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By Alan Gorlick

Part 2

In Part 1 we covered the Social Security trust fund, and the three ways to partake of its largess.  The most common, and the one we will review here, is the retirement benefit.

When you are 62, if you have worked 16 quarters (hint: 4 years), you may sign up.  You also might want to wait, because your monthly check will be 25% less than at full retirement, and if you earn more than $15,480, you will give back $1 for every $2 you earn over that threshold.  On top of that, the Social Security you do keep could be subject to income tax, based on your other earnings.

If you delay until full retirement (age 66 or more for those born since 1942), you can keep the distribution no matter what else you earn, but there is still the possibility of income tax, and the monthly pot gets bigger by about 8% for every year you wait through age 70.

Tough decision.  The basic trade-off is lower payments for more years vs. higher payments for fewer years.  Sounds like a problem for a Social Security calculator.  There are many on line and available from other sources, like insurance companies.  Be careful!  There may be more than one devil in these details.

The most significant variable is life expectancy.  Tell the computer how long you are going to live, and it will crunch the numbers just fine.  Don’t know how long, then make a reasonable assumption, and pay close attention to the other inputs, especially other income, potential earnings on your social security payments, and your spouse’s financial condition and life expectancy.  Re-run the calculation multiple times to see the effects of changed assumptions.  Even better, find a financial guru who can navigate a Monte Carlo simulation, giving you a range of likely outcomes.

Your other earnings are important for several reasons.  First, you need to know if you benefits will be subject to income tax.  If so, that may tip the scales toward waiting until 70.  The second, which dovetails with the first, is that if you are going to wait, you need to know whether you can count on the other cash flow.  Best case is if that other cash flow is immune to income tax.  Use that next egg first, then take the higher Social Security at 70, when you might also be in a lower tax bracket.

Your spouse’s situation is important because once you sign up, your spouse, if 62 or older, can receive all of his or her benefit, or half of yours, whichever is higher.  This option works both ways.  You can choose between all of your benefit or half of your spouse’s.  Moreover, when one spouse dies, the survivor can choose between his or her own benefit, or 100% of the deceased spouse’s.  If your spouse outlives you by several years, you may be leaving a much bigger cash hoard by delaying your benefits until age 70.  Best, settling for the 50% spousal benefit doesn’t count as you signing up.  Thus yours can grow to age 70, while you harvest the spousal tranche.

Earnings on your investments are important too.  To complete a break-even analysis between less money for more years and more for fewer years, an annual expected return is required.  In fact the calculation is very sensitive to that interest rate.  The more you can earn on the money, the more it tips the scales toward collecting it sooner.

Thus, even a simple case is a lot more complicated than just juggling that 8% per year available for waiting.  Plug in life expectancy, taxes, return on investment, and spousal considerations.  With that added complexity comes the possibility of a more accurate answer.

In Part 3, we will look at some little known Social Security perks that can have a major impact on your earnings during retirement.

Alan E. Gorlick, AAMS, is CEO of Gorlick Financial Strategies.  An Air Force Veteran, Gorlick is also a University of Phoenix faculty member, where he teaches MBA and undergraduate finance and economics.  His academic research interest, as well as his focus with clients, is risk management.  He can be reached at alan@gorlickfinancialstrategies.com.