Tax Tips (and other stuff)
I’m just a crazy accountant to plays with numbers.
Basically, Social Security benefits are computed based upon you reaching your official “retirement age” (currently if you were born in 1960, its 66 and 10 months).
Every year you delay taking your benefits, they go up by over 8%. Example: Let’s say “Fred” is a 68-year-old person whose base benefit of $3,757 a month when he reaches full retirement age of 66 and 4 months. If Fred waits until he is 69 years old, it goes to $4,406, if he waits until he turns 70, the benefits jump to $4,800. In all cases, whenever a person chooses to start receiving Social Security benefits, their benefits are frozen at whatever amount they start with and will only go up by the official Social Security inflation rate each year for the rest of their lives.
In our example, Fred is expected to live 20 more years. So, if he started Social Security benefits as soon as he became eligible, his total benefits over 20 years would come to $975,600. If Fred waited until he turned 69, his total benefits over his remaining 19 years of life would come to $1,004,568. If Fred waited until he turned 70, his total benefits over his life expectancy of now only 18 years would come to $1,036,800.
If Fred waited until he turned 69, then started taking his benefits, and invested all of them in an S&P 500 Index fund which could grow at an average of 15% per year, he would short himself about $4,728 per year, but his investment account would start paying him an extra $3,535 a year. Close to break even, best to wait until 70.
What if Fred was working and didn’t plan to retire until he turned 75, so until then he didn’t need any Social Security benefits to support his standard of living? If he started taking his Social Security benefits when he first qualified, when he turns 75, his S&P 500 account may have a balance of about $626,532. If Fred waits until he is 68 before starting to take benefits, his S&P 500 account may have a balance of $605,556. If Fred waits until he turns 70, his S&P 500 account may have a balance of $430,472. In each case, Fred could supplement his Social Security benefits by taking an annual distribution from his S&P 500 account (over his remaining life of 13 years) of over $6,000 per month. (Over $8,000 a month if he started taking benefits when he turned 68.)
The point here is that a person actually has some options with regard to timing of when to start taking Social Security benefits and what to do with them. The best time to start taking benefits, investing 100% of them into something like an S&P 500 Index Fund, if you don’t plan on actually retiring until 75, is when you turn 68.
Have you heard? Proverbs 21:5 says, “The plans of the diligent surely lead to profit; and everyone who is hasty surely rushes to poverty.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. On the web at BullisAndCo.com. Also on Facebook.