Certified financial planner Eric Roberge answers:
I’m 63 and still working full time but have nothing saved towards retirement. I’d like to know if drawing social security and putting it in a mutual fund now would be better than waiting until I’m 65 or older?
I’m glad you are asking this question before you choose whether or not to take your Social Security income (SSI) now. There are several things to consider here.
The Social Security Administration defines “early” as any time before your full retirement age (FRA). Since you are 63 years old, you are right on the cusp of the Social Security full retirement age adjustment. Assuming you were born in 1954, your full retirement age is 66.
Unless you or a spouse are eligible for a state or Federal pension (and therefore potentially subject to the Windfall Elimination Provision (WEP) or Government Pension Offset (GPO), you would be eligible for 100% of your Social Security benefits at your FRA. If you choose to take benefits at age 63, your income will be reduced by 20% to 26%, depending on the month you were born.
Additionally, if you take Social Security early and you receive income of various sources that add up to $ 25,000 or more as a single tax filer ($ 32,000 or more as a married couple filing jointly), between 50% and 85% of your Social Security income can be taxed at your marginal tax rate. This tax is completely removed at full retirement age. At that point, your SSI will not be taxed regardless of how much income you bring in annually.
The tax calculation is rather complicated, but this IRS information can help you determine the taxability of your SSI for your particular situation. You can also call the Social Security office directly to ask them to help you with this calculation.
One reason taking Social Security early could benefit you is that by saving the money in a side account, you can increase your available cash. This means that you could have a sum of money set aside to use in case you needed it for an emergency or some other expense in the future. Having “liquid” cash is important and it sounds like you may not have much of that right now.
In order to figure out if this is worthwhile, though, you’d have to take a hard look at your income needs. What are your expenses now, and what do you think they’ll be in retirement?
If you can live comfortably on the money that you will have coming in from a reduced Social Security payment (we’ll get to reasons for a reduction in SSI in a moment) along with any other income available to you in retirement, then it may be worth considering. But I’m guessing it will be difficult for you to manage your expenses on the reduced SSI, as it really doesn’t provide that much income — the average person can feel challenged to survive on that alone.
And based on your question, I assume that you would not actually use the SSI if you decided to receive it early. If this is the case, it probably doesn’t make sense for you to take this route.
For each year you delay your SSI after FRA, you gain between 6% to 8% in additional monthly income. On the other hand, if you take social security early, your monthly Social Security check is reduced by between 6% to 8% per year, depending on how early you take it.
For someone born in 1954, if you take Social Security the day you turn 63, you will get about 80% of the monthly benefit because you will get benefits for an additional 36 months prior to your FRA. If you take it the day you turn 65, you are eligible to receive just over 93% of your full benefit because you are getting benefits for an extra 12 months. And that reduction in benefit payments decreases the longer you hold off. If you wait until you hit 66, you will receive 100% of your eligible benefit.
If you decide to delay further, you will receive about 8% more in monthly SSI for each month you delay through age 70. At that point, you hit your maximum payout. You basically receive a guaranteed rate of return for each year you delay your SSI.
Based on this guarantee, and the fact that it doesn’t sound like you actually need SSI while you continue to work, I don’t think it makes sense for you to take your Social Security income early if you are earning more than $ 25,000 as a single tax filer, or $ 32,000 as a married couple (filing jointly).
You’ll be taxed on the money through age 65 and you lose the guaranteed 8% increase. You’d be extremely hard-pressed to find anything even close to a guaranteed 8% return through an investment in your IRA these days.
Instead, I would recommend working as long as you can handle it, saving as much money as you can along the way, and maybe even thinking about how else you might be able to generate additional income in the future.
This guidance is specific to your question. There are other variables to consider depending on the other facts involved, and this response should not be considered advice. Please consult with your tax professional or financial planner before making any final decisions.
Eric Roberge, CFP, is the founder of Beyond Your Hammock. He helps professionals in their 30s do more with their money and has shared his money tips with the Wall Street Journal, USA Today, CNBC, Forbes and MONEY Magazine. Get the BYH Newsletter today to learn how to make smart money decisions.
