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Walk away from Social Security?
Old 02-01-2018, 11:44 AM   #1
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Walk away from Social Security?

My son, who is 38 years old, is a dean at a private Christian university in California. They recently implemented a match fund 401K plan and he was told he could opt out of paying into Social Security. When he told me, I said he really needs to think this through before making that sort of decision. He's paid into SS since he was 17. He worked 6 years in New Zealand before returning to California about 3 years ago when he got a job at the university as a director, then later promoted to dean. The university is funding his doctorate program he's enrolled at UOP. He's on track for a vice presidential position, or so it seems.
I don't really know much about his income but I do know he's VERY LBYM and is good at saving. He bought a house soon after returning to California from NZ, has a wife who is a public school teacher, 3 kids, adopting a 4th and adding onto their house with about 800 additional square feet. He's also an associate pastor at a local church. He says this position affects his taxes, although I am not sure why. Maybe clergy get tax breaks on housing or such?

Any thoughts or recommendations on dropping or hanging on to SS I can pass along to him?
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Old 02-01-2018, 11:47 AM   #2
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Make sure he thinks about the fact SS is more than just retirement. Disability and survivors benefits need to also be factored into his decision.
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Old 02-01-2018, 12:02 PM   #3
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I assume this would also mean dropping the employer's share of SS tax, so in essence he'd give up a 100% match to his SS "contribution".

Separately, SS is some of the best longevity insurance out there, even with a haircut.
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Old 02-01-2018, 12:16 PM   #4
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I would suggest to your son that he do a quick NPV comparison of remaining in SS versus opting out. For the “remain in SS” option, there’s already a value for contributions to date (his + employers’), which he’d be giving up [if he has <40 qtrs] if he opted out. The NPV comparison also needs to be ‘risk adjusted’ so, when he calculates the value of the “opt out” choice, the return on savings (presume he’d continue to save his SS contribution in an account) needs to be on the very low risk side. He also needs to address the value of those SS benefits in REW’s post above.

Without crunching the numbers, I’m relatively certain a NPV comparison will tell him to continue with SS.

Would like to hear what he decides, and why, if you don’t mind sharing later.
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Old 02-01-2018, 12:17 PM   #5
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The tax code has a lot of odd provisions for clergy. When he says his work as a pastor affects his taxes, he probably means that he is considered self-employed and pays his own social security tax on those earnings.

In addition, it sounds like he has enough years of other work in the U.S. that he will qualify for SS on his past record anyway.

I don't know much about WEP, but he should try to find out if this 401K plan will affect that in some way since his employer will no longer be paying into SS.
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Old 02-01-2018, 12:40 PM   #6
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I suspect most of us here who have whined about putting into the SS system over the years, did so because we weren't certain it would be here once we retired. Well, now after all these years, I've turned 70 and SS is still here. Not suggesting that will happen to your son. However, my gut tells me SS is "too big to fail" though it almost has to be tweaked at some point. So, if son doesn't need the cash now, I'd say SS is still the best game in town. Caveat as always, the devil (pardon me!) is in the details - see cathy63 post - and as always, YMMV.
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Old 02-01-2018, 12:53 PM   #7
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I suspect most of us here who have whined about putting into the SS system over the years, did so because we weren't certain it would be here once we retired. Well, now after all these years, I've turned 70 and SS is still here. Not suggesting that will happen to your son. However, my gut tells me SS is "too big to fail" though it almost has to be tweaked at some point. So, if son doesn't need the cash now, I'd say SS is still the best game in town. Caveat as always, the devil (pardon me!) is in the details - see cathy63 post - and as always, YMMV.

Yeah, that's me. Never thought I'd collect. Now at 68 I'm collecting a spousal benefit and at 70 I'll switch to a full benefit on my own account.

I would not drop out. At a minimum its a good diversification within an overall retirement plan.
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Old 02-01-2018, 12:56 PM   #8
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Once my lifetime earnings exceeded the SS PIA's 2nd bendpoint. I decided to RE. Sure I could have had a larger SS check if I continued to work, but I only would be credited with 15% of my future earnings. Prior to this the rate was 32% and, 90% early in my career.

The bottom line is that the marginal returns on SS taxes decrease rather significantly after the 2nd bend point.

It would good for your son to understand where he currently is on the curve assuming that he will get SS benefits on his accrual to date if he opts-out going forward.

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Old 02-01-2018, 01:04 PM   #9
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Perhaps you could arrange for him to have a chat with some retirees from Detroit. They might have an interesting view on the matter.
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Old 02-01-2018, 02:14 PM   #10
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My son, who is 38 years old, [...] He's paid into SS since he was 17. He worked 6 years in New Zealand before returning to California about 3 years ago when he got a job at the university as a director
So has he worked 40 quarters to be eligible for SS? The numbers you post would seem to suggest yes (38 - 17 - 6 > 10), so even if he opts out of further payments he could presumably still receive SS beginning at 62.

The other thing is to see how he would fare if he invested a steady 12.4% of his pre-tax salary to a retirement fund. Then compare to how much SS says he would be able to claim on retirement given the same salary and same retirement age. (The salary is presumed to be adjusted upward since the employer SS obligation has been moved to the employee.)

To determine the returns range of a steady 12.4% investment, FIREcalc seems to one tool that could help. For example, if his salary were $50,000/year then to follow only the value of the investment, under the "Start Here" tab enter $0 for spending, $0 starting portfolio, 27 years (e.g. age 65 retire - 38 age now); on the "Not Retired" tab, 2045 for "What year will you retire" and $6500 for amount to add to portfolio per year, a result like the following appears:

"$0 to $833,927, with an average at the end of $416,900".

(The $0 minimum is a bogus value. It looks like the real minimum is around $166,000. Also, median end value would have been more useful than average, but it is likely they are close enough not to matter. Median is less sensitive to outliers. Sorry - this last paragraph isn't relevant to your question!)
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Old 02-01-2018, 02:26 PM   #11
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Originally Posted by REWahoo View Post
Make sure he thinks about the fact SS is more than just retirement. Disability and survivors benefits need to also be factored into his decision.
+1 And don't forget to include Medicare, which is a function of SS eligibility.

I worked outside the US for most of my adult life, and only gained SS & Medicare eligibility because I worked during my high school and college years. Even a small SS pension can make a big difference if it supplements a retirement account.
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Old 02-01-2018, 05:06 PM   #12
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Evil Big Government. He'll get rich beyond his wildest dreams by saving the 8% usurious SS tax...... Just kidding
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Old 02-01-2018, 06:02 PM   #13
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If he has enough quarters in, he should still be able to collect SS. I am not sure what the eligibility is for medicare.
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Old 02-01-2018, 06:44 PM   #14
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https://socialsecurity.tools will show where on the bend points he currently is and can model what additional years will do to his payouts.
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Old 02-01-2018, 08:06 PM   #15
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Clergy compensation and social security can get fairly complicated. See this brochure: http://www.ecfa.org/PDF/10_Fundament..._Optimized.pdf[/
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Old 02-01-2018, 08:25 PM   #16
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https://socialsecurity.tools will show where on the bend points he currently is and can model what additional years will do to his payouts.
TY grrl, that is a nice tool.
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