When to take Social Security

Don’t forget about the concept called the “Social Security Tax Torpedo”

If you take SS early at 62, you may be able to keep all or most of it for many years .

Yes, if you wait until 70 to collect, your checks will be a lot bigger. (Is it 8*8% = 64% bigger or 1.08^8-1 = 85% bigger?) But once you are forced to start taking RMDs, your SS check may end up being highly taxed, and then you don’t get to keep it all.

According to my statement, the age 70 benefit is 79.5% higher and the increase across years isn’t quite as uniform as I’d expected.

It’s all based on the benefit base, which is what you’d get if you start right at SSNRA. 8% extra per year (2/3 of 1% per month) you go late, 6% less per year 1/2 of 1% per month) you go early. Multiplicative.

If SSNRA is 67, as it is for many of us, then that’s 100% of benefit base.

Age 70 is 100 + 8 * 3 = 124% of benefit base
Age 62 is 100 - 6 * 5 = 70% of benefit base

I gave my example in years, but in point of fact they prorate to the month.

Birthday on the 1st or 2nd of the month: the month of your birthday

Birthday on the 3rd of the month or later: the month after your birthday

You either get the full month or you don’t. They don’t do partial months.

If your birthday is June 2, 1970 then you hit SSNRA in June 2037.

If your birthday is June 3, 1970 then you hit SSNRA in July 2037.

So to give a slightly more complicated example, suppose your birthday is December 25, 1955 and you wish to retire May and start collecting benefits in June of this year.

Your SSNRA is age 66 & 2 months. Your SSNRA month is March 2022. By delaying benefits until June 2023 that’s going 14 months late. So your benefit is now:

100 + 14 * 2/3 = 109.33% of base

Your twin brother, on the other hand, collected benefits as early as he could. Which was January 2018. Which was 50 months early. So your twin brother’s benefit was:

100 - 50 * 1/2 = 75% of base

Then your brother has getting CPI increases ever since.

Another point for low earners:

Your benefit after Medicare premium can never go down. So sometimes they have to bump your benefit by more than CPI so that the dollar amount of the checks they write, after subtracting out Medicare, doesn’t go down. The higher your benefit, the less likely it is that you’d benefit from this since your benefit increase in dollars is more likely to exceed the Medicare premium increase in dollars.

This doesn’t affect many actuaries but if we have low earning spouses or family members it might come into play for them. If they are likely to be affected, there’s something to be said for looking at age 65 as the starting month, or even age 62.

I’ll be ecstatic if I can grow my retirement portfolios enough for that to be a problem. All the RMD periods in the current chart for those in their 70’s are in the 20’s meaning that you are required to withdraw less than 5% per year. Playing around with the calculators the amount of taxable SS seems pretty minor until you’re drawing about \$30,000 from retirement accounts. If 5% of your retirement account is over \$30,000 then I’d say congratulations, you’ve done well.

Of course, they will change the rules but history says that changes will most likely favor retirees because retirees vote.

Perhaps for the general public, but for actuaries a 600K retirement portfolio excluding non-taxable income sources won’t produce much of a replacement ratio.

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Yeah, I would think most actuaries would want at least \$1,000,000 to retire, probably more.

That’s drawing \$40,000 a year using the 4% rule, plus Social Security.

Presumably your mortgage is paid off, but you’ve still got insurance & property taxes & maintenance on your home, plus groceries & prescriptions & utilities & auto expenses. Maybe the property tax is a little cheaper if your jurisdiction gives seniors a break on property taxes, although sometimes it’s only low-income seniors.

If you’re single and drawing \$40,000 from savings and another \$40,000 from Social Security (about as high as your benefit can get in today’s dollars) then I believe \$26,600 of your Social Security is taxable income.

Using 2023 tax tables then \$18,575 is taxed at 12% and \$8,025 is taxed at 22%. So the total tax on your Social Security benefit is roughly \$3,994.50.

An important note is that the taxation of Social Security is NOT indexed to inflation. Over time, more and more people are paying taxes on their Social Security income and a greater share of their Social Security is subject to tax.

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I tried doing this exercise and it looked like the tax table thresholds went up 7% but social security went up 8.7% and so a higher proportion of the income ends up being taxed at 22%. The change in taxes between 2022-2023 would be pretty close to 7% if the social security change had been the same 7% as the tax table thresholds. I think.

I think twig’s statement is that how much of your social security is taxed is not indexed. So if social security goes up 8.7%, taxable social security may go uo more than 8.7%. Tax brackets also influence how much tax you will pay

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For completeness, if you’re in the income range where taxation of Social Security is a consideration that you should also consider the impact on your Medicare premiums.

Currently annual incomes of 97,000 for single individuals or 194,000 for couples would trigger higher Medicare premiums and I believe that this would include the taxable portion of Social Security. (This according to Anthem Health).

The higher income triggering higher Medicare premiums definitely includes the taxable portion of your Social Security.

An important note is that if you are Married Filing Separately and your income is over the \$97,000 threshold, your Medicare premium really skyrockets. The taxation of your Social Security benefit is the maximum 85% if you are Married Filing Separately… at any income level. They basically assume that your spouse is rich… doesn’t matter if that’s not true.

You are very very unlikely to be better off filing separately once you start taking Social Security, unless you are 1%er rich. Maybe even 0.5%er rich.

Yep. They put in the taxation of benefits in 1982 when all of the other sweeping reforms went in (including raising the SSNRA).

If your non-Social Security income exceeds \$25,000 or \$32,000 if Married Filing Jointly then a portion of your benefits are taxable.

Those \$25,000 and \$32,000 thresholds have not increased one red penny since they went in in 1982. If they’d gone up with the CPI they’d be \$79,300 and \$101,500 today.

I think this is related enough to belong here.

I happened to attend a very general SS class today. As a result, I went to the SSA site and created my account. Then I jumped thru the hoops to look at my projected benefits at a few different ages. Then I looked at Mr aj’s spouse benefits based on my earnings. Bottom line: his spouse benefit at age 62 is 80% of what he earns now. If he waits until age 67 he’ll get more on Spousal SS than he makes working (assuming no raises, and possibly even with raises).

He married well.

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Oops sounds like I misinterpreted that. He only gets to retire early if I do. But when I retire, if his spouse benefit is higher than his own benefit, he can elect to take that instead. He can also get a benefit based on my income if I die and/or if we divorce and he does not remarry.

Correct. The fact the the federal government allows a spouse benefit when both spouses are living is pretty dumb IMO. It’s one thing for a surviving spouse, but makes no sense if both spouses are alive.

But they do, so you might as well take it if you are eligible.

Edited for clarity.

Given that his projected spouse benefit is higher than his current income, is that still the case? Presumably his benefit based on his own income would be lower than his income.

not sure what this means. Do you mean each should only draw from their own earned benefit while both are alive?

agree that Mr Aj can only take the spousal benefit if Aj is drawing SS too.

Presumably his benefit based on his own income is lower than his income, yes.