Collecting Soc. Sec. While Still Working (after FRA)

[karen_in_nh_2012]

Selhars, could you please say more about this (which very few if any responders have addressed):

Originally Posted by selhars

... I have at least four co-workers who are doing this… collecting their FRA benefit -- AND still making low six figures.
They tell me that while they don't NEED the money, they want to get their benefit now. They have dollar signs for eyeballs and big smiles when they say it.

Is there something I am missing because I thought it was better to delay Soc Sec. But if they're collecting at FRA, while making that kinds of money…they they don't have the income limit -- AND are "replenishing" their benefit to be calculated higher, when they eventually do stop working.

Could they ever put enough back in so their later benefit would equal what their original age 70 amount would have been anyway. How long might they have to work to do that?

I'm curious about the "replenishing" and "put enough back in" -- what did you mean by that? (I THINK you can "change your mind" and "replenish" what you have been paid in benefits already, so that you are effectively retiring later than you actually originally did -- but from everything else you've written, and how others have responded, it doesn't sound like THAT is what you are referring to. So I have no idea what it could be.)

Thanks!

[selhars]

No…just that if you collect benefits -- AND are still working -- you are getting your benefit, but also STILL putting INTO Soc Sec. I used "replacing/replenishing" in that sense.

So your benefit is "recalculated up" a bit because you're still putting into it, even as you collect.

And it helps if these last working years as you collect are your highest.

[Ariadne22]

Originally Posted by selhars

As an aside, Ariadne, are you concerned about the tax torpedo once you start taking RMDs?

No. I don't have the tax issues of others here with generous pensions (I don't have one to speak of) and substantial amounts in tax-deferred retirement accounts. I've been incrementally doing Roth conversions annually to keep the RMD low. The fact that my residence (w/a mortgage and high property taxes) is partially rented to my son/dil gives me opportunities for write-offs on p. 1 of the 1040 to offset part or all of the RMDs. So, no, taxes are not a concern.

[karen_in_nh_2012]

Originally Posted by selhars

No…just that if you collect benefits -- AND are still working -- you are getting your benefit, but also STILL putting INTO Soc Sec. I used "replacing/replenishing" in that sense.

So your benefit is "recalculated up" a bit because you're still putting into it, even as you collect.

And it helps if these last working years as you collect are your highest.

Ah, OK, thanks for the explanation.

Honestly, though, I can't imagine that too many people's last few years' earnings are going to be so much higher than their EARLIER earnings that they can "make up" what they are losing by taking benefits years earlier. Because of this, it seems an odd strategy UNLESS they are among the few who somehow get a huge pay increase for their last few years AND don't think they'll live long enough to be better off waiting?

Given that your colleagues are, as you wrote in the opening post, making in the low six figures, they would likely have 85% of their SS taxed at their marginal tax rate, which would likely be 25% (at least). So again, it's hard to imagine too many scenarios where the numbers would work out better for them taking SS earlier rather than later.

Of course, everyone's situation is different (notice all the "likely's" in what I wrote!), but still ...

In addition:

Originally Posted by Ariadne22

I worked past FRA and collected SS. To offset the SS income, I maxed out deposits to all tax-deferred retirement accounts - 401k/IRA/HSA. My available spendable income thus, remained the same and none of my SS was subject to tax - and my retirement accounts increased. Now that I'm retired, I pay a lower tax rate than when I worked. My 401k allowed deposits up to 50% of one's salary. Unlikely those earning over $100k were saving 50% of their earnings. But, now, with the SS income they can.

Except they COULDN'T because if they are making >$100k/year, 50% of their earnings would be WAY over the limit for 401k contributions, even the higher limits available to those aged 50+. (In 2016 the limit for 401k contributions for those aged 50+ is $24,000, so even if their employer allowed them to contribute 50% of their income, the 401k rules wouldn't.)

Anyway, what an interesting thread, Selhars. I have become more and more interested in this stuff since my retirement COULD BE less than 9 years away (although it likely WON'T be!).

[Thulsa]

I think it was mathjak that said some time ago for a simple rule: if you don't need it, take it now. If you'll need it, delay.

For these people, it could be that their income from investments, pensions, and other aspects of their income situation means that, whether working or not, they would always be well over the limit that places them in the 85%/SS for taxes, especially when RMA kicks in. So for them, taxes on 85% SS would not be a consideration - it's always there.

We would need to know where the crossover point is - where the payments from increased income later become as much as the longer stream of payments taken now. For most folks, I think that's in their mid 80's.
Although the delayed SS will have a 32% higher monthly payment, you have to take into account that people with better incomes may be placing money in investments. Suppose they're not spending the SS but are investing and getting 4%. Then the net difference between taking now and later would be reduced and not 8%, and the crossover moves to later in life and past the expected longevity for most people.

Or they may be looking at taking the payments now as a choice between having, at age 70 having a 96K lump of cash and $2000/month payments for the rest of their life, or at age 70 getting a 2600/month payment.

I think the crossover would be at about 84 for this example. For the average person at age 66, taking now is an even break.
Longevity charts:
https://www.ssa.gov/OACT/STATS/table4c6.html

Although I doubt they would have this problem, if none of their ancestors lived to their 80's, then it is unlikely that they would either. If you can be fairly sure you're going out in your 70's, delaying becomes living on less so you can leave your money to the government.

As for the fact that SS is inflation adjusted, I suspect that in times of high inflation, SS will not keep up nearly as well as a good choice of investments. OTOH, investments can go to zero, but SS won't

[Ariadne22]

Originally Posted by karen_in_nh_2012

Except they COULDN'T because if they are making >$100k/year, 50% of their earnings would be WAY over the limit for 401k contributions, even the higher limits available to those aged 50+. (In 2016 the limit for 401k contributions for those aged 50+ is $24,000, so even if their employer allowed them to contribute 50% of their income, the 401k rules wouldn't.)

Thanks for correcting that limit - I remember now. The last year I worked (2009), the 401k max was $22k, irrc. I also deposited the max, including catchup, in IRA and HSA - so total tax deferred that year was $22k+$6k+$4k, or $32k. If OP's coworkers aren't saving at least that, then the add'l SS income is a good opportunity to do so. Lots of people only deposit up to the employer match in a 401k, which I've never understood - especially if 401k options are decent. My employer match was only 25% of 4%, the equivalent of 1% of gross salary - pretty pathetic. Nonetheless, not wanting to pay 25% income taxes was well worth using the tax-deferral to the max. My employer also offered a Roth 401k, but tax-deferral while I worked was more important for me. Today my tax bracket is much lower.