Theory Behind taking Social Security Early?

[Cut-Throat]

here's an interesting article in Kiplingers that suggests those with significant assets may want to take SS early!

https://www.kiplinger.com/article/r...e-may-want-to-take-social-security-at-62.html

The problem with this article is that it assumes that 'rich people' have to take their income from tax deferred accounts and then pay more taxes. This could not be further from what usually happens. Most 'Rich People' have substantial assets in their Taxable accounts and pay nothing in taxes when they spend them down.


This was my objective when I delayed to age 70.... Mostly the only income I've had in the last 5 years is my Roth conversions. One of the primary reasons I have delayed S.S. is so that I would reduce taxes. Quite the opposite of this article. I have taken advantage of staying in a low tax bracket and have moved quite a few $$$ into my Roth Accounts.

 

[Fedup]

The Kiplingers article leaves out a lot of details, it’s hard to tell what’s wealthy mean in that article. How big is their IRA account, and after tax account.
Honestly, my husband took SS at 64.5, and we now regret that we should have waited just 6 months till at least FRA, but what’s done is done. He would have $5k more per year if he had waited. The difference probably shows up in the tax we have to pay to CA. States that don’t tax SS, it’s best to have larger SS.

 

[sengsational]

The problem with this article is that it assumes that 'rich people' have to take their income from tax deferred accounts and then pay more taxes. This could not be further from what usually happens. Most 'Rich People' have substantial assets in their Taxable accounts and pay nothing in taxes when they spend them down.

Actually, that article might fit people on this forum pretty well.


There's probably quite a few people on here that have drained their after tax cash by the time they get to age 62?


If someone retired 6 years ago at 55 and is approaching the first decision point, it's at least somewhat likely they've been spending after tax funds to keep below ACA limits and/or keep in a low tax bracket. The income they do show has been only Roth conversions. So the after tax accounts could very well be empty. They could pull from Roth accounts, but, realizing the power of Roth accounts is waiting long enough for serious compounding, they are loath to do that. They are left with pulling only from tIRA/401k, which is the premise of the example in the article.


I'd critique the article on not calling attention to the fact that the example has them in 100% equities, which is an uncommon allocation for people on this board.

 

[NW-Bound]

Ran across this by accident: https://www.kiplinger.com/article/r...e-may-want-to-take-social-security-at-62.html

The claim is that by claiming early at 62 ,instead of at 66, you end up ahead because of lower taxation on the SS. Anybody able to agree w/ their numbers?

What the author says is that people with a lot of IRA/401k should still take out SS early. Of course, this is of interest to me. So, I tried to back out his numbers.

He does not provide some basic numbers in the case under consideration, but let's see if we can back out some numbers.

If this family were to delay Social Security payments from age 62 to age 66, it’s estimated they would be deferring nearly $146,000 in Social Security payments over that period. They would be forced to pull money from their retirement accounts to live on, paying a projected $51,372 in federal taxes from age 62 to 66....

From the above, we get 2 numbers:

1) Their SS benefit at 62 is $146K/4 = $36,500/year, ignoring COLA.
2) If they take no SS, their income would be such that their tax is $51,372/4 = $12,843/year.

Ah, that's enough for me to work with!

For a married couple under 65 claiming the standard deduction of $24K in 2018, the tax calculation will be as follows.

$0 - $24K: $0 tax
$24K - $43,050: 10% of amount over $24K
$43,050 - $101,400: $1905 + 12% of amount over $43,500
$101,400 - $189,000: $8907 + 22% of amount over $101,400


With the tax of $12,843, we can see that they are in the 4th bracket above. To pay that tax, their income is $119,290 as drawn from IRA/401k. After paying tax, they have $106,447.

Now, suppose they draw SS early at $36,500, and supplement that with IRA/401k withdrawal of $82,790, so that the total is also $119,290.

The SS tax rule says that if the joint income plus 1/2 of SS is greater than $44K, then 85% of SS will be taxed.

That means their taxable income decreases from $119,290 down to $113,815. The tax on that lower amount is $11,638.

That's a reduction of taxes of ($12,843-$11,638) = $1205. But the author claims that

By drawing early and minimizing taxes on retirement and brokerage funds, the family would owe $9,768 in taxes during the same period. That’s a savings of $41,604 in taxes at the beginning of their retirement career.

His computed tax reduction is $41,604 for 4 years or $10,401. That's a huge difference from what I calculate at $1205.

 

[Cut-Throat]

Actually, that article might fit people on this forum pretty well.


There's probably quite a few people on here that have drained their after tax cash by the time they get to age 62?


If someone retired 6 years ago at 55 and is approaching the first decision point, it's at least somewhat likely they've been spending after tax funds to keep below ACA limits and/or keep in a low tax bracket. The income they do show has been only Roth conversions. So the after tax accounts could very well be empty. They could pull from Roth accounts, but, realizing the power of Roth accounts is waiting long enough for serious compounding, they are loath to do that. They are left with pulling only from tIRA/401k, which is the premise of the example in the article.


I'd critique the article on not calling attention to the fact that the example has them in 100% equities, which is an uncommon allocation for people on this board.

actually if you want to retire early, you are very limited in the amounts you can stash in tax deferred accounts. I always contributed the max, but the brunt of my savings went into taxable accounts. So not in my case, not even close!

 

[NW-Bound]

I have at best medium income. Yet as a single person, I have never paid less than 85% rate on my SS payments.

Yes. Most people cannot avoid paying tax on 85% of their SS.

In the case of the couple above, the tax they save is on 15% of their SS of $36,500 or $5475.

The 22% tax on that $5475 is $1205, the same as calculated above. Note that this way is a much simpler calculation.

 

[hausfrau]

Yup, just like I said... you can turn off the mortality tables by providing an age assumption.

Sorry, I misunderstood.


Most of the scenarios I ran do show us as collecting more money the longer we wait. I guess that makes sense, but I need to run my own projections because right now we could live on what we would collect at 62 (with the minor benefit) if we had to without touching our investments. What we would gain on our investments without touching them isn't insignificant.



DH is also due to collect a pension at 65 when child is still a minor. We've always just viewed this as a bonus, so I usually ignore that in our calculations. The pension and SS would keep us from having to tap our investments for a long time.

The flip side to all of this is that I'm more interested in ER than my husband is. He really likes his current job. I'm not even sure if he wants to leave at 62. I just like planning different scenarios, just in case.

 

[Niuatoputapu]

That's a reduction of taxes of ($12,843-$11,638) = $1205. But the author claims that

His computed tax reduction is $41,604 for 4 years or $10,401. That's a huge difference from what I calculate at $1205.

+1

Thank you for doing the math. I like your calculations. The article does not compute with just Federal income taxes. Perhaps the author included state income taxes and assumed the state does not tax SS benefits at all?

 

[Independent]

His computed tax reduction is $41,604 for 4 years or $10,401. That's a huge difference from what I calculate at $1205.

Impressive job, thanks for doing the math.

I think the take-away is don't believe anything an FA says until you've checked the math.

 

[pb4uski]

here's an interesting article in Kiplingers that suggests those with significant assets may want to take SS early!

https://www.kiplinger.com/article/r...e-may-want-to-take-social-security-at-62.html

I'm skeptical and would love to see the details of his numbers. He says:

If this family were to delay Social Security payments from age 62 to age 66, it’s estimated they would be deferring nearly $146,000 in Social Security payments over that period. They would be forced to pull money from their retirement accounts to live on, paying a projected $51,372 in federal taxes from age 62 to 66.

Instead, if they elected to take their Social Security at age 62 at a 10% bracket, the tax savings on that $146,000 would be substantial. By drawing early and minimizing taxes on retirement and brokerage funds, the family would owe $9,768 in taxes during the same period. That’s a savings of $41,604 in taxes at the beginning of their retirement career.

$51,372 of tax divided by $146,000 is a tax rate of 35%... while there is a 35% tax rate, it only applies to taxable income from $400-600k for a couple. Yet if they take SS early, according to the author they pay $9,768 in tax on $146,000 of SS... a 6.7% tax rate.

The $146,000 is over 4 years... or $36,500 a year. Let's say that they have $100,000 of 401k withdrawal income... with the $36,500 of SS at 85% less $24,000 of standard deductions that would put their taxable income at $107,025 and their federal tax at $15,425 with SS. On the other hand, if their income was $136,500 from 401k withdrawals and no SS, their tax would be $16,629... a $1,204 difference ... essentially the $5,475 of non-taxable SS at 22%.... and $1,204 a year for 4 years is hardly a deal-breaker in the delay or not decision.

Given that the author is an investment advisor, I suspect that his is a contrived example to make his point.... and to retain more AUM to optimize his fees.

Finally, I took TT's What-If worksheet and solved for his take SS scenario... if a couple had $34,275 of 401k income and $36,500 of SS income in 2018 their tax would be $2,442... $9,768 for 4 years. If instead, the entire $70,775 of income was 401k income then their tax bill would be $5,232.... $20,928 for 4 years... and nowhere near the $51,372 cited in the article.... so his numbers are suspect.

The annual $2,790 difference in tax is $23,250 of non-taxable SS at 12%.

ETA: I didn't notice that NW-B had done a similar analysis with the same conclusion that his numbers are suspect.... so we have a belt and suspenders parrallel simulation.

 

[pb4uski]

.... The article does not compute with just Federal income taxes. Perhaps the author included state income taxes and assumed the state does not tax SS benefits at all?

I don't think so... where the author cites the $51,372 it specifically says that they are federal taxes... besides for an article such as this it would typically be based on only federal taxes given a national audience and the wide variation in state taxes.

 

[NW-Bound]

+1

Thank you for doing the math. I like your calculations. The article does not compute with just Federal income taxes. Perhaps the author included state income taxes and assumed the state does not tax SS benefits at all?

Yes, state tax will explain some of the difference between his and my numbers, which is $9196.

Is there any state that taxes that much on a regular income of $36,500 compared to SS? That's a state tax rate of 25%.

 

[sengsational]

I set this guy's scenario up in i-orp. This tool takes into consideration taxes and RMD's, but I turned-off Roth conversions in order to match his scenario. It's not perfectly aligned with the article's scenario, but I did the best I could and it looks like what he actually said was true. But the weird thing is, his metric seems to be something that SHOULD matter, but total spending, which is really what we care about, did not agree! When you look at the actual available spending money across 30 years, taking SS at 62 allowed less spending: K$2,686, whereas taking SS at 66 allowed K$2,756 (a 2.7% increase by taking at 66).

So here's the author's metric of account balances along with my my i-orp runs had to say about it:

SS @ 62		SS @ 66		DIFF
BALANCE		BALANCE
MINE	ARTICLE	MINE	ARTICLE	MINE	ARTICLE
1329	1370	1150	1248	179	122
1607	1530	1418	1386	189	144
1678	1390	1481	1290	197	100
1252	1140	1105	1096	147	44

So what the above says is that i-orp's account balances (given my imperfect matching of the scenario), says the account balances will indeed be higher in the SS @ 62 scenario. In fact, the i-orp model suggests even higher differences than the article.

But, like I said, the i-orp results show that the SS @ 66 scenario results in more level spending money ($81K/yr @66 vs $79K/yr @62).

Generally the i-orp scenario was this: Both age 62, 30 year plan (ending at 95), both have K$650 in their 401k and nothing in taxable, nothing in Roth, both have PIA of 25K/yr. Minimum estate K$1,114. AA 75% equities returning 7%, 25% fixed returning 3% with inflation at 2% (roughly matching the author's 4.47% real). SS funding NOT cut. All of this was my best attempt to match the author's scenario. Feel free to improve upon it.

I doubt these URL's will last very long, but here are the two i-orp runs:
SS@62
SS@66

Here are the inputs I used, in case anyone wants to try to improve the match between the i-orp run and the presented scenario. The data below is for 66. The 62 was the same except for that.

CurrAge  62       Current Age of Retiree
 Spouse   62       Current Age of Spouse
 TaxDef   650      Beginning Tax-Deferred Account Balance
 TaxDef2  650      Spouse Initial Tax-Deferred Account Bala
 Estate   1114     Minimum Estate Size
 SocSec   25       Social Security. 0 for Null.
 SocSec2  25       Spouses Soc Sec. 0 for Null, -1 for GPO.
 SocSecA  66       Age to Begin Social Security.
 SocSecA2 66       Spouses Age to begin Social Security.
 ssFullFn 1        1 if Soc Sec fully funded after 2035
 Termr    95       Retiree Planning Horizon
 Terms    95       Spouse Planning Horizon
 IRA2Roth 0        Maximum IRA to Roth IRA Conversions.
 StktxDfR 75       %  in Tax-deferred stocks at retirement
 StkRothR 75       %  in Roth stocks at retirement
 StkTxblR 75       %  in Taxable stocks at retirement
 StktxDfE 75       %  in Tax-deferred stocks at plan end
 StkRothE 75       %  in Roth stocks at plan end
 StkTxblE 75       %  in Taxable stocks at plan end
 gainsira 7        %  IRA return on stocks
 gainsrth 7        %  Roth IRA return on stocks
 gainsaft 7        %  Rate of return on taxable stocks
 eqdivira 3.26     %  dividend yield From tax-deferred stoc
 eqdivrth 3.26     %  dividend yield From Roth IRA stocks
 eqdivaft 3.26     %  dividend yield From taxable stocks
 yieldira 3        %  IRA return on fixed income investment
 yieldrth 3        %  Roth IRA return on fixed income inv
 yieldaft 3        %  taxable return on fixed income inv.
 Inflatn  2        Inflation rate for income
 InflatnS 2        Spending inflation rate

 

[kaneohe]

Thanks to those who took the bait.......no I mean shared your wisdom w/ the rest of us about the Kiplinger article. I'm studying frantically for my driver renewal test on Monday and didn't want to get distracted last night. Good approaches presented and I agree w/ results. Noticed a contact us link on that article so sent an e-mail asking for details on how results were obtained. Now we'll have to see if they reply..........

 

[golfnut]

The Kiplingers article leaves out a lot of details, it’s hard to tell what’s wealthy mean in that article. How big is their IRA account, and after tax account.
Honestly, my husband took SS at 64.5, and we now regret that we should have waited just 6 months till at least FRA, but what’s done is done. He would have $5k more per year if he had waited. The difference probably shows up in the tax we have to pay to CA. States that don’t tax SS, it’s best to have larger SS.

$5k per year seems like alot. Age 64.5 isn't all that early.

 

[Fedup]

$5k per year seems like alot. Age 64.5 isn't all that early.

When I filed, I made sure he has at least 90% of FRA. But somehow it seems like the percentage has shrunk to less than 90%. So I think the suggestion to take at 62 is even more foolish, especially if you don’t need it.

 

[joeea]

Honestly, my husband took SS at 64.5, and we now regret that we should have waited just 6 months till at least FRA, but what’s done is done. He would have $5k more per year if he had waited.

$5k/year for the rest of his life by waiting 18 months?
I would have guessed less.

 

[Independent]

Honestly, my husband took SS at 64.5, and we now regret that we should have waited just 6 months till at least FRA, but what’s done is done. He would have $5k more per year if he had waited. The difference probably shows up in the tax we have to pay to CA. States that don’t tax SS, it’s best to have larger SS.

The numbers don't line up for me. If 64.5 was six months from FRA, then his FRA was 65. The discount for early retirement would have been 6*(5/9) percent or 3.33% of his PIA. The $5,000 implies his annual PIA benefit was $5,000 / .03333 = $150,000. I don't see how that is possible.

 

[Independent]

When I filed, I made sure he has at least 90% of FRA. But somehow it seems like the percentage has shrunk to less than 90%. So I think the suggestion to take at 62 is even more foolish, especially if you don’t need it.

That doesn't make sense to me. The discounts for early retirement don't change.

Maybe you planned for a Normal Retirement Age of 65, but he actually had a NRA of 66?

This doesn't change the basic trade-offs on starting benefits before NRA.

 

[Fedup]

The numbers don't line up for me. If 64.5 was six months from FRA, then his FRA was 65. The discount for early retirement would have been 6*(5/9) percent or 3.33% of his PIA. The $5,000 implies his annual PIA benefit was $5,000 / .03333 = $150,000. I don't see how that is possible.

This is the table I used.

https://www.ssa.gov/oact/cola/examplemax.html

Had he took SS at 2016 at FRA, he would have received $2491, today in 2018, he would have received $2549. But I think he gets a lot less than that, but above $2000 when he started, going by memory. I don’t remember the exact amount.

I think you misread something, it’s not $5000 per month, it’s $5000 per year. Between $400-$500 per month.

 

[Fedup]

That doesn't make sense to me. The discounts for early retirement don't change.

Maybe you planned for a Normal Retirement Age of 65, but he actually had a NRA of 66?

This doesn't change the basic trade-offs on starting benefits before NRA.

Maybe I’m wrong on this, but I know he is not getting 90% now. I finally checked and his FRA is 66.so he is missing 1.5 years.

 

[NW-Bound]

Thanks to those who took the bait...

When someone promises a $10K/yr reduction in taxes, how do you resist?

 

[pompanobeach]

Hello Everyone. I just read a very interesting article that may sway your decisions to wait until FRA to collect SS. It says that under many circumstances, you would be SAVING on taxes if you took SS early! Forgive me if this article may have been already posted. http://amp.kiplinger.com/article/re...e-may-want-to-take-social-security-at-62.html

 

[braumeister]

Hello Everyone. I just read a very interesting article

At least the third time that article has been posted in this thread. There's no chance we could be repeating ourselves, is there?

 

[target2019]

If one could read a thread as a continuous text file...