When to start collecting Social Security

[JohnH]

Tough to decide

It seems to me that the first consideration is to run the actual numbers for income & deductions and be sure that at a minimum you use up the entire 15% bracket by making withdrawals large enough to slightly overrun into the next bracket. If that exceeds your financial needs, then you could reinvest the excess on an on-qualified basis in the same type of investment that the qualified funds are invested in. If that number doesn't exceed your financial needs, then this line of reasoning really does't matter.

I seriously doubt anyone with the ability to choose distributions based on investment considerations will ever see their income taxed at a rate lower than the 15% bracket, so this seems like a basic strategy. Obviously, it can get much more complicated as time goes on.

[George Boutwell]

RMD, or more?

be sure that at a minimum you use up the entire 15% bracket by making withdrawals large enough to slightly overrun into the next bracket. . . .I seriously doubt anyone with the ability to choose distributions based on investment considerations will ever see their income taxed at a rate lower than the 15% bracket, so this seems like a basic strategy.

I have perhaps a dozen clients who have to be reminded to withdraw enough from their IRA, even if it exceeds the RMD, to get out of the 0% tax bracket.

The 15% bracket is not that wide for many seniors, because they quickly get into the 22.5% bracket when every two dollars of IRA money makes a dollar of Social Security taxable.

Two other things to consider: In what tax bracket are the beneficiaries, and over what period of time are they likely to withdraw the funds? And, if the taxpayer has a net worth high enough to worry about estate taxes, would it be better to reduce it by paying the income taxes now?

[dyne]

I have seen many taxpayers who continue to work after normal retirement age or who
retire and then get a part time job or they have sizeable retirement benefits and/or other
income. When they begin to draw social security benefits at whatever age, their federal
tax skyrockets. Most of these taxpayers are surprised at this. Many men who went to
work after normal retirement age quit their new job after realizing the tax effect. It is not
worth it for them to work. This is another factor to consider.

[JohnH]

We all should hope to have this problem

I tell people in this situation that it's a nice problem to have. I understand the attitude, but I don't have much compassion for their "dilemma".

As a practical matter, nobody's tax rate ever truly increases to the point that it's "not worth it to work", but it is a fact that their net after-tax take-home pay is less that it appears. But then that has always been the case whether or not one is retired.

If they have the ability to exert control over their rate of compensation, they can demand a rate of pay sufficiently high to offset the taxes and compensate them properly for what they feel they are worth after taking the tax haircut. If they can't control the rate but can afford to forego work while maintaining their standard of living because they don"t like paying the taxes, that's a pretty nice place to be in terms of life choices.

Personally, I hope to have invested wisely enough that my taxes will be as high or higher than when I was working full time (provided that the higher taxes are a result of higher income, not just a result of future legislation having increased the rates). That would be part of my definition of successful retirement planning.

[FEDUKE404]

Working after retiring

I have seen many taxpayers who continue to work after normal retirement age or who retire and then get a part time job or they have sizeable retirement benefits and/or other income. When they begin to draw social security benefits at whatever age, their federal tax skyrockets. Most of these taxpayers are surprised at this. Many men who went to work after normal retirement age quit their new job after realizing the tax effect. It is not worth it for them to work. This is another factor to consider.

Dyne - Your point is certainly valid, although I tend to agree with other posters who explain that taxes just come with the territory. "Fairness" is unfortunately not a very good word for the tax world. Every taxpayer needs to factor in the net financial gain from any employment situation and/or expenses associated with the job, and in many cases taking the job is probably not a great idea.

However, my main point was directed at those folks who retire prior to full retirement age and continue some lower level of employment. Many who "consult" or do similar jobs that don't require a daily work schedule are frequently surprised not only at the overall level of their lower income taxes but become quite surprised and/or furious when they get a letter from the SSA stating their monthly benefits have been reduced because they "made too much money." I believe the common phrase is adding insult to injury.

Employment at least after full retirement age does not result in this specific type of problem.

FE

[JohnH]

How true

FE:
You are right on target. And (except for those who MUST retire early due to health reasons, job cuts, etc), isn't it ironic that someone who has the luxury of making choices about when to retire would not bother to check with their tax preparer before making an irrevocable decision, given that they almost certainly had to do years of advance planning to get them to that point in the first place?

People act very strange when it comes time to "get back some of what I've paid in". It's as though having that government check coming in each month is the all important goal, to the exclusion of anything else.

[Jiggers]

Good tax advice??

[QUOTE=JohnH;38128]FE:
You are right on target. And (except for those who MUST retire early due to health reasons, job cuts, etc), isn't it ironic that someone who has the luxury of making choices about when to retire would not bother to check with their tax preparer before making an irrevocable decision, given that they almost certainly had to do years of advance planning to get them to that point in the first place?
QUOTE]

Many clients make those type of decisions without consulting me, someone, anyone with some tax knowledge.

I have one client, who retired early, age 55, due to his wife's terminal illness and having to take care of his minor child.

He had an excellent retirement plan with his employer. Instead of leaving it there he rolled over the full amount to an IRA. Now, still under 59½, he is withdrawing $40,000 per year, subject to tax and a 10% penalty. 10% penalty is $4,000 per year.

He "thought" he knew everything, and still thinks that.

[JohnH]

Planning?

And to think that even after he made the first mistake of rolling it into an IRA, he might have been able to avoid the penalty by setting up an SEPP. If that didn't provide him with the $36k he was actually getting post-penalty, he could have refined it further by splitting the IRA, setting up the SEPP on the larger amount, and taking a "make-up" amount from the smaller IRA, with only the distirbution from the smaller IRA being lsubject to the penalty. But why pay an accountant $1K - $2K for this advice when you can just pay the $16K to the government and pat yourself on the back for having done your own tax planning?

[dyne]

Now I have begun to see teachers and firemen, etc. who are covered under a Terri plan or similar plan in this state which allows them to retire early and then obtain their old job back immediately so that they are receiving retirements benefits and full pay at the same time. The result is that they are receiving MUCH more income than before and their tax is MUCH higher. And this is BEFORE they begin to receive social security benefits. I had considered writing a newsletter for my clients about when they should begin to receive social security benefits but it has now become so complex, it is almost impossible to do tax planning on this. Just a few years ago I was advising clients to begin drawing social security at age 62 because many taxpayers do not live long enough
to recover the differance in benefits lost by withdrawing social security benefits early. I waited until age 65 so my tax service business income would not reduce my social security benefits. Now I have reached 70 1/2 and am withdrawing RMD which I do not need. And some of these clients are hit by AMT.

[JohnH]

It's a vexing question, but

like all financial planning, there are seldom any cut-and-dried answers. To me, the most important things is this -> the only REAL danger in retirrment planning is that you will outlive your income stream and/or retirement assets.

If one skips drawing at 62 or 65 and then dies before reaching 70 or shortly thereafter, all that happens is that their estate has a few thousand less in assets. A premature or unexpected death can turn almost any plan into a mistake. Now if you die leaving money on the table, the only thing that happens is your heirs get a little less. Big deal. They should be taking responsibility for providing for their own retirement and anything they inherit is just a bonus.

On the flip side, if one begins drawing SS too early (and/or drawing down their retirement assets too rapidly) and then lives to age 80, 90, or beyond, they can find themselves receiving a benefit that was adequate for someone 20-30 years ago but totally inadequate for them at that time. Even with cost of living increases for SS and accumulated earnings on investments, inflation and socioeconomic changes can degrade the value of one's retirment income at a time in their life when they are totally unable to do anything to alter it.

There has to be a balance in retirement planning and each situation is different, but to me it seems most prudent to plan around a couple of simple ideas. Assume you're going to live a long time and that you'll need to use your retirement assets in such a way that you need to maximize their benefit to you in your 70's, 80's & 90's. If you die early, your heirs are welcome to whatever is left and they should be grateful for that . But if you don't die early or on time, hopefully they won't have to remember your final years as a time when you couldn't provide adequately for yourself and they had to alter their lifestyle or jeopardize their own retirment in order to help you out. Unfortunately, we see the second scenario more than we would like, so there's a lesson here.

[George Boutwell]

If one skips drawing at 62 or 65 and then dies before reaching 70 or shortly thereafter, all that happens is that their estate has a few thousand less in assets. A premature or unexpected death can turn almost any plan into a mistake. Now if you die leaving money on the table, the only thing that happens is your heirs get a little less. Big deal.

This reflects a flaw in the way many people think about estate planning -- they focus on death, which is only a one-time event, rather than incapacity, which can last for a decade or more. If your estate has $50,000 less when you check into a nursing home at age 66, having deferred collecting that much in benefits so that lifetime payments would increase, all that happens is that you run out of money a lot sooner.

[JohnH]

Let me see if I'm following your logic

So it's not important to focus on when is the optimum time to die, but rather it is important to plan to be incapacitated.

I'll think that one over.

[Roberts]

Jmho

I think it comes down to how much money the person has. The more money you have, the earlier you should start drawing Social Security and the less you have the later you should. It's an annuity type of payment that will never end. If you haven't saved much and plan on running out of your savings during your lifetime, you will be better off late in life with the higher payment. But if you plan on having savings left over when you die to pass on to your heirs, you are better of drawing early and getting as much as possible as early as possible.

[George Boutwell]

Exactly

So it's not important to focus on when is the optimum time to die, but rather it is important to plan to be incapacitated.

.............. That's right!

[wv112]

I'm 63. I'm not drawing my social security. My mind tells me that paying back $1 of every $2 I earn and that 85% of my social secutiy would be taxed at 25% doesnt work.

I'm building up my wages each year and the check at 66 looks like I might be able to actually pay my natrual gas bill in the winter....I know I might not be here to draw any
thing, but that wouldn't bother me. I'd be dead and wouldn't care. What scares me the
most is, What IF I Live past 66...What if I live to say, 96?

I will start drawing my social security check at age 66.

I will start IRA withdrawels at age 70 1/2.

If I get sick and can't work any longer, then I would go ahead and start drawing my
ss.