Social security – what to do?

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cliff
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Social security – what to do?

Post by cliff » Sat Jun 16, 2012 12:01 pm

I am somewhat familiar with various social security options, but am still unsure what to do. Will turn 62 soon and my wife will turn 62 about one year later. Social Security will be slightly higher in my case. Curently have a pension but need to utilize savings to meet all costs. This means selling of investments such as mutual funds or savings bonds. If we take Social Security would not need to utilize any investments for living costs.

Have read about restricted Social Security, meaning my wife takes it at 62, I get 50% at 66, and full amount at 70. This would entitle her to a larger spousal Social Security if she outlives me. I've also read about Claim and suspend. The restriction option appears to be the favored one.

My question revolves around lost investment income. If I take Social Security At 62 I will not need to utilize my investments. Am I better off taking it so that I do not lose investment income? I would like to assume about a 6% overall return. Or do I continue to utilize investment income in order to maximize Social Security utilizing the restriction option?

Carl53
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Re: Social security – what to do?

Post by Carl53 » Sat Jun 16, 2012 12:17 pm

What source is your savings? TIRAs, Roths, 401ks, taxable savings etc.

What is the level of your taxable income, marginal tax bracket?

Will your SS receipt become taxable and if so at what level? If so, it might be better using up taxable resources now, and convert TIRAs and 401ks to Roths, prior to taking SS, allowing the SS benefit to grow.

6% assumed return seems high in this climate.

IMHO, the delaying of SS is more of a risk reduction than an investment. You know that the benefit is going to be bigger each year of delay rather than hoping I'm going to get 6%.

cliff
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Re: Social security – what to do?

Post by cliff » Sat Jun 16, 2012 12:19 pm

25% bracket... utilizing investments from taxable accounts... Expect Social Security to be fully taxed, unless I am mistaken

Carl53
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Re: Social security – what to do?

Post by Carl53 » Sat Jun 16, 2012 12:47 pm

cliff wrote:25% bracket... utilizing investments from taxable accounts... Expect Social Security to be fully taxed, unless I am mistaken


Glad that your taxable account is significant. Sounds like 85% of your SS will be taxed at 25% too, effectively 46.25% on each taxable dollar that has a matching extra SS dollar. That will be .25 X ($ taxable money + .85 SS matching dollars) = .4625 X $ of taxable dollars. That is unless your taxable dollars exceed matching all of your SS income and the tax rate retreats to just 25% since you have no more SS dollars to be taxed. If that is the case just enjoy and thank you for your contribution to the treasury.

If it were possible to spend down your taxable so that you have otherwise a lower marginal bracket, say 15% then you might do so to allow you to convert some TIRA money at 15% rather than a higher rate once RMDs kick in and you are definitely taking SS.

cliff
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Re: Social security – what to do?

Post by cliff » Sat Jun 16, 2012 12:52 pm

I appreciate your response but I'm not sure it helps me with Social Security decision.?...I do not follow your logic of a 46 or so percent tax rate

dickenjb
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Re: Social security – what to do?

Post by dickenjb » Sat Jun 16, 2012 1:13 pm

You can not earn a certain 8% on your investments so delay your SS.

There was just a scholarly article on this topic from the highly respect Center for Retirement Research at Boston College. They said you should "buy" an annuity by using your savings now and taking SS later.

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Peter Foley
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Re: Social security – what to do?

Post by Peter Foley » Sat Jun 16, 2012 1:33 pm

Unless I am mistaken Carl53 is telling you to delay taking Social Security now because it will be so highly taxed. I would offer that same advice. At a minimum, if you are in good health, you should delay for at least a couple years and then reassess.
During those two years of delay you might look for opportunities to move some retirement savings from a traditional IRA or 401K to a Roth.

The BH Wiki has a good explanation of Social Security and marginal tax rates. For middle income couples (ballpark $30,000 to $60,000 in taxable income) the marginal tax rate on any Social Security benefits is very high, 46.25%. A that tax rate it is better to defer taking social secuirty until at least full retirement age.

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BigFoot48
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Re: Social security – what to do?

Post by BigFoot48 » Sat Jun 16, 2012 1:48 pm

cliff wrote:My question revolves around lost investment income. If I take Social Security At 62 I will not need to utilize my investments. Am I better off taking it so that I do not lose investment income? I would like to assume about a 6% overall return. Or do I continue to utilize investment income in order to maximize Social Security utilizing the restriction option?

It all depends on a bunch of things, including how long you and your spouse are going to live. After funding all of living expenses off our investments for ten years, I ran all the numbers multiple ways and decided to let my investments take an eight year breather and take SS at 62 for both of us (spouse had only spousal benefits). A few extra $1,000 a year in our (or one of ours) 80's and 90's really won't matter to us, and I don't expect to make it there anyway (but surprise me God!). I also like being able to pay little or no Federal income taxes for eight years, a minor guilty pleasure.

I like this modeling tool: http://www.sscalc.net/sscalc%20c.php5 and this one: http://analyzenow.com/ and this is the old thread on the issue back when I made my decision: http://www.bogleheads.org/forum/viewtopic.php?t=47691&postdays=0&postorder=asc&start=0 Good luck with your decision.
Retired | Two-time in top-10 in Bogleheads S&P500 contest; 12-time loser

Carl53
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Re: Social security – what to do?

Post by Carl53 » Sat Jun 16, 2012 3:47 pm

cliff wrote:I appreciate your response but I'm not sure it helps me with Social Security decision.?...I do not follow your logic of a 46 or so percent tax rate


The logic is as follows.

If you had no other income and take and receive say $30000 of SS income, you would pay no tax on it. Zero tax on SS. For the first dollar of taxable income you still pay no tax on any of it. This goes on until one-half of your SS, say $15K and the sum of your taxable income (and certain nontaxable income such as tax exempt interest) exceed $32000. So if you are married, and have a pension of $17k and $30k SS, you only have $32K to match against that limit, so none of the SS is taxable and you only pay on the $17k of taxable income. You are still in the 0% bracket and only owe $0. You remain in the zero bracket up to about $18665 of regular taxable income in addition to your SS. You've already exceeded the $32k limit but remain in the zero bracket. The next $100 of taxable income (or other special adders), incurs $10 in tax as you are in the 10% bracket, but now $100 X .5 of SS also becomes taxable at the 10% rate. Essentially the last $100 of taxable income costs you $10 of tax on it plus $5 of tax on the one half of the SS that you have such that your total exceeds the $32k. So that last $100 of taxable income now costs you $15 in tax versus $0 per $100 that all of the first $18665 in pension did. It does this even though you are just barely into the 10% bracket. Effectively you are now in a 15% bracket.

In your case you imply that you are solidly in the 25% bracket. As such you clearly will exceed $44k in taxable income. When the sum of your taxable and other special incomes plus one-half of SS exceed $44k, then the multiplier on the matching SS dollars that become taxable jumps to 85% so that 85% of SS is taxed. Therefore as each of those taxable dollars pile up above the limit, each one causes $0.85 of SS benefits to be taxed until they are all taxed. Say if you had $80k in taxable income, plus the $30k in SS suggested above. Ultimately 85% of your SS benefits would be added to your taxable income to be taxed. 85% of $30K is $25500. The way it works out is rather complicated, but all of the 85% of $30k becomes taxed by the time you have $51950 of other taxable income. Those last dollars of taxable income leading up to $51950 were taxed at 15% just as if you have no SS. They also incurred matching SS dollars to be taxed so that those dollars leading up to $51950 incurred an additional 85% of 15% for a total of 185% of the 15% bracket or $27.5%. Above $51950 of taxable income without any more remaining matching SS dollars, your next taxable dollar would only incur 15% tax. This would be the case until the 25% bracket kicks in.

If you had had $80k in taxable income your tax would be about $8205. Adding $30K of SS income increases the tax take to $13560.

If you and your spouse each had $30k of SS you would find that you passed through an effective 46.25% bracket, before dropping back to 25%.

Look at the four graphs in this prior thread. I apologize to those of you that have seen them before, but I find they are most effective in depicting what is going on. The last time I tried to insert that type of graph I got an error, so I just reference the thread. The graphs were done with 2010 tax rates but you can get the idea of what is going on.
viewtopic.php?f=1&t=70229

NOTE THAT FOR THE NUMBERS USED IN THE DISCUSSION ABOVE I DID NOT INCLUDE THE EXTRA STANDARD DEDUCTION FOR 65 YEARS AND OLDER. THE REFERENCED GRAPHS DID INCLUDE THEM.

cliff
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Re: Social security – what to do?

Post by cliff » Sat Jun 16, 2012 4:07 pm

Thank You Carl and others. The links are quite helpful. I'll need to read them more carefully but will likely do the restricted Social Security option.

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