Case for taking SS early (62)?

[explanade]

Do most folks have more retirement savings in IRAs and 401ks or in non-retirement taxable accounts?

In my case, the latter dwarfs the IRAs and 401k, so whatever income I derive from the taxable accounts would probably have way more impact on my taxable income than the RMDs from IRAs. I forget the actual rules for when I would have to draw from 401k.

But if I have to do withdraws from IRAs and 401ks starting at 70.5 years of age, then in early retirement, I'd draw from my non-retirement accounts and supplement with SS if necessary?

Is that what most RE people are doing, drawing from their non-retirement accounts before taking SS and before the RMDs kick in? Or is there some advantage in drawing down the IRA and 401ks earlier?

 

[pb4uski]

Do most folks have more retirement savings in IRAs and 401ks or in non-retirement taxable accounts?

In my case, the latter dwarfs the IRAs and 401k, so whatever income I derive from the taxable accounts would probably have way more impact on my taxable income than the RMDs from IRAs. I forget the actual rules for when I would have to draw from 401k.

But if I have to do withdraws from IRAs and 401ks starting at 70.5 years of age, then in early retirement, I'd draw from my non-retirement accounts and supplement with SS if necessary?

Is that what most RE people are doing, drawing from their non-retirement accounts before taking SS and before the RMDs kick in? Or is there some advantage in drawing down the IRA and 401ks earlier?

Yes, typically more retirement savings is tax-deferred (401k, IRA, etc) rather than taxable accounts.

A common approach is to draw from non-retirement (aka taxable) accounts from RE until age 59.5, then from retirement accounts but only up to the top of the 15% tax bracket from 59.5 to 70 and then start SS. This avoids the 10% penalty and minimizes RMDs.

 

[RunningBum]

Do most folks have more retirement savings in IRAs and 401ks or in non-retirement taxable accounts?

In my case, the latter dwarfs the IRAs and 401k, so whatever income I derive from the taxable accounts would probably have way more impact on my taxable income than the RMDs from IRAs. I forget the actual rules for when I would have to draw from 401k.

But if I have to do withdraws from IRAs and 401ks starting at 70.5 years of age, then in early retirement, I'd draw from my non-retirement accounts and supplement with SS if necessary?

Is that what most RE people are doing, drawing from their non-retirement accounts before taking SS and before the RMDs kick in? Or is there some advantage in drawing down the IRA and 401ks earlier?

I also have a lot more outside of my IRAs. I'm drawing that down first, and converting part of my tIRA each year to a Roth. There's general agreement to convert up to the top of the 15% bracket, INCLUDING cap gains and dividends, and excluding all deductions/exemptions. If there is no room, converting to the top of the 10% bracket excluding divs and CGs should be fine. For some it probably makes sense to convert up to the 25% bracket.

I will likely convert up to the top of 25% this year, because of a number of factors, including the PPACA income test starting in 2014, and knowing that I'll hit the 25% bracket once my smallish pension and SS kick in. I'm still trying to figure it out but I think I don't want any RMDs at that point so I think I want to convert everything by 70.

You don't have to wait until 70.5 to tap the IRA and 401K. If you think the best thing for you is to get the longevity insurance of delaying SS to 70, you can start in on the IRA/401K money earlier. I would run the numbers and figure out over the rest of your life how to maximize income after taxes. The factors I see are:

1. Smoothing out taxes. It doesn't make sense to pay 0% one year and 25% another. Fill those lower brackets every year. This is where Roth conversions come in.
2. Consider the PPACA subsidy level. If you're on the fringe it may make sense to ignore point 1 above and go with bumpy income levels to claim the subsidy every other year.
3. Figure out when it makes the most sense for you to take SS, including controlling how much of your SS benefit is taxable, if you can.
4. When to take cap gains, losses, or just sell funds at breakeven if you have to liquidate some of your taxable holdings.

For all the planning in the world, tax laws and tax rates can change so it's hard to say what's right. But I recommend coming up with a spreadsheet and putting numbers in a tax program to verify what happens so that you understand your own case. This will help you avoid advice that doesn't work well for you.

 

[JakeBrake]

Do most folks have more retirement savings in IRAs and 401ks or in non-retirement taxable accounts?

In my case, the latter dwarfs the IRAs and 401k, so whatever income I derive from the taxable accounts would probably have way more impact on my taxable income than the RMDs from IRAs. I forget the actual rules for when I would have to draw from 401k.

But if I have to do withdraws from IRAs and 401ks starting at 70.5 years of age, then in early retirement, I'd draw from my non-retirement accounts and supplement with SS if necessary?

Is that what most RE people are doing, drawing from their non-retirement accounts before taking SS and before the RMDs kick in? Or is there some advantage in drawing down the IRA and 401ks earlier?

When I retired in 2007 we had 3 years projected expenses in after tax money market accounts. My retirement portfolio which is all in rollover IRA's and Roth IRA's lost 34% during the recession of 2008-2009. I did not have to withdraw from my IRA's, but we did deplete the after-tax money market accounts since we had no other source of income.

So, DW and I both reached FRA in 2011 and we both applied for SS. The two direct deposits are in our checking account on the appointed day every month and they are rather reassuring. Our IRA's balances are now well above their level at the beginning of the 2008-2009 recession. We are now withdrawing part of the dividends from the rollover IRA's to supplement our SS. We are reinvesting the capital gains. We only withdraw cash from the cash accounts within the IRA's to pay the projected bills for the next 30 days. Sometimes we can go a couple of months without IRA withdrawals.

Actually, I'm sort of looking forward to RMD's which will force us to replenish our after tax cash accounts.

 

[explanade]

I thought a lot of folks were able to save a lot more over the years than the IRA and 401k limits, so the non-retirment (or non tax-advantaged) accounts might have accumulated more over the years.

Is there a FAQ about converting tIRA to Roth IRA? Is it allowed at certain ages or if you've stopped working? I've converted a lot to Roth but then I'm still working so I've added to tIRA accounts since, because the income limits for contributing to Roth are relatively low.

 

[RunningBum]

Not sure about a FAQ here, but fairmark.com has a lot of good, easy to comprehend information on it. It probably makes the most sense to convert after you've ER'd because converting is an anti-deferral. You look to defer income when you are in the higher brackets, and convert when you are lower.

 

[bUU]

I don't recall any limit on Roth conversions.

 

[pb4uski]

I don't recall any limit on Roth conversions.

They said contributions not conversions:

because the income limits for contributing to Roth are relatively low.

 

[bUU]

Is there a FAQ about converting tIRA to Roth IRA?

I don't recall any limit on Roth conversions.

They said contributions not conversions:

I was answering explanade's specific question. You're correct that there is a limit on contributions.

 

[pb4uski]

I was answering explanade's specific question. You're correct that there is a limit on contributions.

And you are correct that there is no limit on conversions (the government will gladly accept your tax payments on the conversion income).

 

[pb4uski]

Interesting article on this thread topic.

U.S. government annuity for sale - CBS News

 

[Chuckanut]

Here's a radical thought on whether or not to take SS at 62 or 70: Why not split the difference and take it at the official retirement age of 65-67?

 

[RunningBum]

Here's a radical thought on whether or not to take SS at 62 or 70: Why not split the difference and take it at the official retirement age of 65-67?

Because if your goal is to get the best longevity insurance, the article that pb4 quotes shows it would cost an extra $109,500 in an annuity to make up the difference between taking at 70 or taking at 66. That's for the couple who's case he was looking at. That's pretty significant, and doesn't require any effort or scrimping. All you have to do is spend down your money differently, assuming you've got something other than SS and a pension to tap to bridge to 70.

If you've got a different goal like trying to leave behind a bigger estate, splitting the difference could make sense.

 

[imoldernu]

I am trying to lay out these options for a friend who will be retiring soon,
so he can add his own variables.

A visual representation of the amounts for a single person age 62, with a SS salary of $70,000 who would be retiring today, based on the retirement year.



This would produce annual incomes as follows for the average Life expectancy of 82 years for a man who is currently 62.
At age: per yr...... Total for:
62- $21500..... 20 yrs- $430,000
63- $23388..... 19 yrs- $443,720
64- $25188..... 18 yrs- $453,384
65- $26988..... 17 yrs- $458,796
66- $29136..... 16 yrs- $466,176
67- $31296..... 15 yrs- $469,440
68- $33456..... 14 yrs- $468,384
69- $35616..... 13 yrs- $463,008
70- $37776..... 12 yrs- $453,312

Variables:
Investment income gained or lost on the annual amounts...
If interest rates return to long term averages...
CPI COLA's
Life expectancy
Taxes (or not)
Spousal situation (plan is for single man)

Sometimes, looking at actual dollars rather than formulas makes the process easier. In our case, (late 1990's) with CD's earning 7%+, taking SS at 62 worked out well.

 

[gerntz]

We're in the camp of DW taking her SS benefit at 65 - no need & higher taxes with me working till then - me taking spousal at 66, & then converting to my benefit at 70 & her taking spousal of mine since that's still a bit bigger than hers. The way we're largely funding our life till I'm 70 is taking LTCG at 0% tax rate & keeping our income below the $72K taxable income threshold. Any balance comes from drawing down savings in taxable accounts.

 

[Archman]

if you are taking money out of savings to fund from 62-70 taking social security at 62 has an EFFECTIVE break even at 90.
the difference in taking 62/70 is 1.76. in example using 1000 dollars if you get 1000 dollars a year at 62 you would get 1760 at 70.


so 1760 x 20 equals 35200 at 90
so 1000 x 28 equals 28000 at 90

but you also did not use 8000 out of your accounts because you took SS at 62. 35200-28000 equals 7200. extra at 90 if from 70

however 8000 saved -7200 is 800 over for taken at 62.

if you use this formula with your actual 62/70 projections from ss you will see the same thing happen

actual break even is about 82 but EFFECTIVE break even is 90

In my situation, if I take Social Security at age 63, and therefore drawing less from my retirement savings, my break even point is at age 97+,assuming the markets cooperate.

Taking less from your investments mitigates the sequence of portfolio bad returns that might occur early in retirement.

Sequence-of-returns risk involves the actual order in which investment returns occur. Typically, negative returns earlier in retirement have a more severe impact on your portfolio than negative returns later in retirement. That’s because your portfolio’s value is reduced by both negative market performance and any withdrawals you take to fund your day-to-day expenses. This means that a smaller amount is left behind to experience any potential future growth.

 

[Independent]

In my situation, if I take Social Security at age 63, and therefore drawing less from my retirement savings, my break even point is at age 97+,assuming the markets cooperate.

Taking less from your investments mitigates the sequence of portfolio bad returns that might occur early in retirement.

Sequence-of-returns risk involves the actual order in which investment returns occur. Typically, negative returns earlier in retirement have a more severe impact on your portfolio than negative returns later in retirement. That’s because your portfolio’s value is reduced by both negative market performance and any withdrawals you take to fund your day-to-day expenses. This means that a smaller amount is left behind to experience any potential future growth.

One argument for deferring is that I'm concerned that markets won't cooperate.

I understand that order of returns matter, that's the point of the Trinity study. Have you done a calculation, or are you using general reasoning?

FireCalc is designed to do these calculations, and it seems to give different results.

I did this:
1) Loaded FireCalc.com
2) Changed the desired income on the front page to $45,000
3) Went to the "Other income and spending" tab and put in $15,000 of SS starting in 2014.
4) Hit submit and looked at the results.
5) Went back to the "Other income..." tab and put in $20,000 of SS starting in 2018
6) Hit the submit and looked at the results.

Comparing, there were two failure years in the "start in 2018", and six failure years in the "start in 2014".

I also went to the "investigate" tab ( which tends to disappear in my browser) and marked the first button so I could get detailed Excel spreadsheets for output. Repeating the above, and looking at the details, it turns out that deferring fails for start years 1966 and 1969. Starting immediately fails for start years 1966, 1969, and also 65, 67, 68, and 73. I believe that all these are years where the early investment returns are particularly poor.

 

[athena53]

Yes, typically more retirement savings is tax-deferred (401k, IRA, etc) rather than taxable accounts.

A common approach is to draw from non-retirement (aka taxable) accounts from RE until age 59.5, then from retirement accounts but only up to the top of the 15% tax bracket from 59.5 to 70 and then start SS. This avoids the 10% penalty and minimizes RMDs.

The "when to collect SS" question comes up frequently but every time more of this planning stuff sinks in. Next year will be my first year with zero wage income and I'll turn 62. Current plan is to wait till age 70 to collect SS on my record but file for the spousal benefit at age 66 (my FRA). I hadn't thought about Roth conversions but it looks like I'll be in a good position in 2015 and 2016 to take some out of the 401(k) that we won't need to spend and will still keep our taxable income from hitting the 25% bracket, and doing a Roth conversion. We just found a tax guy to untangle some mistakes I made on our state returns last year, so I'll get an expert opinion (and have a better idea what our investment income from mutual fund distributions, dividends, etc. will be) before I make any big moves. Thanks!

 

[jimnjana]

We're in the camp of DW taking her SS benefit at 65 - no need & higher taxes with me working till then - me taking spousal at 66, & then converting to my benefit at 70 ....

I'm thinking this is close to what we will be doing as well. Except DW will likely take her SS at 66 which is her FRA. Our benefits are pretty close, mine is about $100 more, but she is 9.5 yrs older. We still have a few years to think it thru, as DW turned 60 earlier this year.

 

[Archman]

One argument for deferring is that I'm concerned that markets won't cooperate.

I understand that order of returns matter, that's the point of the Trinity study. Have you done a calculation, or are you using general reasoning?

FireCalc is designed to do these calculations, and it seems to give different results.

I did this:
1) Loaded FireCalc.com
2) Changed the desired income on the front page to $45,000
3) Went to the "Other income and spending" tab and put in $15,000 of SS starting in 2014.
4) Hit submit and looked at the results.
5) Went back to the "Other income..." tab and put in $20,000 of SS starting in 2018
6) Hit the submit and looked at the results.

Comparing, there were two failure years in the "start in 2018", and six failure years in the "start in 2014".

I also went to the "investigate" tab ( which tends to disappear in my browser) and marked the first button so I could get detailed Excel spreadsheets for output. Repeating the above, and looking at the details, it turns out that deferring fails for start years 1966 and 1969. Starting immediately fails for start years 1966, 1969, and also 65, 67, 68, and 73. I believe that all these are years where the early investment returns are particularly poor.

I did a rough calculation for this. You stated that you got different results using FireCalc. Some time ago I did a couple of FireCalc calcualtions comparing taking SS at age 62 vs age 66. One calculation said at age 100, my portfoilo would be 1.37 x the amount if I waited till age 66 to take SS vs age 62. Another calculation said I would have 1.9x the amount.

Go figure.

 

[Independent]

I did a rough calculation for this. You stated that you got different results using FireCalc. Some time ago I did a couple of FireCalc calcualtions comparing taking SS at age 62 vs age 66. One calculation said at age 100, my portfoilo would be 1.37 x the amount if I waited till age 66 to take SS vs age 62. Another calculation said I would have 1.9x the amount.

Go figure.

I've got two possibilities:

1) You may have entered some age less than 62, so in both your cases SS was being deferred from your start date.

2) You looked at the average result, I looked at the downside risk.

If we made retirement income decisions based on averages, we'd all be 100% in stocks and 7% would be a SWR. Deferring SS is basically a defensive strategy that's supposed to work best in the unlikely case that we have poor investment returns and live to advanced ages. Many people on this board have enough assets or guaranteed income that they don't need to be defensive, averages work for them. Others need to think about the difficult scenarios.

 

[Archman]

I've got two possibilities:

1) You may have entered some age less than 62, so in both your cases SS was being deferred from your start date.

2) You looked at the average result, I looked at the downside risk.

If we made retirement income decisions based on averages, we'd all be 100% in stocks and 7% would be a SWR. Deferring SS is basically a defensive strategy that's supposed to work best in the unlikely case that we have poor investment returns and live to advanced ages. Many people on this board have enough assets or guaranteed income that they don't need to be defensive, averages work for them. Others need to think about the difficult scenarios.

I just did a couple of FireCalc scenarios at my current situation and now it shows that my portfolio will be 1.26x at age 100 , if I wait until I'm 66 to collect SS. vs age 63.

As far as using averages, remember FireCalc takes into account the standard deviation of returns.

 

[Jackanory]

I thought I'd explore what taking SS at various ages would do to me. I took the results from the SS Benefit Calculator and plugged them into Fido's RIP. After running simulations it gave me the total assets at 'end of plan' , based on taking benefits each year from age 62 to 70. I divided each total by the first years total and plotted a graph:

Thus, if I wait until 70 to collect benefits, RIP calculates that my end of plan assets will be 2.1 times greater than if I collect them at 62.

I guess I'll be waiting!

 

[explanade]

Thus, if I wait until 70 to collect benefits, RIP calculates that my end of plan assets will be 2.1 times greater than if I collect them at 62.

I guess I'll be waiting!

So you'd have more money to leave but presumably won't be spending as much from age 62 to 70?

Seems like a choice between spending on yourself vs. leaving more money for heirs.

Or is it a concern about portfolio survivability?

 

[Jackanory]

It's simply a static measure that I can establish a baseline around. I'm not planning on leaving anything to anyone, so now it's easier to play with the spending variable. Apparently, I have to persuade myself to increase that -- not easy once one realizes that ones hobby is being tight-fisted!