Better To Live On Selling Stocks or Taking Early SS?

[Ian S]

Kind of a hypothetical here. Assume single male retiring at age 65 with total of $1.5M in assets including $300K paid off home. Of those assets, only $100K is in a taxable account - all the rest in IRAs with 60-30-10 distribution of stocks/bonds/cash. At age 65, eligible for SS benefits of $2000/mo. Assume also that the taxable account consists entirely of highly appreciated stock consisting mostly of LTGs. Living expenses of $50K/year.

Would the individual be better, in general, to live off the taxable account until it is exhausted then take SS or start taking SS immediately and extend the life of the taxable account or even dip into the IRAs for some percentage of expenses? Or are these the sorts of details that retirement planners of some sort can effectively deal with?

 

[Rickt]

If it was me, I would delay the SS till age 70 and withdraw $50k/yr from from the IRA account. I would leave the $100K in taxable account alone.

At Age 70 apply for SS and reduce the WR but continue withdrawing from the retirement account.

Others may have different ideas. Thanks

 

[gerntz]

Well, if you start SS now & also starting IRA withdrawals now, you may even out your income taxes at a lower rate for the rest of your life vs. jumping into a higher bracket between both higher SS benefits & higher RMD's. And those lower taxes may payout vs. whatever lifetime SS payments you lose, if any (Depending on how long you live.). Wouldn't surprise me that starting SS isn't better for you.

 

[Aiming_4_55]

Consider various tax implications for your scenario with roth conversions with SS at 65 or and without (delaying until 70). What is the max amount you can withdraw at the lowest tax bracket, if that's where you want/need to be.

This tool might help you with scenarios: Optimal Retirement Planner - Parameter Form

Use Turbo Tax or similar to model your scenarios.

Also, consider what your intentions are with any leftover funds in the long run. Taxes aren't too important to you if you have major health issues now. Let's hope that's not the case! In my case, I'm having my mom pay taxes now via Roth to IRA conversions, so perhaps my kids can inherit a Roth account, if she doesn't use it. Silly planning.

 

[Ian S]

Wouldn't surprise me that starting SS isn't better for you.

To be clear, you think taking SS at 65 might be beneficial?

 

[FIREd_2015]

Assuming the 65 y.o. is in relatively good health and the $1.1M is all in a traditional IRAs and not a ROTH I would hold off on SS until 70 and start withdrawing some money from the IRA because at 70.5 the RMDs will be around $40k if the IRAs are worth $1.1M. So the income at 70.5 should be around $70k (RMD + SS @70) which is quite a bit more than expenses so I would want to move some of that income forward. I think an excel spreadsheet with different longevity, tax rate, expected return on IRAs, and expenses is needed to figure out the best option.

 

[Independent]

I see two issues. The first is the standard "do I want to defer SS to buy longevity insurance?" Since this is a single person, that's mostly a matter of gut feel. The $24,000 benefit at 65 will become about $33,900 at age 70. It takes about $170,000 to provide $33,900 for 5 years, but it provides an extra $9,900 per year for a lifetime. Personal preferences will determine a choice.

The second question is taxes, especially with the cap gains in the taxable account.

I'm pretty sure the wrong decision would be to minimize the first year's taxes by taking SS and spending down the taxable account without touching the IRA. That wouldn't "fill up the 15% bracket", and it seems this person will ultimately be in a 25% marginal bracket.

But, that "too low" tax problem can be solved with Roth conversions.

Other than that, when I've looked at my own case, it seems that I either pay taxes now or pay them later. If I were trying to optimize, I'd agree with FIREd and build a spreadsheet with very simple pro-forma taxes. Tax Caster or Turbo Tax can be used to check the worksheet formulas.

 

[gerntz]

To be clear, you think taking SS at 65 might be beneficial?

Yes. But running the income/tax scenarios as posters after me suggested is necessary. Thing is you don't want zero taxes now at the expense of high rate taxes after 70 such that the average from now to death is higher than if you had some taxes now.

 

[sengsational]

Yes. But running the income/tax scenarios as posters after me suggested is necessary. Thing is you don't want zero taxes now at the expense of high rate taxes after 70 such that the average from now to death is higher than if you had some taxes now.

The earlier mentioned i-orp does estimate taxes in it's optimization.

 

[pb4uski]

I think you are best off to take withdrawals from tax-deferred accounts as needed for expenses. That should put you just over the top of the 15% tax bracket and minimize your RMDs and taxes later. Save the $100k for emergencies and tax diversification. Doing that will also provide longevity insurance.

 

[Senator]

Assuming the 65 y.o. is in relatively good health...

And if he is not in good health, it doesn't matter if he takes it at 65 or 70, other than his beneficiaries... So 70 is still a better choice.

 

[iac1003]

Given that many have taken a hit in their invested IRAs in recent months, would you suggest taking money out of them now? I was going to use cash for the next 2 years to make up the shortfall between DH's SS & RMD plus what we needed to live on rather than dip into my IRAs, post-tax account or take SS 2 years earlier than FRA.


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[dallas27]

Use the taxable until there is a bad down year, then start SS to limit the withdrawal while prices are down.


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[Independent]

Given that many have taken a hit in their invested IRAs in recent months, would you suggest taking money out of them now? I was going to use cash for the next 2 years to make up the shortfall between DH's SS & RMD plus what we needed to live on rather than dip into my IRAs, post-tax account or take SS 2 years earlier than FRA.

Presumably, you don't want to sell stocks because you think they are going to rebound.

That seems like "market timing" to me. I don't think I am good at that.

 

[W2R]

Kind of a hypothetical here. Assume single male retiring at age 65 with total of $1.5M in assets including $300K paid off home. Of those assets, only $100K is in a taxable account - all the rest in IRAs with 60-30-10 distribution of stocks/bonds/cash. At age 65, eligible for SS benefits of $2000/mo. Assume also that the taxable account consists entirely of highly appreciated stock consisting mostly of LTGs. Living expenses of $50K/year.

Would the individual be better, in general, to live off the taxable account until it is exhausted then take SS or start taking SS immediately and extend the life of the taxable account or even dip into the IRAs for some percentage of expenses? Or are these the sorts of details that retirement planners of some sort can effectively deal with?

I think you are best off to take withdrawals from tax-deferred accounts as needed for expenses. That should put you just over the top of the 15% tax bracket and minimize your RMDs and taxes later. Save the $100k for emergencies and tax diversification. Doing that will also provide longevity insurance.

+1

This is what I was going to suggest as well, especially if your health is good and you think that it is at least somewhat possible that you may live to a very old age.

On the other hand, if your health is poor (for example, if you have cancer or are in the later stages of diabetes or have other serious health problems), I'd consider taking SS early instead.

 

[Lsbcal]

I'm going to say that the answer is not at all obvious. It depends on how much you want to optimize your tax situation, what you imagine your investment results will be in the future, and your emotional makeup.

For instance, suppose we are at the start of a very bad bear market (not likely I think). Would you feel comfortable spending from your taxable while do IRA conversions and having to pay even higher taxes to get a higher Roth balance? Do you even need a higher Roth balance? Do you know how to optimize for taxs as RMD's kick in? Etc, etc.

I personally decided to take the SS at 64. That was because the 2008-2009 market decline changed our situation and emotionally it was a better fit to not have to dip into investable assets. It turned out well because the market went up a lot more then the annuity like savings that deferring SS might have provided.

It's a very complex situation. Not at all easy to call without doing much more analysis and knowing the individuals. situation in detail. Hope this helps a little.

 

[cooch96]

Use the taxable until there is a bad down year, then start SS to limit the withdrawal while prices are down.

+1. This solution is simple and the logic is sound.

 

[NW-Bound]

I'm going to say that the answer is not at all obvious. It depends on how much you want to optimize your tax situation, what you imagine your investment results will be in the future, and your emotional makeup...

It's a very complex situation. Not at all easy to call without doing much more analysis and knowing the individuals. situation in detail. Hope this helps a little.

I still have a couple of years even before early SS. So, I have time to ponder this problem.

I can see the pros and cons of both taking SS early and delaying it till 70. When I use FIRECalc to look at maximizing my spending power over a 30-year retirement, the difference between SS at 62 and SS at 70 works out to only about $2K/yr. I also try iorp, and the result is similar.

What must also be considered is the balance between increasing your spending vs. leaving behind an inheritance. Your SS or pension goes away when you die, but your 401k and IRA stay for your heirs.

And then, the most important factor, your lifespan, is not predictable. Just because you are perfectly healthy at 65 does not mean you will not come down any time with cancer, a stroke, or a heart attack. I have seen too many cases like that to think that I am immune to sudden death or health decline. Heck, I recovered from a serious trouble that could easily claim my life 2 years ago, and it hit me out of the blue.

I will continue to ponder this issue until I can even claim early. But with my wife of the same age, I think I will go half-way: let my wife claim hers early at 62, while hanging out for mine a bit longer. And a lot will depend on the stock market between now and then.

 

[Yellowjacket]

Some of this depends on what's most important to you and your family. SS payments are not transferable to your children, while your investments are. SS is however a fixed income for your entire life as hedge against your investments performing poorly. All of these factors will equate into your decision. Ultimately it's a question of what is most important to you and what level of risk you can afford.

 

[Chuckanut]

I think you are best off to take withdrawals from tax-deferred accounts as needed for expenses. That should put you just over the top of the 15% tax bracket and minimize your RMDs and taxes later. Save the $100k for emergencies and tax diversification. Doing that will also provide longevity insurance.

+1

I cannot give strong evidence for t, but my gut wanrs me that RMD's may have a big effect on taxes and other costs of living in the future. For example, I can see the Government saying 'We will base more of your Medicare contributions, deductibles, co-pays, etc. on your total income including those huge RMD's you now have to take. Lucky you!"

 

[Lsbcal]

I'll just mention our current situation a bit. Right now we have SS, IRA withdrawals + Roth withdrawals for income. The Roth helps a lot to keep the taxes way down. At RMD time, the taxes will go up and are unavoidable but again the Roth's will help a lot to keep taxes within bounds.

I personally don't think the government will change the rules on taxation all that much for our age group. I do expect to pay more for Medicare (maybe even 2x) and I do expect the tax rules to change incrementally.

I would recommend the OP and anyone else use TurboTax to fill out what-if scenarios. Each year I do a table which increments our income and then I select what bracket I want to be in. So one needs TT and a spreadsheet. If you aren't good at this then either become proficient or see a planner.

 

[OrcasIslandBound]

I ran these scenarios using Fidelity's retirement income planner and got the result that even in a poor market scenario, it came out better to wait on SS. As a result of those calculations, I'm pushing back taking SS as long as possible. However, I believe that spending more money to enjoy life is important during my early 60's, so I've created a strategy to split my investments into two pools. One will support dividends only @2.7% for the rest of my life, the other will be used up until it is gone. When this 2nd pool is gone, I will start my SS at around 67 years old. Later if the markets are good earlier if they are not.

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[Fedup]

I'm doing both this year, I need to close out an exotic IRA, for simplicity sake, $50k, plus $2000 a month SS for my husband and we have other investments to throw off the income. I ran this number last night and surprisingly, I'm still way under the bracket 15% bracket. I might get to convert some IRA to Roth IRA. So run the numbers for more accurate tax situation.


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[Dave J]

Would the individual be better, in general, to live off the taxable account until it is exhausted then take SS or start taking SS immediately and extend the life of the taxable account or even dip into the IRAs for some percentage of expenses? Or are these the sorts of details that retirement planners of some sort can effectively deal with?

Ian,

Please follow the advise of earlier posters and run i-orp using your numbers. It will give you much insight into what is best.
For me, I ended up starting SS at 62 when I said for years I was waiting until 70. I did not understand before how SS was partially taxed if you manage to keep your income on the low side. The amount you pay in taxes can vary a lot depending on when you start SS and draw from your IRS's ect.

 

[Ian S]

Thanks to all for the suggestions. There's really no alternative to running various scenarios I guess and it is apt to be quite different depending on individual circumstances.