Q&A: Social Security Payouts

Dear Liz: My wife and I, 63 and 62, plan to continue working till at least 65. We will begin collecting Social Security benefits in September. Our combined income is $58,000, we own our home outright, and we have no debt, no children, $84,000 in a traditional IRA and $90,000 in a stock portfolio.

I just sold a portion of a mutual fund for a $30,000 gain that is in the bank for the time being. How long do we have to reinvest without paying a capital gains tax? Or would it be best to pay the tax now, leave the money in the bank and be done with it?

Answer: Unless you sell another investment for a $30,000 loss to offset the gain, you’re going to have to pay taxes on your profit.

“There is no way to do a tax-free reinvestment,” said tax professional Eva Rosenberg, an enrolled agent who runs the TaxMama.com site. “And the time to ask questions like that is before you sell the mutual funds.”

You still have time to avoid a much bigger mistake: signing up for Social Security now.

Your Social Security checks would be reduced $1 for every $2 you earn over a certain level, which this year is $15,480. That “earnings test” applies until you reach your full retirement age (which is 66, not 65, for both you and your wife). What’s more, you would lock in lower benefits for life and give up a chance to boost your Social Security payout in a way that’s available only to married couples who wait until full retirement age to start benefits. (More on that in a moment.)

Your savings are too small to generate much income, particularly if you want to minimize the chances of running out of money. You should be looking to maximize your Social Security benefits to help make up for that deficit. Your benefits grow substantially each year you put off applying for them, and most people will live past the break-even point where delaying benefits until full retirement age results in more money than taking them early.

Many people erroneously think they should grab Social Security as early as they can, but the Social Security system isn’t going away, and you are likely to regret settling for a smaller check. Remember that your wife probably will outlive you and will have to get by on one check, so you should make sure your benefits are as big as they can be.

One way to do that is for the lower-earning spouse to claim spousal benefits at his or her full retirement age. Once the lower earner’s benefit maxes out at age 70, he or she can switch if that benefit is larger.

But spousal benefits can’t start until the higher earner files for his or her own benefit. If the higher earner waits until full retirement age to apply, he or she has the option to “file and suspend” — a maneuver that lets the spouse claim spousal benefits while leaving the higher earner’s benefit untouched so it can continue to grow.

This “claim now, claim more later” strategy is available only to people who wait until their full retirement age to start.

Your tax question and your plan to start Social Security early indicate you could really use some sessions with a fee-only financial planner. Such a consultation is a good idea for everyone as they’re approaching retirement, but in your case, it’s essential.


  1. Don’t the reduced benefits (“$1 for every $2 you earn”) get added back later? Using some inevitably complex, even mysterious formula?

    • Liz Weston says

      That’s right, Steve. The reduction in earnings isn’t as big a disaster as the lost opportunities for maximizing benefits, but it’s something to factor into the equation.

  2. I’m laid off, pushing 63, and don’t have any real hope of finding a job like I used to have, but I’m going to delay filing for Social Security as long as I possible can, age 70, if I can. My main reason for delaying Social Security is survivor’s benefits. The longer I hold out, the greater will be my wife’s benefit, if she survives me. Social Security is a complex thing, not to be taken lightly and misinformation abounds. My wife and I have been to a couple of Social Security seminars and found them to be well worthwhile. By waiting, I’ll have to use more of my retirement savings now, but that will be offset by the increase in benefits later. If I do find work, I won’t have to worry about losing any of my benefits.

    • Liz Weston says

      Thanks for your comment, Bill. I wish more folks would educate themselves…and think about the potential impact on their spouses.

  3. Jerome Barry says

    Liz, I certainly hope the writer of that original letter takes every letter of your advice and lives it. He’s so close to cold, hungry, and lonely with his stated plan that it scares me.

  4. I am on RSDI and going to school. I will have an Associates degree in August. My question is if I can not work, how will that affect my retirement? I am only in my 30s but hopefully wont be on disablity the rest of my life. I want to work.

    • Liz Weston says

      If you’re receiving Social Security disability, your disability check will simply become your retirement check when you hit retirement age.

  5. A recent article from another blog relevant to this decision: http://www.obliviousinvestor.com/why-most-experts-suggest-delaying-social-security/

  6. If you are in the 15% tax bracket and lower, your long term capital gains are NOT taxable, until they push you into the 20% bracket. So, imho, the $30,000 capital gain is probably not taxable ( or only a portion is), since they have a joint income, before deductions, of $58,000. This tax break is not available in many states.

    • Liz Weston says

      In California, for example, you’d owe regular income tax on the gain, since there’s no capital gains tax rate.