Money Matters

Good reasons to delay taking Social Security benefits

January 12, 2013 

Q. Almost everything I read and all the financial advisers I’ve met with tell you to wait and take Social Security at full retirement age or even wait to age 70. I’ve never seen an analysis of my plan.

I turn 62 later this year and plan to take my Social Security. As my checks come in, I will invest the money in a Roth IRA. This offers tax-deferred growth and tax-free withdrawals. I’ve run the numbers, and if I can get an 8 percent rate of return on this money, I’ll have more than enough to make withdrawals from my Roth to make up for the reduced benefit when I am 70.

This also allows me to leave the money to my children if I should, unfortunately, die sooner rather than later. The government sure isn’t going to do anything for my children if I die before full retirement age or even 70 to make up for the fact that I either never took a dime or delayed benefits.

Why don’t people in your profession ever discuss the Roth IRA investment approach when discussing when to take Social Security benefits? I agree with a lot of your reasons for taking Social Security early rather than waiting for full retirement age or age 70. But there are some flaws in your Roth IRA approach, and good reasons for some people to wait until FRA or age 70.

Taking Social Security benefits at 62 versus FRA, which is 66 for those born between Jan. 2, 1943, and Jan. 1, 1955, will reduce the benefit by 25 percent for life. Every month you take benefits before FRA, the benefits are reduced by 0.5 percent. Delaying your benefit to age 70 will add 8 percent a year from age 66 to 70 (delayed retirement benefit). A higher benefit can be very valuable to those with little or no retirement savings. A higher benefit can also be significant for your spouse if he or she is to receive more by filing for a spousal benefit rather than his or her own. This is especially true for a surviving spouse.

The longer you live, the more valuable delaying benefits. Obviously, if you die young you would be better off taking the benefits at your earliest age of eligibility. If you don’t have enough saved for retirement, the best thing to do is continue to work. For some, this is not an option, and taking Social Security before FRA is the only way they can make a mortgage payment or put food on the table.

To make contributions to a Roth IRA you must have earned income; you can’t just invest your Social Security checks. If your earnings are too high, your Social Security benefit is reduced. For 2013, for each dollar earned over $15,120, your benefit will be reduced by $2 in the years before FRA. If you will turn 66 in 2013, the early benefit will be reduced by $1 for each $3 you earn above $40,080 until FRA is reached.

The average monthly Social Security benefit is around $1,230 or $14,400 a year. The maximum annual contribution to a Roth IRA for taxpayers age 50 and older is $6,000, or the amount of earned income, whichever is less. The return on your Roth IRA is subject to the market and may be more or less than the 8 percent rate of return you are using in your comparison.

The government’s official position is that there is enough money to pay currently scheduled benefits until 2041. If you believe this, then a 62-year-old would be assured of future benefits at the projected levels until age 92. Your Roth comparison would work only if you achieve the assumed rate of return, are able to contribute the maximum to the Roth for you and your spouse, and keep your earnings under the allowed limits.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624

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