Penny Wise and Pound Foolish
Sometimes people get so excited to have some extra money coming in that they forget to look at the big picture. Let me share a real life example I heard this week. There is a daughter of a client. We will call the daughter Meredith (name changed to protect the innocent). Meredith knows I’m happy to help children of clients with one-off questions. So she called with the following scenario.
Meredith turns 62 in July. She owns her own business. Her accountant told her that if she pays herself less than $18,000, she can go ahead and collect Social Security at age 62 without a penalty. Normally your benefits get reduced if you collect Social Security before age 66.
Meredith is fairly successful in her business and normally makes $100k per year. Her accountant’s advice was to leave anything above $18k in the company and wait until age 66 to withdraw that extra money. This would allow her to get her Social Security early.
There are at least two reasons why this strategy won’t work, which would result in Meredith having her Social Security reduced anyway. 1. The IRS says she has to pay herself a fair wage. 2. Social Security also checks the number of hours a business owner works to make sure they aren’t trying to game the system by taking less pay.
But just for a minute, let’s pretend that this little scenario would work. Meredith is jumping through an awful lot of hoops to reduce her cash flow for the next four years. Somehow the idea of getting more from Social Security (in her mind) caused her to miss the fact that she would be reducing her cash flow from $100k to $18k in order to collect $20k. And over her lifetime she would actually be reducing her Social Security benefits. If she just waits they will continue to go up 7%-8% per year. She’s giving up that growth.
I think Meredith just plain got so excited about the strategy to get some extra money out of Social Security that she didn’t look at all the downsides. It happens to all of us from time to time. That’s why it’s good to have a trusted advisor to bounce ideas back and forth.