Taking benefits while working is often a bad idea

Q: I will be 66 in July - that's full retirement age according to Social Security. I am thinking about starting to draw Social Security while I am still working. I will work to age 68, waiting for my wife to be able have Medicare benefits. I earn about $88,000 a year. My wife doesn't work anymore. She started to draw her Social Security at age 62. What are your thoughts on this, the good or the bad? - B.T., by email

A: Taking Social Security benefits while working is often an idea that doesn't survive close examination. Here are the reasons NOT to take benefits while working:

The first is that those benefits will be immediately added to your taxable income, so while you're expecting one amount, you'll get less. If you visit a tax preparer and compare your federal income tax bill with, and without, the additional Social Security benefit income, you'll be surprised - your tax bill may double. Yes, double. Many people forget that Social Security benefits can become taxable income.

The second reason not to take benefits while working is what that extra income may do to your psyche: Most people feel they can spend more when they have more income. But your Social Security benefits are income that is supposed to replace a portion of what you used to earn. If you add it to what you currently earn, well, you're looking for a big comedown when you actually retire.

Is there a circumstance where taking Social Security benefits while still working is a good idea? Maybe one: Many teachers and public employees

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can expect to retire on Social Security and pensions, but have little saved. If you have very little in liquid savings, taking Social Security benefits while still working can be a way to build personal savings - provided you actually save the money. It's also possible that if you save the money in your employer's tax-deferred retirement plan, your tax bill won't go up so much. Sadly, this can often be found in the "easier said than done" category.

Q: I'm a firm believer in low-cost index fund investing such as put forth in your Couch Potato Portfolio or Andrew Hallam's book, "The Millionaire Teacher."

I just spotted a Fidelity Investments ad in The Wall Street Journal titled "Why We Believe in Active Management." It highlights the Fidelity Contrafund as beating the S&P 500 by 3.12 percent over 25 years. Frankly, it's a tempting pitch for moving at least some portion of my portfolio into this fund. Were they just that lucky?

I have absolutely no affiliation with Fidelity or any other financial services company. I'm a business development director for a large technology firm. Your thoughts? - D.K., by email

A: Fidelity is a terrific firm and a virtual brain trust that has been a consumer-friendly, low-cost provider of financial services for as long as I've been investing - 50 years. That's one of the reasons I frequently mention Fidelity Puritan Fund even though it is managed.

Over the last 15 years, Morningstar data show that Contrafund was in the top 1 percent of its large growth category, returning a 7.87 percent annualized return at the end of December. That's 2.87 percent a year more than the 5.00 percent return of the S&P 500 over the same period. More recent figures aren't so stellar, but are still well above average. A statistics guy would very likely tell us that you don't do that with dumb luck.

The past, however, isn't the future. And since you are betting your retirement security on this, my suggestion is that you have the bulk of your investments in low-cost index funds. These will almost certainly provide you with better returns than more than 70 percent of all managed funds.

If you'd like to "bet" some of your savings on a fund like Contrafund, or the Dogs of the Dow, or a collection of Warren Buffett's major holdings, that's fine. The important thing is that whatever you choose to do, it should be a sideshow to where and how the bulk of your money is invested. You may do well - or not. But you will be engaged, and that's a good thing.

• Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser.