Taking Social Security Early Can Pay Off
QUESTION: Many months ago, I read about the differences between beginning Social Security payments at age 62 versus age 65. I thought I read that it would take 12 years to make up the difference between the two payment schedules. Is this true? --M. O’D.
ANSWER: Yes, but let’s walk through all the math to show why.
According to the Social Security Administration, if you start collecting Social Security payments at age 62, your monthly checks will be about 20% less than the amount you would have received if you had started drawing benefits at age 65. In exchange for the lower monthly benefit, the recipient collects an additional 36 payments.
Here’s an example of how the system works. Let’s say a retiree is entitled to an $800 monthly benefit at age 65. If he retires at age 62, that benefit would be reduced to $640, a difference of $160 per month. Not taking into account cost-of-living adjustments, the 62-year-old beneficiary would collect a total of $23,040 by the time he reached age 65. Again, not taking into account any annual adjustments, it would take 12 years at the higher monthly benefit for the 65-year-old retiree to make up the $23,040 received by the 62-year-old. So after age 77, the later retiree finally starts reaping the benefits of delaying his Social Security payments.
When to take Social Security payments can be one of the most difficult decisions a retiree faces. Of course, if you think you will live fairly long, it makes sense to wait until age 65 to start receiving benefits. However, because predicting longevity is, at best, imprecise, it makes sense to look at other factors.
One issue of great importance to many retirees is the amount of money they may earn while still collecting full Social Security benefits. Currently, regulations allow retirees under age 65 to earn up to $6,480 each year and still keep full benefits. However, retirees aged 65 to 69 may earn up to $8,880. There is no earnings limit for retirees aged 70 and older. Under current Social Security regulations, 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. In 1990, they will lose $1 for every $3 earned above the limit.
How to Track Income of Investment Clubs
Q: I am thinking of starting an investment group with some friends, but the bookkeeping logistics have me stumped. How do investment clubs handle the reporting of dividends and sales income for their members? --J. P.
A: We took your question to Thomas O’Hara, chairman of the board of trustees for the National Assn. of Investor Clubs, for an authoritative answer. According to O’Hara, whose organization has overseen the creation of thousands of investment clubs, virtually all clubs are organized as simple general partnerships that pool members’ contributions and invest them, typically in the stock market.
Someone within each group is designated as the treasurer or bookkeeper, and it is the job of this person to keep track of the club’s expenses, its trades and the dividend income generated by the investments.
O’Hara says that after organizing as a partnership, the groups usually petition the Internal Revenue Service for exemption from reporting income on IRS Form 1065, the partnership income form. If the exemption is granted--and it usually is--the treasurer keeps track of dividend payments and any income, or losses, generated by the trades. At the end of the year, the treasurer determines each partner’s share of the total. It is the responsibility of each member to report that share on his or her income tax filing.
For more information, ask the investment club association for its free pamphlet. The address is 1515 East Eleven Mile Road, Royal Oak, Mich. 48067.
Tax Basis a Factor in Holding Stock
Q: Last year, when my wife retired, she received a lump-sum distribution of 3,000 shares of her company’s stock, which was then selling for $21 a share. Since then, the stock has traded for between $20 and $22 a share. The stock pays a dividend whose annual yield is about 3.5%. I have been urging her to sell the stock and invest the proceeds in our money market fund, which will give us a greater return. She wants to hold onto the shares for future appreciation. We really don’t need the money because we have an annual income of about $62,000. But I just feel that we are losing about $4,000 a year by holding the stock. Do you have any advice?--R. T. C.
A: You haven’t told us everything we need to know to give a full answer. Namely, we don’t know what your taxable basis in these shares is. If your wife received these shares throughout the course of her employment at the company, it is likely that her taxable basis in these shares is quite low. If that is the case, you could owe a substantial amount of tax on the stock’s appreciation. Under these circumstances, the personal finance advisers we consulted recommend that you hold onto the stock, since you don’t need the additional income.
However, if your taxable basis is the value of the shares at the date of distribution, $21 each, our advisers say you would be wise to consider a sale. But the advisers urge you not to invest in a money market fund that will give you more taxable income. They note that you already are in the highest income tax bracket.
Our advisers say you should consider putting the proceeds in a tax-sheltered account. They come in many flavors these days. A simple one might be a tax-deferred annuity offered by many investment companies. Consult your accountant or enlist the aid of a qualified financial planner for help in selecting the right investment for you.
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.
