Social Security; When to Collect

A major decision facing individuals turning age 62 is; should they take Social Security benefits early or delay until full retirement age or even later. You will get different answers among financial professionals depending on who you talk to. If a financial service person goes right into; take Social Security and invest the money into XYZ, you should be suspicious. They are more than likely thinking of a sale, than what is really best for you. Because your decision to take Social Security early depends on your life expectancy and future returns of investments, an absolute answer to the question is not possible. What is possible is to inform you what to consider when making the decision.

According to an example on SSA.gov a 62 year old would receive $1018 a month. At age 67, which would be full retirement age, the monthly benefit is 1476, and at age 70 the benefit is $1840 monthly.

Let’s say you collect your benefit at age 62 and invest 100% of the after tax amount into an investment that earns 6% per year for 5 years. Let us assume you are married, file a joint tax return, and have a combined income of $42,000. About $76 of each check will go toward income taxes. That leaves $942 to invest each month. Invested for five years at 6% you would have $65,744. If you invest in an immediate annuity for you and your spouse, you would get about $390 (Joint life annuity) a month according to immediateannuity.com. This is short of the increase in monthly benefits of $458 from Social Security for delaying payments until age 67. The increase in your SS benefit comes with a cost of living adjustment (COLA) and more favorable tax treatment. A single life annuity would produce about $465 monthly. This may be more than the increase in your SS benefit, but with  one or two COLA adjustments you should have a greater benefit from SS in a few years.

The other way to look at it is; how long it takes to accumulate $65,744 (cost of delaying benefit) if you invested the $458 a month (the increase in benefit). You would break even in 9 years and 1 month using a 6% rate of return. Which means if you live past the age of 76, it was worth the delay in benefits. Most articles now state the probability of a 67 year old living to age 76, this misses the point. You need to make your decision at age 62. The probability of a 62 year old male living to age 76 is 75%, and a female 80% according to The Vanguard Group’s life expectancy calculator.

Some other things to consider are:

If you still plan on working before your normal retirement age, $1 in benefits will be deducted for each $2 you earn above the annual limit. In 2008 the limit is $13,560.

Your health, you may want to take SS benefits as soon as you can, for obvious reasons. If you take the early benefits, remember it may impact your spouses’ benefits.


Whose record will your spouse collect under? If your spouse will be collecting SS under your record, then an increase in benefits to you will mean an increase in benefits to your spouse if he/she outlives you.

Can you afford not to take it? Sometimes retirement is not by choice, and people need to figure out how to make ends meet. Collecting SS early may be a necessity.

Individuals considering taking early SS benefits should think about other sources of income to sustain themselves for as long as possible. Social Security is the one benefit backed by the taxing power of the federal government; which makes it one of the most secure lifetime benefits in the world today. As noted above it also has a COLA and favorable tax treatment. There is not another product available today by financial service companies that can match the value of your SS benefits.

To Roth or not to Roth

The question of whether to invest in a Roth IRA versus a Traditional IRA comes up often during retirement saving discussions. The first thing that needs to be address is whether or not you can even invest in a Roth IRA. The IRS sets income limits on who can invest in a Roth. For taxpayers filing a joint return in 2008 or as a qualifying widor(er) a phase out of contributions starts at $159,000 to $169,000. For all other taxpayers (other than married taxpayers filing separate returns) the phase out starts at $101,000 to $116,000. For complete details of the phase out visit IRS.gov. This means that if your AGI is above the phase out you can not contribute to the Roth.


In order to realize the full benefits of the Traditional IRA it depends if you are eligible to participate in an employer sponsored plan. If you are eligible to participate in an employer sponsored plan and you are a taxpayer filing a joint return in 2008 or as a qualifying widor(er) you are unable to deduct the Traditional IRA contributions if your income is above $85,000. For all other taxpayers (other than married taxpayers filing separate returns) if income is above $53,000 you lose the deduction. If your spouse is eligible to participant in an employer plan, but you are not, and your combined income is above $159,000 you will also lose the deduction.
So for high income taxpayers your employer sponsored plan is most likely your best option. If you are above the limits hopefully your employer has added the Roth 401(k)/403(b) as an option under the plan. Which are not subject to the limits. If so the discussion below will be helpful.


Now that eligibility is out of the way let me say this. I do not claim to have the right answer to the question because in my opinion no one can. We do not know what the future holds but we can look at the landscape and make educated guesses on what we should consider when making a decision.


Let’s go over the benefits of a Roth versus a Traditional IRA. With the Roth you make a contribution with dollars that you have already paid taxes on. This means that there is no tax break in the present day. Your contribution grows tax free which mean you do not pay taxes on the earning even when witdrawn (rules apply). Let’s say you made a $1000 contribution to a Roth IRA and ten years later you had $2000. If you are age 59 ½ or older your $2000 is completely tax free.


Now let’s say you contribute $1000 to a Traditional IRA. If you are in the 15% tax bracket you will save $150 in federal income tax. If you are in the 35% tax bracket you will save $350 in federal income tax. The higher your tax bracket the more you save today. The money grows taxed deferred which means you do not pay income tax on the earnings in the year they are earned. If your $1000 grows to $2000, and at age 59 ½ you withdrawal the account balance, you will pay income tax on the full $2000. Depending on what tax braket you are in at the time on withdrawl, determines the amount of tax you pay.


When considering to Roth or not to Roth one can not ignore their current tax situation. For younger workers who are most likely in lower tax brackets and will be moving into higher tax brackets, I say go with the Roth for two reasons. Currently income taxes are historically low, which means you are not receiving much of a current tax benefit. The second reason is you may not be eligible to contribute to a Roth in the future, and your employer may not offer the Roth 401(k). You will also have access to your original investment (basis) before age 59 ½ without penalty. This is sometimes considered a bad thing depending on one’s view.


For individuals who are in higher tax brackets and still eligible, I say split your contributions. The tax code is a progressive tax. So for a single taxpayer (in 2007) if your taxable income is $81,100 for example, and you contribute $4,000 or more to your employer plan you will reduce the amount of tax you pay in the 28% bracket to zero. This is because your income is not taxed at 28% until you go over $77,100. By doing $4000 you take your highest tax bracket down to 25%. Then you can contribute another $4000 to a Roth IRA. For income tax brackets go to IRS.gov.


For those of you who are not eligible to contribute to the Roth IRA because of the income limits you should press your employer to add the Roth 401(K) to their plan. The reason is that the Roth does have its place in estate planning which is beyond the scope of this current blog.


Anyone serious about saving for retirement should contact both their tax advisor and financial advisor for individualize advice.