Philadelphia Reflections

Beginning Social Security Benefits

Some should start benefits before age 65, others should delay it for ten years or more

Dr. Fisher

BY mail or visit to the local Social Security office in your neighborhood, it is possible for anyone to determine how much you can expect to be paid in benefits, and at what age. In fact, it is a wise precaution to ask for this information every few years, just to be sure your payments are being credited properly, since hundreds of millions of payments are flowing into many millions of accounts, and you want to get things straight before years of problems accumulate. In the early years of the program, one of their biggest problems was that a great many people used the sample numbers on the illustration card instead of their actual "Social".

Assuming payments from your employers have been flowing properly, you currently have the option to retire at the age of 62 and start getting reduced benefits. You will get three extra years of payout, but you may need to pay income tax on some of it, and the payout will be less. More recently, the standard age to begin payments was raised to age 67, gradually phased in. And more recently than that, the payments became taxable for some people, with offsets for Medicare reducing it. Better check where you stand. My Pennsylvania Dutch uncle used to say it was bad arithmetic to take the money early. But my Scotch-Irish accountant advised everybody to take the money as soon as possible, because money in your pocket is real money, while future payments depend on your living long enough to get them, and just might depend on who was elected President. Who knows, you might get hit by a truck tomorrow. So, ultimately any decision about this matter is based on opinions which differ since the sanctity of contracts is fast becoming a quaint anachronism.

Social Security Benefits

However, the arithmetic is available, once you know a few facts. The longer you wait, the larger the monthly payments will become. However, you can count on about 3% inflation during the interval so the money might have less purchasing power. Some of the monthly payment will be free of income tax, some of it will be taxable at whatever your tax rate might be. If you spend the money, it's gone; but if you save it, it will grow at an after-tax rate which may or may not be greater than if you leave it with Social Security until you need it. The arithmetic isn't very hard, but if you look around on the Internet, somebody surely provides a fill-in-the-blanks tool which will calculate it for you.

If the arithmetic or your personal situation is such that you aren't going to spend your Social Security check as soon as you get it, here's what you do. Arrange for direct deposit into a world index fund, total market. Historically, that will grow at 8% compounded annually and will pay about 1.8% taxable dividend. Now, do the math again, and see if you are better off leaving it with those nice folks on Social Security Boulevard, in Baltimore, instead of those nice folks at Vanguard or Fidelity.

The whole theory behind this maneuvering is that many people have half-time jobs or dual incomes, or income from the sale of a house, which means that for a few years after they retire they have more income than they will have later in life. For them, there is a choice between the two methods of saving Social Security money for the time in life when they need it. Other people need every cent they can get, right now. If you are one of the lucky ones, try to be even a little luckier by using arithmetic and choosing between the options. If you are hit by a truck, it really won't matter what you do, so try to be an optimist.

Originally published: Saturday, December 30, 2006; most-recently modified: Tuesday, May 14, 2019