Briefcase Study

November 2014: Briefcase Study

In Briefcase Study, Income Planning, Investment Management, November 2014, Social Security by Adam Cufr

Each issue of The Steward will include a brief case study. In it, strategies will be highlighted that we utilize in solving problems and creating opportunities for our clients. We hope you’ll enjoy this case study and find some wisdom in it that may help you in your own planning.

The Tax Torpedo

In a recent meeting with a family we serve, the conversation as it often does turned to Social Security. The question was, once again, whether it was best to begin receiving Social Security benefits at age 62 or wait until age 66, their Full Retirement Age (FRA) with Social Security. I was reminded how important this topic was to you, and thought you would find a more in depth look very helpful. Although there are a number of reasons why one person might claim at 62 while another claims benefits at 66, allow me to focus this article on one specific aspect: taxes.

Note: in our December 4th Evening Session, we will discuss a number of tax-savings strategies for retirees, this being one of them. RSVP now for that session if you’d like to arm yourself with some tax-savings strategies. Email:

Social Security Income benefits are taxable to the receiver, but on a limited basis. For simplicity’s sake, just know that up to 85% of Social Security Income is taxable. That is as opposed to 100% of a withdrawal from an IRA or 401(k). Thus, when you take money out of an IRA in retirement, all of that withdrawal is taxed at your ordinary tax rate. Social Security Income is only taxed at up to 85%, depending on how much income you earn from other sources (wages, pension, dividends, etc.).

Why is this important?

If you are building a retirement income plan, deciding whether to use Social Security Income to meet your expenses or using IRA money can have widely different results. Because Social Security Income is taxed to a lesser degree, you may wish to delay taking it and using IRA money first. This allows the Social Security Income to grow, meaning you’re deferring a growing and more tax-friendly asset.

This example may help you understand. Let’s say you could magically predict that your IRA would grow 8% next year. Social Security, on the other hand, is guaranteed to grow 8% each year that you wait to receive benefits after age 62. If you had to choose which account to use first for income, your IRA or Social Security, would you elect? Let’s take a look:

$10,000 grows at 8% to $10,800, of which $10,800 is taxable (100%) Taxed at 20% = $2,160 of tax owed to IRS

Social Security
$10,000 grows at 8% to $10,800, of which $9,180 is taxable (85%) Taxed at 20% = $1,836 of tax owed to IRS

Difference in taxes owed = $324 in favor of taking Social Security first.

If we stop there and choose to neglect all of the other reasons for possibly delaying taking Social Security, can you see the value in just the tax savings? Of course you can … with our sample numbers it’s $324!

Imagine if I put a sign in front of our office advertising that we’re giving $324 to each person who is eligible for Social Security benefits. We would have a line down the street!

The name of the strategy I just laid-out is called “reversing the tax torpedo.” It’s just one of many ways that we can increase the total value of your assets and income without even discussing rates of return on your investments in the market.

If you’re interested in this strategy and more, contact us for a meeting or RSVP for the upcoming Evening Session. Space is very limited.