Social Security Dilemmas - Part 2

This is the second part of a two part discussion on Social Security (SS) dilemmas. Last time I discussed the pros and cons of taking SS early. In this article, I'll discuss the pros and cons of working while receiving SS as well as drawing SS later than Normal Retirement Age (NRA) as to receive a higher benefit.

Many seniors enjoy working and don't plan on hanging it up until health dictates otherwise. The term, earnings limitation (EL), is one that should have all seniors in an uproar. EL dictates the amount of money one can make before Uncle Sam starts reducing the SS check. Its kinda like this - "You work all your life and pay into the system; when its time to start drawing money out of the system, what you get is limited by your current earnings, not by what you put in." As a side note, one must remember that SS is not a retirement plan - it is a social program.

The EL works like this: Retiree's under 65 are allowed employment earnings up to $8,280 annually without any reduction in SS benefits. For every $2 in earnings above that amount, SS is reduced by $1 (thus a 50% reduction). For retirees age 65-69, the EL is higher and the reduction is less. For retirees age 70 and over, there is no EL or reduction in SS benefits.

In answering the question of whether to draw SS while working, I have a simple stair-step philosophy. First, if you want to work, then work. Second, if your earnings are sufficient, don't draw SS. Third, if your earnings are insufficient, draw SS; and since your primary concern is meeting needs, then losing benefits is of secondary concern. Fourth, mitigate the effects of EL by drawing income from other sources (e.g., interest, dividends, investments, etc.) to meet income needs over and above the EL.

Next on the list is to discuss the pros and cons of delaying retirement in order to receive a higher SS payment, referred to as Delayed Retirement Credits (DRCs). DRC provisions provide an increase in the Retiree's benefit after NRA for each month the Retiree was eligible for, but not receiving, benefits. The amount of the DRC credit depends upon birth year, and can be as high as 8% each year. For example, Mr. Retiree turned 65 (NRA) this year. The DRC is 5.0% for each year delayed. If Mr. Retiree waits until age 70, his SS benefits will increase by 25% (5% x 5 years).

Generally speaking, the only person who should delay receiving SS benefits is one who works beyond NRA and has a problem with EL. All others should NOT delay. Delay decisions are usually only considered by those not needing the income. My suggestion would be to receive the unneeded income and invest it. Point #1: What happens if Mr. Retiree dies just before turning 70? His survivors get nothing but they could have had five years' worth of invested SS payments. Point #2: If he chose to receive and invest his SS payments, Mr. Retiree's savings account from the invested SS payments would only need to earn 1.18% to replace his foregone DRCs. Without a doubt, this technique will surely enhance one's retirement nestegg and inheritance.

Gary Ellis, MBA, CFP