that I might have missed.

First, I'm accepting that social security benefits over a lifetime are actuarially neutral (whether starting at 62 or 66). In my case, age 81 is the break even point. Who knows if I'll live longer than that or not. Assumimg 81 is my life expectancy, I'll recieve the same amount of money from social security whether I start at 62 or 66.

SS benefits start to be taxed when income reaches 32k per year. Half the benefits are taxed proportionally if total income is between 32k-44k (assuming only pension, investment, and SS income). Above 44k, 85% of benefits are fully taxed.

If my retirement income (pension, investment, and half my early SS benefit) equals around 32k, I wouldn't have to pay SS tax (or very little). If I wait to 66 for the higher benefit, I'll approach 44k and will then be taxed on 85% of my benefit.

In this case, doesn't it make sense to take SS early and avoid being taxed on the benefit? Anyone else encounter this? (As can be seen, I plan to live frugally on my income.)
I thought about this when I first retired. I did some spreadsheets, looked at scenarios, and decided it didn't make sense for my situation.

Intuitively, it makes sense. Spread out SS over more years to stay below certain breaks in tax brackets.

I think you need to crunch numbers. Here are some things to think about.

1. delete

2. The $32k trigger is on a special "income" that includes only 1/2 your SS benefit. That changes your crossover point.

3. You've suggested that deferring SS would increase your total income by nearly $12k. That would suggest you're getting a benefit of nearly $36k at age 62 - even for a couple, that's a pretty high number. It's possible that you don't have much other income. Because of #2, you would not have an issue with taxes.

4. Presumably, you're intending to spend about the same amount whether the money comes from SS or from IRA withdrawals. So I think your "total spendable" income won't change from $32k to $44k, only the mix of SS vs. other changes.

There's a worksheet in the 1040 instructions. It would be worthwhile to go through it step by step for three situations (a typical year if you start at 62, a prior-to-66 year if you start at 66, and a post-66 year if you start at 66).
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Old 05-21-2013, 10:16 AM   #18
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No Richard8655 said he has a spouse in post #12. This is an important factor that needs to be considered.

You have to consider joint life expectancy which makes waiting til 70 often a much better option.

My pet peeve is married people who disregard the effects of delaying SS on the survivors benefit. They will probably be leaving widows who are suddenly taxed at the much higher single tax rate. I feel people need to consider the whole of retirement for both spouses and not just focus on the beginning of retirement when both spouses are alive and paying tax at the married rate.
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Old 05-21-2013, 01:03 PM   #19
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No Richard8655 said he has a spouse in post #12. This is an important factor that needs to be considered.

You have to consider joint life expectancy which makes waiting til 70 often a much better option.

My pet peeve is married people who disregard the effects of delaying SS on the survivors benefit. They will probably be leaving widows who are suddenly taxed at the much higher single tax rate. I feel people need to consider the whole of retirement for both spouses and not just focus on the beginning of retirement when both spouses are alive and paying tax at the married rate.
Continuance of life is probably more likely than stable tax rates. IF tax planning can be done that won't negatively affect outcomes when tax rates and or regulations change, why not? But this is a rare circumstance.

Ha
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Old 05-21-2013, 01:25 PM   #20
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.....You have to consider joint life expectancy which makes waiting til 70 often a much better option.....
+1 many people don't consider joint life expectancy.
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