It is a retirement dilemma.

When planning for retirement cash flow, should a client start Social Security as early as age 62, letting individual retirement account money continue to grow, tax-deferred? Or should that client tap the IRA and wait for a larger Social Security benefit?

A client who would receive $1,500 a month at 62 would collect $2,640 a month, plus any cost-of-living adjustments in the interim, by waiting until 70, the latest starting date.

THE CASE FOR TAPPING IRAs

“Many retirees claim Social Security too early,” says Mark Lumia, a CFP and the founder and chief executive of True Wealth Group in Lady Lake, Fla. “They may be reducing the longevity of their nest egg and increasing the tax burden.”

Why should clients take IRA distributions rather than Social Security benefits?

“Social Security gives an 8% credit every year benefits are delayed,” says Josh Mellberg, president and founder of J.D. Mellberg Financial in Tucson, Ariz. “That’s a rate that we aren’t seeing anywhere else now.”

Moreover, Social Security provides lifelong cash flow, with COLAs.

“Due to today’s threats of longevity and inflation, it can be in a client’s best interest to use qualified accounts to fund the early years of retirement while delaying Social Security,” Lumia says.

There also might be tax advantages to waiting for Social Security.

“If a client takes out qualified money after starting Social Security, that money may affect how much of the Social Security benefits are taxed,” Mellberg says.

The formula for the taxation of Social Security benefits counts $1 of pretax traditional IRA distributions as $1 but counts $1 paid by Social Security as just 50 cents.

“Delaying Social Security benefits and taking larger IRA withdrawals instead can result in lower lifetime taxes,” Lumia says.

THE CASE FOR STARTING SOCIAL SECURITY

Bryan Slovon, founder and chief executive of Stuart Financial Group in Greenbelt, Md., agrees that delaying Social Security sometimes may be a good choice.

“For clients who won’t need as much income prior to age 70, perhaps because they’ll have a pension, this may make sense,” he says.

However, in other situations, Slovon leans toward holding on to IRAs and starting Social Security earlier.

“I try to maintain liquid assets,” he says.

“Although I recommend long-term care insurance for most clients, about 80% of the population won’t purchase LTC plans. Assets should be maintained in case clients incur these costs,” Slovon says.

IRA money that isn’t spent early in retirement may be available for long-term care and other health care expenses.

“Planning that focuses on getting the most from Social Security may overlook this potential problem,” Slovon says. “In addition, it takes years to recoup money not received from Social Security.”

A retiree forgoing a $1,500 benefit at 62 to receive $2,640 at 70 would sacrifice $144,000 in Social Security checks. The extra $1,140 a month wouldn’t match that for more than 10 1/2 years, not counting the time value of money or the benefit of receiving the cash while younger and possibly more able to pursue enjoyable pastimes during retirement.

This story is part of a 30-30 series on preparing for retirement.

Donald Jay Korn

Donald Jay Korn is a New York-based financial writer who contributes to Financial Planning and On Wall Street.