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Old 01-01-2011, 01:36 PM   #81
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TAXATION OF SOCIAL SECURITY BENEFITS.
Note: This explanation does “NOT” determine the “rate” at which your Social Security will be taxed, since that rate will be determined by the tax bracket that you ultimately fall into based on your Adjusted Gross Income on form 1040. This paper simply shows how to determine what portion (or percentage) of your Social Security will be included in your AGI and therefore, subject to taxation.

Terms:
Provisional Income = the sum of ½ of your Social Security income, plus items shown on page 2 below.
Base and Upper Threshold = Provisional income levels that trigger changes in % Social Security subject to taxation.

These three cases determine what percentage of your Social Security benefits will be subject to tax:
1. Provisional Income below the Base Threshold incurs zero tax on Social Security benefits.
2. Provisional Income falling between the Base Threshold and Upper threshold incurs a tax on 50% the amount of Social Security benefits above the Base Threshold.
3. Provisional Income above the Upper Threshold will incur taxation on Social Security Benefits of 50% the amount between the Base and Upper Thresholds plus tax on 85% of the amount over the upper threshold.

Threshold Amounts as of 01/01/2010 used in figuring your taxable Social Security:

Filing Status Base Threshold Upper Threshold
Single $25,000 $34,000
Head of Household $25,000 $34,000
Married Filing Jointly $32,000 $44,000
Qualifying Widow(er) $25,000 $34,000


Examples: (Assume all 3 examples are single people who fall into a 15% tax bracket.)
1. Taxpayer Tom earns $20,000 in Social Security and has $14,000 AGI from his 1040. His Provisional Income is ($20,000/2 plus $14,000)=$24,000 which falls below the $25,000 Base threshold and pays no tax on any of his Social Security. He will be taxed at 15% only on the $14,000 earned on the grant.
2. Taxpayer Bill earns $20,000 in Social Security and $22,000 of AGI from his 1040. Based on the his Provisional Income = $32,000, he falls between the Base and Upper thresholds. He will pay tax on his $22,000 income plus tax on ½ of the amount above the $25,000 Base, so ( ½ of $7,000) $3,500 of his Social Security is also taxable. So he owes 15% of $22,000 + $3,500.
3. Taxpayer Lisa, earns $20,000 in Social Security and $35,000 of AGI from her 1040. Her Provisional Income exceeds the Upper Threshold and will owe taxes on her $35,000 cap gains plus her Social Security will be taxed on ½ of the amount between $25,000 and $34,000, plus tax on 85% of the amount above $34,000. So, she will pay 15% tax on ($35,000 cap gains + $13,000 SS) $48,000.


To Calculate Provisional Income

To arrive at your provisional income, start with your adjusted gross income, or AGI, which is the amount that will appear on the last line on Page 1 of your Form 1040. However, don't count any Social Security benefits when figuring your AGI. (You can find a Form 1040 on the IRS web site here.)
Next, take that AGI number and add the following amounts (chances are, only the first two will apply to you).
1. 50% of your Social Security benefits.
2. Tax-free municipal bond interest income (from line 8b of Form 1040).
3. Tax-free interest on U.S. Savings Bonds used to pay for qualified college expenses (from IRS Form 8815).
4. Tax-free adoption assistance payments from your employer (from IRS Form 8839).
5. The Page 1 deduction for student-loan interest.
6. The Page 1 deduction for higher education tuition and related fees.
7. The Page 1 deduction for domestic production activities (from IRS Form 8903).
8. Tax-free foreign earned income and housing allowances and certain tax-free income from Puerto Rico or U.S. possessions (from IRS Forms 2555 and 4563).
The result of doing all this arithmetic is your provisional income for the year.
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Old 01-01-2011, 01:38 PM   #82
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Not necessarily so.

Ha
OK, I'll re-phrase.

I hope that folks will steer me straight!
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Old 01-01-2011, 01:42 PM   #83
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I ran numbers in a spreadsheet a little differently (and more simply) - started with the numbers for SS @63 and SS in future dollars @66. You can find these future dollar estimates on the SS website.

I just did a running sum on what I collected depending on whether I collected at 63 or 66. I increased SS by 3% which may be high, but was consistent.

Anyhow, my crossover point was at age 77 - after that I would have collected more by waiting. At 2% inflation of the SS payout, it drops to age 76.

I did not consider taxes - that complicates it too much and I think there's no way of knowing what will be taxed when.

So how to figure longevity... I am a cancer survivor, but from a long-lived family... no way at all of knowing whether I'll live to 100 or to 75 or much less. I will be 63 in June and I think I'm going to start SS in 2011. I haven't applied yet so it won't be January - the wheels of government don't spin that fast .

I'm going with the bird in hand theory. It will give me an income stream (I have no pension). That will decrease the amount of my investments I will have to liquidate for my living expenses. I always keep some cash but I still will - at some time - need to start selling stocks or whatever.
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Old 01-01-2011, 01:51 PM   #84
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I ran numbers in a spreadsheet a little differently (and more simply) - started with the numbers for SS @63 and SS in future dollars @66. You can find these future dollar estimates on the SS website.

I just did a running sum on what I collected depending on whether I collected at 63 or 66. I increased SS by 3% which may be high, but was consistent.

Anyhow, my crossover point was at age 77 - after that I would have collected more by waiting. At 2% inflation of the SS payout, it drops to age 76.

I did not consider taxes - that complicates it too much and I think there's no way of knowing what will be taxed when.

So how to figure longevity... I am a cancer survivor, but from a long-lived family... no way at all of knowing whether I'll live to 100 or to 75 or much less. I will be 63 in June and I think I'm going to start SS in 2011. I haven't applied yet so it won't be January - the wheels of government don't spin that fast .

I'm going with the bird in hand theory. It will give me an income stream (I have no pension). That will decrease the amount of my investments I will have to liquidate for my living expenses. I always keep some cash but I still will - at some time - need to start selling stocks or whatever.
Hopefully you make it to year 100 and look back and say, "darn, that was a mistake".

You make a good point that is sometimes missed. Waiting to get a bigger SS payout means that the portfolio has to be liquidated to provide income and it's a long stretch from 62 til 70. In a down market that could mean taking a bigger portion of the portfolio than is safe.

Nice to have the options.
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Old 01-01-2011, 01:59 PM   #85
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OK, I'll re-phrase.

I hope that folks will steer me straight!
Here's the thing-getting the right answer for oneself depends on asking the right questions. Since people will have different priorities, they will not all choose the same path.

For me, these questions are-what do I want- longevity protection, or maximum cumulative payout?

Am I willing to guess parameters (inflation, age at death), or do I want to maximize breadth of effectiveness, not necessarily maximize total payout.

Do I have immediate need for the money, or immediate high quality high return investment opportunities?

For me, and clearly not for you, the only true replacement for the SS COLA annuity is a COLA annuity bought from a strong insurance company. So I shopped around and determined that Uncle sells the cheapest COLA lifetime annuity.

Now since I made my decision, there is more talk about SS limits. But over time I have learned to ignore "possible" changes, good or bad. It's just one way of dealing with uncertainty- not necessarily the best way, but my way.

Another thing- not necessarily relevant but interesting is that Sam took away the re-do. If we could be induced to screw ourselves with a re-do, don't you think that Sam would be out there on billboards and TV advertising the re-do? Set up a dedicated redo department? Remember Maestro Greenspan exhorting us to take out variable rate mortgages when fixed 30 year mortgages were hitting alltime lows?

What happened instead is that as soon as re-do began to be popularized Sam shut it down.

Ha
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Old 01-01-2011, 02:07 PM   #86
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I think the payback calculations have generally confirmed what I've read in a number of articles over the years from places like Scott Burns and Bud Hebeler-- breakeven is around age 75-78 and your (female) spouse will really appreciate your thoughtful delay until age 70 to maximize her survivor's benefits.

Getting back on the original topic for a second, today John Greaney posted a good summary about the change:

Cheap Annuity, No More. Social Security "Withdrawal of Application" Strategy Ends
Quote:
You can still "buy" the additional inflation-adjusted monthly benefit that the now defunct Withdrawal of Application strategy provided at age 70 by simply delaying your first Social Security check until then. Think of it as "buying an annuity on the installment plan." It would still be much cheaper than taking Social Security at age 62, and then buying an annuity in the private market at age 70 to make up the difference in your monthly benefit.

The March issue of Retire Early will compare the cost of buying an annuity versus delaying Social Security benfits until age 70. It will also illustrate how long you'll need to live to make each alternative a reasonable deal for you.
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Old 01-01-2011, 02:24 PM   #87
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Originally Posted by Zero View Post
OK, I'll re-phrase.

I hope that folks will steer me straight!
Where's the fun in that?

Quote:
Originally Posted by Zero View Post
Waiting to get a bigger SS payout means that the portfolio has to be liquidated to provide income and it's a long stretch from 62 til 70. In a down market that could mean taking a bigger portion of the portfolio than is safe.

Nice to have the options.
The nice thing about it is that there is no real penalty in deciding to wait and then encountering a down market, as you can change your mind at any time without paying any penalties. Each month you delay beyond 62 your benefits increase, but you are only a phone call or few mouse clicks away from claiming your benefits.
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Old 01-01-2011, 02:33 PM   #88
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OK, here is a very straightforward approach. I have in hand my SS Estimate for age 62 and age 70. Since that data is in current dollars, lets look at it as if I am 62 today and then look again as if I am 70 today.
doing it this way makes the numbers gotten from taking SS at 70 smaller than what they would be if you were making the decision for 1 person at 2 different ages. in reality you are making the decision between taking SS at age 62 in the amount of $18,816/yr or start your SS at the age of 70 in the amout of $41,727/yr (given your asumptions about the cpi) instead of the $32,840 you used starting at age 70 today. the problem with using the numbers you did (aside from the fact that you are comparing people of 2 different ages therefore making this an apples to oranges comparison) is that you increase the SS benefit for each of 8 years from age 62 to age 70 (by the CPI of 3%/yr) when starting at 62 but dont when you wait to start at age 70. please redo your analysis using the amounts you would actually get so as the people who are following this thread will get accurate information.


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So, it's pretty easy to see how much money accumulates during the period to 100 years. And in reality, that is what counts, the accumulation of assets, namely cash.
not for everyone. some people would rather safely maximize the amount they can spend (whether that increase is for the years between 62 and 70 or the rest of their life). some people would like the comfort of haveing an cola'd annuity to replace aslarge an amount of their income as they can when they so that they wont worry (or worry as much) about managing there investments. your decision to take SS at age 62 is less effective in both of these cases. heck lots of people are interested in how much they can spend in retirement not how much they can accumulate in retirement.
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Old 01-01-2011, 02:34 PM   #89
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Here's the thing-getting the right answer depnds on asking the right question.

For me, these questions are-what do I want, longevity protection, or maximum cumulative payout?

Am I willing to guess parameters (inflation, age at death), or do I want to maximize breadth of effectiveness, not necessarly maximze total payout.

Do I have immediate need for the money, or immediate high quality high return investment opportunities?

For me, and clearly not for you, the only true replacement for the SS COLA annuity is a COLA annuity bought from a strong insurance company. So I shopped around and determined that Uncle sells the cheapest COLA liftime annuity.

Now since I made my decision, there is more talk about SS limits. But over time I have learned to ignore "possible" changes, good or bad. It's just one way of dealing with uncertainty- not necessarily the best way, but my way.

Ha
Ha, I don't recall your original SS decision but I do recall you decided to do a Do-Over, BTW congrats. So I can only assume that at some point you saw earlier SS as the best option for you. It was nice to have the option to reconsider at 70.

As I consider starting next year or waiting until 2020, it just seems to me that having a very stable income stream from Uncle SAM is a nice risk reducer to my portfolio. Lessens the overall volatility. Also means I can take $19,000 less from the portfolio and wait for better times to take capital gains, etc.

I don't know if this is reasonable thinking but I feel better able to predict I will live from 60 to 70, than I can predict my chances of living from 85 to 95.

If I could take my SS next year at 62, accumulate it till 70 and then repurchase, that would have been sweet, I could get my physical at 70 and decide if I had 5 years left in me or 15.
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Old 01-01-2011, 02:39 PM   #90
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Forget the Private Annuity approach, too difficult to find data for a COLA’d Annuity without calling or asking for a quote.
NEW SCENARIO = Take SS at 62, save the checks and invest it in S&P500 Index.
Historical CAGR for S&P500 = 8.9% per CAGR of the Stock Market: Annualized Returns of the S&P 500
ooh and alot of people would think that using an 8.9% increase in asset value each and every year is overly optimistic. it was the falacy of this type of retirement planning that led to the trinity study and the development of FIRECalc.
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Old 01-01-2011, 02:40 PM   #91
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Each month you delay beyond 62 your benefits increase, but you are only a phone call or few mouse clicks away from claiming your benefits.
Note that once you pull the trigger it can be more than two months before you receive your first payment: Beginning month of retirement benefits
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Old 01-01-2011, 02:43 PM   #92
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Gross Income = $34,000 e.g. ($18, 816 SS + $15,184 income)
Provisional Income = 1/2 of SS benefits plus all other income.
Therefore:
Provisional Income = 1/2($18,816) + $15,184 = $24,592
soo you are living on $15,184/yr of income? that would explain why you arent interested in increasing your retirement income.
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Old 01-01-2011, 02:46 PM   #93
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doing it this way makes the numbers gotten from taking SS at 70 smaller than what they would be if you were making the decision for 1 person at 2 different ages. in reality you are making the decision between taking SS at age 62 in the amount of $18,816/yr or start your SS at the age of 70 in the amout of $41,727/yr (given your asumptions about the cpi) instead of the $32,840 you used starting at age 70 today. the problem with using the numbers you did (aside from the fact that you are comparing people of 2 different ages therefore making this an apples to oranges comparison) is that you increase the SS benefit for each of 8 years from age 62 to age 70 (by the CPI of 3%/yr) when starting at 62 but dont when you wait to start at age 70. please redo your analysis using the amounts you would actually get so as the people who are following this thread will get accurate information.
The SS statement that we receive gives the figures for what a 62 year old would receive in today's dollars and also what a 70 year old would receive in todays dollars. Given my scenario, that two folks recieve the same SS estimate. One is 62 the day he/she receives it and the other is 70 the day he/she receives it, the analyses are correct as stands.

It shows how much a person would accumulate over a similar time span, not over a similar age range.
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Old 01-01-2011, 02:46 PM   #94
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Note that once you pull the trigger it can be more than two months before you receive your first payment: Beginning month of retirement benefits
Good point. You'd need to have a few months of cash reserves before you make that decision, otherwise you'd end up being forced to sell equities in a down market.
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Old 01-01-2011, 02:48 PM   #95
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soo you are living on $15,184/yr of income? that would explain why you arent interested in increasing your retirement income.
Another possibility might be that I have a SO earning a living for the next 8 years!
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Old 01-01-2011, 02:48 PM   #96
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Taking SS at 62 and saving the checks till 70, requires a person to live off their existing savings until 70.
Taking SS at 70, also requires a person to live off their existing saving until 70.

Same impact to the existing savings so not sure what you mean by "why would anyone...". You could just as easily said, "why would anyone wait till 70 before getting SS payments to support their living expenses?".
well one answer could be that they would like to spend more in the years 62-70. this can be done if you wait till age 70 to start SS when compared to starting SS at 62.
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Old 01-01-2011, 02:51 PM   #97
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ooh and alot of people would think that using an 8.9% increase in asset value each and every year is overly optimistic. it was the falacy of this type of retirement planning that led to the trinity study and the development of FIRECalc.
I tend to accept that 140 years of market data are a decent data set to base that on. Did you use the link to verify, that 8.9% is the 1871-2009 CAGR?
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Old 01-01-2011, 02:52 PM   #98
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Absolutely, it's like a nice big bandaid on the income while the portfolio is taking hits and allows you to pay bills with guaranteed money stream.

And in your case, turns out you might have seen a smaller paychecks eventually because of the recent AWI declines.
not so, AWI stops being used when you turn 62 and then all SS payments are adjusted via CPI (whether you are collecting or not)
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Old 01-01-2011, 02:55 PM   #99
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I'm getting a headache.
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Old 01-01-2011, 02:58 PM   #100
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I'm getting a headache.
Me too.

I keep hoping that someone will come along and present a counter-spreadsheet in support of waiting till 70!
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