FIN 422 Week 4 Social Security and Distributions Example

Claim at 62, 67 or 70? Social Security Timing, a Spouse's Benefits, Penalty-Free Access After 55 and a Withdrawal Order for a 61-Year-Old Senior Drafter

[Student Name]

University of Phoenix

FIN/422: Retirement and Benefit Planning

Week 4 Assignment

[Instructor Name]

[Date]

The employee, his spouse and all figures are composites written for a model paper; Social Security and distribution rules are summarized generally from the sources listed and change over time.

Luis Ortega, a composite 61-year-old senior drafter at Ridgeline Design, earns $78,000 and hopes to stop full-time work at 63. His wife Elena, 59, worked part time for years and has a small Social Security record. Their savings include a rollover IRA of $210,000 from a previous employer, the new Ridgeline 401(k) with about $35,000 by the time he leaves and $40,000 in savings. Their Social Security statements estimate his benefit at full retirement age of 67 at about $2,500 a month and Elena's own benefit at about $800. The question was not just when Luis should claim, but how to cover the years between his last paycheck and his first check in a way that protects Elena if she outlives him. This paper plans both.

Claiming at 62, 67 or 70

Luis was born in 1964, so his full retirement age is 67. Claiming at 62 reduces his benefit permanently to about 70 percent, about $1,750 a month. Waiting until 70 adds delayed retirement credits of 8 percent a year, raising it to about 124 percent, about $3,100 a month (Social Security Administration, 2025). Ignoring interest, waiting until 70 rather than claiming at 62 pays more in total if he lives past about 81. With cost-of-living adjustments applied to every option, the comparison holds in real terms.

Elena's Benefits

Elena can receive the larger of her own benefit or a spousal benefit of up to half of Luis's full retirement age amount, $1,250, at her own full retirement age, but the spousal benefit cannot begin until Luis has filed for his own. She can claim her own $800 benefit at her full retirement age and step up to the spousal amount when Luis files. More important is the survivor benefit. If Luis dies first, Elena would receive his benefit, including any delayed credits, in place of her own. If Luis claims at 70, her survivor benefit would be about $3,100; if he claims at 62, about $1,750 or somewhat more under the survivor rules. Because women tend to live longer and Elena is younger, her survivor benefit may be paid for many years.

What Research Says About Delay

Shoven and Slavov (2014) calculated that delaying Social Security is actuarially advantageous for many people, especially when interest rates are low, and that the gains are largest for the higher-earning spouse in a married couple, because delay raises the survivor benefit. Luis's situation fits that finding.

The Earnings Test

If Luis claimed at 63 while working part time for Ridgeline at $40,000 a year, the earnings test would apply. In 2025, benefits are withheld by $1 for every $2 earned above $23,400, so about $8,300 a year would be withheld. The withheld benefits are not lost; his benefit is recalculated at full retirement age, but the test makes early claiming while working a poor choice.

How Benefits Are Taxed

Up to 85 percent of Social Security benefits can be subject to federal income tax when a couple's provisional income, adjusted gross income plus tax-exempt interest plus half of benefits, exceeds set thresholds. Large IRA withdrawals in the same years as benefits can push more of the benefit into taxable income, which argues for drawing more from the IRA before benefits start.

Bridging the Gap Before 70

To delay, Luis needs income from 63 to 70. He plans to keep working part time for Ridgeline at about $40,000 a year until 66, which with Elena's part-time income of $18,000 covers most of their $54,000 after-tax spending without claiming benefits, avoiding the earnings test entirely. From 66 to 70, after he stops work, withdrawals of about $52,000 a year will come from the 401(k) and IRA, reduced once Elena claims her own benefit at her full retirement age. Leaving Ridgeline after the year he turns 55 qualifies his 401(k) for an exception to the 10 percent early withdrawal penalty, and his IRA is already past the age of 59 and a half, so both are available without penalty.

Roth Conversions in Low-Tax Years

The years between leaving work and claiming at 70 are low-income years. Converting part of the IRA to a Roth IRA up to the top of the 12 percent bracket each year would pay tax at a low rate now, reduce future required distributions and lower the share of benefits taxed later.

Required Minimum Distributions

Under current law, required minimum distributions begin at 75 for people born in 1960 or later. By then, conversions and withdrawals will have reduced the IRA, limiting forced taxable distributions.

A Sustainable Withdrawal Rate

After 70, Social Security will cover most of their spending. A withdrawal of about 4 percent a year from remaining savings, adjusted for inflation, has historically lasted 30 years in most market periods for balanced portfolios. The bridge years will use most of their savings, so at 70 they are projected to have about $85,000 left, and 4 percent of that is about $3,400 a year, best kept as a reserve for health and home repair costs. That tradeoff is the heart of the strategy: savings are spent early to buy a larger, inflation-adjusted lifetime income.

Should They Buy an Annuity?

An immediate annuity converts savings into guaranteed lifetime income. Brown (2001) found that annuities offered substantial value to many people near retirement because they protect against outliving savings, and that people who valued annuities more were more likely to plan to annuitize. Delaying Social Security is itself the cheapest inflation-protected annuity available, so the couple will rely on that rather than buying a private annuity now, and revisit the question at 75.

Conclusion

Luis should move to part-time work at 63, stop at 66, bridge the years to 70 with the IRA and the 401(k), using the age-55 exception, convert part of the IRA to Roth in low-tax years and claim at 70 to maximize his benefit and Elena's survivor benefit. Elena should claim her own benefit at her full retirement age and move to the spousal benefit when Luis files. The plan protects the survivor, controls taxes and leaves a modest reserve.

References

Brown, J. R. (2001). Private pensions, mortality risk, and the decision to annuitize. Journal of Public Economics, 82(1), 29-62. https://doi.org/10.1016/S0047-2727(00)00152-3

Shoven, J. B., & Slavov, S. N. (2014). Does it pay to delay Social Security? Journal of Pension Economics and Finance, 13(2), 121-144. https://doi.org/10.1017/S1474747213000309

Social Security Administration. (2025). When to start receiving retirement benefits (Publication No. 05-10147). https://www.ssa.gov/pubs/EN-05-10147.pdf