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Social Security vs. pre-tax savings

Posted: Wed Sep 19, 2018 9:15 am
by clemrick
My husband turned 60 this year. He had a small IRA (under $10K) that I have wanted to get rid of, for simplification. So early this year, after he was 59.5, he closed the IRA. We have used the IRA distribution to replace the money he had directed into a deferred comp plan at work for this year.

I just did a dry run of our 2018 taxes using the draft IRS forms (boy is that a mess to do on paper now). I was surprised at how low his taxable salary was, which made me realize that the SSA would be getting a much lower number for this year.

Since he is 5-10 years away from retirement and our finances are getting better each year, I have been playing with numbers to determine how much should go into his deferred comp plan and his 403(b). I had not been thinking about the affect this would have on the numbers the SSA would be getting.

Has anyone else thought this through and can give me some points to consider about maximizing SS and pre-tax savings since they seem to have an inverse relationship?

He will also have a pension that will provide 40% of pre-retirement income, if that matters, and our financial needs for retirement will not be much lower than they are now.

Thanks.

Re: Social Security vs. pre-tax savings

Posted: Wed Sep 19, 2018 9:29 am
by NightFall
My impression is that retirement account contributions do not affect social security tax. There are few ways to escape this tax with W2 income.

Re: Social Security vs. pre-tax savings

Posted: Wed Sep 19, 2018 9:31 am
by cheese_breath
"Deferred compensation shouldn't affect Social Security benefits."

https://finance.zacks.com/deferred-comp ... 11598.html

Re: Social Security vs. pre-tax savings

Posted: Wed Sep 19, 2018 9:36 am
by vtMaps
Cheese breath beat me to it.

Also, do you know about the SS bend points? Once you reach the second bend point, the amount of your benefits does not increase (per dollar of contributions) as rapidly as before the bend point.

--vtMaps

Re: Social Security vs. pre-tax savings

Posted: Wed Sep 19, 2018 10:00 am
by Watty
Your Social Security benefit is calculated using a complicated formula that only considers the inflation adjusted earnings of the highest 35 years of your earning history. In addition it gives a lot more weight to your lower income and income about about $70K counts very little in the calculation. Here is some information on how it is calculated but it is difficult to understand.

https://www.ssa.gov/oact/COLA/piaformula.html

Since your husband is 60 he likely already has 35 years of income history unless he was out of the workforce for a while. He should have gotten a letter from SS around his 60th birthday which listed his earning history. It is important to review that and get any errors fixed.

Once you have 35 years of even modest earning history working another year usually adds very little if any to your Social Security Benefit since the extra years earning history will only replace a lower inflation adjusted earning year in your set of 35 years.

I had more than 35 years history when I retired and I think that my last full year of work added about $2 a month to SS benefit amount.

Re: Social Security vs. pre-tax savings

Posted: Wed Sep 19, 2018 11:09 am
by FiveK
clemrick wrote:
Wed Sep 19, 2018 9:15 am
Since he is 5-10 years away from retirement and our finances are getting better each year, I have been playing with numbers to determine how much should go into his deferred comp plan and his 403(b). I had not been thinking about the affect this would have on the numbers the SSA would be getting.

Has anyone else thought this through and can give me some points to consider about maximizing SS and pre-tax savings since they seem to have an inverse relationship?

He will also have a pension that will provide 40% of pre-retirement income, if that matters, and our financial needs for retirement will not be much lower than they are now.
As others have noted, 403b contributions do not affect SS benefits.

A couple of spreadsheets and a web tool that work well for calculating an individual's benefit:
- The 'SocialSecurity' tab of the personal finance toolbox spreadsheet. That spreadsheet can also give a likely good estimate your 2018 taxes.
- The Downloadable Social Security Benefit Estimator (repost) - Bogleheads.org.
- The Social Security Calculator
A web tool that evaluates SS benefit start dates for a couple: Open Social Security: Free, Open-Source Social Security Calculator

It may or may not be worthwhile to switch to Roth 403b (if available), given the significant pension. Have you compared your current marginal tax saving rate vs. the marginal rate you expect to pay on traditional withdrawals? See Traditional versus Roth - Bogleheads for more.

Re: Social Security vs. pre-tax savings

Posted: Thu Sep 20, 2018 9:26 am
by clemrick
Thank you all. Of course it doesn't affect social security. I should have remembered that. Just a bit of brain freeze on my part.