Q: We just read your article in the Sept/Oct issue of AARP Magazine, regarding Social Security benefits. [Other readers will find that article here .]
We would like your advice on our situation. My husband turns 66 later this year. He has been advised by our tax accountant to apply for his Social Security benefit at that time, even though my husband plans to work until June 2012. Our CPA explained that although my husband's benefit will be smaller if he takes it now, by investing the money in a 401(k) plan for almost three years, he would be further ahead. After reading your article, we are now questioning that strategy and wondering what to do. --TH via email
A: You're weighing a risk against a certainty.
Your tax accountant doesn't know how that 401(k) plan will perform in the next three years, and neither does anyone else.
But you do know how that your husband's Social Security benefit will grow 8% for each year that he delays taking it after he turns 66. (For more about these extra credits, see Does It Really Pay To Postpone Taking Social Security?).
That 8% annual growth is his bonus for the postponement. It has nothing to do with annual inflation adjustments.
There's been some speculation that next year there may be no Social Security inflation adjustment because the inflation rate as measured by the Consumer Price Index has been negative so far this year. (By law, Social Security benefits can't go down even if inflation is negative.)
Let's assume, for the sake of argument, that there's no inflation adjustment -- not just in 2010, but for the next three years. If your husband postpones taking Social Security, in the worst-case scenario, without inflation adjustments he'll gain 8% a year in extra credits.
He might do better in the 401(k) plan. But he might do much worse, too.
As we were all grimly reminded last year, there's no law that 401(k) plans can't go down. If he takes his benefit now and invests it the 401(k) plan for three years, the worst case scenario is that he loses three years worth of Social Security benefits.
And no matter how the 401(k) performs, your husband's monthly Social Security payment in retirement -- and your widow's benefit, should you survive him -- will always be 24% smaller than if he had waited.
Life is full of risks worth taking, but this doesn't sound like one of them.
(c) Lynn Brenner, All Rights Reserved
We would like your advice on our situation. My husband turns 66 later this year. He has been advised by our tax accountant to apply for his Social Security benefit at that time, even though my husband plans to work until June 2012. Our CPA explained that although my husband's benefit will be smaller if he takes it now, by investing the money in a 401(k) plan for almost three years, he would be further ahead. After reading your article, we are now questioning that strategy and wondering what to do. --TH via email
A: You're weighing a risk against a certainty.
Your tax accountant doesn't know how that 401(k) plan will perform in the next three years, and neither does anyone else.
But you do know how that your husband's Social Security benefit will grow 8% for each year that he delays taking it after he turns 66. (For more about these extra credits, see Does It Really Pay To Postpone Taking Social Security?).
That 8% annual growth is his bonus for the postponement. It has nothing to do with annual inflation adjustments.
There's been some speculation that next year there may be no Social Security inflation adjustment because the inflation rate as measured by the Consumer Price Index has been negative so far this year. (By law, Social Security benefits can't go down even if inflation is negative.)
Let's assume, for the sake of argument, that there's no inflation adjustment -- not just in 2010, but for the next three years. If your husband postpones taking Social Security, in the worst-case scenario, without inflation adjustments he'll gain 8% a year in extra credits.
He might do better in the 401(k) plan. But he might do much worse, too.
As we were all grimly reminded last year, there's no law that 401(k) plans can't go down. If he takes his benefit now and invests it the 401(k) plan for three years, the worst case scenario is that he loses three years worth of Social Security benefits.
And no matter how the 401(k) performs, your husband's monthly Social Security payment in retirement -- and your widow's benefit, should you survive him -- will always be 24% smaller than if he had waited.
Life is full of risks worth taking, but this doesn't sound like one of them.
(c) Lynn Brenner, All Rights Reserved
Lynn - I like your response, it makes great sense. On the other hand, there is a way that this can certainly work out in the favor of the recipient, with the one risk being an untimely death of the recipient.
If the recipient definitely does not need the SS benefits to live on and can "bank" them in a conservative manner in the 401(k), why not go ahead and do so? Then later, as long as the funds in the 401(k) have not lost value (hence the conservative allocation), pay the benefits back to the Social Security Administration and request a "do-over" recalculation at the current attained age.
In this fashion, whatever growth occurs in the 401(k) is "gravy" - in essence, your payment for taking on the risk of the death of the recipient before the payback and recalculation. See the article at the following link for more information: http://financialducksinarow.com/490/the-ultimate-do-over/
It's not an action for everybody, but as I said, if you really don't need the funds, there could be a benefit to taking it early and then requesting the "do over". If the recipient should happen to pass away before the payback/recalculation is initiated, then the survivor's benefit will always be based upon the reduced rate - so there is definitely a risk involved with the strategy.
jb
Posted by: Jim Blankenship, CFP®, EA | 08/28/2009 at 09:55 AM