M E R I D I A N     M A G A Z I N E

You've Got to Pay Social Security—You Might As Well Maximize Your Return
by Richard P. Halverson

Not so long ago a good friend said he had heard that the best way to maximize your social security earnings was to begin taking them at 62 even if you don't need them and invest the money. He wanted to know what I thought. I was a little puzzled by his question. I knew he was about to turn 62. I did not know he was about to be called as a mission president. Being called as a mission president helps in an odd sort of way, as we will see in a moment.

So, here is the question. You've been paying social security taxes all your life, whether you liked it or not, how do you maximize the retirement benefits you receive back?

So, here is the answer. Live a long time! Live to a hundred, a hundred and ten is better. That will drive the actuaries nuts. And if your sole goal in life is to live long so you can get a great return on your social security taxes live your religion. The statistics prove that living the way the Brethren counsel increases longevity. Maybe all Mormons won't live to be a hundred and ten but we do live longer.

Of course, even Mormons don't know how long we will live even if it is longer than average. So, there is still a question. How do you maximize the retirement benefits you receive from social security? Unfortunately, there are so many variables that guessing how long you will live is probably easier. But here are some thoughts.

First, there are three potential retirement ages that are important in social security.

• There is early retirement. You can begin receiving benefits at 62.

• There is full retirement. Historically, that has been age 65. It is now gradually being pushed out to age 67. If you were born between 1938 and 1959 it will be between ages 65 and 67. If you were born after 1959 full retirement is age 67 under current law. Don't be surprised to see this increase again.

• There is delayed retirement. That is age 70.

The government's actuaries would like to encourage people to delay retirement as long as possible. (When you fully understand what a financial and actuarial time bomb social security is you understand why the government wants people to delay their retirements.) To encourage people to delay retirement social security provides reduced benefits for early retirement and increased benefits for delayed retirement. For example, assume you have just turned 62 and assume you have paid maximum social security tax since you were 21. These are the approximate monthly benefits you will receive using an estimated cost of living adjustment of 3.5%.

• Retire today at 62. $1315.00 a month.

• Retire at full retirement of 65 and 4 months. $1720 a month.

• Delay retirement to age 70. $2367 a month.

The reduction for early retirement is permanent. You will receive more than $1,000 extra every month if you postpone your retirement for 8 years. After you retire these amounts change only with the cost of living.

This raises my friend's question. Suppose a person really doesn't need social security to live on at age 62 or at age 65. Is the person still better off to begin drawing the lower amount at an early age anyway and invest it? Will this in the end amount to more dollars to live on later? Under some circumstances the answer is "Yes!" To over simplify, if you can invest better than the government you will come out ahead.

It is important that I expand on this answer because in the end it may not be a great idea for everyone.

First, if you are thinking of retiring at age 62 are you really thinking of retiring? Some might think they can begin drawing benefits and continue working. The rules regarding working while drawing social security have changed but only after you reach full retirement age. If you are 62 today you will lose $1 of benefit for every $2 you earn over $10,800. If you earn around $42,360 you will receive no benefit. But if you are 62 and being called as a mission president you are in good shape. You won't be earning anything! Anything the government recognizes as income anyway. Because in this case the only earnings they count are earnings you would normally pay social security taxes on. Earnings do not include investment income, for example.

Second, if you have reached your full retirement age of 65+ you can begin receiving benefits and you can continue to work. There is no earnings offset. You don't even need to be called as a mission president. Consequently, if you are in position to take the benefit and invest rather than spend it you may come out ahead of waiting until 70 to begin taking benefits.

An important variable in this "take it and invest it" scenario is how much you can earn on the investment. The higher benefits paid to older retirees are based on earnings assumptions used by the government that are very modest. A few years ago it was easy for almost anyone to do better. Today it is not so easy. By definition these are retirement funds that will be needed in a few years. Consequently, they should be invested conservatively. With interest rates way down you may be lucky to earn 4.5 to 5.0% after tax. And to make matters worse if you are a mission president you probably don't have any time to be worrying about investing. I still believe returns well above that can be earned in stocks over the long term. So if you are a good investor you may do much better.

This table can give you an idea whether this might work for you without exhausting you with numbers. Here is how you read it. Look at the fifth line down for example. Suppose you are 65 but you plan to continue working until you are 70. Suppose you decide to begin taking your benefits immediately. Suppose instead of spending the benefit you invest it and earn 4.5% after tax. From a total dollars available point of view this will be a good idea unless you live to be older than 90. That is the age where the effect of the higher benefit you receive for a delayed retirement passes up the effect of receiving a lower benefit and investing it for a five years.

Of course, you may still feel it is a good idea even if you plan to live a few years beyond 90. "Take it and invest it" gives you more dollars earlier. You may think it is an advantage to have the money while you are still in your-out-and-about seventies rather than in your stay-at-home nineties. Especially, if you have your health care pretty well under control.

Please note all these numbers are rough approximations. They are based on lots of assumptions to a lot of tough questions. You should know what the questions are.

• The amount you have paid into social security?

• When you will retire?

• What will inflation be?

• How well you can invest?

• What changes in the law will occur?

• And, perhaps most important, how long will you live?

OK, you have been investing involuntarily in social security for years. You don't really need to take your retirement benefits when you become eligible for them. You have a right to maximize your return. "Take it and invest it" is an idea worth considering. As you do you realize social security can give a whole new meaning to the phrase, "endure to the end."

Oh, and by the way, you don't have to be called as a mission president to make the age 62 work. Any Church mission will do. If you are in a favorable position mention it to your bishop. He would love to help you leave on your 62^nd birthday.

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