Theory Behind taking Social Security Early?

[kaneohe]

My own numbers match the article when comparing start dates.

thanks for your response........I may have misunderstood your post above.
I thought you were talking about the tax savings when you took SS early
and could explain why I and others didn't understand that part or the article.......the tax savings.....if you can explain that part, folks are listening...........

 

[Fedup]

I just download the RPM model, I think it’s not easy to use and input. It gave me headache. It’s worse than I-ORP.

 

[sengsational]

It’s worse than I-ORP.

I have to agree! I'm used to i-orp, so it hardly even makes my head hurt, but when I tried to put the same scenario into that spreadsheet and compare the results, I was bumfuzzled beyond comprehension. I've interacted with the authors of both, trying to get a better understanding of them*. The final result was that the results were reasonably close from a macro standpoint, but how they got to those similar results seemed totally divergent. For me, it's just a puzzle to fiddle with; when it comes to actionable items, there are only a few levers to pull, and I'm relatively comfortable at the controls. I sure would be nice, though, if I were a whole bunch smarter and was willing to spend a whole bunch more time to really nail this down. But I'm not (either of those things).


* The tools, not the authors, lol!

 

[Winemaker]

Okay, at least I'm not alone in your observations. I have done this spreadsheet at least a thousand times, starting with nothing but cabbage pickers wages up to my/DW's situation so that I can get a better handle on things. In the end, for us it doesn't make a hoot of difference in terms of conversion, or SS. we'll be paying 22% now til we die, unless the tax law changes. Not complaining just commenting out loud.

I-orp suggests emptying the 401k and tIRAS in the first 4 years, and put everything in a taxable account, pulling 4%+ inflation til death due us part. Nice problem to have, we've been blessed.

 

[Independent]

DH/me same age, 61. I'm taking my SS at 62 and he'll wait until 66.5 My yearly SS is $9000. He has a small consulting business, income $42,000 plus our investment income that we re invest (do not touch). How is my SS taxed? Is it combined with the other income then taxed?

A portion of your SS benefit will be included in your taxable income, along with your other income.

You can calculate the portion here: https://apps.irs.gov/app/vita/content/globalmedia/social_security_benefits_worksheet_1040i.pdf

If you had only $42,000 of regular income plus $9,000 of SS benefits, then I think $6,625 of your SS will be taxable.

Note that you also include your investment income in that worksheet, but you didn't specify how much you have.

 

[kaneohe]

More Bait

The author of the Kiplinger article replied to my query today.......this time I plead out-of-town visitors so hopefully I have successfully attached his attachment for the pleasure of those who can't resist. I was impressed by search finding a thread telling how to do the attachment.

 

[pb4uski]

Tax calculations seem sensible, but it is unclear how he is coming up with the different income numbers and he didn't provide details.... the income number for 2020 is particularly crazy... $184,114 where SS is delayed vs $76,218 for SS at 62... how can income be over $100,000 different! Doesn't make sense.

 

[Independent]

Tax calculations seem sensible, but it is unclear how he is coming up with the different income numbers and he didn't provide details.... the income number for 2020 is particularly crazy... $184,114 where SS is delayed vs $76,218 for SS at 62... how can income be over $100,000 different! Doesn't make sense.

Yep.

 

[Lawrencewendall]

thanks for your response........I may have misunderstood your post above.
I thought you were talking about the tax savings when you took SS early
and could explain why I and others didn't understand that part or the article.......the tax savings.....if you can explain that part, folks are listening...........

I'm going back and re-reading it right now but the first thing that jumps out at me is that if the money needed for expenses is totally drawn from pre-tax money, 100% of it is taxed to the bracket they need to survive ($101k to the top of the the 12% and $165k to the top of the 22%). If they start pulling from SS at 62, only 85% of the SS is taxed, saving 15% on taxes on the same amount every year. I may have more to add as I continue reading it.

EDIT: I have to laugh. From the article "If they were to take their Social Security at age 62 — while in a 10% tax bracket from age 62 to 70....."
In order to be in the 10% bracket, they would have to withdraw/tap SS for less than $43k a year. Not sure many "wealthy" couples could get by on that. We can't at least. My mortgage alone is $21k a year. I'll pay my 12% just so I'm not living on Alpo. Still reading

 

[pb4uski]

If they are drawing enough that their after-tax withdrawals are the same and the SS is $146,000 over 4 years or $36,500/year then the tax savings from non-taxable SS would only be $36,500 * 15% non-taxable * 22% marginal tax rate = $1,204/year.

There might be some second order effects from having to withdraw $1,204 more but the tax differences in the article seem too extreme to be credible.

 

[misshathaway]

I learned from Alan on this forum that it is possible to cash out an I-bond in part. The user interface on the Treasury Web site indeed allows this.

What! Mind blown. Thanks.

 

[shotgunner]

I learned from Alan on this forum that it is possible to cash out an I-bond in part. The user interface on the Treasury Web site indeed allows this.

You can also convert paper Savings Bonds to electronic Savings Bonds and then be able to cash the paper bonds out in smaller incremental amounts.

 

[sengsational]

I-orp suggests emptying the 401k and tIRAS in the first 4 years, and put everything in a taxable account, pulling 4%+ inflation til death due us part. Nice problem to have, we've been blessed.

If tIRA/401k have a lower equity percent than after tax, i-orp will preferentially yank that first. If emptying those accounts seems extreme, you might put the same equity percentage in all buckets and see if the result is the same. You can even tilt away from pulling those funds early by making them a higher equity percentage.

 

[NW-Bound]

I learned from Alan on this forum that it is possible to cash out an I-bond in part. The user interface on the Treasury Web site indeed allows this.

What! Mind blown. Thanks.

In 2005, I needed to get some cash and had to redeem an I bond in whole. At some time around 2009, I complained about this later on this forum, and Alan told me I could have redeemed part of it. I went back to the Treasury site, and indeed I did not have to cash the whole thing out.

Was this feature available in 2005, and I missed it, or was it implemented later? I guess I will never know.

 

[NW-Bound]

Tax calculations seem sensible, but it is unclear how he is coming up with the different income numbers and he didn't provide details.... the income number for 2020 is particularly crazy... $184,114 where SS is delayed vs $76,218 for SS at 62... how can income be over $100,000 different! Doesn't make sense.

I just looked at this.

Of course the tax on $184,114 is going to be a lot more than on $76,218.

Was he comparing apples and oranges?

 

[pb4uski]

I just looked at this.

Of course the tax on $184,114 is going to be a lot more than on $76,218.

Was he comparing apples and oranges?

I have no idea what he was doing. I'm not sure what he does either.

 

[Koolau]

In 2005, I needed to get some cash and had to redeem an I bond in whole. At some time around 2009, I complained about this later on this forum, and Alan told me I could have redeemed part of it. I went back to the Treasury site, and indeed I did not have to cash the whole thing out.

Was this feature available in 2005, and I missed it, or was it implemented later? I guess I will never know.

My I bonds are $1000 each (plus maybe $500 interest now). I can't think of any reason I would cash one where I didn't (more or less) need the whole thing. I'd like to think I could always come up with $1000 without cashing my I bonds. After all, $1000 ain't what it used to be.

But, then again, $1000 here, $1000 there - pretty soon you're talking real money, but YMMV.

 

[NW-Bound]

I wanted to stash some money those years, and did not think of the time when I needed to cash them. So, I bought in increments as large as $20K. Those are now $27K.

It does not matter now, as I can cash out any portion of a bond.

PS. The purchase limit on I bonds is now $10K/year per person.

PPS. Just looked it up. The limit used to be $30K/year per person. That explains the $10K and $20K bonds I still have in my and my wife's accounts.

 

[sengsational]

Weird they lowered the limit. I know nothing about government bonds, although I did make a TIPS ladder using Treasury Direct. That was a long while back, though, they all matured and I spent the money. I was going to be lazy and ask what the difference is between TIPS and I bonds, but I figured that was lmgtfy fodder so I found this. https://www.treasurydirect.gov/indiv/products/prod_tipsvsibonds.htm
Not sure why to get I bonds over TIPS, though.

 

[NW-Bound]

US Treasury used to pay as much as 3% above inflation rate. One heck of a good deal, so they had a limit.

The deal is not that good anymore when they pay just the inflation rate, so I have not bought any for more than a decade, and just hang on to the ones I have. Got enough there to last me 3 years of living expenses, if the market gets really bad.

 

[misshathaway]

You can also convert paper Savings Bonds to electronic Savings Bonds and then be able to cash the paper bonds out in smaller incremental amounts.

I was paying attention to them just enough to do that part a few years ago. At the time, maybe still, you had to mail the paper bonds to them and wait. That was a nail-biter, but so much easier to track now.

 

[Floridatennisplayer]

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

Very interesting article.

 

[ragabnh]

I read the 19 pages of this thread till the end post at this moment, and I have changed my mind at least 10 times as to when to take SS, and at the end I can say for sure I am confused, I will start my spreadsheet now and check what if scenarios. I will be 62 this coming December.

 

[MichaelB]

I read the 19 pages of this thread till the end post at this moment, and I have changed my mind at least 10 times as to when to take SS, and at the end I can say for sure I am confused, I will start my spreadsheet now and check what if scenarios. I will be 62 this coming December.

That is totally understandable and you are not alone. I found FIRECalc helped me visualize and quantify the impact of taking it earlier or later.

 

[NW-Bound]

Very interesting article.

Two posters independently mentioned that article earlier in this thread.

Then, several of us independently failed to verify the numbers in the case studied in that article. Let's just say it does not make sense.