Home > Library > Stable Times > Volume 9, Issue 3 & 4  

Retirees Advised to Consider Postponing Social Security Withdrawals

The conventional wisdom is that workers who are planning to rely on both Social Security and their own savings in retirement should try to get by on Social Security first. Withdrawals from their savings account, which are likely taxable, should be delayed. That's especially true if those savings are sheltered in an IRA or employer-sponsored defined contribution retirement plan, as the money there can continue to grow tax-deferred until it's finally needed. (Money in those accounts is only taxed upon withdrawal.)

But the conventional wisdom isn't right for every retiree. Speaking at the SVIA Forum, Jim Mahaney, a marketing director with Prudential Financial's retirement group, said retirees should determine whether they might be better off tapping their savings account first and postponing the date when they begin taking Social Security benefits.

For many people, Mahaney said, delaying Social Security benefits can provide higher cash flow in retirement. The reason lies partly in the fact that workers who delay taking their Social Security benefits receive a higher benefit. But more importantly, it reflects the favorable income tax status accorded Social Security benefits. For example, under federal tax laws, if a married couple's annual combined income?defined as 50 percent of their Social Security benefits plus all other income?is $32,000 or less, none of their Social Security benefits are subject to federal income tax. If their combined income is between $32,001 and $44,000, up to 50 percent of their Social Security benefits are taxed. If their combined income is $44,001 or higher, up to 85 percent of their Social Security benefits are taxed. By contrast, all withdrawals from an IRA, 401(k) plan or similar retirement account are taxed as ordinary income.

At the very least, Mahaney said, couples should consider postponing Social Security benefits for at least one partner in the marriage. To make up for the forfeited Social Security income until Social Security benefits begin flowing?assuming that income is needed for living expenses?he said they may want to consider purchasing an annuity. Naturally, the cost of purchasing that annuity and the income it can generate must be factored into the decision about when to start taking Social Security benefits.

Read Next: Insurers Tout Annuities as Defined Benefit Plans Become Increasingly Rare