When to take Social Security by David Disraeli



Most individuals in or near retirement have three financial legs to support them in retirement: Social Security benefits; qualified retirement savings [401(k), IRA, 403(b), etc.] on which taxes have not yet been paid; nonqualified

savings and investments on which taxes have been paid on the principal and possibly some or all of the earnings. By carefully coordinating the use of these three sources of money, the typical retirement minded couple can add up to 20% to their after-tax income and afford a better retirement lifestyle.

Unfortunately, most couples in or near retirement overlook the importance of coordinating the uses of their available money. The results are higher tax bills and lower lifestyles in retirement. Both can be avoided.  In what follows, you will be shown how the typical retired couple can add as much as 20% to their after-tax  retirement income just by coordinating when to use the different categories of their money. There is nothing  to buy, no risky investments to make or additional money needed: you just use what you have smarter. This

is very important for a married couple because one spouse could spend as much as one-third of their lifetime  in retirement.  Conventional wisdom says to delay the use of your qualified money as long as possible in retirement

because it grows faster due to the tax deferral. Generally, the conventional wisdom is wrong. The millions  who have heeded this inappropriate advice will have less after-tax money to support them in retirement.  This Guide will show you that qualified money should be used first so you can delay taking Social Security  benefits as long as possible. There are also tax advantages to using your non-qualified money last in  retirement. This timing can give you more after-tax income in retirement and a better lifestyle.  Unless you have substantially more money than needed for retirement, it is foolish to pay taxes you can  avoid by simply changing the timing of how your three categories of money are used in retirement. The  typical retiree’s greatest fear, and also the greatest challenge, is to not run out of money before they run out

of breath. Many are in danger of losing this battle because the Center for Retirement Research is now  reporting that 43% of U.S. households headed by workers ages 34-60 are in danger of having 90% or less of  the money they’ll need to maintain their lifestyle in retirement. According to one recent study reported in  Retirement Weekly: “The average American family is on track to replace 57% of its annual pre-retirement  income, some 28 percentage points less than the minimum 85% figure experts typically say retirees will need

to live on in their golden years”.  By following the advice outlined in this Guide to Social Security, you can stretch your retirement money by up to 20%. Before we can discuss when and how to use the three categories, each needs to be identified and defined. You may receive other categories of money, e.g., inheritance, life insurance benefits, loans, reverse mortgage proceeds, trust income, lottery (dream on) and support from family members, but these will not be discussed in this Guide. Also, in the following discussion we’ve assumed the “average” retirement-minded couple; however, there are many exceptions, and we recommend you seek professional advice before taking



Social Security Benefits


Social Security benefits are an entitlement promised by the federal government if you or your spouse paid enough into the Social Security fund during your working years to qualify for benefits. While Social Security is not guaranteed by law, it is backed by the promise of the U.S. government and not fulfilling this

promise would be political suicide for members of Congress. Contrary to lively debates about the future of Social Security, in all probability lifetime Social Security benefits will continue indefinitely. However, to keep the program solvent there may be measured changes in the taxation of benefits, adjustment for inflation, additional taxes on workers and other changes potentially detrimental to retirees. A statement of your expected Social Security benefits in retirement can be obtained on-line at:




You can also calculate future benefits at:




Social Security benefits are paid until death and in some cases paid

to certain dependents after your death; therefore, the decisions made about Social Security will have an impact throughout your lifetime and possibly for the remainder of a loved one’s life. You’re generally entitled to benefits if you have not paid into the fund but your spouse qualifies for and is receiving benefits. If a spouse receiving benefits dies, the surviving spouse will generally receive the greater of his/her own benefit or that of the deceased spouse. There are also other provisions that benefit spouses and dependent children of qualifying individuals. These provisions are discussed below in conjunction with

when to start benefits.  Retirement benefit calculations are based on your lifetime earnings from which Social Security payroll taxes were withheld. Social Security payroll taxes are collected under the authority of the Federal Insurance Contributions Act (“FICA”). The payroll taxes are sometimes even called “FICA taxes” and are currently 12.4% (employee and employer pay 6.2% each) of the first $94,200 of annual earnings. For most current and future retirees, the Social Security Administration uses the earnings from your 35 highest years to determine your benefits. The complex formula used to compute benefits gives additional weight to low income years that helps boost benefits for the lowest wage earners. If you have a pension from work where you also paid Social Security taxes, the pension will not affect your Social Security benefits. However,

pensions based on work that is not covered by Social Security (for example, the federal civil service and some state, local, or foreign government systems) will probably reduce the amount of your Social Security benefits. If you’re under the normal retirement age and want to continue working while receiving Social

Security benefits, you’ll want to consider the reduction in benefits due to your earned income. Any time you work in a job that is covered by Social Security – even if you are already receiving Social Security benefits – you and your employer must pay the FICA taxes on your earnings. If you are self-employed, FICA taxes are paid on your net profit.


Qualified Retirement Money


Qualified retirement money is what you’ve set aside in a retirement plan during your working years. Many employers totally or partially match your contributions. Qualified retirement plans receive favorable tax treatment and, if affordable, you should maximize your contributions to such plans. Generally, the money

put into your qualified retirement plan is not included in your taxable income base during the year it was contributed, and the earnings are not taxed until you start withdrawing the money. While the IRS provides substantial tax advantages for qualified retirement plans, they also impose penalties if you withdraw the

money prematurely. While there are a number of qualified retirement programs allowed under the tax code, e.g., 401(k), IRA, Roth IRA, SEP, Keogh, SIMPLE, 457, 403(b), etc., we’ll refer to these collectively as “IRA” and/or “qualified money”. Generally, any qualified money can be rolled over into a traditional

Individual Retirement Account, so the generic IRA nomenclature is appropriate.

Since the money you and/or your employer contributed to your qualified retirement plan was excluded from your income for income tax purposes, you’ll pay income taxes on all earnings and pre-tax contributions at your regular income tax rate when you make withdrawals. You can withdraw qualified money without penalty as rapidly as desired once you reach age 59½ but are required to start taking at least the minimum required distributions by the end of the year you turn 70½, or no later than April 1 of the following year, unless you have converted to a Roth IRA. Some qualified retirement accounts can be accessed prior to age 59½ without incurring early withdrawal penalties. You must continue to make at least minimum required withdrawals no later than December 31 every year thereafter until your death or you exhaust your retirement



If your qualified retirement money is in a 401(k) or another employer-sponsored plan, you generally can, and should, roll it over into an IRA once you leave your ex-employer. You can then place the money in any allowable investment. Some employer plans have an option that allows you to convert your qualified

retirement money into a lifetime income for you and possibly for the lifetime of your spouse. In such cases, you’re advised to shop the market to make sure you’re getting the best lifetime income for your money. Far too many times the lifetime income option offered through your employer’s plan is less than what you can get from another comparable source. If you find a better alternative, you can then roll over your qualified money tax-free into a traditional IRA and then purchase the better lifetime income benefit. You will most likely want to work with a financial planning professional if you follow this route.  The most common employer-sponsored retirement plans are ones where both the employee and employer make defined contributions; however, a few employers still provide plans to which the employee does not contribute but is entitled to a defined benefit provided by the employer. The defined benefit is for the

remainder of the employee’s life and possibly that of their spouse. Generally, defined benefit plans cannot be rolled over into an IRA; thus, you’re limited to the options offered by the plan. However, if your defined benefit plan allows a lump sum payment option at retirement, you’ll want to compare the lifetime income you can buy with the lump sum payment with that offered by your employer’s plan. You can generally elect to take reduced lifetime payments to insure that your surviving spouse will receive the same or smaller

payment for his/her remaining life. Which option you choose should also be analyzed by engaging the services of a professional financial planner that is qualified to give you solid advice on the best option to choose. Far too often the advice provided by your employer is either (a) biased because it comes from the

firm managing the plan’s money or (b) questionable because the human resource personnel relies on biased outside guidance and/or has no expertise in this area of retirement finance. After all, you’re an ex-employee at that point!

If a spouse dies before all money is withdrawn from her/his IRA, the surviving spouse can convert the remainder to their personal IRA as well as exercise other options. Also, Congress has written into the tax code the ability of a non-spouse beneficiary to inherit IRA money which can then be withdrawn lump sum or

in minimum required distributions during the remaining life of the beneficiary. The Pension Protection Act of 2006 made some important changes in the ways qualified retirement money can be passed to beneficiaries; thus, you’ll want to review these changes before you make final decisions. This stretch

provision in the tax laws allows money not taken as income by the non-spouse beneficiary to continue growing tax-deferred. This little understood IRA stretch provision of the tax code can be an excellent estate planning tool, especially if you qualify for and can afford to convert to a Roth IRA.

For more information, contact David Disraei at 512-464-1110 or david@pcfo.net