Thursday, May 3, 2012

Social Security Limitations

I overheard a conversation after church the other day that has had me a bit concerned.  The conversation was something like, "Between 62 and 67, for every dollar you make, you lose a dollar of Social Security."  This would seem like a strong argument for not starting Social Security payments until you were 67, assuming that you had significant investment income.

The actual details are not quite so frightening.  It turns out that if you have earned income exceeding a certain level ($14,160 in 2011), there is a reduction in your Social Security payment for that earned income.  But if your income is from interest, dividends, or other investment income, there is no reduction.  In short, if you are still actively working, being a productive member of society, you will be punished.  If you are just living off the income from your wealth, you will not be punished.  That makes sense to you, doesn't it?

I knew that Social Security had changed the retirement age some years back, but I have never bothered to worry about it because:

1. I had hoped to be rich enough to just donate it to a charity each month.

2. It was a long ways off.

3. I wasn't terribly confident that Social Security would still be operational by the time I was old enough to collect it.

This page shows the sliding scale for full retirement age, based on when you were born.  You can still retire at age 62, but with a corresponding reduction in the benefit amount.  Something that I did not know is that you can delay retirement past full retirement age, and get a somewhat larger monthly benefit if you do so.

2 comments:

Anonymous said...

And sadly with this bad economy too many people are taking early benefits and losing big time because of it.

Anonymous said...

I think 2:12 PM Anon's comment may not be correct.

When doing pre-retirement planning, I looked at the range of social security payments, based on retirement age. What I found was that if I retired at 63 (which I did) and began collecting SS benefits the payments would be about 22% less than waiting until 67 (full retirement age for my age group).

Why give up 22%? Because collecting the reduced payments beginning at 63 as opposed to waiting until 67 showed that even with lower payments I would receive more money through - in my case - age 77 and 4 months. In the 5th month of my 77th year I would begin "falling behind" based on the difference in payments.

That gives me 14 years and 4 months of more money from SS to work with that I wouldn't have had if I waited until age 67. Of course, once past 67 the advantage declines each month until 77 and 4 months where it essentially breaks even. I plan on living substantially past 77, but there are no guarantees.

That "monthly advantage" at the front end is, so far, pretty rewarding in my investment portfolio, and adding the 4 years at the front (between 63 and 67) gives me 4 additional years to compound my investment returns, plus, as Clayton pointed out, one can earn slightly over $14K/year without reducing the SS payments (in fact, for ever $2 earned above $14,140/yr one's SS payments are reduced by $1). I've procured 24 hr/week part-time employment that
will keep me just under the cutoff point, which more than pays all my fed/state/local taxes plus more. There's also the option within SS that if one returns to full-time (or very lucrative part-time) employment and earns enough so that SS payments are discontinued entirely, when one "retires again" the SS payments are computed on that "new" retirement age, resulting in higher payments, just as if one retired initially at that higher age. Plus, once one reaches one's "full retirement age" one can collect full SS payments with no limit on earned income.

I also have two pensions which, each by themselves would not support me, but together, and with SS, has me pretty comfortable and allows quite a bit of investment. And, I'm not planning on touching my 401k, any of my IRAs or my 457 until I hit 70 1/2 and the government mandate to begin withdrawals strikes. Needless to say, those withdrawals (assuming Congress doesn't eliminate the mandate) will simply be shipped to my taxable investment portfolio after the necessary taxes are paid.

The point is, I guess, that if one looks only at SS payment amounts based on age, and that is one's only resource, then the payment difference between 62 when one becomes eligible and 67 when "full" benefits kick in is big enough to strongly consider. But, if SS is just one component of a complete retirement plan then, depending on individual circumstances, it may be beneficial to start SS payments earlier than full retirement age.

Plus, given the state of the economy and government finances, I don't consider it outside the realm of possibility that SS may not be available in any amount at some point in the future. If that turns out to be the case, I'll still have an investment portfolio created with my early payments.