Magazine article The CPA Journal

Choosing the Right Beginning Age for Social Security Benefits

Magazine article The CPA Journal

Choosing the Right Beginning Age for Social Security Benefits

Article excerpt


MOST OF THE MODELS ASSUME VERY HIGH RATES OF RETURN. This assumption is highly questionable for older individuals with shorter investment horizons.

The Senior Citizens' Freedom to Work Act (SCFWA) of 2000 repealed the Social Security earnings test for individuals between normal retirement age (currently age 65) and age 70. The earnings test for individuals that elect early retirement (currently age 62) was not affected.

Prior to SCFWA, individuals that continued to work after beginning to receive Social Security benefits at age 65 would have their benefits reduced by $1 for each $3 of earnings exceeding an earn ings limit ($17,000 in 2000). Individuals that continued to work after their normal retirement age were advised to defer Social Security benefits until they retire or reach age 70, especially since their benefits would increase due to delayed retirement credits (currently 6% per year). Since SCFWA, many financial advisors strongly recommend beginning to receive Social Security benefits at the normal retirement age, or earlier.

Review of Recent Literature

Robert Hey wastes no time informing readers of "Benefit Puzzle: Take the Money at 65, or Wait?" (AARP Bulletin, November 2000) that "many financial advisors have no trouble making a strong recommendation: Take the money now." Hey explains that individuals that wait until age 70 to begin receiving benefits must live until age 86 to recoup the benefits they lose between 65 and 70. Hey briefly mentions that an individual's tax situation could affect the decision, but says that it is possible to come out ahead by waiting until age 70 to begin taking benefits only if the person lives a "very long life."

Humberto Cruz ("Age Weighs Heavy on Social Security Benefits," Corpus Christi Caller-Times, November 6, 2000) takes a slightly more cautious approach, but suggests that age 62 is probably the better time to begin receiving benefits. The article points out that retirees that do not need the money and plan to invest it may benefit more by taking early benefits. The article concludes that "if those investments can achieve an 8% rate of return-the historical average for a balanced portfolio of stocks and bonds-you would have to live to age 83 to make it worthwhile to wait to col lect benefits until full retirement age, and you would have to live beyond age 95 to justify waiting until age 70 for the higher delayed benefits."

Sidney J. Baxendale, in "Social Security Benefit Delayed is Generally Wealth Denied" (Practical Tax Strategies, October 2000), provides results obtained from an elaborate computer model. The model assumed that all Social Security benefits would be invested, that taxpayers would remain in the same tax bracket, that tax payers would have sufficient income to cause 85% of the Social Security benefits to be taxed as received throughout the entire analysis, and that the cost-of-living adjustment would be 2% annually. Baxendale then compared accumulated amounts using assumed rates of return ranging from 6% to 12% and different assumptions about the taxability of the investments. Baxendale points out that the benefit of taking early benefits diminishes at lower rates of return, but concludes that the decision is clear. A "Planning Tip" panel clearly states: "Taxpayers who work past age 65 are generally better off starting to collect Social Security benefits at that age ... even if they do not need the extra current income. Although delaying the benefit start date results in larger monthly checks, the recipients would have to enjoy extreme longevity to recoup the renounced benefits, plus investment income they could earn."

What's Wrong with this Picture?

To understand the above advice, one must first understand the assumptions made about the various factors that affect the decision as to when to begin receiving Social Security benefits. One fac for is what will be done with the benefits as they are received. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed


An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.