When to start collecting Social Security

[George Boutwell]

I had a client today who was trying to help a relative figure out whether to start collecting her Social Security. The relative is 62, makes $20,000 a year, and would probably receive about $750 a month based on her ex-husband's earnings record (more than what she would receive on her own). That would be reduced to about $500 a month because her income exceeds the annual limit for persons under "normal" retirement age.

This isn't really a tax question, but there are tax implications to it, and clients at least need to be told to contact Social Security for specifics on their individual situation. I usually tell clients that if they can provide me with their date of death, I can compute the best time to start collecting benefits. I also remind them that if they delay the start of Social Security and then are run over by a truck the day after their 66th birthday, their survivors will lament that no benefits were received before then.

Then tonight there is an article in the New York Times about an economist who takes a contrarian view on this issue. While most financial advisers suggest starting Social Security early and IRA distributions late, he says that for some people it would work out better if they did it the other way around -- IRA money now, Social Security later.

The story is at

http://www.nytimes.com/2007/05/12/business/12money.html?_r=1&hp&oref=slogin

It also contains this interesting point:

>>over a lifetime a plumber has a higher standard of living than a physician with a general practice because the doctor starts earning later, pays higher taxes and high malpractice insurance premiums. <<

[Kram BergGold]

No correct answer

Unless you can predict the timing of someone's death, which most oftern you can't, there is no way to predict whether taking benefits at 62 versus 66 will ber beneficial. You can do an analysis and take an educated guess but ultimately death will determine which way was better.

[Joe Btfsplk]

Confoosing but amoozing

Scott Burns who writes a financial column which is published in the Dallas Morning News recommends taking the benefits LATER. I don't remember all of his logic, but I believe one aspect was that the benefits will be lower for the rest of your life if you start early. The article is also available on his blog if you can find it amid all the other articles which appear in his blog.

[dsi]

My situation will require me to take my cut after full retirement age. Why, 'cause I'll still be behind this wonderful desk at age 80.

[thomtax]

Yes, if you live long enough

Scott Burns who writes a financial column which is published in the Dallas Morning News recommends taking the benefits LATER. I don't remember all of his logic, but I believe one aspect was that the benefits will be lower for the rest of your life if you start early. The article is also available on his blog if you can find it amid all the other articles which appear in his blog.

It will take about 13 years for the additional that you draw at full retirement age to catch up with the extra years you get by starting early at 62. You do have the consideration of limited earning allowed in the early years, but assuming that is not a factor, you must decide if you think you will live more than 13 years.

For me personally, my mother lived to be 79 and my father 82. That's 14 and 17 years. The are the kind of things that I look at very closely.

The other factor is if you think ss will be around in it's present format for that long.

It is all a very personal decision and will vary with each person.

LT

[JohnH]

I think it depends upon your health

I read an article years ago that said the person needs to only consider their health in deciding whether to begin drawing SS benefits before full retirement age. This is assuming they have a choice - can afford to delay if they choose to do so.

Since the total benefit amount is exactly equal on an actuarial basis regardless of when one retires, and since no one knows the answer to the crucial question of "on what date will I die?", the only known factor is one's general health at the time the decision is being made. If in poor health, they might be better off taking early retirement since they are not likely to live to their normal life expectancy. If in good health, they should delay because their probability of living past their average life expectancy is greater, and thus they will receive more $ over the course of their life, once they live past their normal life expectancy. It's more or less like the decision on whether to pay "points" on a loan, but the time frame is much greater..

The logic makes sense to me.

[George Boutwell]

Maybe not the best and brightest answer

David Halberstam, 73, was in excellent health when he died in a car accident a couple weeks ago.

[Gary]

62

I started taking mine at 62. I'm not a gambler, and if I live past that magic age, I'll be happy, even if my SS is not the greater number.

Gary

[George Boutwell]

Do The Math

Someone reaching age 62 now would take a 25% reduction in benefits compared with what they would receive at age 66 "normal retirement age." So let's say their age 66 benefit is $2,000. If they take $1,500 a month now and put it in the bank (and don't have to pay tax on it), they will have $72,000 saved by their 66th birthday. With interest earned, that would be closer to $80,000.

For $80,000, a 66-year-old can buy a lifetime annuity that will pay about $550 a month -- more than the $500 a month extra that would be received, by waiting. So the 13-year payback rule is somewhere between an urban myth and a "well, it depends on all the facts and circumstances."

[JohnH]

However,

Doesn't your math ignore the tax consequences? Someone who begins drawing SS at age 62 and who can afford to invest the entire benefit because they have other income would also see the actual amount available for investment reduced by 85% of the benefit received times their tax rate - at least 15% and possibly 25%. Plus they would also see each year's earnings on the amount invested reduced by their maximum tax rate as well. Not saying your math is wrong, but it assumes a scenario that can't occur as presented.

[JohnH]

So, are you saying

that the exception disproves the rule? This will be a huge bit of news to those who spend their lives calculating actuarial tables.

[FEDUKE404]

It can get even worse

Doesn't your math ignore the tax consequences? Someone who begins drawing SS at age 62 and who can afford to invest the entire benefit because they have other income would also see the actual amount available for investment reduced by 85% of the benefit received times their tax rate - at least 15% and possibly 25%. Plus they would also see each year's earnings on the amount invested reduced by their maximum tax rate as well. Not saying your math is wrong, but it assumes a scenario that can't occur as presented.

Another issue to keep in mind with the age 62 choice is that IF you continue to work as an employee or as a self-employed individual, your current Social Security benefits can decrease. Not only are you (currently) looking at potentially 85% of your SS benefits being taxable, but you also are looking at less benefits to be taxed.

The other kick in the fanny is if you have none/some of your SS benefits being taxed, but your income spikes because of a fortuitous stock sale. Then not only do you pay the "regular" taxes on the stock sale, you potentially have a greater percentage of your SS benefits subject to taxation. The overall tax cost from such a capital gain can easily be in the 40+% range.

FE

[George Boutwell]

Rule is Determined by Exceptions

The people who put together the actuarial tables know that for everyone who outlives his life expectancy by 10 or 20 years, someone is going to die tomorrow to balance things out.

[George Boutwell]

Someone who begins drawing SS at age 62 and who can afford to invest the entire benefit because they have other income

Someone might, someone else might not. Someone might live with her kids who are millionaires and give her everything she needs. Someone else might live with a domestic partner. Someone else might have a house with no mortgage, $2,000 a month in nontaxable veterans benefits and a job that pays $14,000 a year.

But I agree, there are a number of tax implications to this decision, involving not only present law but what it will be in five or ten years. Same thing applies to IRA distributions.

Then there is always the question of whether the self-employed semi-retired person making $20,000 a year should form an S Corporation and pay herself $14,000 a year.

[Joe Btfsplk]

I may have goofed

I waited until I was 65 to start drawing SS, but maybe I should have started earlier. By deferring it, I had to make withdrawals from my Rollover IRA since I had two children in college. My earned income was fairly low, so maybe I would not had a big reduction in my SS due to earned income level.

Now I have another situation somewhat similar. Should I limit myself to the RMD now that I'm over 70 1/2. I would estimate my life expectancy to be half way beteen my two parents.