To try to develop the most effective retirement income strategy for the middle class, Stanford University’s Center on Longevity analyzed and compared 292 scenarios.[i]
Its conclusion is a two-prong strategy. First, delay taking social security until age 70 by working either full- or part-time. Second, withdraw annually from your IRAs or 401(k)s based on the IRS’s minimum requirement tables.
Every year you wait after age 66, your social security benefit goes up by 8%. For example, if you are eligible for $30,000 at 66 but are waiting until you reach age 70, that benefit increases by 32% to $39,600. (After age 70, there is no reason to wait because the 8% stops accruing.)
Future cost of living adjustments (COLAs) are then based on the higher amount, which is $39,600 in this example. If the Social Security Administration announces a 2% COLA, your amount next year will be $40,392.
The study recommends that married couples have the higher-earning spouse delay taking his or her social security until age 70 while having the lower-earning spouse begin taking social security when he or she hits the full benefit, which is usually age 66.
That way, if the higher-earning spouse dies, the lower-earning spouse’s social security jumps to the amount the higher-earning spouse was receiving.
The second prong is supplementing your social security by withdrawing from your IRAs or 401(k)s based on the IRS’s required minimum tables. For example, the table might require you to take out 4% of your account value at age 73. If your IRA is worth $100,000, you would withdraw $4,000.
The amount you withdraw each year will change as your account’s value changes and the percentage required to take out goes up.
They recommend keeping between 50 to 100% of your portfolio in stocks. In good years, your withdrawal amount will be higher than when the stock market is down.
The study is based on working until age 70. That way, you will not deplete your IRAs or 401(k)s as you wait. If someone fully retires at age 66, the benefits of waiting to take your social security get more complicated.
Financial Planner Michael Kitce did a study that found it takes to age 80 to break even from having to use retirement assets between ages 66 to 70.[ii]
What About Public Employees?
The study focused on people working for companies that no longer offer traditional pensions, so there is a need for Social Security to replace it.
Most public employees still have traditional pensions. If they retire at age 66 or younger, pension might make it easier to wait for the more significant Social Security payout at age 70.
Other public employees work in one of the fifteen states where some or all their municipal employees do not contribute to Social Security. (Some may become eligible through other jobs.) For them, because of the Windfall Elimination Law, which reduces their Social Security payment by around 55%, why wait until age 70 to get a more significant number decreased by 55%?
Married public employees in those states should be wary of their spouse waiting until age 70 to start taking Social Security, especially if the spouse fully retires at 66.
Why deplete retirement resources, especially if the public employee pension provides a lifetime income guarantee to the spouse upon the death of the public employee? A second law, the Government Pension Offset, means the public employee gets little to none of the spouse’s Social Security after that spouse dies.
These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
[i] Vernon, Steve. How to “Pensionize” Any IRA or 401(k) Plan.” Stanford Center on Longevity. November 2017. http://longevity.stanford.edu/wp-content/uploads/2017/12/How-to-pensionize-any-IRA-401k-final.pdf
[ii] Caplinger, Dan. Social Security: Why the 8% “Return” Myth Shouldn’t Make You Wait to Retire. The Motley Fool, Jun 21, 2015. https://www.fool.com/retirement/general/2015/06/21/social-security-why-the-8-return-myth-doesnt-make.aspx