Break Even, for what you actually get

[pb4uski]

It's actually insurance!! Let's see if you would like your health Insurance premiums taxed in the same way?

"The Social Security Act was signed into law by President Roosevelt on August 14, 1935. In addition to several provisions for general welfare, the new Act created a social insurance program designed to pay retired workers age 65 or older a continuing income after retirement.

But it isn't health insurance... it is a a life pension, life insurance and disability insurance combined. For pension-type annuities the portion representing the growth is taxed and the contributions are not taxed.

If I claim at 70 and calculate the exclusion ratio as if my SS was a life annuity using 75% of what I paid in SS taxes per my SS statement (assumes that 75% was for retirement benefits and 25% for DI and survivor insurance) then I get a 13.8% exclusion ratio, meaning that 13.8% of my benefits would not be taxed and 86.2% would be... interesting coincidence that it is so close to 85%, eh?

IOW,

............... 75% of SS paid per my SS statement..............
(age 70 benefit * 12 mos/year * 14 year life per IRS table) = 13.8%

 

[Sandy & Shirley]

I wanted a simple visual of what changes when you take SS earlier or later, so I made this spreadsheet where you can put in your FRA benefit and see the annual and cumulative amounts, then I highlighted the breakeven points. https://docs.google.com/spreadsheets/d/1UjBqWxGYEc3OO82G9Q4o6wJWWZYK6yfv50gQxglq8II/edit?usp=sharing

Again, your spreadsheet is only taking into consideration the amount of Social Security that the government is giving to you, but your income is not the only thing that needs to be considered. Your retirement lifestyle is far more important as the numbers in my first post indicated.

I’m 75, my full retirement age was 66, so age 62 would be 75% of my PIA and age 70 would be 132% of my PIA, so to illustrate my perception of break-even I reran all my tax calculations for a lifestyle of $60,000 after tax and also $72,000 after tax. These are my new numbers:

SSB + Other Taxable Income – Fed – State = Lifestyle | Net Gov % PIA
$24,000 + $63,087 - $10,750 - $4,337 = $72,000 | $8,913 49.05%
$32,000 + $53,828 - $10,209 - $3,619 = $72,000 | $18,172
$42,240 + $39,131 - $6,891 - $2,480 = $72,000 | $32,869 180.88%


$24,000 + $46,005 - $6,992 - $3,013 = $60,000 | $13,995 54.93%
$32,000 + $34,521 - $4,398 - $2,123 = $60,000 | $25,479
$42,240 - $20,649 - $1,841 - $1,048 = $60,000 | $39,351 154.45%

When you look at the cost for your desired lifestyle, the amount of taxes that you give back to the government is considerably higher when your Social Security is lower. Based on my full retirement age, I’m supposed to get 75% of my PIA at age 62, and that is true if I only look at my GROSS SSB, but if I look at my NET amount of income, SSB minus all taxes, I’m only getting 54.93% of my NET PIA with a $60,000 retirement lifestyle and only 49.05% when I try to increase my lifestyle to $72,000 after tax each year!

Also, all of these numbers get even worse if your “Other Taxable Income” is coming from a part time job! If that is the case, you have to add another Tax Column for Payroll Taxes!


The only thing that I’m trying to do with this post is to get others to take a closer look at the concept of “Break Even”. When Social Security gives you less, they literally take back more taxes!

 

[pb4uski]

Again, your spreadsheet is only taking into consideration the amount of Social Security that the government is giving to you, but your income is not the only thing that needs to be considered. Your retirement lifestyle is far more important as the numbers in my first post indicated.

I’m 75, my full retirement age was 66, so age 62 would be 75% of my PIA and age 70 would be 132% of my PIA, so to illustrate my perception of break-even I reran all my tax calculations for a lifestyle of $60,000 after tax and also $72,000 after tax. These are my new numbers:

SSB + Other Taxable Income – Fed – State = Lifestyle | Net Gov % PIA
$24,000 + $63,087 - $10,750 - $4,337 = $72,000 | $8,913 49.05%
$32,000 + $53,828 - $10,209 - $3,619 = $72,000 | $18,172
$42,240 + $39,131 - $6,891 - $2,480 = $72,000 | $32,869 180.88%


$24,000 + $46,005 - $6,992 - $3,013 = $60,000 | $13,995 54.93%
$32,000 + $34,521 - $4,398 - $2,123 = $60,000 | $25,479
$42,240 - $20,649 - $1,841 - $1,048 = $60,000 | $39,351 154.45%

When you look at the cost for your desired lifestyle, the amount of taxes that you give back to the government is considerably higher when your Social Security is lower. Based on my full retirement age, I’m supposed to get 75% of my PIA at age 62, and that is true if I only look at my GROSS SSB, but if I look at my NET amount of income, SSB minus all taxes, I’m only getting 54.93% of my NET PIA with a $60,000 retirement lifestyle and only 49.05% when I try to increase my lifestyle to $72,000 after tax each year!

Also, all of these numbers get even worse if your “Other Taxable Income” is coming from a part time job! If that is the case, you have to add another Tax Column for Payroll Taxes!


The only thing that I’m trying to do with this post is to get others to take a closer look at the concept of “Break Even”. When Social Security gives you less, they literally take back more taxes!

When you calculate the tax impact you are including the tax on SS as well as the tax on the other income. You need to isolate the tax on SS by doing a with and without calculation.

Let's take the two extremes of your $72,000 in spending. I can't replicate your numbers but I get close with https://www.irscalculators.com/tax-calculator using a single person over 65 with Maryland state income taxes.

Using $24,000 of SS and $63,087 of unearned income, one would pay $13,452 in taxes and have $73,635 left to spend. If you had no SS and $63,087 of unearned income you would pay $8,965 in taxes. So the taxes on that $24,000 of SS is $4,487 ($13,452 - $8,965) or 18.7% of the $24,000 of SS.

At the other extreme, using $42,240 of SS and $39,131 of unearned income, one would pay $8,455 in taxes and have $72,916 left to spend. If you had no SS and $39,131 of unearned income you would pay $4,281 in taxes. So the taxes on that $42,240 of SS is $4,174 ($8,455 - $4,281) or 9.9% of the $42,240 of SS.

So if you collect early, your net SS is 81.3% after taxes and if you collect later your net SS is 91.1%. While you wold think that the taxes should be higher on the higher SS, part of the reason for the counterintuitive result is that if you collect early then 85% of your SS is taxable because your other income is much higher whereas if you collect later then your other income is actually less than your SS so only 63% of your SS is taxed.

So by taking later you not only get more but also get taxed less on your SS if you adjust withdrawals to achieve a stated amount of spending.

 

[finnski1]

When you calculate the tax impact you are including the tax on SS as well as the tax on the other income. You need to isolate the tax on SS by doing a with and without calculation.

Let's take the two extremes of your $72,000 in spending. I can't replicate your numbers but I get close with https://www.irscalculators.com/tax-calculator using a single person over 65 with Maryland state income taxes.

Using $24,000 of SS and $63,087 of unearned income, one would pay $13,452 in taxes and have $73,635 left to spend. If you had no SS and $63,087 of unearned income you would pay $8,965 in taxes. So the taxes on that $24,000 of SS is $4,487 ($13,452 - $8,965) or 18.7% of the $24,000 of SS.

At the other extreme, using $42,240 of SS and $39,131 of unearned income, one would pay $8,455 in taxes and have $72,916 left to spend. If you had no SS and $39,131 of unearned income you would pay $4,281 in taxes. So the taxes on that $42,240 of SS is $4,174 ($8,455 - $4,281) or 9.9% of the $42,240 of SS.

So if you collect early, your net SS is 81.3% after taxes and if you collect later your net SS is 91.1%. While you wold think that the taxes should be higher on the higher SS, part of the reason for the counterintuitive result is that if you collect early then 85% of your SS is taxable because your other income is much higher whereas if you collect later then your other income is actually less than your SS so only 63% of your SS is taxed.

So by taking later you not only get more but also get taxed less on your SS if you adjust withdrawals to achieve a stated amount of spending.

Once again good analysis. So far we are holding out till 70 ourselves. But what I'm more impressed with is that you were posting at 1:45 AM and now again at 7:30 AM. Did you get any sleep?

 

[pb4uski]

Yes, I did.

A little insomnia and was up in the middle of the night and up again this morning... I'll take a nap this afternoon if needed.

 

[Sandy & Shirley]

Once again good analysis. So far we are holding out till 70 ourselves. But what I'm more impressed with is that you were posting at 1:45 AM and now again at 7:30 AM. Did you get any sleep?

I'm 75, so my normal nightly schedule is waking up every few hours to pee!


These are my golden years, so when I'm done each time I have to turn around to double check that what I just did looks like gold and not tomato juice!


PS: The one thing that I now realize is that I'm now doing all of the things that I used to laugh at my father for doing!

 

[target2019]

No one reads titles

I'm 75, so my normal nightly schedule is waking up every few hours to pee!

These are my golden years, so when I'm done each time I have to turn around to double check that what I just did looks like gold and not tomato juice!

PS: The one thing that I now realize is that I'm now doing all of the things that I used to laugh at my father for doing!

I know what tomato juice is. The urologist mentioned if it looks like tomato juice then things are not good, and I should go to the emergency room.

For the topic, I checked the internet, looked up and down the street, and assume all of the rules, regulations and laws are still in effect.

About taxation of SS: it is what it is. You can challenge and argue about why, how, and what would be better. But it is still what it is. You can use an online calculator, build your own, even shout at the TV and it doesn't change what is.

Spouse has talked with SS about her impending check, and how much she can earn and so on. I listen politely, but know that it is what it is. No conversation can describe exactly what happens to our bottom line, to our joint taxation. She'll work, or not, they'll withhold, and next April 15th we'll settle up. YMMV.

 

[gauss]

Your spreadsheet pretty much agrees with what I've seen at other sites. Breakeven taking at 62 instead of 70 is in the early 80s.

And this qualitatively makes sense too. Early 80s is the typical life expectancy in the USA if I am not mistaken.

If the discount/premium applied to SS, when taking at an age other than the FRA, is actuarially neutral, then the fact that the breakeven age is close to the average life expectancy makes sense IMHO.

-gauss

 

[omni550]

And this qualitatively makes sense too. Early 80s is the typical life expectancy in the USA if I am not mistaken.

If the discount/premium applied to SS, when taking at an age other than the FRA, is actuarially neutral, then the fact that the breakeven age is close to the average life expectancy makes sense IMHO.

-gauss

US life expectancy has recently dropped...it's now 76!

ttps://www.healthline.com/health-news/life-expectancy-in-the-u-s-has-dropped-and-its-not-just-due-to-covid-19

omni

 

[Alex The Great]

I believe SS itself should not be taxed. Because this is not earned or investment income, these are money provided by government to help older people who is unable to work anymore. Some form of charity, if you will. All additional earnings can be taxed as usual.

 

[ShokWaveRider]

I believe SS itself should not be taxed. Because this is not earned or investment income, these are money provided by government to help older people who is unable to work anymore. Some form of charity, if you will. All additional earnings can be taxed as usual.

It probably should be taxed, as it was funded (or donated to) with OUR pre-taxed SS contributions, so initially it was earned income, but not taxed, just like our IRAs and 401ks. It is not being provided in whole by the Government.

 

[NW-Bound]

I say social security should just be 100% taxable from dollar one. It's income, isn't it? No different than income you receive from a private pension or an IRA draw. Then we could be spared all the whining.

Yes, one can make the case that taxing SS 100% would make sense. However, this was not done from the beginning, and younger generations feel being cheated.

There were even silly clauses, such as to allow postponing your own SS for a better pay later on, while claiming 1/2 the benefits of your ex whom you were divorced from decades ago. What's the rationale for the above? That and other spousal benefits have been terminated, and the young generations of course miss out.

I still recall reading an observation by Jim Rogers in his book, Adventure Capitalist. He said that once a government has given some benefits to people it's very hard to take it away without causing a lot of grievances. Yet, governments still give out tax credits and deductions left and right.

I believe SS itself should not be taxed. Because this is not earned or investment income, these are money provided by government to help older people who is unable to work anymore. Some form of charity, if you will. All additional earnings can be taxed as usual.

Charity? Then, the gummint may in the future cancel SS for people with a fat 401k/IRA, because these people don't need it.

Yikes! I would rather get my SS taxed than not getting any.

Am I delaying my SS till 70, just to see it goes "Poof!" ?

 

[Alex The Great]

Then, the gummint may in the future cancel SS for people with a fat 401k/IRA, because these people don't need it.

Well, but this is what we have now, isn't it? SS payments are effectively reduced for those who receive additional income by IRA distributions or from other sources.
This is exactly the reason why I think it is wrong. SS should not be reduced (or completely eliminated) for people with fat IRA/401K.