01 Jan 2015

The following is an analysis of the merits of taking your Social Security benefits at age 62 vs. age 66. This discussion assumes two conditions: that you stop working at or before age 62, and that you have an IRA investment account that is funded from an IRA, 401K, or lump sum distribution from a pension plan.

 

Let me introduce a little history into our conversation, Social Security was enacted in 1935 with a retirement eligibility age of 65. The average life expectancy at that time was just under 60 years for a man and 64 years for a woman, so the government really didn’t plan to pay benefits to most people. Therefore the plan to fund the benefits to recipients with the contributions of the active participants probably made some sense. (By the way, if you research what they call this type of funding today, pyramid scheme, and Ponzi are the most often mentioned). Fast forwarding to today, in 2015 the average life expectancy is 76 for males and 81 for females, so you are doing your government a disservice by retiring early and living too long.

 

Let’s get back to the topic at hand, if you take your Social Security at age 66 you receive a full benefit, but you need to fund your retirement for the four prior years from your IRA account. If you elect to receive Social Security benefits at age 62, they are reduced by 25% but your IRA account is not diminished by the  amount of the reduced benefit for four years. Also note that at lower income levels Social Security Benefits are not taxed, while distributions from IRAs are taxed as regular income. Everybody’s individual case is unique from the perspective of actual dollars and tax rates, but the ratios and the forward looking projections are the same for everyone. I list the calculators, in the appendix, that I used and invite you to run your own numbers.

 

EXAMPLE

 

Age 66 benefit: $16,000 yr / $1,333 mo.                   Age 62 benefit: $12,000 yr / $1,000 mo.

 

The difference at age 66 is $4,000 yr. or $333 mo., but what does that do to your IRA? There are three answers to this question;

  1. I put the money under my mattress and it earned nothing.

  2. I left it in my IRA and it earned 5%.

  3. I left in in my IRA but I would have had to pay a 10% income tax when I withdrew it.

 

The answers are;

  1. $48,000 reduction in my IRA

  2. $52,775 reduction in my IRA based on a 5% return on investment in my IRA over 4 years.`

  3. $58,050 reduction in my IRA based on the rules in B. and with the 10% income tax.

 

So, I took my Social Security early, but now I’m 66 and I have a benefit shortfall of $4,000 yr or $333 mo. how long will those dollar amounts listed above last covering the difference?

  1. 12 years, or until I’m 78

  2. 21 years, 8 mo, or until I’m almost 88.

  3. 26 years, or until I’m 92.

     

I don’t recommend option A, unless you’re a man not planning to exceed today’s life expectations. But no matter which model you like, you are better off taking your benefits at 62. Here’s the final benefit, all calculations with the dollars in the A, B, and C categories are inheritable, Social Security is not. So if you pass prior to age 78, 88, or 92, some of that money is passed on to your heirs.

 

I took very conservative estimates for return on investment (5%) tax rates (10%) and my calculations are from reputable websites. The “how long will my money last” calculations are based in reverse mortgages, and all interest based calculations are based on quarterly compounding.

 

 


 

 

APPENDIX

 

Compound Interest Calculator - INVESTOR.GOV  an SEC website

Annuity Tables - FINANCE.YAHOO.COM   Look for spending calculators

Social Security Rules - SSA.COM

 

My assumptions for return on investment rates were based on the table below:

 

ROI Table.gif



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Last modified on Wednesday, 08 June 2016 16:16
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