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Withdraw from IRA and delay Social Security?
Old 01-03-2018, 10:12 AM   #1
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Withdraw from IRA and delay Social Security?

Tried to do a search on this topic but didn't find much.

What I am considering, after doing a few years of ROTH conversions, is to begin withdrawing from our Trad. IRA's at age 60 and delay Social Security benefits until age 70. This will maximize our SS benefits and reduce RMD's from the remaining Trad. IRA. at 70 1/2.

A few caveats I can see:

1) We die sooner than expected and lose SS benefits if we had taken them earlier. (Obviously).

2) By delaying to age 70, Uncle Sam reduces future benefits when we would have been grandfathered in if we had taken benefits earlier. ( We may have time to react and be grandfathered in as well).

3) Obviously, we lose out on future gains between now ( we are ages 58/57) in our Trad. IRA's BUT we get an 8% increase in benefits for every year we wait beyond age 62 ( or maybe full retirement age?) for SS benefits.

Not sure we will even need the extra income since we have pensions, but I can see us spending the most money in retirement between ages 60-70 as we want to do most of our traveling during these 10 years, so it is difficult to estimate annual expenses (discretionary expenses) during this time period.
We are 12 years away from age 70, so we have time. What do you think?
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Old 01-03-2018, 10:21 AM   #2
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Lots of people do exactly what you are planning. Nothing wrong with the logic; I'm assuming you've crunched the numbers in Firecalc and i-orp and are happy with the results?
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Old 01-03-2018, 10:26 AM   #3
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I think you are wise to take some out of your IRA's and enjoy the lower tax rates available before you start SS. Depending on your income now and in retirement, once you start SS, the tax-ability of SS benefits formula does some funny things to your taxable income until 85% of your SS is taxed. At certain points it makes every dollar taken out of IRA increase your taxable income by $1.50, then it goes up to every dollar extra taxed as $1.85 income. Now if your retirement taxable income is high enough that you already pay taxes on all your SS, this is a moot point. I'd guess from your post you already know this, but others may not. Personally, I had never run the numbers on SS income tax-ability until I was 61, and I wasted a couple years I could have pulled IRA money more easily. HTH
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Old 01-03-2018, 10:47 AM   #4
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The annual increase in benefits between 62 and FRA is not 8%... more like a +/-6%... from FRA to 70 it is 8%/year but simple not compounded... so someone with a FRA of 67 that defers to 70 gets 124% of their FRA benefit.

You may want to google SSAnalyze and run your situation through that tool.

Regarding the risk of future reduced benefits, I doubt that people that are 62-70 and collecting will gain an advantage over people not collecting.... and as you say, even if that does happen there may be an opportunity to respond.
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Old 01-03-2018, 10:56 AM   #5
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Quote:
Originally Posted by MrLoco View Post
Tried to do a search on this topic but didn't find much.

What I am considering, after doing a few years of ROTH conversions, is to begin withdrawing from our Trad. IRA's at age 60 and delay Social Security benefits until age 70. This will maximize our SS benefits and reduce RMD's from the remaining Trad. IRA. at 70 1/2.

A few caveats I can see:

1) We die sooner than expected and lose SS benefits if we had taken them earlier. (Obviously).

2) By delaying to age 70, Uncle Sam reduces future benefits when we would have been grandfathered in if we had taken benefits earlier. ( We may have time to react and be grandfathered in as well).

3) Obviously, we lose out on future gains between now ( we are ages 58/57) in our Trad. IRA's BUT we get an 8% increase in benefits for every year we wait beyond age 62 ( or maybe full retirement age?) for SS benefits.

Not sure we will even need the extra income since we have pensions, but I can see us spending the most money in retirement between ages 60-70 as we want to do most of our traveling during these 10 years, so it is difficult to estimate annual expenses (discretionary expenses) during this time period.
We are 12 years away from age 70, so we have time. What do you think?
Not entirely accurate. See here:

https://www.ssa.gov/OACT/ProgData/ar_drc.html

If your IRA is getting better returns, it's best to leave it alone and take SS. My .02
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Old 01-03-2018, 10:59 AM   #6
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Current SS recipients being 'grandfathered' in if there is a cut in SS benefits somewhere down the road? I think that is a huge assumption. It may happen, of course, politics being what it is. Or they may find a way to get all or most of the grandfathered 'excess' money back. I can think of several.

Who knows for sure?
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Old 01-03-2018, 02:46 PM   #7
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Current SS recipients being 'grandfathered' in if there is a cut in SS benefits somewhere down the road? I think that is a huge assumption. It may happen, of course, politics being what it is. Or they may find a way to get all or most of the grandfathered 'excess' money back. I can think of several.

Who knows for sure?
Yes, "grandfathering" is a ridiculous assumption.

If benefits are reduced, it will be across-the-board, same as with the other SS changes that have happened over the last few decades.
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Old 01-03-2018, 03:00 PM   #8
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OP - You are very clever and smart.
We are doing the exact same thing, converting IRA to ROTH, and simply taking some out to spend from the IRA.
Now that the tax rates are lower, I'm seriously considering taking out to the top of the 22% bracket. Since I don't expect the rate table to remain for many years.
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Old 01-03-2018, 03:40 PM   #9
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Quote:
Originally Posted by MrLoco View Post
Tried to do a search on this topic but didn't find much.

What I am considering, after doing a few years of ROTH conversions, is to begin withdrawing from our Trad. IRA's at age 60 and delay Social Security benefits until age 70. This will maximize our SS benefits and reduce RMD's from the remaining Trad. IRA. at 70 1/2.

A few caveats I can see:

1) We die sooner than expected and lose SS benefits if we had taken them earlier. (Obviously).

2) By delaying to age 70, Uncle Sam reduces future benefits when we would have been grandfathered in if we had taken benefits earlier. ( We may have time to react and be grandfathered in as well).

3) Obviously, we lose out on future gains between now ( we are ages 58/57) in our Trad. IRA's BUT we get an 8% increase in benefits for every year we wait beyond age 62 ( or maybe full retirement age?) for SS benefits.

Not sure we will even need the extra income since we have pensions, but I can see us spending the most money in retirement between ages 60-70 as we want to do most of our traveling during these 10 years, so it is difficult to estimate annual expenses (discretionary expenses) during this time period.
We are 12 years away from age 70, so we have time. What do you think?
1) You will not be around to be annoyed

2) It does not have to be all or nothing- take Tira distributions and do conversions until full retirement age, then take the SS. You get a little of the benefit from both sides.

3) You are assuming the market always goes up...... SS is guaranteed.

Best wishes on your decision, but stay flexible.

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Old 01-03-2018, 04:32 PM   #10
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....You may want to google SSAnalyze and run your situation through that tool.....
+1 Good tool! Try entering an age one year longer than what they default to. It yielded a significantly different recommendation for us.
http://www.bedrockcapital.com/ssanalyze/
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Old 01-03-2018, 08:58 PM   #11
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I took SS at 62. My calculations showed that I would come out ~$200k better in my old age considering taxes and all other things I could think of. This was comparing taking SS at 62, 66 2 mo and at age 70.
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Old 01-03-2018, 09:59 PM   #12
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I took SS at 62. My calculations showed that I would come out ~$200k better in my old age considering taxes and all other things I could think of. This was comparing taking SS at 62, 66 2 mo and at age 70.
Every thing is a gamble. I hope it all works out for you!!
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Old 01-04-2018, 06:35 AM   #13
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Originally Posted by MrLoco View Post
Tried to do a search on this topic but didn't find much.

What I am considering, after doing a few years of ROTH conversions, is to begin withdrawing from our Trad. IRA's at age 60 and delay Social Security benefits until age 70. This will maximize our SS benefits and reduce RMD's from the remaining Trad. IRA. at 70 1/2.
Like you OP, we are withdrawing from traditional IRAs and plan to wait for SS till 70. But we will re-evaluate the SS decision at FRA and every year after that.

One makes decisions knowing certain things and not knowing certain things, and re-evaluates as things change. There are so many unknowns (should I quote Rumsfeld on unknown unknowns) that we do what we can with our best guess at all the unknowns.
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Old 01-04-2018, 08:13 AM   #14
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Quote:
Originally Posted by MrLoco View Post
What I am considering, after doing a few years of ROTH conversions, is to begin withdrawing from our Trad. IRA's at age 60 and delay Social Security benefits until age 70. This will maximize our SS benefits and reduce RMD's from the remaining Trad. IRA. at 70 1/2.

Not sure we will even need the extra income since we have pensions, but I can see us spending the most money in retirement between ages 60-70 as we want to do most of our traveling during these 10 years, so it is difficult to estimate annual expenses (discretionary expenses) during this time period.
We are 12 years away from age 70, so we have time. What do you think?
There is plenty of literature regarding both reducing RMDs through Roth conversions and delaying social security benefits until 70. Try some more searches.

In general, your plan makes a lot of sense. You may want to experiment a bit with some additional SS claiming strategies. It almost always makes sense for the higher-income spouse to delay until 70. What you should do with the lower-income spouse may vary though. Sometimes it is better to claim the lower benefit sooner than 70. One of the best things about planning to delay your SS benefits is that you can always change your mind and claim sooner if your situation changes dramatically.

If you want to spend a few dollars, you can play with https://maximizemysocialsecurity.com/ for a year for $40. It's a pretty comprehensive system. You can try as many different scenarios as you like - varying your longevity, etc. It will show you the optimal SS claiming strategy, and the gain in expected dollars because of it.
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Old 01-05-2018, 02:12 PM   #15
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Quote:
Originally Posted by MrLoco View Post
Tried to do a search on this topic but didn't find much.

What I am considering, after doing a few years of ROTH conversions, is to begin withdrawing from our Trad. IRA's at age 60 and delay Social Security benefits until age 70. This will maximize our SS benefits and reduce RMD's from the remaining Trad. IRA. at 70 1/2.
I posed this exact question to our Financial Planner last week. I expected him to confirm this path as our best solution. Instead, he said that our optimal method will likely be to immediately start collecting SSA benefits when we retire. He will run the personalized scenario for us using our ages and financial situation, but told us these same scenarios he has run for his other clients almost always support the immediate drawing of SSA benefits. There is no universal answer for everyone's situation.

We may have our personalized answer at our next quarterly meeting with him. Retirement is still nearly two years away
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Old 01-05-2018, 03:20 PM   #16
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I posed this exact question to our Financial Planner last week. I expected him to confirm this path as our best solution. Instead, he said that our optimal method will likely be to immediately start collecting SSA benefits when we retire. He will run the personalized scenario for us using our ages and financial situation, but told us these same scenarios he has run for his other clients almost always support the immediate drawing of SSA benefits. There is no universal answer for everyone's situation.

We may have our personalized answer at our next quarterly meeting with him. Retirement is still nearly two years away
I expect your financial planner almost always uses the same assumptions regarding investment returns and longevity.

Be sure that he/she runs multiple scenarios and explains the differences to your satisfaction.

And, plug your numbers into FireCalc or some other multi-scenario tool to check the FP's work.
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Old 01-05-2018, 03:33 PM   #17
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I posed this exact question to our Financial Planner last week. I expected him to confirm this path as our best solution. Instead, he said that our optimal method will likely be to immediately start collecting SSA benefits when we retire.
If you draw SS immediately, the balances in your investment accounts will stay high. If he is paid with an assets-under-management percentage, he will make out better by having your balances stay higher. Just be aware of any biases that he may be injecting into the analysis. If the market stays red hot, any move to minimize draw on investments will look great, so be careful about back testing.

In our case, the low earner will draw at 62, and the plan is for the high earner to draw at 70. We may be able to do some Roth conversions between those two dates. We also have the ability to begin higher earner SS at any time, if circumstances change.

When to draw Social Security is a hotly debated topic, with no clear solution that fits everybody.
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Old 01-05-2018, 05:25 PM   #18
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Originally Posted by MI-Roger View Post
I posed this exact question to our Financial Planner last week. I expected him to confirm this path as our best solution. Instead, he said that our optimal method will likely be to immediately start collecting SSA benefits when we retire. He will run the personalized scenario for us using our ages and financial situation, but told us these same scenarios he has run for his other clients almost always support the immediate drawing of SSA benefits. There is no universal answer for everyone's situation.

We may have our personalized answer at our next quarterly meeting with him. Retirement is still nearly two years away
IF your Financial Planner is paid a percentage of the assets under control/investment, then this is the answer he/she will give all clients.

So how is your Financial Planner paid ?
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Old 01-05-2018, 08:11 PM   #19
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I expect your financial planner almost always uses the same assumptions regarding investment returns and longevity.
Since longevity should be based on Actuarial Tables, I imagine he does use similar ultimate life expectancy unless the client's have shared known serious health problems with him or they have been rejected for Life Insurance policies or increases.

Returns should have some variation as higher net asset clients can afford to invest heavier in higher return (and risk) investments without causing exposing themselves to loss of the income necessary to sustain their planned life-style.


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IF your Financial Planner is paid a percentage of the assets under control/investment, then this is the answer he/she will give all clients.

So how is your Financial Planner paid ?
A combination of Fixed Fee with an ultra-low percentage applied to the value of our portfolio. Ultra-low is my wording as the percentage is hundredths of one percent. The FP's loss of commission from a $30K annual withdrawal (mimicking the SSA distribution) would not buy a two person lunch at McDonalds.
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Old 01-06-2018, 09:08 AM   #20
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Since longevity should be based on Actuarial Tables, I imagine he does use similar ultimate life expectancy unless the client's have shared known serious health problems with him or they have been rejected for Life Insurance policies or increases.

Returns should have some variation as higher net asset clients can afford to invest heavier in higher return (and risk) investments without causing exposing themselves to loss of the income necessary to sustain their planned life-style.
People can look at the same mortality statistics and focus on different things. Some will assume they'll die at about the "average" age, others may be very concerned about paying for an unusually long life. The adviser should consider those differences in emphasis.

Some people will be happy with a spending plan based on "average" returns, others will want a spending plan that is sustainable even if they happen to retire into an exceptionally poor investment climate. Again, the adviser should consider those differences.

Single people, who are comfortable assuming average life spans and/or average investment returns, probably find that taking SS sooner maximizes their spending or estates. OTOH, single people concerned about the possibility of combined long lives and poor investment experience may want to defer SS.

Married people have the same issues, but need to consider the added factor of SS survivor benefits.

Let's move away from SS and simply think about safe withdrawal rates. The first group of people above may well be comfortable withdrawing/spending 6% or even 8% of their savings in the first year of retirement. The second group is more likely to limit themselves to 4%. I'd think your adviser works with both types of people.
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