Would you delay taking SS?

[FlaGator]

What SS doesn't take into consideration is the survivor benefit neutrality. That is, while male and female are treated as having the same life expectancy (we know it isn't really), the life expectancy of one person of a married couple surviving is considerably longer than any one individual. Delaying SS for the higher earner is better than one might think.

I'm aware of that, and my late wife was one who failed to beat the house by a substantial margin. Nothing on the horizon that would put spousal benefits in my decision matrix, but that could change as decision time approaches.

To clarify my point, the conventional wisdom is based on assumptions that do not apply universally. Mine are no spouse (at this time), and the desire to leave a clean estate for my kids (not likely to change).

 

[RunningBum]

SS may be "actuarial neutral", and some (many?) people here seem to think they'll beat the house.

Just stop.

This is one of the more frustrating arguments I hear, because you are unfairly and incorrectly projecting our preparation in case we live longer to somehow be smug knowledge on our part that we are going to beat the odds. We don't know. But a lot of us see SS as longevity insurance, a cheap annuity.

 

[Perryinva]

The option to delay filing for SS is far more complicated for the ER crowd. The other very important thing SSA does not have personal knowledge of, is your NW and investment acumen. Some, because they have such a fine handle on living without it, view it as a windfall, and a relatively small amount. The percentages have to take a back seat to absolute dollars. If your SS is $800 at 62, and you've been ERd for 15 years and watched your NW climb as you easily live on $150k/yr, then there is really no incentive to delay. You would just put that more much money to work where you have been enjoying an ROI that meets or beats what the SSA is giving you.

On the other hand, for the less investment saavy, but still relatively healthy income, where ER MEANS retiring at 62, and that SS is a large, accounted for, and planned on portion of retirement income, delaying is almost a must. SS of 24k/yr vs $36k at FRA or $43k at 70 means that person only has to "worry" about the market returns if their investments while they delay. After they collect at a later date, they can breathe easy knowing that a COLA annuity is always there, AND if the larger earner, passed on to their survivng spouse. There are far more people unable to take the emotional pain and uncertainty of investing, or uneducated enough that it makes no sense to them, than there are that do it as a matter of course evey day. It is very true that NW drops while you delay as you are making time based payments on a future annuity. The break even point should not be a consideration, if one is considering their own personal income. It matters not if you die...you are dead...but it matters significantly for some if they live..just like any annuity, and SS is by far the best deal out there, as mentioned. Also, one can always file retroactive for 6 months at any time, while delaying. If the size of your estate, for heirs or charity, etc, is more important than your income (usually because you already have all or more than enough income that you could ever use), then break even is important, to maintain NW.

 

[RunningBum]

And then there are people with plenty of investment savvy who understand that the stock market may not continue double digit growth as it has for 15 years.

 

[joeea]

It seems like there is a real effort to encourage retirees to delay taking SS for that "8% increase" in monthly payments, hoping they will never collect a single penny.

On the contrary. I hope everyone (except my friends and family) starts collecting at 62.

That will cost the US less in the long run.

 

[1-31-18]

And then there are people with plenty of investment savvy who understand that the stock market may not continue double digit growth as it has for 15 years.

+1

Well said in few words.

 

[FlaGator]

Originally Posted by FlaGator
SS may be "actuarial neutral", and some (many?) people here seem to think they'll beat the house.

[-]Just stop.[/-]

This is one of the more frustrating arguments I hear

[-]., because you are unfairly and incorrectly projecting our preparation in case we live longer to somehow be smug knowledge on our part that we are going to beat the odds. We [/-] I don't know.

But a lot of us see SS as longevity insurance, a cheap annuity.

FIFY.

No disagreement that SS can be a form of longevity insurance.

Puzzled by the ad hominin, as I never claimed, or implied, that you, specifically, might be one of those people. Also did not say that I think it is an unreasonable bet to make for those who choose to, however few or many there are.

Further you don't know what I'm thinking beyond the few words that I post, so the idea that I am "projecting" anything is speculation on your part and is undermined by the part of my post you deleted from your quoting of me:

"...I've seen the house win by a large margin, and the possibility of that happening to me has resulted in no longer accepting the conventional wisdom that it's better to wait to FRA or beyond to start collecting.

Have several more years to make that decision, so I'm not getting my mind locked into a path now. Just not as obvious a decision as some espouse, and the idea of passing a larger estate due to taking SS earlier is a factor for me."

Also can't tell who the "we" is you are speaking for, nor is it obvious that you can definitively speak for anyone but yourself.

 

[Helena]

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.

Spending more money than necessary does not always equal a "better life."

.

 

[FI_RElater]

A couple of things:

the 8% increase only occurs AFTER FRA, before that-- well it's complicated
https://www.ssa.gov/OACT/ProgData/ar_drc.html

It's not a 62 versus 70 question-- you can claim anytime after eligibility:
I suspect that the option of waiting until FRA and then, as Dallas has suggested, choosing to claim only if the market has a correction might be a good option
(For us, pensions and cap gains/dividends already put us into the 25% space-- but still need to look into how much of tax deferred to convert to Roth)

State taxation might not be inconsequential-- with rates in the 8,9, 10%+ range they can be significant relative to just holding as normal IRA with normal gains. Obviously for those in no tax states the conversion dynamics are easier.

 

[Perryinva]

Spending more money than necessary does not always equal a "better life."

.

Maybe not, but it increases security and options, and that really depends on what level you are living at. For the readers of this forum, that are successful long term ER members, that may very likely be very true. One can't generalize about the tax bracket they are in. One could have an annual income of $200k, all LTCGs and still be in the 15%. An extra $1000/mo will not change their life much, if they comfortably can only spend $100k. But the gist of his comment, is in general, If you are just living OK on $2000-3500/mo, it sure as heck is a lot more comfortable, secure, ie "a better life" to have a COLA annuity of an extra $1000-1500/mo added to that.

As a side note, I guess it is safe to assume that the younger one started ER, the lower their SS will naturally be, and the longer they have had no need for it. If one ERd at 42, and didn't really start making a lot until 22, then there are only 20years of income counted, and 15 years of zeros. Of course, the most the top 45% of max index adjusted earnings is only 15% of that amount, so it is conceivable that by the time they collect SS their FRA amount may only be $700-800 under the max. But for those that got FI with millions in 10 years due to very high incomes, SS could be $1000/mo which is far less than the noise in their investment accounts. The Medicare is worth more than the SS.

 

[pb4uski]

....One could have an annual income of $200k, all LTCGs and still be in the 15%. ...

....I guess it is safe to assume that the younger one started ER, the lower their SS will naturally be...

.

On the first part.... unlikely unless you had huge itemized deductions... taxable income at the top of the 15% tax bracket for a married couple is $75,900 in 2017 and 2 exemptions add $8,100 to that so the maximum amount of income one could have and still be in the 15% tax bracket would be $84,000 plus deductions.

In the second part, while true the impact was minor (less than $50/month) when I retired 10 years before my FRA.... you can get a good estimate of the impact you at the SSA website and estimate your SS with zero earnings between now and FRA.

 

[Perryinva]

I was under the impression that LTCGs are not taxed as ordinary income and only taxed at 15% throught the entire 25% bracket. Not that many would condone living soley on LTCGs.

Retiring at 56, while STILL early, still gives one 35 years of earnings from age 21. As I said, the effect is minimal as the last 45% only gains one 15% of that amount in SS. So it totally depends on where your AGI fell relative to max SS earnings as to the impact. If one was a maxed out earner for all 35 of those years, there is still a pretty good reduction of more than $50/mo by not displacing the 4 years lowest years with the highest from ages 56 to 60. In that case, it is about $300/mo. If one was not a max earner for those 35 years (more typical), than yes, it could easily be only a $50/mo difference. But $3600 a year is never a reason to not retire 4-6 years earlier, IMHO, if one hates their job, it is unhealthy, etc.

Once the indexing of previous years earnings stops, at age 60, the gains from working, even at max, to displace the lowest years are minimal. The indexing is what raises the max adjusted average monthly salary every year after there are no more zeros. This is not normally well understood.

 

[Teacher Terry]

Larry: I am so very sorry to hear about your wife's illness. I don't plan on taking SS until my FRA at 66 because I am still working p.t. and my benefit will be so tiny because of WEP.

 

[Happyras]

FWIW, I just learned the rule on how Medicare Part B premiums are calculated. They look back to your Fed Tax 1040 AGI 2 years back, age 63 (if you file for MC late in the year you turn age 65). For me, since I took SS at age 62 it will raise my AGI past the 170K threshold. Going forward I get blessed with paying higher premiums for the rest of my life due to the one year of AGI used to determine income. Since mega corp decided to give me another bonus check the year after I retired, my income management was all shot to #@$#. I am struggling now to minimize income below 170K joint AGI.

 

[pb4uski]

I was under the impression that LTCGs are not taxed as ordinary income and only taxed at 15% throught the entire 25% bracket. ....

After re-reading what you wrote, I guess your use of the term 15% in the earlier post is what threw me off... if you had $200k of income and it was all LTCG, it is true that some of those gains would be taxed at 15% (some would be offset by deductions and exemptions and some would be taxed at 0%), but your taxable income would be in the 28% tax bracket (which starts at $153,101 of taxable income for a married couple filing jointly) unless you had a boat load of itemized deductions.

 

[RunningBum]

After re-reading what you wrote, I guess your use of the term 15% in the earlier post is what threw me off... if you had $200k of income and it was all LTCG, it is true that some of those gains would be taxed at 15% (some would be offset by deductions and exemptions and some would be taxed at 0%), but your taxable income would be in the 28% tax bracket (which starts at $153,101 of taxable income for a married couple filing jointly) unless you had a boat load of itemized deductions.

I don't think so, would it?

If it's ALL LTCGs, you have 0 taxable income. If you start adding taxable income, it's offset by deductions and exemptions, but you push more LTCGs into being taxed at 15%. So your tax bracket is 0%, but the effective tax is 15%.

Get past the deductions and exemptions, and you're into the 10% bracket, with the additional LTCGs being taxed making it an effective 25% rate.

Get past 10%, and you're into the 15% bracket, with more LTCGs being taxed for an effective 30% rate.

After 15%, you're in the 25% bracket, and all LTCGs are taxed, so the effective tax is still 25%.

You're not in the 28% bracket until you have enough "real" income to put you there.


Edited to add, try this in taxcaster or your own tax program to see for yourself.

 

[pb4uski]

For 2016 per TurboTax and Taxcaster:

LTCG............................$200,000
Total income....................200,000
AGI................................200,000
Standard deduction...........(12,600)
Exemptions........................(8,100)

Taxable income................179,300 ($0 ordinary, $179,300 qualified)

Tax...................................15,600

$15,600 = First $75,300 * 0% + ($179,300 - $75,300)*15%

First $75,300 (15% tax bracket) is taxed at 0% since all LTCG, rest at 15%


Taxster output:

Total Income ? $200,000
Total Deductions ? $12,600
Total Exemptions ? $8,100
Taxable Income ? $179,300
Regular Taxes ? $15,600
Alt. Minimum Tax ? 0
Additional Taxes ? 0
Tax Credits ? 0
Tax Payments ? 0
You Owe ? $15,600
Marginal Tax Rate ? 28%

 

[RunningBum]

For 2016 per TurboTax and Taxcaster:

LTCG............................$200,000
Total income....................200,000
AGI................................200,000
Standard deduction...........(12,600)
Exemptions........................(8,100)

Taxable income................179,300 ($0 ordinary, $179,300 qualified)

Tax...................................15,600

$15,600 = First $75,300 * 0% + ($179,300 - $75,300)*15%

First $75,300 (15% tax bracket) is taxed at 0% since all LTCG, rest at 15%


Taxster output:

Add $100. I get 15,615. 15%. I don't see anything that lists the "Marginal Tax Rate" in taxcaster, but the actual marginal rate clearly isn't 28%.

 

[pb4uski]

Click on the little up arrow just to the right of "Estimated Amount Owed" in Taxcaster and you'll see the output I posted.

I don't the "Add $100" or extra $15 but those are nits.

 

[RunningBum]

Click on the little up arrow just to the right of "Estimated Amount Owed" in Taxcaster and you'll see the output I posted.

I don't the "Add $100" or extra $15 but those are nits.

You don't what the "Add $100" or extra $15? Why are they nits? They prove that an extra amount is taxed at 15%, and if you think about it, it's exactly because of what I explained above: 0 on the income, $15 on the $100 LTCGs pushed into being taxable. The 28% comment is clearly an error in taxcaster.


Total Income ? $200,100
Total Deductions ? $12,600
Total Exemptions ? $8,100
Taxable Income ? $179,400
Regular Taxes ? $15,615
Alt. Minimum Tax ? 0
Additional Taxes ? 0
Tax Credits ? 0
Tax Payments ? 0
You Owe ? $15,615
Marginal Tax Rate ? 28%

 

[pb4uski]

No, the 28% marginal rate is not an error in Taxcaster... the 28% bracket is for taxable income from $151,901 to $231,450 in 2016 and in the example taxable income is $179,300. See https://taxfoundation.org/2016-tax-brackets/

LTCG are included in taxable income just like other forms of income... when the tax is calculated, taxable income is then implicitly bifurcated between ordinary income ($0 in this case) and preferenced income. Ordinary income is taxed first based on ordinary rates, then preferenced income is taxed at 0% up to the top of the 15% tax bracket and 15% thereafter (and higher rates when really high but not part of this discussion).

I guess it was self evident that if you add $100 of LTCG that the incremental tax is 15%.... but that does NOT mean that you are in the 15% tax bracket.

 

[RunningBum]

How on earth can you be in the 28% bracket if nothing, not your last dollar, not your next dollar, nothing, is taxed at 28%?? Tax brackets are applied to income excluding LTCGs and Qualified dividends (and also subtracting deductions and exemptions). That's what you clearly see in the Qualified Dividend and Capital Gains Worksheet. QDivs and LTCGs are taxed with one method, and the rest of taxable income is taxed according to the tax brackets...the first few dollars at 10%, the next at 15%, then 25%, and so on.

If you want to claim that all income together puts you in a certain tax bracket, I can't stop you, but it's totally meaningless in a situation like this when your income is not being taxed at that tax bracket rate. If your last dollar of income isn't taxed at the rate of a bracket (or more, in cases like LTCGs being pushed into being taxable for an extra 15%), I don't see how you can possibly say you're in that bracket.

But I give up. Say whatever you want, but you don't look very credible when you say things like this, IMO.

 

[pb4uski]

...Say whatever you want, but you don't look very credible when you say things like this, IMO.

You're the one making up stuff. TaxCaster and TurboTax are wrong according to RunningBum.

It's not just me saying that your tax bracket is based on your taxable income and filing status... that is the common definition of someone's tax bracket.

I guess you need to write to Fidelity and tell them that they are wrong too. In this webage they define "Tax Brackets" based on Filing Status and Taxable Income, as I did. In that webpage they say "...your tax bracket is based on your taxable income...".

https://www.fidelity.com/tax-information/tax-brackets

 

[Running_Man]

I agree that one has to take into consideration their personal circumstances in making the decision, like family history longevity, personal health, etc. However, those who advocate delay would do it based on averages since that is all they have to go on. And you are right that you can only go on what you know when you make the decision and unpleasant surprises happen... those are the chances that you take... on the other hand... you might live long.

The numbers are pretty easy... you would get 100 at 66 and 132 at 70 (an additional 8% for 4 years).

While what you say about those wealthy enough to delay SS probably won't alter their spending may be true, that just means that they can spend more on heirs or charities or more will be left for heirs and charities when they pass on.

Actually, unclaimed SS payments don't go to other recipients... they just stop and don't get paid at all... incrementally they make the system more financially secure I guess.
.

The 8 percent argument is irksome because it is not 8 percent - it is flat eight percent of the original payment at full retirement age - for the last year the actual increase is only a 6.45% increase —— yet I keep seeing “where else can you get a guaranteed eight per cent per year." So the actual merits of waiting decrease by each year after the FRA.

 

[nate2953]

How do you figure it is only 6.45%? You literally get 2/3 of one percent for each month after FRA. 48 months past FRA, 2/3*48=32. Total of 32% increase at 70 vs at 66.