Should You Draw Down Your Portfolio to Delay Social Security?
Deciding when to start taking Social Security benefits is a profound financial decision that can significantly impact your retirement income. With various factors to consider—such as your health, life expectancy, and financial situation—a common strategy is to delay Social Security benefits to increase future payments. However, this prompts the question: Should you draw down your investment portfolio to postpone Social Security? Here are the key considerations to help you make an informed decision.
Understanding the Basics of Social Security
Social Security benefits can be claimed as early as age 62, but the full retirement age (FRA) depends on your birth year and ranges from 66 to 67. It’s important to note that if you choose to claim benefits before your FRA, your monthly payments will be reduced. Conversely, delaying benefits until after your FRA can result in increased monthly payments, potentially by up to 8% for each year you delay, until age 70.
Pros of Delaying Social Security
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Increased Monthly Payments: The most significant advantage of delaying Social Security is the increase in monthly benefits. For example, if your FRA is 67 and you decide to delay benefits until 70, you could receive a substantial bump in your social security income for the rest of your life.
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Longevity Insurance: For individuals with longevity in their family history, delaying Social Security can serve as a form of insurance. You’ll have a larger income stream in your later years, which can be crucial if you live longer than expected.
- Potential Tax Advantages: Delaying your benefits may also help manage your tax liability. If you have significant income in retirement from other sources (like withdrawals from tax-deferred accounts), it may make sense to minimize Social Security income initially.
Cons of Delaying Social Security
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Out-of-Pocket Expenses: The key to successfully delaying benefits is having sufficient income from other sources to cover your living expenses. If you draw down your portfolio early, it could potentially exhaust your savings too quickly.
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Investment Risk: Drawing down your investment portfolio introduces market risk. If the market has a downturn while you’re withdrawing funds, you could deplete your assets more quickly than planned, especially if you are in a bear market.
- Health Considerations: If you have health issues or a family history of shorter lifespans, delaying Social Security may not be the best strategy, as you might not live to reap the benefits of higher monthly payments.
Analyzing Your Financial Situation
Before deciding to draw down your portfolio, consider the following financial factors:
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Current Savings and Expenses: Assess your savings, expenses, and income. Can your portfolio comfortably cover your living expenses until you start receiving Social Security?
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Withdrawal Rate: Determine a sustainable withdrawal rate from your portfolio. Financial experts often recommend a rate around 4% for a balanced portfolio, but this can vary based on individual circumstances and market conditions.
- Other Income Sources: Consider all your income sources during retirement, including pensions, rental income, or part-time work. These sources can relieve some pressure from relying solely on your portfolio.
Making the Decision
Ultimately, the decision to draw down your portfolio to delay Social Security will depend on a blend of personal preferences, financial stability, and your anticipated life expectancy. Consulting with a financial advisor can help tailor a strategy to your unique situation, allowing you to weigh the pros and cons effectively.
Conclusion
Delaying Social Security can be a strategic financial decision that enhances your retirement income, particularly if you can manage your expenses and portfolio withdrawals effectively. However, it’s crucial to examine your circumstances holistically—the health of your investments, your living expenses, and your life expectancy. Ultimately, this decision requires careful planning, introspection, and a keen understanding of your financial landscape to ensure a secure and fulfilling retirement.
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Logically this doesn’t make sense. If you are delaying taking your 401k withdrawals by taking social security it’s the exact same thing. Meaning you are not “growing” your 401k but are rather enjoying your 401k for less years in exchange for a bigger balance.
The question is….do you think you can beat the guaranteed 8% growth that social security provides.
Also do you plan on working part time for
62-67 just to keep social and active which will penalize your social security.
I don't really think RMDs will impact me. My pension will start at $3,517/month at 62, then increase annually based on COLAs. My Social Security will be below $2k/month. My wife won't have much Social Security. Maybe $600/month at 62. All of my 457(b) will be converted to a Roth by age 65. The only issue I might have will be my DROP account, which will have a $900k balance at 62. So it's not like my wife and I will be in a $200+k tax bracket, even if we have to pull 4% from the DROP account each year starting at age 73.
I would add a few more factors to consider. The 2 year look back for Medicare and RMD’s.
I’m not looking to die richer so while being invested 1/3 in real estate at 59 I’m going to do ROTH conversions til 62 (3 years) I want to have 1/2 of my portfolio after tax that I believe I will be leaving to my kids therefore it will have 20-30 years to grow tax free for them. The other half will be for me to draw down on while I wait for 67 and 70 for me and my wife respectively to receive the max (survivor benefits are only up to 67) and I believe will make it to at least 80 due to our parents living all til 90 and above. Hopefully this will allow me to control RMD’s and the resulting tax burden.
yeah, but I have a spouse that I would like to leave a larger, guaranteed income from ss. And like another comment mentioned the fact that RMDs and possible roth conversions at a lower tax rate may be good to delay ss until 70.
For people with a typical life expectancy it usually makes sense to wait until age 70, if they are in decent financial shape.
A lot of people I know who haven't lived the healthiest lives have made it past 85 years old…. Just don't know whether you'll pass at 62 or 72 or 82 or 92.
As you say, SS is a more dependable increase each year than the stock market, as it raises with inflation.
If you have even a 10% chance of living to 85, there's not typically a good reason to start claiming at 62, aside from spousal benefit influencing the numbers…. I know I don't want to chance running out of money in my late 80s, if I'm fortunate enough to live that long.
Contrarian view. I took my estimated benefit statement, and took that benefit amount and calculated a 6% return of the early money (at age 62) and compared to age 67 and age 70.
Guess when the “break even” between the three approaches? 92 and 93 years of age.
Something to think about – even if all it does is keep my 401k money intact, it’s earning the 6%.
Your greatest flaw in this video is you're not calculating the inflation rate you get with social security every year, so it's not $100 plus $100. It's $100 plus whatever the inflation rate was the next year.
I'm in the rare group, yay for me.
Thanks for a fresh perspective on taking SS! My dad died at 68, mom’s alive at 91! So here’s my plan. Retire in 6 months at 59, collect $2,000/month SS at 62. Use $1,000 for expenses, pay $500 for taxes and $500 in ROTH to grow till my breakeven at 78. That should conservatively give me around $150,000 tax free at 78. Just another option, I’m always looking for “best of both worlds”, not necessarily A or B but maybe there’s a C!
clients could have another bucket for income, that would be a cash account. So you should consider SS as bucket 1, 401k/Roth IRA/Brokerage Account is bucket 2, and Cash in bucket 3. Thus if the market is down, take the money out of cash and not the 401k, and the inverse when the market is up.
What about RMDs?
Loved this video. I have this same discussion with family and friends often. You articulated this very well. Most financial advisors never account for the loss you sustain from drawing off your investments and they tend to recommend waiting as long as possible to take SS. For fun… I put together an extremely rudimentary excel sheet based on collecting at 63 when I retire vs waiting to full retirement age. The SS breakeven is as you stated approx 80 years old. But If I added into the calculation the money I drew down from my investments and the loss of growth on those dollars at a straight 4% average rate of return. I found I can never breakeven. So….I will be collecting SS at 63 when I retire.
Your Hiers don't get your SS if you die.
Unless someone has a portfolio of at least $1 million – or there abouts – the bridging strategy starts to become the better option IF your SS benefits come fairly close to the maximum that is paid out by SS. If your situation is one where your savings is less than $200,000 or so, you may want to bridge with that to delay until 70. The idea of the "break even point" is not a strategy. If you file early, how does getting $2,000 per month in SS benefits help if you have $200,000 in savings or investments to supplement that with? Because you will totally deplete that before too many years and then only have the $2,000 SS benefit to live off of when that happens.
I retired and started collecting SS at 63 to allow our investments to grow. My spouse is 6 years older and has some health concerns. Knowing that when he passes I’ll be eligible for his larger check the break even point didn’t seem to apply as much to the decision. We’re also wanting to leave as much legacy to the kids as possible!
If I take SS at 62, I’ll get $2,500 per month or 30k per year.
I have 1mm in a retirement fund with an average annual return over the last 20 years of 8%.
I plan to draw 3% of that at 62, which equates to another 30k per year.
So a total of 60k per year, I have zero debt.
Based on my average return, I will still net a 5% annual increase.
I’m still ahead and can retire with enough annual income to do the things I want.
My wife is 9 years younger than me. Waiting at least a couple years past 62 will just benefit her when I'm eventually gone