At FRA, but still working. Should I start drawing SS?

[JonC850620]

I've just hit FRA, and as I understand it, I can now claim SS with no limit on my income from the current job. The question I have is whether it's worth it to claim now, or wait until I quit working.

I'm currently set to receive $3140 monthly. My current job is paying about 200K. 

Is the tax bite going to be worth waiting, or am I better off claiming now and collecting what I can?

Thanks

Jon

[Tonster521]

@JonC850620 I agree with fffred that there are other factors to consider in order to make the appropriate decision for your situation. Obviously, your taxable income and whether you file Single or Married is important.For example, as Single,your tax bracket will probably be 32%. And, depending on additional taxable income (i.e., interest, dividends, capital gains, etc.), you may creep into the 35% tax bracket. If Married (filing jointly), you are probably in the 24% tax bracket. This means that 85% of your SS benefits will be taxed at the applicable above noted tax rates. This amounts to collecting SS Benefits and repaying the SS Trusts via Federal Income Taxes (FIT). FYI, 50% of the applicable FIT is repaid to the Old Age Trust and 35% of the applicable FIT is repaid to the Medical Insurance Trust. For example, if you receive $37,680/year, $32,028 is subject to Federal Income Taxes (varies with States). At the MFJ rate of 24%, 7,686.72 is the FIT you will pay. This get apportioned as noted above. So, it isn't lost to he the Feds, but redeposited to the SS Program. It is what it is. Also important, you need to consider your life expectancy. Some of us will live longer than others. So, delaying may be a viable strategy. However, your upfront cost will exceed $100,000 (at least 3 years and some months of SS Benefits). That upfront cost may be returned to you via greater monthly SS Benefits. However, you need to live at least to about age 84 to recoup that amount ( using 3% discount rate). I suspect that you may be a savvy investor. So, you may need to live longer (beyond age 84) to recoup the upfront cost of delaying especially if you are earning returns greater than 3%(i.e., 4%, 5%, or more). Another concern is a much younger spouse as ffred has noted in his posting. Once again, there is a time factor (life expectancy) for both worker and spouse that should be reviewed. The SS Survivor Benefit is essentially a death benefit which may be addressed with the SS Program or through investments or annuities or life insurance. I favor life insurance inasmuch as it is tax free, can pay multiple beneficiaries, can be used as a wealth transfer strategy, and, for folks with large estates, pay inheritance taxes. The cost of life insurance can get expensive as you attain age. I think a 2% or less cost is reasonable (i.e., $20,000 premium or less for $1,000,000). The challenge is to find a knowledgeable life insurance agent well versed with the above uses for life insurance. To play it safe, you may need multiple policies to ensure guarantees with your State Guaranty Association should any insurance company fail. I am including, via copy and paste, the SS Actuarial Life Table (ALT)  link https://www.ssa.gov/oact/STATS/table4c6_2004.html I believe the info is based on empirical data from the SS Program as of 2004. However, if you click on Office of the Chief Actuary and then click on Periodic Life Tables, you can access data from various years (including 2019 which has similar results). They are close. The important info that is derived from the 2019 ALT is that about 50% of a males pass by 80 - 81; about 66.6% pass by 85 - 86; about 85% pass by 90 - 91; and about 95% pass by 95 - 96. Although somewhat more complex than a start or delay answer, I hope this helps. 

[JonC850620]

Thank you for the great reply. For more background, I am married. My wife is 2 years older than I am (69 this year) and started drawing her SS at 62. I'm assuming her benefit amount will grow from the current $360 a month to the spousal benefit level when I start drawing SS.

I do have concerns, as I imagine most of us do, about the continued solvency of SSI and whether our benefits will be reduced in the future.

We live in a no income tax state, so federal taxes are my only real concern.

I'm leaning towards filing now. Although I'll be taxed at a higher rate while I work, the benefit amount should continue to grow and hopefully offset itself when I do retire.

[Tonster521]

@JonC850620 Thanls for your positive reply. You are correct that your spouse's monthly benefit will increase based on Spousal Benefits which should be 50% of your Retirement Benefit (aka Old Age Benefits). Based on your SS Benefit of $3,140, your spouse's monthly amount should be $1,570 (combined $360 retirement and $1,210 spousal). Because your monthly amounts may exceed the Family Benefit limit, there may be an adjustment to the above amounts. Once again, you will need to include 85% of your SS Benefits as taxable income which will reduce your Real (as opposed to Nominal) SS Benefits based on your applicable tax rate (i.e., 24%,etc.). In effect, you will incur this reduction of SS Benefits before the SS Trust is depleted which is projected to occur 2034 or 2035. Thereafter, SS Benefits will be apportioned based on FICA Revenue at that time which is estimated to be about 75%. So, COLA will probably not be available at that time as well. The depletion of the SS Rust is serious especially for folks who only rely only on SS Benefits. The sad fact is that Congress has not corrected the FICA revenue shortfall even though the SS Actuary has informed them for years. I started working in 1968 when FICA was 4.4% (OASDI 3.8% and Hospital Insurance .6%). Over the next 22 years ( 1969 to 1990) FICA was increased 12 times. FICA has been the same rate (7.65%) for most employees since 1990 (31 years going on 32 years). Higher income folks continue to pay the HI portion (1.45%) on all earnings. I do not know of any business that has the same price from 31 to 32 years ago. At any rate, I believe there will be a solution. In my opinion, workers will be asked to pay more FICA, SS Beneficiaries will be asked repay more benefits via the FIT scheme, and folks over $400,000/year will pay unlimited FICA for both OASDI and HI. I do not see our Labor Participation Rate (LPR) reaching over 65% which is a minimum to keep the SS Program viable. The LPR reached 67.2% in March 2001 and has declined since then. Based on the info you provided, I agree with your strategy. Your spouse will appreciate the additional income. The taxes are what they are. There is no way getting around the tax issue. Good Luck.

[fffred]

@Tonster521 

This comment caught my eye, the "maximum family benefit". I've been assuming (based on prior reading years ago) that if there is only the Number Holder and a spouse receiving spousal benefits then the maximum family benefit is immaterial...it's not going to affect the NH and the spouse. Do you agree? I'm not getting a clear-cut answer wading through the SSA site and Google results. Thanks!

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@Tonster521 wrote:

...Because your monthly amounts may exceed the Family Benefit limit, there may be an adjustment to the above amounts. 

[Tonster521]

@fffred and @GailL1  I believe it is possible, but I don't know the actual math for worker and spouse. There is an article at AARP that provides some info on Maximum Family Benefit. https://www.aarp.org/retirement/social-security/questions-answers/social-security-limits-married-cou.... I thought FMB is something that the folks need to be aware of even if it does not affect them. 

[fffred]

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@Tonster521 wrote:

I thought FMB is something that the folks need to be aware of even if it does not affect them. 

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I wholeheartedly agree about the need to be aware. Because you never know when something that you may not think affects you suddenly does. Seen it happen. Had it happen.

[GailL1]

There is a formula for the Family Max -

SSA.gov - Formula For Family Maximum Benefit

You know we have to provide for all those marriages that lasted for 10 years.  All the minor children.

[fffred]

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@GailL1 wrote:

You know we have to provide for all those marriages that lasted for 10 years.  All the minor children.

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Like my wife's cousin... I call him "Johnny Appleseed".    ;- )

Thanks for the link. Didn't fully address my question when only NH and spouse are drawing benefits. But I think that the general rule is that in this case they won't fall afoul of the MFB.

I just ran Anypia32.exe again for our situation and the program reports the spousal benefit and then again as restricted by MFB...though in our case the two values were the same, no MFB restriction.

[fffred]

@JonC850620 

I just started taking my SS at age 70. My situation is similar to the details you have described, similar salary, similar SS benefit, similar age. Deciding whether to take your SS benefit now or later, or anytime between now and age 70, may depend more on other factors in your life that weren't mentioned.

I have seen a lot of discussions about the pro's and con's of taking SS at FRA versus waiting a few years. And I have seen the argument that one could take benefits at FRA and invest the entire amount through age 70; people make this analysis and then compare the financial value that each approach might provide. Of course, the future of the investment world is unknowable and putting that stream of cash into the market might be a catastrophe. Or it might be the Golden Goose. And people often don't act as they think they would when the markets crash.

The fact that you are still working beyond your FRA doesn't seem to affect the analysis much. You will however possibly get higher benefits if the next few years will count as some of your "highest 35 years" of earnings for SS benefits (note that those earnings are factored for cost of living in their analysis). Even so the choice of whether to take now or later is likely unaffected by your continued working.

There is the intangible point that the SS Trust Fund will be depleted in the near-ish future. This doesn't mean that SS will be kaput but it is possible that benefits may be decreased in the future, at least for some people (based on age, I presume). Again, really hard to base a decision on such uncertainty. Though I myself in my planning and spreadsheets account for such a reduction in the future. Some people may think "better take it now!". Or an analytical person might crunch the numbers on taking now versus later, also accounting for the possible reduction.

I was enamored of taking SS at FRA and stashing the cash until a later age. But I realized the insurance aspects of the SS benefit: I had my wife to consider (some people our age may even have young children at home to consider as well). Since my wife is considerably younger than me I elected to delay SS until age 70, so as to maximize her possible survivor benefits. Based on some analyses I did years ago I even decided to extend my term life insurance so that it expires around the time that wife will be 62 and begin taking SS benefits (of course, if I die before then she can take survivor benefits as early as age 60). I was most comfortable with this approach, delaying SS until I was 70, to assure that she would be taken care of in my demise. As implied, my analysis of years back showed me that the risk to her was my "early demise", in which case she would have a cash crunch, rather than me living to a ripe old age and spending all of her inheritance.

For your decision you'll have to consider if you will leave any survivors who would depend on your SS and other assets. If no one is in this position then it is likely immaterial whether you elect now at FRA or wait. I think the inflation-adjusted cash flow, transformed into a net present value, would differ very little.

[Tonster521]

@fffred Your reply provides a number of factors that you reviewed when deciding to begin or delay SS Benefits. Readers with similar marital status may use your approach as a "template" for factors to consider when reviewing their sources of retirement income. Your approach may be used with those retirement sources (SS Benefits, monthly pensions, annuities, withdrawal strategies, etc.) to determine optimal income streams based on projected life expectancy. 

I would add an additional factor; namely, Federal Income Taxes (FIT) to consider. State taxes may be a factor as well for folks that live in States that tax SS Benefits.I have read that approximately 50% of SS Beneficiaries are subject to FIT at the 50% or 85% thresholds. I understand the logic to the 50% threshold, but not the 85% threshold. If folks are fortunate to receive a monthly pension, annuity, or have accumulated assets in a defined contribution plan (i.e., 401 K, 403 B, 457, ESOP, IRA, SEP, etc.), they must consider the amount of money they will repay the SS Program due to the current FIT thresholds. For Married Filing Jointly (MFJ), once combined income exceeds $44,000, 85% of SS Benefits are taxable at one's  applicable Federal tax rate. The Treasury collects the money (taxes) and returns those funds to the SS Trusts. In effect, your SS Benefits are paid to you and you repay the SS Trust via the FIT scheme. In some situations, a Survivor may see a FIT increase from the 12% tax bracket to the 22% tax bracket after the Worker's death. This is why I suggest to folks with multiple retirement income sources (that may not change upon the death of the Worker) to consider life insurance which is tax free as an alternative to Survivor Benefits. As you probably know, couples with dual income where earnings are close to equal or not significantly different, Spousal and Survivor Benefits may not provide much money, if any, over the amount of Retirement (Old Age) Benefit. If eligible for a decent premium, life insurance should be considered as an option.