Anyone else plan to take SS early, to stay in a lower tax bracket?

[Backpacker]

Many of us have baked this in. opensocialsecurity.com allows you to haircut benefits starting in a certain year and for a certain amount. Their default is 23% beginning in 2034 by you can put in whatever assumptions you want.



I personally think that at some point Congress will do something like what they did in 1983 and reform social security so current and near term beneficiaries will not be significantly impacted.

Re: phase in changes to SS. the changes in 1983 are just now taking full effect. ( ie. FRA). Took nearly 40 years to be fully implemented. At 57 years old, I'm not overly concerned about a large deduction in my SS benefits.

Even if whatever changes made are phased in 2x faster, that's a 20 year window to adjust.

 

[youbet]

Many take SS early for one reason--out of need. We have expenses to pay and we need the income.

I've heard of folks who withdraw from their FIRE portfolios for the same reason: They need the money to cover expenses! Can you imagine? What are they thinkin'?

 

[pb4uski]

I've heard of folks who withdraw from their FIRE portfolios for the same reason: They need the money to cover expenses! Can you imagine? What are they thinkin'?

OMG! You mean they saved it to spend it in retirement? and not to hoard it?

 

[skyking1]

LOL!
I was fully in the "DW takes hers at ~62 and I wait till 70" camp, then life has happened all over my family. Now I know it is going to be a periodic analysis every year starting at the end of this one, when I reach 62.

 

[RunningBum]

I posted about this in the other current SS thread. I used some average SS benefit amounts, similar earning and age spouses, the mortality tables and the default haircut in opensocialsecurity.com. The biggest lifetime difference in strategies I could find was $39K. Maybe others would have more of a difference with their own particular inputs / assumptions.

I replied in the other thread. Those of us who prioritize delayed SS to 70 for longevity insurance would see a much larger benefit if we outlive the mortality estimate. We don't care nearly as much what we lose on if we die early.

 

[daylatedollarshort]

I replied in the other thread. Those of us who prioritize delayed SS to 70 for longevity insurance would see a much larger benefit if we outlive the mortality estimate. We don't care nearly as much what we lose on if we die early.

I understand. We have different goals. SS and pensions cover most of our expenses, so we don't need much from the portfolio each year. We have over 200 years of expenses cover by SS, pensions and the portfolio, 300 years if we downsize, so I'm more interested in being able to pass our SS benefits on to our kids than I'm concerned about longevity insurance.

 

[Exchme]

Is P.G. similar to a combination of the Retiree Portfolio Model and Case Study Spreadsheet tools?

In other words, how do the above tools compare with each other?

No comparison, Pralana is ridiculously more full featured than those. I won't do it justice, you can download the manual for free and there is a free "bronze" version that shows you the general look and feel, but the free stuff doesn't let you do anything fancy.

A few nuggets of what it can handle:

Cash is separate from your stocks and bonds, so for instance you can start with a stack of cash and spend that down. It handles HSAs, 529s, after tax basis in IRAs, inherited IRAs, Inherited Roths, life insurance, early mortgage payments, loans for college, charitable giving.

Allows income of lots of different types with different tax treatment, from wage income with SS taxes due and company match to 401k, to pensions, annuities reverse mortgages and any other continuing or one time taxable or non taxable thing you can dream up.

You can reinvest dividends or not, input a capital loss carryover, average unrealized capital gains. It will do cash flow including capital gains and taxes on them (puts CG taxes into the following year), ACA premium credits for one or both of you, SS taxation, IRMAA, NIIT, AMT. You input year by year Roth conversions limited by the most restrictive of your choice of tax bracket, IRMAA tier or FPL and it instantly tells you the impact.

There are lots of withdrawal strategies available like Consumption Smoothing, Actuarial, constant spending, % of portfolio, floor and ceiling, Guyton-Klinger, CAPE rules.

You set the priority of what order to draw from the four big types of accounts (taxable, your tax deferred, spouse tax deferred, Roth). You can make special withdrawal from any account at any time (for instance, I have stored up receipts to take a chunk out of my HSA, but will wait a few years).

It shows historical and Monte Carlo results as decile bands (rather than the spaghetti graphs in FireCalc). You can even select a start year and see how your plan would have fared.

You can do one-click studies on returns, longevity, inflation, SS claim age, stop work age, long term care need.

Not trying to be a commercial for it, I'm sure other paid programs are powerful too, but using freebie or home-brew programs when there are low-cost, super-powerful tools and there is a lot of money riding on the answer doesn't seem like a good bet to me.

 

[RunningBum]

... so I'm more interested in being able to pass our SS benefits on to our kids ...

I hear this a lot as a reason for taking at 62 but I don't get it. Can you explain the rationale?

Assuming you spend the same amount no matter when you take SS, if you die before the breakeven, you'll leave more for your kids taking at 62. But if you die past the breakeven, taking at 62 is worse for them. What am I missing?

 

[daylatedollarshort]

I hear this a lot as a reason for taking at 62 but I don't get it. Can you explain the rationale?

Assuming you spend the same amount no matter when you take SS, if you die before the breakeven, you'll leave more for your kids taking at 62. But if you die past the breakeven, taking at 62 is worse for them. What am I missing?

I would rather leave them more money when they are younger and may need the money more, like for raising kids or buying houses. We are getting an inheritance this year and and at our ages don't really need it and it won't make a difference in our lifestyle.

 

[RunningBum]

I would rather leave then more money when they are younger and may need the money more, like for raising kids or buying houses. We are getting an inheritance this year and and at our ages don't really need it and it won't make a difference in our lifestyle.

OK, thanks for that explanation. The way I see it, if I die early, I won't have used much of my investments and will leave plenty even without get any SS benefits, but for people who would need to use a lot more of their own money to make it to 70, I can see that.

 

[youbet]

I hear this a lot as a reason for taking at 62 but I don't get it. Can you explain the rationale?

Assuming you spend the same amount no matter when you take SS, if you die before the breakeven, you'll leave more for your kids taking at 62. But if you die past the breakeven, taking at 62 is worse for them. What am I missing?

For me, it was the insurance component of taking SS early. If I passed before 70, DW or the kids would have gotten nothing.

I partially agree with you on the before or after break-even point. But since I include the time value of money in my calculation of break-even, you don't know when break-even will be until you pass through it at some future point.

In my case, since I'm long past 70 and now have the actual results of the size of the stash investing early SS has yielded, I'll likely never reach break-even. Investment returns were excellent and the calculators say my life expectancy is far less than 100.

It sounds like you've worked out a great plan for yourself given your circumstances and goals.

 

[SevenUp]

Is P.G. similar to a combination of the Retiree Portfolio Model and Case Study Spreadsheet tools?

In other words, how do the above tools compare with each other?

No comparison, Pralana is ridiculously more full featured than those....

Thanks for the overview. Don't know if "ridiculously more" is apt (e.g., it appears the Case Study tool has all the tax calculations mentioned - albeit for only one year at a time), but it may depend on the specifics of someone's situation.

I suppose it wouldn't hurt to give the Bronze version a try, unless this is a case of "oh, the free version won't provide enough feedback - one really has to buy the Gold version to understand...."?

 

[Sunset]

Don't have stocks or bonds. Will probably just put the SS from 62 to 70 in CDs. Making up for any differences living longer than average. Also, I may have a little less faith in the govt. than some. .....

Your CD's must have been paying horribly lately, ouch...

I get some folks have less faith in the govt. What I find funny is many of these same people trust greedy money grubbing companies to treat them better

 

[2HOTinPHX]

Your CD's must have been paying horribly lately, ouch...

I get some folks have less faith in the govt. What I find funny is many of these same people trust greedy money grubbing companies to treat them better

I try not to think about all the money we have out there in cyberspace..it kinda freaks me out that its just a bunch of zeros and ones that could get lost or hacked somehow. I joke to the wife I want to start hiding it under the mattress and tin cans in the backyard.

 

[Sunset]

I try not to think about all the money we have out there in cyberspace..it kinda freaks me out that its just a bunch of zeros and ones that could get lost or hacked somehow. I joke to the wife I want to start hiding it under the mattress and tin cans in the backyard.

I've had the same thoughts.. Yet in 1850 it was hardly different.

You put money into the bank and they wrote it in a ledger and gave you are receipt. After 20 years of saving, if the bank burned down, your money was lost ... unless you had the receipts. (actually it was lost as there was no FDIC back then).

 

[almost there]

Your CD's must have been paying horribly lately, ouch...

I get some folks have less faith in the govt. What I find funny is many of these same people trust greedy money grubbing companies to treat them better

My average is about 3 1/2% the past 5 years. 3.25, 3.4, 3.5 and 3,75.
And should continue. As about 1/2 just went into a money market acct. Waiting to be tied up. My broker offers 3.25% on a 5 year today. Will wait a bit to tie it all up in 1, 3 and 6 month CD's. And go from there. I dont mind not being the end of the year return leader. Just bugs me when things are down. So I avoid it all together. lol lol Makes actual planning easier. And I sleep like a log.

 

[Looking4Ward]

On the last part, just know taking isn't irreversible, you can get a do over if you pay them back anything that you have received since you haven't been receiving for a year.

Excellent point, thank you. I have to admit I'm looking forward to not having to draw as much from my own portfolio while the markets are in such a current disarray. Perhaps I'll re-evaluate before the first year is up (and maybe payback / suspend benefits if the markets make an exceptional recovery) or then wait until FRA and make the same evaluation without the payback penalty.

Good to have those options.

 

[Sunset]

Excellent point, thank you. I have to admit I'm looking forward to not having to draw as much from my own portfolio while the markets are in such a current disarray. Perhaps I'll re-evaluate before the first year is up (and maybe payback / suspend benefits if the markets make an exceptional recovery) or then wait until FRA and make the same evaluation without the payback penalty.

Good to have those options.

You can suspend without the need for payback, and your delayed credits start accumulating again.

 

[augam]

You can suspend without the need for payback, and your delayed credits start accumulating again.

I believe this may be true once you reach FRA.

 

[Sunset]

I believe this may be true once you reach FRA.

Thanks, you are correct.

 

[New Thinking]

It’s been a while since I have posted. My name is Jim Mahaney and my paper is cited in the Bogleheads wiki mention above. The link is broken on the Wiki page, so I'll repost it below. I originally wrote the paper back in 2005 and one thing that really hasn't changed much is the lack of understanding of the tax benefits of delaying SS. On page 10 of the paper, I try to explain it but it does tend to get complicated.

I used the term "Tax Torpedo" which I borrowed from Scott Burns, a columnist from the Dallas Morning News. As many of you know, it refers to what happens when taxable income (e.g., an IRA withdrawal) forces the taxation of up to 85% of Social Security benefits. As a result, at it's highest point, one has $1 of IRA income + 85 cents of SS income being taxed concurrently.

But, delaying SS can result in avoiding the Tax Torpedo or minimizing its effect. That's because the Provisional Income formula (aka Combined Income formula) treats SS as only 50 cents on the dollar. So, you can "stuff" much more SS income into the formula before seeing the Tax Torpedo hit. After the paper was released I was contacted by Dr. Bill Reichenstein and I walked him through the numbers. Dr. Reichenstein has now retired from Baylor University and runs Social Security Solutions, Inc. with Bill Meyer.

I mention this because his software used by FAs does a great job of demonstrating the concept and he has done a masterful job exploring this in his published research such as "How Social Security Coordination Can Add Value to a Tax-Efficient Withdrawal Strategy" which appeared a couple of months ago in the Journal of Retirement. (I'm not sure if the public has access to that piece as I sit on the Editorial Board and have a log-in). Morningstar did a podcast with Reichenstein last month which covered this as well. https://www.morningstar.com/article...henstein-avoiding-tax-headaches-in-retirement

I no longer work at Prudential as I ER'd and am opening a flat fee-based RIA, but my paper appears to live on. https://www.prudential.com/wps/wcm/...ecurity-benefits.pdf?MOD=AJPERES&CVID=nkCVUtj

 

[marko]

I have not read every post here but I'm wondering if, considering the potential 25% haircut in 2034, if anyone has done the math of taking SS asap vs waiting 8-10 years.

If the haircut is going to happen, I'd guess taking it at 62 would be to one's advantage for the next 12 years. Waiting to 2034 when you turn 70 would seem to be a losing plan (but as I've often demonstrated here, math is not my forte).

Regardless, the current break-even for me is 82 or so, so for me 62 made sense. If I'm lucky enough to make 83 I'll be thrilled to be 'losing money' at that point.

 

[New Thinking]

SS Cuts

It's highly unlikely SS benefits will be cut for current retirees. IMO, there is a much higher likelihood that ordinary income tax rates increase, thereby impacting IRA withdrawals more than SS income.

 

[almost there]

Even with the last 8 years of Roth conversions, one more this year and one final in 2023. I will never be able to get my taxable income under $44k a year. (Wish I could!) In my case SS at 62 for both is $2900 / mo. So I will be paying 12% tax on $2465 rather than $1450. I love the idea though. Just cant get down that low.
With rental income and a small lifetime fixed annuity ($4700 combined / month today)
And a remaining IRA balance around 500k, I will be taking equal annual distributions from 62 to around 82.
I thought staying under $83,550 (12% bracket 2022) was a bold move. And staying there forever..
But 44k? Wow!, now there is a goal.
Unless I am missing something?

 

[almost there]

It's highly unlikely SS benefits will be cut for current retirees. IMO, there is a much higher likelihood that ordinary income tax rates increase, thereby impacting IRA withdrawals more than SS income.

Agree, the SS cuts will be forward looking. Like being able to get full SS at 65 and now 67 yrs. That went into effect in 1983.
One question, if you are over 62 and under 70. But not taking SS, are you considered a retiree?

I look for both. Higher tax's in the future. And a reduction in SS.
Guess I don't have as much faith in the Govt. as some.