Options for guaranteed income if you’re delaying Social Security until FRA

[G-Man]

The plan has always been for my wife to take her SS benefits at age 62 and I will take mine at 70. In 1.5 years, I will need to make a decision on whether to turn on my wife's SS benefits at age 62. Since, I'm the higher earner, I will delay my SS benefits until age 70 (12 years from now).

Lately I have been thinking about delaying my wife's benefit until age 67 (her FRA). However, I will need to bridge the 5-year gap (from 62 -67) with some guaranteed income. Such as taking a certain amount from her 401k and buying a product such as an annuity, CD ladder, bond ladder, etc. I have determined that she will need about $31,500 per year for 5 years. With this approach, it will allow us to draw down on her tax-deferred account and reduce RMDs in later years.

I would like to know the pros and cons of this approach and what is the best product (bond ladder, CD ladder, SPIA, MYGA) to generate $31,500 per year in guaranteed income for 5 years. If annuity is the best option, how much would it cost and is an annuity transferable on death?

 

[Spock]

Is that $31,500 to be pure interest? or interest + principal = $31500?
Either way I would tend to go with a bond ladder but I'm biased against annuities. Right now good CDs are hard to come by so that leaves (for me) Treasuries and Agencies. Interest only means you would need about $630K.


As far as the SS start age the opinions are all over the board. My math came up to it being a wash whenever the lower income spouse hit max spousal benefits. Problem is ssa.gov and the board favorite opensocialsecurity.com give me two different answers to that question.

 

[G-Man]

Is that $31,500 to be pure interest? or interest + principal = $31500?
Either way I would tend to go with a bond ladder but I'm biased against annuities. Right now good CDs are hard to come by so that leaves (for me) Treasuries and Agencies. Interest only means you would need about $630K.


As far as the SS start age the opinions are all over the board. My math came up to it being a wash whenever the lower income spouse hit max spousal benefits. Problem is ssa.gov and the board favorite opensocialsecurity.com give me two different answers to that question.

The $31,500 is principal and interest per year for 5 years only. Just looking for a 5 year product.

 

[Out-to-Lunch]

In similar circumstances, I opted for a 10-year TIPS ladder within the tIRA.

 

[TheWizard]

I had a seven year gap to deal with from start of retirement at age 63. So I did two things.

I annuitized portion of my TIAA accumulation for LIFETIME monthly income. This was a mix of TIAA Traditional and CREF Stock so the monthly payout has increased nicely since 2013.

Secondly, I withdrew $3000/month pro rata from my tax-deferred investments, in lieu of SS.
When my age 70 SS started on 2020, I stopped that $3000/month withdrawal.
So now I have a good-sized monthly income.

Unfortunately, most folk are not eligible for TIAA annuities and I'm not aware of other places offering similarly low-cost immediate annuity payouts...

 

[TheWizard]

For the OP's $31,500/year over five years, I wouldn't annuitize anything.
Just take $2625 per month from her tax deferred investments, allocated at least 50% to the S&P 500 or similar.

And what is her total tax-deferred investment amount, roughly?

 

[Koolau]

The plan has always been for my wife to take her SS benefits at age 62 and I will take mine at 70. In 1.5 years, I will need to make a decision on whether to turn on my wife's SS benefits at age 62. Since, I'm the higher earner, I will delay my SS benefits until age 70 (12 years from now).

Lately I have been thinking about delaying my wife's benefit until age 67 (her FRA). However, I will need to bridge the 5-year gap (from 62 -67) with some guaranteed income. Such as taking a certain amount from her 401k and buying a product such as an annuity, CD ladder, bond ladder, etc. I have determined that she will need about $31,500 per year for 5 years. With this approach, it will allow us to draw down on her tax-deferred account and reduce RMDs in later years.

I would like to know the pros and cons of this approach and what is the best product (bond ladder, CD ladder, SPIA, MYGA) to generate $31,500 per year in guaranteed income for 5 years. If annuity is the best option, how much would it cost and is an annuity transferable on death?

Maybe I'm missing something. Why not just draw each year what she needs from her 401(k)? Whatever her investments within the 401(k) will continue to (hopefully) grow in the mean time. You still accomplish the future RMD reduction and you no longer need to deal with an annuity and its inherent costs. Basically, that's what we did because I waited until 70 for SS. Also, withdrawing a big chunk of 401(k) money to open an annuity might mean a higher tax bracket. YMMV

 

[G-Man]

For the OP's $31,500/year over five years, I wouldn't annuitize anything.
Just take $2625 per month from her tax deferred investments, allocated at least 50% to the S&P 500 or similar.

And what is her total tax-deferred investment amount, roughly?

$300k

 

[G-Man]

Maybe I'm missing something. Why not just draw each year what she needs from her 401(k)? Whatever her investments within the 401(k) will continue to (hopefully) grow in the mean time. You still accomplish the future RMD reduction and you no longer need to deal with an annuity and its inherent costs. Basically, that's what we did because I waited until 70 for SS. Also, withdrawing a big chunk of 401(k) money to open an annuity might mean a higher tax bracket. YMMV

All good points. Thanks for responding.

 

[ShokWaveRider]

$300k with a 5 year period certain (Funds depleted in 5 years) = $5,521 a month for 5 years.

$300k with a 10 year period certain (Funds depleted in 10 years) = $3,049 a month for 10 years.

 

[G-Man]

$300k with a 5 year period certain (Funds depleted in 5 years) = $5,521 a month for 5 years.

$300k with a 10 year period certain (Funds depleted in 10 years) = $3,049 a month for 10 years.

What if we use $150k instead of $300k. What website are you are using to get these numbers?

 

[ShokWaveRider]

What if we use $150k instead of $300k. What website are you are using to get these numbers?

Just cut the above numbers in half. You can try the options yourself here:

https://www.immediateannuities.com/

 

[Al18]

If the $300K is already allocated according to your stock/fixed income plan you don't need to do anything. Assuming a 60/40 split, you currently have $120K in fixed income. As mentioned above, you just withdraw $31.5K each year from stocks/fixed income.



Personally, I would transfer the 401K balance to a Rollover IRA account before the withdrawals start, because it's easier to buy CD's from within an IRA. Also withdrawals from a 401K have a mandated 20% Federal withholding, while there is no required withholding from an IRA.

 

[G-Man]

If the $300K is already allocated according to your stock/fixed income plan you don't need to do anything. Assuming a 60/40 split, you currently have $120K in fixed income. As mentioned above, you just withdraw $31.5K each year from stocks/fixed income.



Personally, I would transfer the 401K balance to a Rollover IRA account before the withdrawals start, because it's easier to buy CD's from within an IRA. Also withdrawals from a 401K have a mandated 20% Federal withholding, while there is no required withholding from an IRA.

Thanks for the feedback.

 

[Koolau]

One suggestion I might add would be to consult a fee-for-service Financial Planner. Find someone who can help you do the calculations (including things like taxes and any of the financial "cliffs" you want to avoid.) Good luck and YMMV.

 

[G-Man]

One suggestion I might add would be to consult a fee-for-service Financial Planner. Find someone who can help you do the calculations (including things like taxes and any of the financial "cliffs" you want to avoid.) Good luck and YMMV.

I agree. I would love to work with someone to perform the analysis to determine if collecting SS at 67 has a significance benefit as opposed to collecting at 62.

 

[pb4uski]

Have you used opensocialsecurity.com?

 

[G-Man]

Have you used opensocialsecurity.com?

Actually, I'm using the RightCapital retirement planning software and the social security feature within the software. When I toggle between taking my wife's SS at 62 versus 67, it has a minimum increase to my Monte Carlo probability of success score as well as the end-of-life balance. Based on the analysis of this software, it's not worth taking it at her FRA (age 67).

With opensocialsecurity.com, if I use the default mortality table, it recommends that my wife takes her SS benefits at 62 and 1 month, and I take my SS benefits at 70. The default is using the "2020 Social Security Period Life Table".

When I don't use the default mortality table and input my wife and I "assumed age at death" (97 and 94), it recommends we both take our SS benefits at age 70.

 

[G-Man]

Any other feedback on this topic?

 

[Tadpole]

I delayed collecting SS until age 70 but retired at age 62. I had an old TIAA/CREF account from one of my first jobs which had grown sufficiently such that moving it all to TIAA and opting for a 10-year payout annuity produced, after tax, about the same amount my SS would have paid had I started it at age 62. The side benefit was that this part of my future RMDs was just about reduced to zero when my bigger retirement accounts were mandated to start RMDing and my age 70 big SS check began.

 

[5Miler]

I retired at 58.5 years and did not take Social Security until 68.5 years so I had 9 years to cover before SS kicked in after living the first year off of severance and etc.

Coincidentally, I also needed about $30K annually from my IRA. I set up a monthly distribution to my checking account from my IRA money market making sure to periodically replenish the money market by selling securities. I retired in 2012 and happened to leave during a sweet spot in the market so my IRA balance actually increased substantially despite the monthly distributions. I initially kept 3 years cash in my MM to guard against market drops but eventually just kept 1 year of distributions replenishing quarterly if I remembered.

 

[Trailwalker]

I did 5 years of TIPS to cover ages 65 to 70. I was lucky and caught the near top of the market at 2.5% fixed rate plus inflation.

 

[Closet_Gamer]

Any other feedback on this topic?

In your circumstances I would go for guaranteed and simple, which to me equals a ladder of either CDs or Treasuries.

You want $31.5K/yr. That's 5% return on $30K assuming you consume the principle as part of paying the $31.5K.

They yield curve still bends down a little bit, so it will be hard to get 5% but its close.

Using this as a guide to rates ...
https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

1 Yr @ 4.94%
2 Yr @ 4.56%
5 yr @ 4.20%

Investing about $30K in each ladder rung will get you just about $31500 per year and allow some room for inflation.

 

[G-Man]

In your circumstances I would go for guaranteed and simple, which to me equals a ladder of either CDs or Treasuries.

You want $31.5K/yr. That's 5% return on $30K assuming you consume the principle as part of paying the $31.5K.

They yield curve still bends down a little bit, so it will be hard to get 5% but its close.

Using this as a guide to rates ...
https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

1 Yr @ 4.94%
2 Yr @ 4.56%
5 yr @ 4.20%

Investing about $30K in each ladder rung will get you just about $31500 per year and allow some room for inflation.

Not sure I understand the various rings I would need in the ladder to produce around $31.5k per year. So, let's assume I need the guaranteed income starting in January 2025. How would I construct the ladder rings?

 

[TickTock]

Not sure I understand the various rings I would need in the ladder to produce around $31.5k per year. So, let's assume I need the guaranteed income starting in January 2025. How would I construct the ladder rings?

For simplicity, I'd do the following:

In January, take out the full $31.5k. Spend $2,625. And set up a ladder - 1, 2, 3, 4, 6, and 12 month new issues are available. Either fill in the remaining six rungs at secondary auction, or wait and buy at the appropriate time (buy a new 6 month UST when the first one has gone down to 5 months, and so on). Or buy 2x the 1/2/3/4/6/12 rungs.