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Taking Social Security Sooner

by Kevin McKinley - August 18th, 2015

Posted Under: retirement planning

We’re still debating the merits of taking Social Security now, instead of delaying the benefits. So far we’ve argued that the longer that you wait, the bigger the checks will be. And living off of other sources of income (i.e. your IRA) could lower your overall tax bill in retirement. But those benefits still might not outweigh having a proverbial bird in the hand instead of two in the bush. Here are some reasons that you may want to take your Social Security retirement benefits at an earlier age.

Paycheck replacement

By the time you reach retirement age, chances are you received four decades of bi-weekly paychecks from your employment—about a thousand, in many cases.

You’ve become conditioned to anticipate and live off of those paychecks, and no matter how much money you have salted away, drawing down your savings is generally a less-palatable alternative to receiving a predictable Social Security check every month.

The psychological effect of living completely off of your investments is even more stressful if a decline in asset prices is accelerating the rate of depletion.

What if you’re still working?

Social Security recipients who are under normal retirement age (66 to 67, depending on your birth year) and still earning money by working can suffer a reduction in their benefits if their annual gross earnings exceed a certain amount.

For 2015, that figure is $15,720, and you lose $1 of Social Security benefits for every $2 that your earnings exceed $15,720.

Keep in mind that only your own earnings are considered. It does not include your spouse’s earnings, or interest, capital gains, dividends, pension payments, or distributions from annuities and retirement accounts.

Best of all, once you reach full retirement age, the “lost” benefits will be repaid to you in the form of a slightly-higher monthly Social Security payment.

It’s not THAT much more

One strong argument for waiting to take Social Security is that your payment increases in size by 8% for each year you delay, until you turn 70 and the increases cease.

In other words, if you’re expecting $1,000 per month at age 66, waiting a year to initiate the payments would give you a check of $1,080 per month at age 67.

But during your year of waiting you’ll have missed out on $12,000 worth of payments (12 months x $1,000), and it will take a long time of $80 more per month to make up for the lost $12,000.

Even considering the foregone checks, there still may be a gain to waiting. It depends on several factors, including how long you live, what rate of return you earn on your investments, your taxes, etc.

Several studies have shown that in a typical retiree’s circumstances, waiting one year might net you a gain of 4-5%. That’s still respectable, but not the 8% figure that’s often cited.

Same income, lower taxes

Let’s say you’re thinking about either taking Social Security now, or delaying payments and living off of your retirement account withdrawals.

You will definitely pay less in annual income taxes by choosing the former. Social Security payments are technically tax-free.

They only become taxable if your total modified adjusted gross income (MAGI) exceeds a certain amount.

50% of your benefits are taxable if your MAGI exceeds $25,000 for single filers ($32,000 for married filing jointly). That rate jumps to 85% if your MAGI exceeds $34,000 for single filers and $44,000 for married filing jointly.

In other words, even in the worst-case scenario you’ll pay the same amount of income taxes on 85 cents taken from your IRA, as you would if you were to take a dollar from Social Security.

As a normal human being, we’re guessing the idea of getting a little less income now plus paying less taxes on it will appeal to you.

But in case it doesn’t, we’ll be back next week with even more reasons why you may want to take your Social Security payments sooner instead of later.