Every time I take further interest in Social Security, I learn something I didn’t know; it’s like the layers of an onion. In the 19 years of writing this column, I’ve written about different aspects of the program 13 times — everything from the quality of government bonds that fund it to different strategies for getting the most out of what we have contributed over the years.
Most recently, I was reminded of the advantages of waiting until age 70 to get the maximum benefit from that time forward — including a higher base income to which cost-of-living percentage increases will apply. Like the majority of recipients, I didn’t go that route when I reached “full retirement age” at 66. I just wanted the satisfaction of getting something for certain after contributing for so many years. A bird in the hand for the following four years was worth two in the bush.
But don’t listen to me. So-called “break-even” calculators (including one from The Social Security Administration at www.ssa.gov) can illustrate the age at which the money taken up front will be offset by the loss of the higher income over the remainder of life. Of course, the longer you live, the reward for waiting progressively increases. Typically, that tipping point is age 82.5, but many factors can affect the result based on individual circumstances.
For example, taking early Social Security income over and above existing job income of one or more spouses will subject that income to the family’s highest combined marginal federal and state income tax — likely reducing the “take-home” amount by 30 percent or more here in California. The checks rolling in may offer smug satisfaction after all these years, but in April, the tax owed on that extra income may come as a shock. In that case, the reward for waiting could come sooner than the standard calculations indicate, because there’s less upfront money (after taxes) to offset the substantially greater benefit in the future — each year of waiting increases that benefit by 8 percent.
But someone still working who taps Social Security early may then have extra money to invest in some stock-oriented mutual funds over, say, the following four years. If they use this extra income as a resource allowing them to then defer additional tax-deductible contributions at work into their 401(k) or 403(b) plan, those extra contributions (a maximum of $24,000 per year) will have effectively pushed the 82.5-years-old break-even point to an older age.
Using break-even analysis as the engine driving the decision-making can be a mistake for several reasons. It doesn’t take into consideration the longevity risk — the fact that we might live long enough to exhaust our retirement resources. It also doesn’t measure the quality and guarantees of the stream of payments. Mutual fund star ratings, as an example, reflect both the total annual returns as well as the level of volatility or risk. By this measurement, as a guaranteed fixed-income investment with inflation protection, the Social Security system is in a class by itself.
In the end, there is no way to determine, for certain, the optimal age for tapping our long-awaited Social Security benefit. We’ll only know that answer after the fact. Our best guess should be at least an informed decision and a realization that we’re stuck with what we’ve chosen.