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Jingthing

Making an early social security claim when you have other assets to spend down

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Posted (edited)

I'm starting this topic because it might benefit others.

When to start an old age Social Security claim is a massively important and often difficult decision.

There is no right answer for everyone. 

I'm assuming people reading this already know that taking it early reduces the benefit amount, and the benefit amount goes up considerably every year (month even) up to I think about age 70 (which is past the "full" retirement age which varies somewhat based on your birth year).

A significant majority do take it at the earliest possible time, age 62, but many or even most of those people that do that probably shouldn't have. 

That may surprise a lot of people but it's true. In the mainstream press we're always told never to do that but that's the same mainstream press that talks as if most people have a million or two socked away in savings. 

The very best reason to take it at 62 is because you very seriously need the money.

That is probably the most common reason.

Also if you're in very bad medical shape and know you have a low life expectancy that's another good reason to start at 62.

That said, what about a situation where you think you need the income BUT you do have other assets to spend down that you could spend down to avoid starting early? Typically retirement funds.

The question is (assuming you have enough to spend down and aren't very ill) is it financially smarter to spend down at a higher rate from your retirement saving fund or just start the benefit instead?

I chose to start the benefit early.

I'm kind of thinking I made a mistake and that over the long term spending down my retirement account and waiting much longer to start the benefit would leave me better off in the long term.

I recently read an article calling this situation of spending down instead of taking the benefit - a BRIDGE.

Well, if this is going to be your situation, all I'm saying is strongly consider doing the bridge instead of starting S.S. early.

Of course, you still may decide to start it early.

I'm not saying I didn't consider doing the bridge (even though I didn't know that term before). I did. But I probably should have thought about it harder.

Edited by Jingthing

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If one has an IRA or 401K etc. one has to remember the mandatory RMD (required minimum distribution) kicks in at age 70 1/2 in the USA and you are required to start withdrawing your nest egg every year from then on (which will affect your tax liability). 

 

So for example if you wait until age 70 to start pulling money out of your IRA and also wait until age 70 to take your SS benefits then you might be in for a larger tax bill than expected (especially if you are still working or have rental income/dividends or other passive income to claim).

 

It is complicated and very unpredictable to try to make the right decision ahead of time since nobody knows what new tax laws or tax changes will present themselves next year, or with the next president etc.  Health and life expectancy is also a biggy like you said.  Another consideration for many is their spouse and what benefits he or she gets (if any) and what condition your spouse will be in once you check out.

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Yes but people at age 62 aren't worrying too much yet about required withdrawals at age 70.

 

Do people think their investments are going to beat the EASY high annual increase in their social security benefit as long as they delay the claim?

 

But you're right to add tax planning to the equation.

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It's not just Federal IRS taxes either, it's the State taxes too (depending on which state you claim residency in or which state your funds originate from).  I would say that the tax hit is the biggest unknown (unless you are living off a very small social security check and no other income so basically in a low income bracket).  I always try to figure out which way will cost me the least in taxes and go from there (since I don't believe that retired persons should be taxed at all ...unless they are wealthy).

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Another consideration for some (and not known to many) is the WEP and GPO otherwise known as the Windfall Elimination Provision and the Government Pension Offset.  These are a big deal for me because I lose 50% of my Social Security benefit when I take it (I'm only 58 now).

 

The reason I get penalized is because I have a government pension for the rest of my life even though I paid into social security for more than 30 years, I still get penalized for having another pension.  It's not fair but it's just the way it is.  Therefore, I plan to wait as long as I can to claim my SS benefits so as to maximize my monthly take and minimize my losses so to speak.

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25 minutes ago, MeePeeMai said:

Another thing to consider (though it is out of our control) is the current state of the Social Security system itself since it is often said that if nothing is done, there will be dire consequences in a few years as the money runs out (since it has been misappropriated for other projects for which it was not intended). 

 

It's depressing to think about but many experts are talking about the possibility that if nothing is done, there will be a 15 or 20 percent benefit cut across the board (to start with) for all those receiving benefits (in order to save the system for a few more years until something else can be done), in other words ... kicking the can down the road.  This would be a disaster for many who rely solely on SS benefits and I hope it never happens.

Funny that you mention that.

Yes, I've heard that a lot.

In my opinion that is one of the most common BAD reasons to take the benefit early especially for people already over 50.

But that's just my opinion of course.

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Jingthing,  In the past, I read from credible sources that one could stop taking their SS early, pay back what they had received, and restart later for better benefits, in the case that you regret your decision and have funds to do that.

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Jingthing,  In the past, I read from credible sources that one could stop taking their SS early, pay back what they had received, and restart later for better benefits, in the case that you regret your decision and have funds to do that.

I think that's true. There must be a time limit though to do that. Does anyone know what that is?

 

To add I said I think I may have made a mistake but I'm not sure that I have.

 

My retirement pot is not nothing but its not great either. For me to do a bridge would mean a much higher than 3 or 4 percent spend down. So it really would be a significant spend down over numerous years.

 

 

I use 3 to 4 percent as a basis because that is the classic spend down if you want to be highly certain that you will never spend to zero.

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40 minutes ago, Jingthing said:

I think that's true. There must be a time limit though to do that. Does anyone know what that is?

 

To add I said I think I may have made a mistake but I'm not sure that I have.

 

My retirement pot is not nothing but its not great either. For me to do a bridge would mean a much higher than 3 or 4 percent spend down. So it really would be a significant spend down over numerous years.

 

 

I use 3 to 4 percent as a basis because that is the classic spend down if you want to be highly certain that you will never spend to zero.

Sent from my Lenovo A7020a48 using Thailand Forum - Thaivisa mobile app

 

 

 

 

If one has the means, however marginal, I think in almost every case it is better to defer receiving SS payments. Amykat is correct:

 

https://money.usnews.com/money/retirement/articles/2016-01-25/how-to-undo-claiming-social-security-early

 

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That has always been the voodoo part of retirement planning: you don't know when you'll die.  The best you can do with the unknown factor is play "what if."  I spent a lot of time playing that after turning 50. 

I figured my nest egg would have enough to get me to full-benefits age, but I wouldn't have much surplus. Scary.  That would put me squarely at the mercy of the monthly check.  My two biggest fears at this point in life are not being able to live independently (for physical or mental reasons) and being penniless and unable to earn my sustenance .  Should either misfortune come my way I'll figure out what to do when it happens.

I have no concern involving passing on an inheritance when I'm gone, so maximizing what's left isn't a factor.  To hell with the $20 gold piece on my watch chain.

 

Well, I opted for earliest age, which was 62 (I think it has gone up since).  With the current changes taking place in US gov't operations all bets are off in regards to the future.  My assets are unimpressive, I'd say most people I know make more in one year, but if I had spent it down planning to opt for full benefit I would feel very uneasy right now (that's an understatement).  As it happens when Medicare kicked in at 65 I saw a doctor (something I would only do when absolutely necessary) and found I had a condition that could possibly shave years off my lifespan.  If I had known that then yes, I would have opted for minimal age/minimal benefit.  Crazy as this may sound this diagnosis has given me moments of existential relief, in that I can learn of some impending dread and think "I hope it doesn't happen before I die."

 

If you don't get the $20 gold piece reference I'll let Louis explain:

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Yes the earliest age is still 62. Didn't you say you claimed at 62? Yeah I totally get the fear of the nest egg getting too small. That is the key dynamic with doing a bridge or not as per the situation in the OP. Of course fot people still working etc it's a different dynamic.

 

Best wishes with your health problems.

Sent from my Lenovo A7020a48 using Thailand Forum - Thaivisa mobile app

 

 

 

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3 hours ago, amykat said:

Jingthing,  In the past, I read from credible sources that one could stop taking their SS early, pay back what they had received, and restart later for better benefits, in the case that you regret your decision and have funds to do that.

This option was removed a few years ago.

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