Drawing early social security

[oceanlovin'ea]

I have a client who will be 62 in 2015 and he is considering drawing social security early. He is the president of an S corporation and gets a W-2. The W-2 wages include the medical insurance that the company pays and he deducts the cost of the insurance as an adjustment to income on his tax return.

When he starts to draw social security, he will be limited in what he is allowed to make. He will turn 62 in January. So he will be allowed to make $15,480 (amount for 2014) during the year. This is $1290 per month. His health insurance is around $800 per month. Since that $800 per month is included in the W-2 wages even though not subject to Social security and medicare taxes, does that mean that he will only be allowed to take as a salary $490 per month?

Linda, EA

[Roland Slugg]

When he starts to draw social security, he will be limited in what he is allowed to make. He will turn 62 in January. So he will be allowed to make $15,480 (amount for 2014) during the year.

What??? Where on Earth did you (or your client) get that idea? Social Security imposes NO limit on what a social security recipient can make. What DOES happen each year until he reaches his "full retirement age" (66 in his case) is that for every $2 above the earned income level you mentioned his social security benefit will be reduced by $1.

Have you discussed with your client the wisdom, or lack thereof, of starting his SS benefits at age 62? For many people a much wiser choice is to delay the commencement of benefits until age 66 or even later ... up to age 70.

[taxea]

why start benefits if he will continue to work?

[Burke]

His health insurance is around $800 per month. Since that $800 per month is included in the W-2 wages even though not subject to Social security and medicare taxes, does that mean that he will only be allowed to take as a salary $490 per month?

Linda, EA

To answer your actual question:
The reduced benefit for SS recipients taking early retirement (I know that is what you mean) is based on gross wages even if not subject to FICA. So yes, the $800 per month would count.

[Roberts]

Not including COLA adjustments, spousal benefits and future value of your savings spent if you deferred SS;

If you begin taking SS at age 62 versus 66 - breakeven is around age 77.
If you are considering taking SS at 62 versus 70, breakeven is around 79.
If you are considering taking SS at 66 versus 70, breakeven is around 80.

The reality, there isn't a massive difference in accumulated benefits between 62, 66 or 70 when you reach 79-80. It's only after that point that it matters.
It's a very personal choice based upon your life expectancy, living style, assets, whether you have long term care insurance, dependents, life insurance and personal risk analysis.

[oceanlovin'ea]

Thanks Burke

Thanks Burke. You answered my question that I wasn't quite sure about.

For the others that commented.....choosing to draw social security at age 62 is a controversial topic. In this man's situation, he would continue to work until the end of next year to pay off existing financial obligations.
He is in a trade that is evolving rapidly into areas that will require him to go back to school to keep up with the younger people coming in. He chooses not to do that. They are in a position to be able to retire and do some volunteer work that they strongly believe in doing. He will pick up some side jobs from time to time when someone asks him to but at the end of 2015 he will not be working in the capacity that he is now.

They want to be able to do this volunteer work while they have their health and are able to do it.

So I just needed to know how to advise him if he starts to draw his social security when he turns 62 or if he should wait later in the year.

Thanks.

Linda, EA

[mscash]

Obviously he will be limited in what he can earn. Does he smoke? The big question is how long is he going to live. You hit the break even point at about 76 years and 4 months so if he plans to live significantly longer than that he should hold off a while because up til then you are getting what is due you early but you short change yourself for the rest of your life.