Social Security Benefits Lower if Collected Early
QUESTION: Can you please discuss the pros and cons of taking Social Security payments at age 62 rather than age 65?
M. W.
ANSWER: According to a Social Security Administration spokesman, if you start collecting Social Security payments at age 62, your monthly checks will be 20% less than the amount you would receive if you started drawing benefits at age 65. But although the monthly benefit is lower, you stand to collect an additional 36 payments. Using the Social Security Administration’s estimate that the average monthly benefit received by a 62-year-old is $500, an early retiree stands to receive about $18,000 by age 65.
By contrast, he says the average monthly benefit for a 65-year-old retiree is about $620. The Social Security Administration estimates that it would take about 12 years for the benefits received by a 65-year-old retiree to catch up with those received by a 62-year-old retiree. So, after age 77 or so, the later retiree will start reaping the benefits of delaying retirement.
One Social Security spokesman jokingly suggests that if you think you’re going to live fairly long, it makes some sense to wait until age 65 to start receiving benefits. However, since predicting longevity is an imprecise science, perhaps we should look at some other factors.
One important consideration for many retirees is the amount of money that they are allowed to earn while still collecting full Social Security benefits. Under current regulations, retirees under age 65 may earn up to $6,120 while keeping full benefits. Retirees aged 65 to 69 may earn up to $8,400. There is no earnings limit for retirees over age 70. According to current rules, retirees with earned income--this does not include dividends and interest payments--above the limits for their ages lose $1 of Social Security benefits for every $2 of earnings. Beginning in 1990, they will lose $1 for every $3 earned above the limit.
Q: I would like to know if I can make an individual retirement account contribution for 1988. I am 35 years old, single and was injured at work last year and haven’t worked since. I receive a tax-free medical retirement and a monthly settlement check for the injury. I also own some stocks and rental properties.--J. G.
A: You haven’t given us enough information to give you a precise response. However, our IRA experts say you probably are not eligible to receive the full tax advantage for contributing to an IRA in 1988. Their reasoning is that the income you receive--a tax-free medical retirement, injury settlement fees, dividends and rents--does not meet the definition of “taxable compensation” that the tax code requires you to receive in order to qualify for the IRA deduction.
To take the full IRA tax deduction, you must receive at least $2,000 of taxable compensation, a term our IRA experts loosely define as money--salaries, fees or whatever--that you are paid for performing some sort of work or activity. Basically, one expert said, you have taxable compensation if you are required to complete a W-4 withholding form and file a W-2 form with your taxes.
In your case, it would seem that most if not all of your income does not qualify as taxable compensation. (This, of course, does not mean that it is not taxable, only that it is not compensation for services rendered.) “This person seems like he’s being compensated for being sick, not for working,” one lawyer said.
Q: I have a married son who is about to buy his first home, and I am looking for a way to shelter some of my income as well as help him financially. Could we set up a joint ownership so I might assist him while benefiting from the interest deductions? What should I do?--W. J. C.
A: If you do not already own a second home, you might want to consider buying a house with your son. The move can both help him enter today’s expensive housing market and offer you some tax deductions. The key to your getting any benefit out of this arrangement, however, is for you to make sure that your name is on the deed to the property and any loans taken out to finance the purchase.
Gary Kuwahara, a certified public accountant in Torrance, says that if your name is on the deed and loan, you are entitled to deduct your pro-rata share of the taxes and loan interest charges on your income taxes as though it were your second home. These deductions would still be allowed even if you do not make the mortgage and tax payments because the government considers these payments to be your responsibility and treats their being paid by someone else as a gift to you.
So, if you contribute half of the down payment and are listed as a 50% owner of a house with your son, you would be entitled to deduct half the mortgage cost and half the property taxes on your taxes. Be sure to designate the house as your second home on your income tax form.
Our experts also strongly suggest that you consult an attorney to draw up a document clarifying your financial arrangement with your son. Such a document can head off any potential disputes and serve as a guide in the event of the death of one of the partners.
Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.
