Friday, March 28, 2014

When to Take Social Security Given Other Types of Retirement Assets Part I

This is two part article on a very important question, when to take Social Security. Before making that decision, you must decide how long you will live. You will also need to spend some time considering how you plan to use different kinds of money in retirement. If you don’t have enough income to pay for groceries, you will need to take Social Security as soon as you retire. This is happening to far too many people in my generation who lost a job in the Great Recession. Age discrimination is real. They are not finding new jobs in the ongoing recovery. They need Social Security today. If you have the resources that will allow you to delay Social Security, that might be a very good idea.

Here are the basic facts from a particular example generated by the Social Security Administrations Quit Calculator.

If you were born in 1952, are currently earning $100,000 a year here is what you can expect to draw.

$1,616 a month: Starting at age 62 $2,217 a month: Starting at age 66 $3,017 a month: Starting at age 70

In this particular example, the crossover point for 62 or 66 occurs at approximately age 76.75. If you live to age 77 you win by delaying Social Security.

The crossover point for 62 or 70 would occur at approximately age 79.2. If you live to age 80 you win by delaying Social Security?

Or do you?

What could you do if you take that money today that you couldn’t have done if you choose to delay? How would it change your long term budgeting strategy in retirement? There are certain kinds of money we expect to spend in retirement. There are certain kinds of money we delay spending in retirement. There are even certain kinds of money we hope that we will never have to spend in our lifetime. Consider the family farm.

I have been learning that in retirement there are several kinds of money. I propose that generally, they should be spent in the following order.

1)Renewable Resources: These guaranteed income streams include pensions, Social Security, and annuities. In a perfect world, this money would replace your paycheck.

We do not live in a perfect world.

2) Cash: These funds include savings accounts, checking accounts, and money market funds. Their purpose is flexibility. Whether you need $10,000 to move to your new retirement home, $10,000 to repair your existing home, $10,000 to pull the trigger on a stock trade, or $10,000 for a vacation on the French Riviera you need to put your hands on the cash on the day the bill comes due. Besides covering large irregular expenses, if your guaranteed income stream is not sufficient to cover your regular monthly expenditures, you will be spending cash on a regular basis. My experience indicates, that you will need to have more cash on hand in retirement than you might think will be necessary.

3) Taxable Investment Accounts: Almost every stock and mutual fund I own is set up on an automatic DRIP reinvestment program. I use the dividends to purchase more shares in that investment at no cost, thereby putting the power of compound interest to work. I can divert that stream of dividends and interest from purchasing more shares to a regular quarterly deposit in my checking account or I can prune a position that has grown too large or I believe to be overvalued as a source of cash. If necessary, these positions can be liquidated on a regular ongoing basis to renew available cash.

4) Tax Preferred Accounts: For most people, this is your 401(k) and your Roth IRA. Money in the 401(k) has never suffered the cold dead hand of the taxman. All of it is going to be taxed when you cash it out. That is why you delay actually using these funds until you have depleted a large portion of your taxable investments. The Roth IRA can grow tax free. If you can leave it alone, leave it alone.

Before I retired, the tax consequences of my actions were not that important a consideration. I am basically a buy and hold investor. I pay income tax on dividends in my taxable accounts, but I seldom sell much of anything so I don’t spend a lot of time worrying about capital gains. Money went into my tax deferred investments with the hope it will never come out in my lifetime. It is my desire that I will be able to fund my charitable remainder trust with those investments, guaranteeing a lifetime income for my wife, 20 years of income for my heirs, and the remainder for the Lord’s work. Now, how I choose to liquidate my holdings has real noticeable consequences, especially if I have to tap my tax deferred investments.

5) Primary Residence: If you live long enough, there will come a day when you need to sell your home, either to create a source of income or because you are no longer physically or mentally able to live in a house by yourself. I don’t like to think about that possibility.

Although the defined benefit pension is disappearing, almost all Americans still have one guaranteed income stream, Social Security. When to tap that stream is an ongoing debate.

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