Another Good Reason To Delay Social Security Benefits

As you likely know from reading many of my articles on the subject, I have long advocated the concept of delaying your Social Security benefit as long as possible.  This shouldn’t be a surprise – many financial advisors have espoused this concept for maximizing retirement income.

Lately there has been a white paper making the rounds, from a Prudential veep, Mr. James Mahaney, entitled Innovative Strategies to Help Maximize Social Security Benefits.  The white paper supports the very theme that I wrote about a couple of years ago in the post Should I Use IRA Funds or Social Security at Age 62?.  This paper seems to have struck a chord with a lot of folks, as I’ve received it no less than a dozen times from various folks wondering if the strategies Mr. Mahaney writes about would be useful to them.

The point is very clear: It makes a great deal of sense and saves significant tax money later in life when you can maximize the amount of Social Security income as a percentage of your overall income requirements.

I’ll run through an example to help explain how this works:

We have an individual who has a pre-tax income requirement of $75,000 per year. The individual has significant IRA assets available. If he takes Social Security at age 62, he will receive $22,500 per year. Delaying Social Security benefits to FRA would get him $30,000; waiting until age 70 would provide a benefit of $39,600 per year. In tables below we show what the tax impact would be for using Social Security at age 62, FRA, and age 70. In each case the required income is always $75,000.

Table 1 – taking Social Security benefit at age 62:

IRA SS Tax
62 $ 52,500 $ 22,500 $ 9,556
63 $ 52,500 $ 22,500 $ 9,556
64 $ 52,500 $ 22,500 $ 9,556
65 $ 52,500 $ 22,500 $ 9,556
66 $ 52,500 $ 22,500 $ 9,556
90 $ 52,500 $ 22,500 $ 9,556
Totals $ 1,522,500 $ 652,500 $ 277,113

Table 2 – taking Social Security benefit at age 66:

IRA SS Tax
62 $ 75,000 $ 0 $ 11,113
63 $ 75,000 $ 0 $ 11,113
64 $ 75,000 $ 0 $ 11,113
65 $ 75,000 $ 0 $ 11,113
66 $ 45,000 $ 30,000 $ 7,953
90 $ 45,000 $ 30,000 $ 7,953
Totals $ 1,425,000 $ 750,000 $ 243,263

Table 3 – taking Social Security benefit at age 70:

IRA SS Tax
62 $ 75,000 $ 0 $ 11,113
63 $ 75,000 $ 0 $ 11,113
64 $ 75,000 $ 0 $ 11,113
65 $ 75,000 $ 0 $ 11,113
66 $ 75,000 $ 0 $ 11,113
67 $ 75,000 $ 0 $ 11,113
68 $ 75,000 $ 0 $ 11,113
69 $ 75,000 $ 0 $ 11,113
70 $ 35,400 $ 39,600 $ 5,901
90 $ 35,400 $ 39,600 $ 5,901
Totals $ 1,343,400 $ 831,600 $ 212,811

The difference that you see in the tables is due to the fact that Social Security benefits are at most taxed at an 85% rate. With that in mind, the larger the portion of your required income that you can have covered by Social Security, the better. At this income level, the rate is even less, only 85% of the amount above the $44,000 base (provisional income plus half of the Social Security benefit). This results in almost $34,000 less in taxes paid over the 29-year period illustrated by delaying to age FRA, and nearly $65,000 less in taxes by delaying to age 70.

Note: at higher income levels, this differential will be less significant, but still results in a tax savings by delaying. It should also be noted that COLAs were not factored in, nor was inflation – these factors were eliminated to reduce complexity of the calculations. In addition, in calculating the tax, deductions and exemptions were not included.

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

An IRA Owner's Manual
A Social Security Owner's Manual

13 Comments

Leave a comment

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Copyright 2014 FiGuide.com   About Us   Contact Us   Our Advisors       Login