Retire at 65 And Take Social Security Or Delay? {Case Study – Age 64} - Cravitz Financial & Insurance Solutions

Retire at 65 And Take Social Security Or Delay? {Case Study – Age 64}

Deciding when to collect Social Security benefits is more complex if you have other assets or sources of income available to you in retirement. If you have money saved in retirement accounts or have other savings and investments, then even though you retire it doesn't necessarily mean that you should start your Social Security benefits right away.

So what is the right choice? Should you start Social Security at retirement, or should you delay and rely more on your retirement accounts for income until you start your Social Security? The decision on when to file for Social Security needs to be made within the context of your overall retirement income plan.

In this video I am focusing on the tax impact of filing at different ages. Tax planning is an important component of a sound retirement plan. We will look at the projected amount of taxes over his lifetime if he retires next year at 65 and collects Social Security and then will compare that to filing at 67 and at 70.

Full Transcript:


Making a decision as far as when you should file for your Social Security benefits gets a lot more complex. There's just a lot more involved if you have other sources of income or other assets available to you in retirement. You may have a 401(k) or some other type of retirement plan, or you might have other savings and investments. And now the decision needs to be made when you retire. Should you turn on Social Security now? Should you delay it, maybe rely more on your retirement funds in the meantime. Now, if you retire at 70, the decision is easy because you can't delay taking your Social Security past 70 and receive any delayed retirement credits. So if you're going to retire though, anytime between 62 and 70, and again, you have other sources of income and assets available to you, that's when there's some decisions here that need to get made.


So I'm going to share with you an example. This is based upon a guy that I had just recently met. I've changed his name, I've simplified some of the information here for our purposes here today, but he's 64, wants to retire at 65. He's single, and by the way, he's in good health and both his parents lived into their nineties. So we are planning here to make sure that he has the income he needs until he's 95. And let's go ahead and dive in. I mean, there's a lot to talk about here when it comes to this decision. By the way, today in this video, I'm just going to focus on the tax aspect here. Certainly how you're going to invest and other things need to be considered in line with how you're going or when you're going to file for your Social Security.


But I just want to focus on the tax part because so often I will say something like Social Security dollars are more advantageous than IRA dollars. And the reason that I say that is because of how Social Security is taxed. In other words, if your only source of income is Social Security, then you won't pay any taxes on Social Security at the federal level. It's only other income that could make it taxable. And even if you make a million dollars a year, still 15% of your Social Security benefits are going to be tax-free at the federal level. And by the way, many states don't tax Social Security either. Some do, many don't. Alright, let's dive in. And I'm going to share with you these are three different spreadsheets. And so what we were doing here is taking a look at when he should file for Social Security. So again, he's 64, wants to retire at 65, and we looked at if he took his Social Security at 65, then we're going to look at if he takes it at 67, which is his full retirement age.


Then we're going to look at if he waits until 70 to take it. So if he takes it at 65 first year, he's going to receive about 33,000. I'm just going to round off numbers here when I talk through these. So he'll get, let's say $33,000 the first year from Social Security. And his living expenses by the way, are 77,000 here. So he's going to have to withdraw $55,000 from his IRA. By the way, right now his IRA is worth a million dollars, I'm assuming a 5% rate of return on this. So between the Social Security and the IRA withdrawal, he is able to meet his living expenses. Now this is an after tax number, that's the after tax living expenses. These are the taxes he's going to have to pay. When you add these two numbers here together, you're getting this number right here, right?


This total on this side. So if we scroll down, what we're going to see here is that right here, he runs out of money. So his IRA has been depleted and he is age 92 in this example. Now let's look at age 67. So if he takes his Social Security at 67, he's going to have two years here where he's not getting Social Security obviously. And so he's going to have to rely on his IRA much more so. And so you'll see first two years here, we're drawing about a hundred thousand dollars a year and then it drops down quite a bit after that once he starts taking his Social Security. And so if we come down here, we will see that in this scenario, instead of him running out at 92, he runs out at 94. And if we take a look, if he files at 70, again first five years here, no Social Security, he's going to heavily rely upon his portfolio in the meantime.


In fact, he's withdrawing $521,000 over the course of five years. And this can be very unsettling for most people, especially you spend a lifetime accumulating a nest egg and then in five years to go through roughly half of that. Now he's earning interest as well, but he's spending through a lot of that before any of the Social Security is kicking in. Now the results when we scroll down here, you'll see that at age 95 he still has money coming in, he has all the money he needs to meet his living expenses and he still has an extra $389,000 left. So again, there's a lot of components here that I could talk through. If you're going to file for Social Security at a different time, that's also going to perhaps how you might invest. So for instance, if he's going to take his Social Security at 70 and he has this million dollars, well he's going to heavily rely upon that for those first five years.


So we have to be aware of a sequence of returns risk, which if you're not familiar with that, that's the risk of having substantial losses, especially early in retirement, needing to withdraw money from that portfolio. And that could put you at a very real risk perhaps of running out of money. So we need to be careful there. And again, we're not going to get into the details on the investments, but structuring an investment plan to accommodate these income needs over the course of five years is going to be very, very important. And there's different approaches to take maybe a bucketing strategy where we might invest one way for this period of time between zero and five years. We might incorporate a second bucket for the money that we're going to need five to 10 years down the road and then we might go more aggressive perhaps in that bucket for the money that we're not going to need for 10 years or more perhaps down the line.


So a lot of different ways that we could approach that. Again, not going to get into detail on that. The focus of what I want to show you here is just from the tax aspect. So one of the key things to consider when trying to make your income last longer in retirement is thinking through when you're going to withdraw money from different income sources and when. Now I've made this simpler because I am just assuming there's an IRA and there's Social Security. Now with the guy that I've actually been working with, he actually has other sources of income as well. He has investments that are held outside of retirement accounts. So we're dealing with capital gains and dividends and that sort of thing. So that gets a little bit more complicated, but again, I want to keep this simpler here for this purpose. Alright? So as we can see, bottom line end of the day, age 70 works out pretty good from especially if he lives a long life. Now let's take a look at the difference in the amount of taxes that he would have to pay if he were to file at 65 versus age 70. So kind of the two extremes that we're looking at here. So at 65, over the course of his lifetime, he'd pay a total of $508,000 in taxes.


Now, and by the way, the last year here he's paying taxes that is at age 92. So he's got three years here of no taxes. Alright, so $508,000. Let's look at age 70.


So at age 70 he's paying a total of $379,000 in taxes. And in fact, let me back that up just a little bit. So let's make that even. So right here, this is how long he's going to pay taxes if he files for Social Security at 65 in that example. So now we're looking at only $342,000 of total tax compared to again, $508,000. That's a big difference. What is that? About 158, $116,000, something like that, somewhere in that neighborhood. So that's a big difference in tax. And the reason why, again is because Social Security dollars are more advantageous than IRA dollars. And let me show you. So what we're going to look at here is take a look at this. So this is this guy. We're taking a look at his 1040, what it's projected to be here, excuse me, in 2035 if he were to file for Social Security at 70.


So if he did that and went with that plan, his Social Security benefits will be about $66,000 of which only $31,000 are going to be subject to tax. Okay? And the reason why, and I'm not going to get into the details as far as how it's determined whether Social Security is subject to tax other than to say that there is a provisional income formula, and I have gone over that in more detail in other videos and kind of walk through exactly how that works. But because we've limited the amount of money that we need now from the IRA that's reduced the amount of the Social Security that's subject to tax. So as we can see by doing this calculation, $31,511, I'm going to divide that by $66,665, in his case, 47% approximately of his Social Security benefits are subject to tax if he goes with this plan. Okay, now let's say he files at 65, and again, we're going to look at 2035 as our comparison year.


Now we're seeing that there's only 46,000 of Social Security benefits and there's the taxable amount is 39,605. So if you take $39,605 and divide that by $46,594, you're going to see that 85% of his Social Security benefits here are subject to tax and that's when there's less Social Security. But now we need more IRA dollars in order to meet the living expenses in this case. Now, one thing that a lot of people find interesting is that, and let's just look at the one here at 70. So at age 75, what you're seeing here is that his total income is $66,000 from Social Security, $32,000 from the IRA withdrawal. So that's about 98, $99,000. Now if you've taken a look at the provisional income tax charts, if you're like a lot of people, you would be led to believe that you would have to pay taxes on 85% of your Social Security benefits.


And the reason why is because this is what that chart looks like. This is straight from the social securities website. And as you can see down here for a single person, you'll see this right here, you'll see more than $34,000 and many people again will just assume 85%, that's the amount of my Social Security or 85% of my Social Security benefits I'm going to have to pay taxes on. And it's a common mistake. And for a married couple, you'll see that number is $44,000. So again, a lot of times single folks will say, well, I'm making more than $34,000, or I'm married and I'm making more than 44,000, so I'll definitely have to pay taxes on 85% of my Social Security benefits. Now if your income is high enough, that's certainly the case, but if it's not high enough like it is in this case where he's actually living on 98, $99,000 a year here, by the time he's 75, he's not having to pay taxes on 85% of his Social Security.


In his case, he was paying, what was it, I think 47%. I've taken that number off my calculator. So hopefully that just gives you an idea on how that works. So one other thing that I'm going to touch on here as it relates to taxes is you'll notice here I've got this yellow green and then this blue. So I'm kind of separating this because these are the different ages that he could take. Social Security and this time period right here, this is before the RMDs kick in right here, the RMDs. And at age 75, this is when the RMD starts. So the RMDs are the Required Minimum Distributions. So these are the required amounts that the IRS requires you to take out of your pre-tax retirement accounts each year once you hit a certain age. And so for him, based upon his age, he'll have to start at 75.


So the required amount that he'll have to take based on his IRA balance at the end of last year is $26,000. Here you'll see now he actually needs $32,000 total and that's actually what he withdraws. So about $6,000 more than his RMD to meet his living expenses. But down the road here, you'll see this column, it says spend unsaved cash. This is extra money coming out. So he's actually being forced to have to take a little bit more from his IRA because of the RMD, and he is got a little bit extra that he'll have here. Now he could reinvest it, but I'm just assuming that he goes ahead and spends this. So this number down here, this doesn't even include this extra money. It's not a lot, but this extra money that he could have just reinvested there as well if he didn't spend it.


So just for kicks, let's look here at age 75, you'll see again the RMDs $26,000 and he needs $32,000. Let's compare that to 65. Or if he files at 65 by the time he's 75, you'll see here his RMD is $33,000, but again, he needs $62,000, so a lot more, almost twice as much money in order to meet his living expenses. And of course, because he has to withdraw more there, he doesn't have as much from Social Security that increases the taxes that he's going to have to pay. One final note here, of course this assumes that tax rates are going to stay the same. And it also assumes here in the analysis that I did that tax rates will go up in two years when the Tax Cuts and Jobs Act sunsets, that is set to happen unless anything happens between now and then.


But if taxes were to increase in the future and they were going to tax the IRA more or whatever might happen, this could potentially put him in a better situation also by not having to pay taxes on as much of an IRA withdrawal there in the future and having more of those Social Security dollars. So a lot to think about. I'll leave it at that and I'm sure I'll probably dive deeper into some of these different areas because when constructing an income plan, there's a lot of components, the tax part, the way that you invest and everything else. So have a good day and we'll talk soon.


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