Social Security~ Pays to delay says Scott Burns

[mickeyd]

I thought that Scott's analysis of how much a person is rewarded when they delay starting SS until later on was right on the money. If you do not need the monthly cash to live on, you should consider delaying it as long as possible if you understand the possible negative aspects of your desision.

I wonder how Scott gets "My Social Security representative?" Do we all get one or do we have to share?

The opportunity is very simple. You don't have to make bets on the economy, future corporate earnings or the direction of the yen, euro or renminbi. Nor do you need insight into the direction of natural gas prices or interest rates.

Just defer taking your Social Security benefits.

Each month of deferral will increase your benefits by a small amount. But the increases add up. And there isn't an investment anywhere in the world that will deliver as high a "return" with no risk.

Needless to say, this option isn't available to everyone. Many men take their benefits early because they simply don't have a choice. They need the cash.



http://www.dallasnews.com/sharedcontent/dws/bus/scottburns/columns/2006/stories/DN-burns_01bus.ART.State.Edition1.317990e.html

 

[Mr._johngalt]

This was a no-brainer for me. A) I need the cash........ and B) I don't believe in counting on being around to collect in the future (I may be I just don't plan on it). That is completely alien to how I
live. Thus, I signed up in July. First check due 11-08-06. BTW, I would
follow this procedure even if the "discount" from full benefits was more
than 25% (the reduction at my age level).

JG

 

[retire@40]

Per the article "And there isn't an investment anywhere in the world that will deliver as high a "return" with no risk."

Did he forget the risk of dying before you collect your first check? Or is that not a risk?

Maybe I just have known too many people that have decided to wait and died in the meanwhile before enjoying any benefits.

Sometimes the widow makes out since she can take over what would have been his benefits if her benefits are not higher.

Sometimes the government wins when the guy is not married and it all stays in the government pot.

 

[haha]

Per the article "And there isn't an investment anywhere in the world that will deliver as high a "return" with no risk."
Did he forget the risk of dying before you collect your first check? Or is that not a risk?

To my way of thinking at least, that is not a risk. You are seeking financial insurance against running out of money as you age. If you are dead, problem solved!

Ha

 

[sgeeeee]

To my way of thinking at least, that is not a risk. You are seeking financial insurance against running out of money as you age. If you are dead, problem solved!

Ha

Yes, but there is a risk that the 70 year old version of you will not be healthy enough to enjoy the social security benefit as much as the 62 year old version of you. There is also a risk that tax and beneift rules become less generous as time progresses.

 

[mathjak107]

After running the numbers many times with many different scenerios for us 62 is the choice. Although we could get a bigger monthly draw by waiting we probley wouldnt spend more as our expenses are already set.

The fact was on about a 2 million dollar portfolio to start the best calculation of waiting to 65 gave us about 50,000 bucks extra at the end of both our lives in the estate. Thats figuring all investments in the case of taking it early, and spending our investments in the early years before ss kicks in ,in the case of taking it later.

50,000 bucks in 30 + years will be worth what 5000.00 is today. Certainly not waiting for and playing the ill beat the system game by living longer.

We want to figure the ss money right from day 1 in our plans

 

[dory36]

I was surprised he didn't run the numbers on taking the $$$ early and investing all of those SS payments.

Using his numbers, if you started taking the payments at 62 and invested them all with a modest 5.6% annual return, you'd have about $141,000 extra after the 54 months.

If you then switch to drawing the interest only from that $141,000, combined with your reduced SS payment, the net would be the same as if you waited for the higher SS payments. AND you (or your heirs) would have the $141,000 principal.

Anyone in a (financial) position to wait is probably also in a financial position to invest the early payments, and to take the risk that 5.6% won't be attainable.

 

[REWahoo]

I was surprised he didn't run the numbers on taking the $$$ early and investing all of those SS payments.

What I've not yet been able to wrap my mind around are the tax consequences of taking SS at 62 vs delaying until 66 or later. In Burn's and your example, how much of that $141,000 and $50/month would be eroded by higher taxes on your SS income?

 

[dory36]

Oops - forget that $50 -- it was a leftover from an earlier calculation. At 6%, you'd have $150,000 and $50 a month more than if you waited. At 5.6%, you break even.

The $50 comment (since edited out) was a leftover...

 

[OAG]

Dory - you are right on. 5.6% return is the current LOW of the past 15 years for safe, insured, savings.

REWahoo - Don't forget inflation but even if you ignore it for a minute do not forget taxes and Medicare. I'm 66 and taxes and MC take fully 25% out of the benefit.

Take the money and run is the only way -- besides I think it is 2017 or some time about that when SS will be receiving less annually than the annual payout. I think it is written in the last big study group and congressional law that whenever the payout exceeds the intake (in just pure dollars (no vodoo stuff)) that the rate of benefits CAN BE reduced (reverse COLA?). I doubt that that will ever happen, but I am old enough, to never say never.

 

[jeff2006]

Take the money and run is the only way

Couldn't disagree more.

It might be best for your set of circumstances, but there are certainly other scenarios where it is far better to wait til full retirement age or even age 70.

My suggestion would to be to read the thoughts of Henry Hebeler on analyzenow.com before making a decision one way or the other. He agrees with Burns.

 

[OAG]

jeff2006 -- Sorry, went back and read my post, should have added "For us it was" take the money and run. I can see where one size does not fit all.

 

[Mr._johngalt]

For jeff2006 and old armyguy...........

Any issue can be debated of course, and the scope of opinion is
unlimited on any subject (part of what makes this forum so interesting).
On this issue, for many of us it's a "gut call" and thus no reading
or number crunching is necessary. If you don't plan/expect to be here
or functional at age 70, why would you wait? In my own case, I almost
never follow the advice of others anyway.

JG

 

[New Thinking]

RE:

What I've not yet been able to wrap my mind around are the tax consequences of taking SS at 62 vs delaying until 66 or later. In Burn's and your example, how much of that $141,000 and $50/month would be eroded by higher taxes on your SS income?

I shared this with the board before and someone had posted a link to the white paper I wrote on this. The tax benefits for delaying SS are signficant for many andd have been posted about many times here. But delaying SS has a dramatic effect...By "trading" IRA income for higher SS income, a double benefit often appears. First, the IRA dollar is gone, so no tax there. Then, SS isn't taxable at the same level because the IRA dollar disappeared. SS goes into the "Provisional Income formula" at a better rate and thus SS often will often escape taxation....

I am cutting and pasting here (so hope it looks okay), but here is how it might work after age 70 between taking an IRA dollar (because SS is taken early) which forces the taxation of a SS dollar and comparing to taking an SS dollar (due to delaying SS).

How combined IRA income and Social Security income is taxed:
IRA Income $1
Tax Rate x 25%
IRA Tax (A) = .25

PLUS

Additional Social Security Subject to Tax $1
% of Social Security Income Subject to Taxes x 85%
Taxable Social Security Income = .85
Tax Rate x 25%
Social Security Tax (B) = .2125

Total Tax in Cents (A + B): = .4625
Total Tax in Percentage: OR 46.25%


VERSUS

How every dollar of “delayed” Social Security income is taxed:
Social Security Income $1
Combined Income Formula x 50% = .50
% of Social Security Income Subject to Taxes x 85%
Taxable Social Security Income = .425
Tax Rate x 25%
Social Security Tax = .1062
Total Tax in Cents: = .1062
Total Tax in Percentage: OR 10.62%


It actually works out more favorably for many, but this is part of the equation. The reason it works out even more favorably is that the "test" for taxation of SS is the least of the formulas. One of those pieces says that the tax is due on "50% of the first threshold ($32k for married/$25k for singles) plus 35% of the excess over the second threshold." Thus, as SS counts in the Provisional Income formula at a 50% rate, one could take $64,000 of SS without triggering any SS taxation because you haven't reached the first threshold. (And this ignores deductions, credits, etc. )Figure in state tax and the story gets better for delaying. Again, not intuitive but beneficial when you realize how much more of your retirement income one can keep by lowering the effects of the "Tax Torpedo" Burns writes about.

 

[d]

as the previous posts suggest, there's not one right answer on this one. it depends on marital status, health (of both), availability of other funds, tax status of those funds, etc. etc. etc. and, to throw a real money wrench into it, future tax treatment of s.s. and of iras

 

[FIRE'd@51]

Thus, as SS counts in the Provisional Income formula at a 50% rate, one could take $64,000 of SS without triggering any SS taxation because you haven't reached the first threshold.

This would only be true if you had no other AGI or municipal bond income. Is that what you are assuming?

 

[New Thinking]

No - It is always true..SS always counts at a 50% rate in the formula. Don't be confused that up to 50% of SS can be taxed..That is a secondary part of the equation.

 

[FIRE'd@51]

No - It is always true..SS always counts at a 50% rate in the formula. Don't be confused that up to 50% of SS can be taxed..That is a secondary part of the equation.

As I understand it, Provisonal Income is all your other income (including muni's) plus 50% of SS. If your Provisional Income is over 32K, some of your SS benefits will be included in your AGI and may be taxed depending on your deductions/exemptions.

Take your example of a couple with 64K of SS income. Assume they have 12K of other income and take the standard deduction plus 2 exemptions:

Provisonal Income = other income + 0.5*SS = 12K + 32K = 44K

Taxable SS is 50% of the amount of Provisional Income over 32K which = 6K

AGI = 12K + 6K = 18K

Taxable Income = AGI - std ded - exemptions = 18K - 10.3K - 6.6K = 1.1K

Tax = $110

If your Provisional Income goes above 44K, then 85% of the Provisonal Income over 44K is added to your AGI, up to 85% of your SS.

 

[Spanky]

Here is a calculation that does not consider taxes.
Assumptions:
Age in 2005: 55
Income 2005: 75,000

Age 62 66 70
initial benefits: 15,919 21,226 28,018

Age Cumulative amount at 6% return
70 $182,930.26 $119,652.94 $28,018.00
75 $334,538.83 $279,775.55 $195,434.47
80 $537,425.31 $494,055.74 $419,475.48
85 $808,933.18 $780,810.96 $719,292.89
90 $1,172,271.95 $1,164,554.13 $1,120,516.22
95 $1,658,501.19 $1,678,089.06 $1,657,443.53
100 $2,309,185.59 $2,365,314.64 $2,375,973.40

Taking benefits at 62 seems to be a better deal especially the average life expectancy is 80. Obviously the amount will be significantly lower after taxes.

 

[New Thinking]

Fire'd - I was only answering the first part of your question and wasn't clear to you. My bad. Yes, you appear to have it..The "other income" drives the Provisional Income up. I was saying that you could have $64,000 of SS income and no other income without triggering the tax (and this ignores the standard deductions and exemptions).

 

[New Thinking]

Spanky - You are doing what most do when people "spreadsheet" this. You are plugging in "today's dollars" for the amounts at age 66 and age 70. You need to bring those amounts up by the projected COLAs if you are doing your calcs in future dollars. For example, assuming a 3% COLA, you should be plugging in $23,890 at 66 (not $21,226) and $35,492 (not $28,018) at 70.

You also do not seem to be accounting for COLAs in your cumulative amounts. These are the big difference makers if you live longer than life expectancy.

 

[hogwild]

Taking benefits at 62 seems to be a better deal especially the average life expectancy is 80. Obviously the amount will be significantly lower after taxes.

For me, the issue is one of cash flow, not cummulative amounts. Using your example, the cash flow at age 90 for SS at 62 would be over $4500 less than for SS at 66 and over $8400 less than for SS at 70. The difference increases each year.

 

[youbet]

For me, the issue is one of cash flow, not cummulative amounts. Using your example, the cash flow at age 90 for SS at 62 would be over $4500 less than for SS at 66 and over $8400 less than for SS at 70. The difference increases each year.

If you begin taking SS at 62, isn't your total SS eqivalent cash flow at 90 the sum of your annual SS payment (determined when you started at 62 plus COLA's) plus the investment income from prudently investing all those dollars received since you started collecting at 62? That is, to keep the comparison apples to apples, you have to assume that SS income collected from 62 onward is retained and invested and available when you are 90.

 

[MooreBonds]

I'm working on a spreadsheet for this analysis...I just need a few items clarified:

Can someone please clarify how SS is taxed? Is it 50% of your SS payments count towards calculating your AGI, then if you are over a certain threshhold, then 85% of your SS is subject to taxes? What percent of your SS payments are subject to taxes if you are under that threshhold?

If so, what are the threshholds (single/married joint/married separate)?

Another complicating factor is that most people are spending down their nest egg at that age. To assume that you will be investing ALL of your SS payment seems a bit of a stretch - since this will require you to be selling/withrawing from your taxable and IRA accounts to fully fund your living needs in order to not touch your SS payments. This will result in you increasing your taxable income by receiving SS at 62, but only using SS to reinvest and not to live off of. So I'm not so sure that the additional income taxes owed from receiving SS early "just so you can reinvest it" will be that beneficial once the numbers are spit out. But, I won't know until someone could give me a little assistance on the above...after which, I'll post my Excel (2000 format) spreadsheet for public scrutiny.

--Peter

 

[FIRE'd@51]

Spanky's results would be correct if he had specified that the 6% was the real (after inflation) return. I have done similar calculations comparing taking SS at age 62 instead of 66 and found:

Real Return Break-even Age
0% 78
1% 80
2% 81
3% 83
4% 85
5% 88
6% 94
7% 115

These results also assume you achieve these returns in the first four years from 62 until 66.