Waiting for Social Security

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This year (2022) I turned 60 which means I still have two years to wait before I can apply for Social Security. My full retirement age is 67, but I could start receiving benefits as early as 62. The Social Security Administration recently sent me an estimate of my monthly benefits. It ranges from $1745 at age 62 up to $3074 at age 70. The amount of a person’s retirement benefit depends on his or her lifetime earnings. The maximum amount a person could receive if they retired at age 62 in 2022 would be $2,364 per month. I had $1.5M in lifetime earnings that were taxed by Social Security. My employers and I paid over $185K in Social Security taxes. If I start receiving benefits at age 62 it would take about 9 years to recover the SS tax that was paid in. If I wait until I’m 65 it would take 7 years. At full retirement age of 67 it would only take 6 years. This doesn’t factor into a decision on when to start taking benefits but is interesting to note.

What does become a factor is your monthly expenses and income tax situation. There are 38 States that do not tax Social Security benefits. Unfortunately, I live in one that does. Minnesota will tax up to 85% of Social Security income for the highest earners and 50% for middle-income earners. People who earn less than $25,000 pay no state Social Security taxes in Minnesota. If I start at age 62, my annual benefit would be $20,940. Add dividend and interest income and my annual income would be about $39K. That would mean that Minnesota would tax 50% of my social security benefit. Minnesota’s tax rate is 6.80% at that income level. That would be a tax of $712 on 50% of my Social Security income. Plus, my health insurance premium would go up because of the increase in annual income. I need to wait until I’m 65 before I qualify for Medicare.

Based on this, I think it would be better for me to wait until age 64 or 65 before collecting Social Security. The other option would be to move to a State that doesn’t tax Social Security. But then I would need to apply for health insurance in a different State which may have a different income requirement. With only $5764 in taxable income for Minnesota in 2021, I still had to pay $308 in State taxes. My MN State income tax bill will be over $1000 once I start collecting Social Security. In 2022 my income will be reduced by tax loss harvesting. This year it will be easy to find stocks to sell at a loss to reduce any capital gains. I have started taking money each month out of my retirement account to pay bills. This money is taxable. Since I started mid-year, it will only add about $2000 to my taxable income for 2022. Because of inflation, I will likely have to increase the amount that I’m taking out each year, until I apply for Social Security. A law signed in 2019 moved the age of required minimum IRA withdrawals to age 72. That’s a long way off for me.

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