Q & A: February/March 2019

Q & A: February/March 2019

Use Retirement Savings or Start Social Security Early to Cover Large Medical Expenses?

Q: I will be 66 in April and still work at a small company.  I get my healthcare through a Medicare Advantage plan.  I’ve learned I will need to have surgery and expect to have extensive out-of-pocket health care expenses this year.  In order to cover my healthcare costs, would I do better by taking money from my retirement savings in order to delay starting Social Security (allowing my benefit to grow) or should I start Social Security retirement benefits now to reduce what I need to take from savings? 


A:  This is one of the many retirement questions for which there is no straightforward answer.  Many financial advisors recommend delaying the start of Social Security until you are at least your full retirement age or better yet, to wait until age 70.  At your full retirement age, (66 in your case), you would be eligible for 100% of the benefit to which you are entitled.  However, for every year you delay until age 70, your Social Security benefit will grow 8%.   Your benefit at age 70 would be 32 percent higher than you would get at 66.  That’s a return that’s very hard to find these days.

A major factor in delaying Social Security is your life expectancy, and the age at which you would come out ahead.  Chances are you would be ahead by your early 80s.  Average life expectancy for men is 84 and nearly 87 for women, and more people these days are living well into their 90s.

From a tax perspective, your distributions from a traditional IRA or 401(k) are 100% taxable, while distributions from a Roth IRA or 401(k) are not taxable.  Up to 85% of Social Security benefits may be taxable but, for many people, the taxable percentage is much lower.

Starting distributions from your retirement savings ahead of age 70 ½

may tend to lower your tax bill later, by reducing the required minimum distribution amount that you must take in order to avoid tax penalties after age 70 ½.  Large required minimum distributions could also trigger taxes on up to 85% of your Social Security benefits in addition to a surcharge on your Medicare Part B and Part D premiums.

This is the type of question that you should discuss with a professional financial advisor and a tax professional.

The full retirement age is based on the year when you were born.  To learn more about the full retirement age see this chart from the Social Security Administration —https://www.ssa.gov/planners/retire/retirechart.html