Would you delay taking SS?

[always_learning]

This is sort of a spin-off of "Another SS Staff Story" and a post made by Koolau on page 4.

Basically, would you delay taking SS at age 62 in order to maximize 402k/IRA withdrawals up to the 15% tax bracket limit?

Assuming tax brackets remain the same and SS is not needed to meet living expenses, would you delay SS in order to reduce the amount of money in tax-deferred accounts subject to future RMDs?

I'm trying to think through the best option here. On the one hand, moving the tax-deferred amounts into a post-tax account sounds great. On the other hand, having the SS in hand earlier sounds great, too.

Some comments in that thread got me thinking about tax-deferred accounts and survivors, and how their taxes go up after the loss of a spouse. Koolau's post is what got me to thinking about this. Our plan had been for DH to start SS at age 62 and just reduce our 401k withdrawals accordingly to stay in the 15% tax bracket, but now I'm second-guessing that in favor of grabbing as much as we can from the 401K/IRAs before taking SS.

Thoughts?

 

[Fedup]

Yes, I'm doing that. May not even take my other small pension at 62 even. I want to convert as much money into Roth first before taking my SS. My husband is already taking SS.

 

[FlaGator]

Timely post and questions - I have been questioning the conventional wisdom of doing Roth conversions and delaying SS while drawing down my taxable account. I have no spouse and don't expect to acquire one soon, and prefer to leave behind a clean estate (assuming there is anything left ) with no RMD complications.

What I haven't figured out yet is a good analytical framework for evaluating the options. Can do the TVM calcs, but need a roadmap for the steps to make sure I don't forget anything significant. The online calcualtors I have found like SSAnalyze appear to use assumptions that are not relevant for me.

Any tips from the crowd as to how to approach this type of analysis?

 

[Alex The Great]

Sorry, I think I miss the point. Having SS early in hand? This would significantly reduce the amount of money you collect. There is a great difference if you start to collect SS at 62 and 70. I do have some analysis here:
Social Security: what to expect? | Seed4Great
The best approach would be to have a plan in place well in advance, how much you can withdraw from 401K (or roll it over to Roth) each year between the time of ER and 70, to meet your tax goal. Staying in 15% bracket seems like a right strategy. Then, start to collect SS at 70.

 

[RunningBum]

Sorry, I think I miss the point. Having SS early in hand? This would significantly reduce the amount of money you collect. There is a great difference if you start to collect SS at 62 and 70. I do have some analysis here:
Social Security: what to expect? | Seed4Great

#1, by collecting SS at 62, you can keep more of your investments intact, earning more money. The cost of deferring and getting the larger monthly payment at 70 is that you get $0 between 62 and 70. Your "analysis" totally misses this.

#2 Some people think that the benefits will change and nobody gets grandfathered in, such that you are better off getting the full benefit while it's still being given out. If you can get benefits at the current rate at age 62, but at age 69 they cut everything by 30% across the board, your breakeven point has been pushed quite a ways out.

There are a lot of other moving parts:
- Being able to convert 401K to Roth at a lower tax rate
- The tax impact if you can't convert it all before 70 and have to take MRDs,
- How much of your SS gets taxed in various situations
- Whether you are trying to limit income to get an ACA subsidy
- Your likelihood of living past the crossover point based on your health and your family history
- Special spousal situations
- The state of the stock market: If we're at a high, I'd rather be selling off a little more of my investments for living expenses and deferring SS. If the market drops, I'd rather limit my selling, and would likely take SS to cover more of my living expenses. Don't forget, you can make that decision at any point between 62 and 70, so if you are 62 now and think the market it high, you can hold off, and then if it crashes in 2 years you can start collecting then. There's no formula for that, just like there isn't one for #2 above, you go with your gut feeling of what's best for you
- others?

The good news is, most of these probably don't matter too much in the big picture. I think because it is an active decision you have to make, people (myself included) overthink this too much. I have a hunch that if the govt just automatically started giving you your SS benefits at 67 unless you explicitly told them otherwise, a lot of people would just passively accept it because then they wouldn't have to make a decision.

 

[Hermit]

I wish I had that opportunity. I am getting SS on my late wife's account. Between that and my pension, I cannot get below the 25% bracket and will be in a higher bracket a few years after turning 70. If I don't take DW's SS now it is money lost and not a small amount. Taking the pension later would have also been money lost because it would not have gotten any bigger.

I would do the analysis on tax savings under different scenarios. Trying to analyze the time value of when you take SS in conjunction with tax savings could get very complicated and probably not a great difference at the finish line.

 

[Sunset]

#1, by collecting SS at 62, you can keep more of your investments intact, earning more money. The cost of deferring and getting the larger monthly payment at 70 is that you get $0 between 62 and 70. Your "analysis" totally misses this.

#2 Some people think that the benefits will change and nobody gets grandfathered in, such that you are better off getting the full benefit while it's still being given out. If you can get benefits at the current rate at age 62, but at age 69 they cut everything by 30% across the board, your breakeven point has been pushed quite a ways out.

There are a lot of other moving parts:
- Being able to convert 401K to Roth at a lower tax rate
- The tax impact if you can't convert it all before 70 and have to take RMDs,
- How much of your SS gets taxed in various situations
- Whether you are trying to limit income to get an ACA subsidy
- Your likelihood of living past the crossover point based on your health and your family history
- Special spousal situations
- The state of the stock market: If we're at a high, I'd rather be selling off a little more of my investments for living expenses and deferring SS. If the market drops, I'd rather limit my selling, and would likely take SS to cover more of my living expenses. Don't forget, you can make that decision at any point between 62 and 70, so if you are 62 now and think the market it high, you can hold off, and then if it crashes in 2 years you can start collecting then. There's no formula for that, just like there isn't one for #2 above, you go with your gut feeling of what's best for you
- others?

The good news is, most of these probably don't matter too much in the big picture. I think because it is an active decision you have to make, people (myself included) overthink this too much. I have a hunch that if the govt just automatically started giving you your SS benefits at 67 unless you explicitly told them otherwise, a lot of people would just passively accept it because then they wouldn't have to make a decision.

Excellent summary of all the moving parts..

So far our plan is to delay SS, figuring if the gov't wants to cut SS, there will be discussion before it happens (or a revolt).

During our delay of SS, we will convert heavily, and pay taxes, because once we start SS, should we take out RMD's it will mean SS is also taxed.

Now, if the market drops like crazy, we have enough cash for a few years, and would convert "IN KIND" like Crazy, so everything can go back up in a ROTH.

 

[Alex The Great]

#1, by collecting SS at 62, you can keep more of your investments intact, earning more money. The cost of deferring and getting the larger monthly payment at 70 is that you get $0 between 62 and 70. Your "analysis" totally misses this.

#2 Some people think that the benefits will change and nobody gets grandfathered in, such that you are better off getting the full benefit while it's still being given out. If you can get benefits at the current rate at age 62, but at age 69 they cut everything by 30% across the board, your breakeven point has been pushed quite a ways out.

There are a lot of other moving parts:
- Being able to convert 401K to Roth at a lower tax rate
- The tax impact if you can't convert it all before 70 and have to take MRDs,
- How much of your SS gets taxed in various situations
- Whether you are trying to limit income to get an ACA subsidy
- Your likelihood of living past the crossover point based on your health and your family history
- Special spousal situations
- The state of the stock market: If we're at a high, I'd rather be selling off a little more of my investments for living expenses and deferring SS. If the market drops, I'd rather limit my selling, and would likely take SS to cover more of my living expenses. Don't forget, you can make that decision at any point between 62 and 70, so if you are 62 now and think the market it high, you can hold off, and then if it crashes in 2 years you can start collecting then. There's no formula for that, just like there isn't one for #2 above, you go with your gut feeling of what's best for you
- others?

The good news is, most of these probably don't matter too much in the big picture. I think because it is an active decision you have to make, people (myself included) overthink this too much. I have a hunch that if the govt just automatically started giving you your SS benefits at 67 unless you explicitly told them otherwise, a lot of people would just passively accept it because then they wouldn't have to make a decision.

RunningBum, thanks for a nice summary! Sorry if my post or blog offended you in any way. The focus of my analysis was exclusively on SS, without investment or any other income consideration. But I think it is an interesting topic and I plan to revisit it some day. As regarding your points: they are all valid, but I still have a few comments:

#1 Not sure, why it is not possible to earn that investment income later, after taking SS at 70? Just by investing the part of SS income, equal to the difference between SS at 62 and 70 during the next 8 years? Then, it would totally compensate the loss. Of course, if someone live that long ...

#2 It is true, that SS benefits may change at any time. Unfortunately, there is also no guarantee that the market conditions would be good enough to earn that difference by the end of these 8 years. Especially for someone, who may not be very good at investment.

 

[FlaGator]

Originally Posted by RunningBum
#1, by collecting SS at 62, you can keep more of your investments intact, earning more money. The cost of deferring and getting the larger monthly payment at 70 is that you get $0 between 62 and 70. Your "analysis" totally misses this.

#2 Some people think that the benefits will change and nobody gets grandfathered in, such that you are better off getting the full benefit while it's still being given out. If you can get benefits at the current rate at age 62, but at age 69 they cut everything by 30% across the board, your breakeven point has been pushed quite a ways out.

There are a lot of other moving parts:
- Being able to convert 401K to Roth at a lower tax rate
- The tax impact if you can't convert it all before 70 and have to take RMDs,
- How much of your SS gets taxed in various situations
- Whether you are trying to limit income to get an ACA subsidy
- Your likelihood of living past the crossover point based on your health and your family history
- Special spousal situations
- The state of the stock market: If we're at a high, I'd rather be selling off a little more of my investments for living expenses and deferring SS. If the market drops, I'd rather limit my selling, and would likely take SS to cover more of my living expenses. Don't forget, you can make that decision at any point between 62 and 70, so if you are 62 now and think the market it high, you can hold off, and then if it crashes in 2 years you can start collecting then. There's no formula for that, just like there isn't one for #2 above, you go with your gut feeling of what's best for you
- others?

The good news is, most of these probably don't matter too much in the big picture. I think because it is an active decision you have to make, people (myself included) overthink this too much. I have a hunch that if the govt just automatically started giving you your SS benefits at 67 unless you explicitly told them otherwise, a lot of people would just passively accept it because then they wouldn't have to make a decision.

Excellent summary of all the moving parts..

So far our plan is to delay SS, figuring if the gov't wants to cut SS, there will be discussion before it happens (or a revolt).

During our delay of SS, we will convert heavily, and pay taxes, because once we start SS, should we take out RMD's it will mean SS is also taxed.

Now, if the market drops like crazy, we have enough cash for a few years, and would convert "IN KIND" like Crazy, so everything can go back up in a ROTH.

Agree, good summary of the significant issues, and helpful to narrow down the decisonable factors. After the recent ACA legislative discussions, I've concluded there is no political appetite to change what people are expecting. MMVY, and I think the same will hold true for SS. Future beneficiaries may have a different outcome as they have had previously.

Appreciate each of taking the time to share your thoughts.

 

[Independent]

This is sort of a spin-off of "Another SS Staff Story" and a post made by Koolau on page 4.

Basically, would you delay taking SS at age 62 in order to maximize 402k/IRA withdrawals up to the 15% tax bracket limit?

Assuming tax brackets remain

The OP seems mostly about taxes.

I'm pretty analytical, but when I looked at our situation, it seemed that taxes were pretty much "pay me now or pay me later". Things that lowered taxes sooner increased taxes later, things that lowered taxes later raised taxes sooner.

There are plenty of assumptions that go into these calculations. In my case, reasonable differences in assumptions switched the result, so I felt I didn't have a definitive answer.

 

[Koolau]

The OP seems mostly about taxes.

I'm pretty analytical, but when I looked at our situation, it seemed that taxes were pretty much "pay me now or pay me later". Things that lowered taxes sooner increased taxes later, things that lowered taxes later raised taxes sooner.

There are plenty of assumptions that go into these calculations. In my case, reasonable differences in assumptions switched the result, so I felt I didn't have a definitive answer.

I understand the "pay me now or pay me later" argument. I'm sure it applies in many cases. But one of the issues I'm most concerned about (in my situation) is that RMD required withdrawal RATE increases every year (starts about 4% and goes up from there). Eventually, that might place one in a relatively HIGHER tax bracket.

At 70, it's too late for me for most options, but OP is still less than 70 so has many options available. 1) when to take SS 2) whether/how much Roth conversion 3) Spending from 401(k)/tIRA or not 4) Possibly when to FIRE or stop adding to deferred savings 5) etc.

I think it might be well worth a couple of hours with the RIGHT financial planner (as in fee-only) or "tax guy" to set up a frame work for how to manage all of this for tax efficiency. It just could turn out to be pay me now or later, BUT it might be an "aha!" of tax savings once all the pieces are put in place. even though my options are so limited, I'm still looking into more Roth conversions if I can find the right person to help me make the calculations (I've never done my own taxes).

All in all, I think this is a very worthwhile exploration to make - especially those with a little time to the critical date of age 70. YMMV

 

[Fedup]

I use Turbo Tax and have a few scenarios for comparisons. My goal is to reduce the amount you have to take at RMD.

 

[Hermit]

I understand the "pay me now or pay me later" argument. I'm sure it applies in many cases. But one of the issues I'm most concerned about (in my situation) is that RMD required withdrawal RATE increases every year (starts about 4% and goes up from there). Eventually, that might place one in a relatively HIGHER tax bracket.

At 70, it's too late for me for most options, but OP is still less than 70 so has many options available. 1) when to take SS 2) whether/how much Roth conversion 3) Spending from 401(k)/tIRA or not 4) Possibly when to FIRE or stop adding to deferred savings 5) etc.

I think it might be well worth a couple of hours with the RIGHT financial planner (as in fee-only) or "tax guy" to set up a frame work for how to manage all of this for tax efficiency. It just could turn out to be pay me now or later, BUT it might be an "aha!" of tax savings once all the pieces are put in place. even though my options are so limited, I'm still looking into more Roth conversions if I can find the right person to help me make the calculations (I've never done my own taxes).

All in all, I think this is a very worthwhile exploration to make - especially those with a little time to the critical date of age 70. YMMV

You still have the added complexity of leaving the investments in the tax deferred accounts as long as possible with the good possibility of earning added amounts on the cash used to pay taxes earlier. I gave up on coming up with a clear better way to do this and will pay the taxes when I have to. The tax bite will be much greater because I am single.

This is really a problem for my heirs. I will do what I can to limit the RMD tax cash drain by moving the portion of my estate designated to my favorite charity in annual qualified charitable distributions (QCDs) that equal my annual RMDs. It may not be a perfect solution, but it is the best I could come up with. The down side is that this amount of my estate will be transferred to the charity and no longer available for major medical expenses later in life which could impact the eventual overall estate distribution which is defined on a percent of total assets including those earlier distributed through QCDs.

 

[Chuckanut]

Keep in mind that if you delay taking SS security you can always reverse that decision if things dont' work out as you thought they would. IIRC, after taking SS you only have a few months to give-it-back and undo the decision. Then you are stuck with the decision for the rest of your life.

Just a thought. There is no one right decision for everybody.

 

[Senator]

Basically, would you delay taking SS at age 62 in order to maximize 402k/IRA withdrawals up to the 15% tax bracket limit?

If I was in the 15% tax bracket, I would take it and live more. Even if you have enough to live, living below the 15% bracket is not much spending.

Take it and live a better life.

 

[jimnjana]

In our situation delaying to FRA+ makes the most sense. After age 65 the increasing cost of Medicare offsets to some extent the bump up in SS you get by delaying. We are not leaving a legacy to anyone. I'm trying to offset DW (She wants to die broke) w/my more frugal nature. At FRA we will likely defer SS (the +) and spend out what is left in her traditional IRA (about 1 yr of her FRA SS). So it is likely she will collect at FRA +1 yr, age 67 in her case. Subject to change of course.

 

[Fedup]

We are in 10% or less bracket and trust me, it's plenty.

 

[Fedup]

In our situation delaying to FRA+ makes the most sense. After age 65 the increasing cost of Medicare offsets to some extent the bump up in SS you get by delaying. We are not leaving a legacy to anyone. I'm trying to offset DW (She wants to die broke) w/my more frugal nature. At FRA we will likely defer SS (the +) and spend out what is left in her traditional IRA (about 1 yr of her FRA SS). So it is likely she will collect at FRA +1 yr, age 67 in her case. Subject to change of course.

I'm still debating about taking SS at FRA, but my FRA is not 65 but it's 66 or maybe 67. But the problem I have is I have to pay Medicare part B premium account age 65. And I don't even need Medicare, I have retiree health insurance.

 

[MichaelB]

I'm still debating about taking SS at FRA, but my FRA is not 65 but it's 66 or maybe 67. But the problem I have is I have to pay Medicare part B premium account age 65. And I don't even need Medicare, I have retiree's insurance.

Why would you enroll in Medicare if you have retiree health insurance?

 

[Alex The Great]

If I was in the 15% tax bracket, I would take it and live more. Even if you have enough to live, living below the 15% bracket is not much spending.
Take it and live a better life.

It all depends on spending habits, mentality and how many family members you support. For me, $40K per year in retirement is more than enough: currently I live on $30K per year in SF Bay Area (but health insurance from employee). And it is not really a frugal: I buy whatever I want, and have regular trips overseas.

 

[Sunset]

Why would you enroll in Medicare if you have retiree health insurance?

If you don't enrol in medicare at age 65 (or have an allowable reason) you have to pay an increasing penalty forever when you do enroll.

I also "think" having retirement health insurance from a previous employer still means you need to enroll in medicare.

 

[Fedup]

Why would you enroll in Medicare if you have retiree health insurance?

I don't know but my husband is enrolled in both. I think for Medicare if you don't enroll right away at age 65 and you are not working, you get 10% penalty every year. So when I do need it, it will be expensive. Another reason, is less worry or headache about paperwork. We don't care who pays what but it's paid, and that's what we care. For example, my husband did a routine blood work last year, just to get his baseline and it's not paid by Medicare, I think I saw a sign on the front desk for this, but his private insurance picked up the cost. And another example, his doctor told us last year they don't accept BCBS insurance but they accept Medicare. So that's why. It's in The who knows category as in I don't know who will pay and who will not pay.

 

[Sunset]

The opposite view of why folks don't delay:

I talked to a neighbor, he said he is going to claim at 66, since it was not worth waiting until age 70, then he went on to say say a whole host of things that were totally wrong about SS

1. You get a 25% benefit if you delay to age 70, no benefit to delay between 66 and 70.
2. SS is based on the last 2 years of work.
3. SS was tax free. (even if you are working).

It makes me think, a lot of the folks claiming at age 62, or could be doing so because they are filled with wrong information like my neighbor.

At least he knew if you claim early, you get less, and he didn't want less than the full amount.

 

[Fedup]

I also "think" having retirement health insurance from a previous employer still means you need to enroll in medicare.

You don't because I almost didn't want to enroll my husband. I think Medicare part A is free for us but not Medicare part B.

 

[MichaelB]

If you don't enrol in medicare at age 65 (or have an allowable reason) you have to pay an increasing penalty forever when you do enroll.

I also "think" having retirement health insurance from a previous employer still means you need to enroll in medicare.

Got that. My post was in response to Fedup saying she didn't need Medicare. From her subsequent post, it looks like she may need it after all.

I don't know but my husband is enrolled in both. I think for Medicare if you don't enroll right away at age 65 and you are not working, you get 10% penalty every year. So when I do need it, it will be expensive. Another reason, is less worry or headache about paperwork. We don't care who pays what but it's paid, and that's what we care. For example, my husband did a routine blood work last year, just to get his baseline and it's not paid by Medicare, I think I saw a sign on the front desk for this, but his private insurance picks up. And another example, his doctor told us last year they don't accept BCBS insurance but they accept Medicare. So that's why. It's in The Who knows category.

If your husband is enrolled in both, you probably do need Medicare. It wouldn't hurt to check, no sense in overinsuring.