Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

In this Discussion

Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

    Support MFO

  • Donate through PayPal

The 4% Rule

13»

Comments

  • beebee
    edited May 2015
    Gandalf said:


    My wife is 5 years younger than me, and her earnings when she worked were much lower than mine. Our thought is for me to defer taking my SS to 70, she claims half of mine at her FRA when she turns 66, and then she can move to her own at 70 if greater than her spousal. Meanwhile, if I pass, she will benefit from my higher SS amount.

    Sounds like you'll receive your benefit at 70 and your wife will receive 1/2 of that benefit starting a year later when she turns 66 (you'll be 71). Everyone should try to optimize their SS options. Sounds like you have thought through that with your spouse.

    My point is you have SS resources and non-SS resources. You may spend more of your non-SS resources prior to SS resources kicking in or maxing out. You might spend less of your non-SS after. Doing a spreadsheet on all this is helpful.

    If you're hoping to leave something to your kids, SS doesn't have a survivors benefit (for your kids) unless they are under eighteen or still your dependent (special needs). When you and your spouse pass it will be your non-SS resources they inherit.

  • What Gandalf said, and what I and many others are doing. My 66yo wife's first SS check (half of mine, delayed) auto-deposited today, w/ Medicare taken out. I will take my SS at 70, two more years.
  • Very close, but not exactly the same. Gandalf has no file-and-suspend. He draws at 70, before W's FRA, and then W files for spousal benefits (only) at 66.

    You have filed and suspended (at age 68) so that W can file for spousal benefits (only) at 66.

    Two reasons why this distinction matters:

    - If you should die now, your W would get your SS benefits enhanced to age 68, not to age 70. (I'm assuming your benefits are greater than W's.)

    - The lower benefit terminates when either spouse dies; since your age spread (with spouse) is smaller than Gandalf's, all else being equal it is likely that you will enjoy two income streams longer than he will, possibly making this strategy a more likely win for you.

    Sorry to sound slightly morbid here. The key point is that this strategy works best if both spouses are in good health and expect to live long enough to make this pay off and/or you ascribe positive monetary value to (longevity) insurance. Both of you (David, Gandalf) seem to do the latter.

    Personally, I agree and may some day post some thoughts on the ways people view risk (why insurance seems to be undervalued at the same time some risks are overestimated).
  • >> me to defer taking my SS to 70, she claims half of mine at her FRA when she turns 66, and then she can move to her own at 70 if greater than her spousal.

    yes, he did not say apply+delay (SS terms for file and suspend), but I guess I am a little confused if your reading is correct: How does she claim half of his at her 66 (spousal)?

    Is it not the case that she cannot do this unless he has applied and delayed?

    All your other variables and factors analyses are exactly correct. We both do have to live to early 80s, if you look at where the lines cross, yes. But your clause about valuation of longevity insurance is key: if this works out, drawdown of retirement investments is reduced and majorly postponed. If I die soon, that's different. And if I ail early, I suppose I can start taking benefits anytime in the next 2y.
  • These discussions certainly demonstrate that SS considerations are anything but cookie-cutter, and should be thoroughly examined and discussed for every individual case to determine the most advantageous configuration. Moreover, while the various SS options themselves are a major variable, considering SS in context with other factors such as life expectancy, health, financial reserves, debt (or lack thereof), desire to leave an inheritance, and other income from pension or annuity only make the considerations even more complex.

    Quick shots such as "take it early" or "take it later" don't begin to touch the complexity, and are for the most part worthless.
  • >> me to defer taking my SS to 70, she claims half of mine at her FRA when she turns 66, and then she can move to her own at 70 if greater than her spousal.

    yes, he did not say apply+delay (SS terms for file and suspend), but I guess I am a little confused if your reading is correct: How does she claim half of his at her 66 (spousal)?

    Is it not the case that she cannot do this unless he has applied and delayed?

    He will be 71 when his wife turns 66. Call me crazy, but I don't think he'll delay benefits at age 71:-)

  • MJG
    edited May 2015
    Hi Guys,

    Thank you for some terrific postings.

    From a global perspective, I agree with Old Joe’s assessment of the Social Security initiation and drawdown dilemma. It is a complex problem, with many moving and uncertain parts. It can not be perfectly dovetailed into a one size fits all solution.

    What to do?

    Well I have a suggestion that will not surprise anyone.

    Mark Twain is commonly credited with the saying “ If your only tool is a hammer then every problem looks like a nail”. And adding a little bit of depth to that insight is Warren Buffett’s cautionary observation that “Don’t ask a barber if you need a haircut.”

    My easily anticipated suggestion is to examine the Social Security issues more fully using the Monte Carlo tool that is the original primary focus of this thread. So this comment is a return to home base.

    Application of The Flexible Retirement Planner’s Monte Carlo code will allow users to explore the varied impacts of the many uncertain parameters that enter the Social Security decision process. No single answer is likely to emerge.

    But within minutes, numerous what-if scenarios that are tailored to the users special circumstances and needs, can be parametrically investigated.

    The code permits the user to specify a huge array of special purpose inputs like additional cash inflows (maybe Social Security), taxes, inflation, projected portfolio returns, and study timeframe (like survival age) all as a function of time. Like all candidate tools, limits do exist, but the recommended tool is indeed more “flexible” than other accessible options.

    I frequently use several Monte Carlo codes when examining uncertainty issues to better overcome any input shortcomings.

    I suggest that you think about applying Monte Carlo analyses as part of your Social Security withdrawal studies. I did. I agree that each retirement/social security situation is unique and warrants special attention to detail. The details do matter.

    Monte Carlo simulations just might give a user a better appreciation of the scope and magnitudes of the uncertainties, and perhaps provide some guidance to a decision that defines and hopefully softens that uncertainty range.

    Best Wishes.
  • bee said:

    Gandalf said:


    My wife is 5 years younger than me, and her earnings when she worked were much lower than mine. Our thought is for me to defer taking my SS to 70, she claims half of mine at her FRA when she turns 66, and then she can move to her own at 70 if greater than her spousal. Meanwhile, if I pass, she will benefit from my higher SS amount.

    Sounds like you'll receive your benefit at 70 and your wife will receive 1/2 of that benefit starting a year later when she turns 66 (you'll be 71). Everyone should try to optimize their SS options. Sounds like you have thought through that with your spouse.

    My point is you have SS resources and non-SS resources. You may spend more of your non-SS resources prior to SS resources kicking in or maxing out. You might spend less of your non-SS after. Doing a spreadsheet on all this is helpful.

    If you're hoping to leave something to your kids, SS doesn't have a survivors benefit (for your kids) unless they are under eighteen or still your dependent (special needs). When you and your spouse pass it will be your non-SS resources they inherit.

    Bee,

    I understand your point and am well aware that my kids cannot collect SS benefits based on my demise, other than maybe a small death benefit (but I'm not sure about that). However, there is another consideration with spending down some of the nest egg, which in my case is predominantly before tax IRA money. To this end, spending down some of the IRA before 70.5 will also soften RMDs. All of this is complex and everyone's circumstances are different.
  • msf said:

    >> me to defer taking my SS to 70, she claims half of mine at her FRA when she turns 66, and then she can move to her own at 70 if greater than her spousal.

    yes, he did not say apply+delay (SS terms for file and suspend), but I guess I am a little confused if your reading is correct: How does she claim half of his at her 66 (spousal)?

    Is it not the case that she cannot do this unless he has applied and delayed?

    He will be 71 when his wife turns 66. Call me crazy, but I don't think he'll delay benefits at age 71:-)

    Correct, I will file at 70, and then my wife will file for her spousal a year later when she reaches FRA.
  • Gandalf said:

    However, there is another consideration with spending down some of the nest egg, which in my case is predominantly before tax IRA money. To this end, spending down some of the IRA before 70.5 will also soften RMDs. All of this is complex and everyone's circumstances are different.

    I can't address your other consideration, but I can say something about RMDs.

    People with large pre-tax IRAs may benefit from drawing down their balances gradually as you suggest. This way, they prevent the IRAs from growing too large. Thus they avoid getting kicked into a higher tax bracket in later years when RMDs are high (large balance and few years left to divide by).

    But withdrawing doesn't necessarily mean spending. For example, if one is in the 15% tax bracket in retirement (but is concerned with getting kicked into the 25% bracket), one can withdraw some amount, say $30K/year. (Just tossing a number out to be concrete.)

    If you don't need the money, pay the $4500 tax, and put the rest (25,500) into a Roth. That way you haven't touched any of your taxable accounts (so whatever plans you had for that money are unchanged), you keep your traditional IRA from growing "too much", and by using the Roth, the money grows tax free.
  • beebee
    edited May 2015

    @msf said...If you don't need the money, pay the $4500 tax, and put the rest (25,500) into a Roth. That way you haven't touched any of your taxable accounts (so whatever plans you had for that money are unchanged), you keep your traditional IRA from growing "too much", and by using the Roth, the money grows tax free.

    Would this be a Roth conversion? If so, do RMD rules impact Roth conversion rules?
  • Sorry I worded it poorly. Gandalf was talking about using IRA money before RMDs kick in (i.e. before 70.5). So while I was talking about a Roth conversion, the RMD rules wouldn't apply since by assumption this is before RMDs.

    I was suggesting something I normally try to avoid - using money that comes from the IRA to pay the IRA taxes (as opposed to using outside money to pay the taxes). If one uses IRA money to pay taxes, it is usually a wash, i.e. it doesn't matter when you take the money out. But if you're trying to reduce the growth of the IRA, then sooner is better than later. Reducing growth seemed to be something Gandalf was hinting at.

    You're absolutely right about there being an interaction between RMDs and Roth conversions (when one is older than 70.5). The rule is that the first money out of a traditional IRA in a calendar year must be the RMD. Only after that may you take more money out and convert it to a Roth.
  • @msf,

    Gotcha. Thanks. Lots to digest.
  • Yes, I was alluding to spending down the IRA $s, and thereby attempt to minimize paying higher taxes from large RMDs.
Sign In or Register to comment.