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How can delaying your social security decision be beneficial?

Many people will take a social security benefit as early as possible, when they start Medicare or when income from work no longer has an impact on their benefit. These decisions are often made unknowingly of the tax implications. Tax efficiency in retirement planning may be an afterthought or maybe not at all.

The concept of provisional income may not be realized prior to the decision of when to file, potentially giving Uncle Sam a little more of their retirement income.

When a social security benefit is delayed, its value is increased. All benefits taken prior to full retirement age (FRA) are reduced and retirement benefits after FRA are increased because they earn delayed retirement credits (i.e., 8% per year).

Your “provisional income” includes 1/2 of your Social Security benefits, plus all other taxable income, including dividends, realized interest, and realized capital gains, plus non-taxable interest earnings, such as from municipal bonds. At any age between FRA and 70, you can voluntarily suspend your benefit and earn DRCs.

Assume a married couple is considering when to retire. They know they want $60,000 per year of income. They are not opposed to work, although working less might be more favorable. The couple also have other assets to supplement their income (primarily IRAs).

Propose are two plans.

One in which they claim social security early understanding it will be reduced for filing early. The social security benefit is $20,000, with $20,000 from IRA distributions and $20,000 from part time jobs. The total $60,000 to meet their income need.

In the second option they are delaying for a larger social security benefit $40,000 and the same $20,000 from IRA distributions. This option would also meet their $60,000 income need.

The results of both options are displayed below. The base case representing delaying for the larger social security benefit and the scenario the early election.

The software’s calculated fields make it easy to compare the end results of electing early versus delaying for Social Security benefits. In this case, it is paying zero taxes compared to $2,507. So, paying no taxes and not working may be the retirement option most appealing for this couple.

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