Withdrawal Sequence: Single Person Age 62 with $3 Million of Financial Assets
This case demonstrates how you can extend your portfolio’s longevity by judiciously choosing when you begin Social Security and tax efficiently withdrawing fund from your portfolio. It also presents the tradeoff as to when this single individual should begin Social Security. If he was confident that he would not live more than 20 years then he should begin Social Security early. However, even if he should decide to begin Social Security early then he should tax-efficiently withdraw his funds since it could add years to his portfolio’s longevity or allow his beneficiaries to inherit a larger amount.
Financial Facts:
$1,900,000 in 401(k)s
$100,000 in Roth IRA
$100,000 in non-qualified annuity
$900,000 in regular taxable accounts
Cyrus Age 62 with $3,000,000 of assets
He plans to retire from work this year. He has $3,000,000 in financial assets including $1,900,000 in a 401(k),$100,000 in Roth IRA, $100,000 in a non-qualified annuity, and $900,000 in regular taxable accounts. He wants to know how long his financial portfolio may last if he spends $131,000 after taxes in the first year and an inflation-adjusted equivalent amount each year thereafter.
Options Compared
Option 1: He begins Social Security at age 62 and withdraws the funds tax inefficiently.
Option 2: He begins Social Security at age 70 and withdraws the funds tax inefficiently.
Option 3: He begins Social Security at age 70 and withdraws funds in a tax-efficient manner from his financial portfolio. Each year, he will withdraw funds from his 401(k), Roth IRA, non-qualified annuity and taxable accounts in a fashion that is designed to increase the longevity of his portfolio.
We assume he maintains a 50% stocks-50% bonds after-tax asset allocation with stocks earning 7% per year and bonds earning 3%, both historically conservative assumptions. Other assumptions are provided below.
In Strategy 1, he begins Social Security at age 62 and his portfolio runs out of money at the end of 2037. (The $131,000 after-tax spending was set because this is the largest amount rounded to $100 that will allow his portfolio to last through 2037.)
In Strategy 2, he begins Social Security at age 70 and his portfolio runs out of money at the end of 2038; it provides almost all the money he needed in 2038.
In Strategy 3, he begins Social Security at age 70, withdraws the funds tax efficiently from his portfolio, and it runs out of money after providing about $65,000 of his financial needs in 2043. The tax-efficient withdrawal strategy added more than four years to his portfolio’s longevity.
Altogether, by judiciously choosing when he begins Social Security and withdrawing funds tax efficiently, he was able to extend his portfolio’s longevity by more than five years.
Assumptions: He maintains a 50% stocks-50% bonds after-tax asset allocation with stocks earning 7% per year including 2% dividend yield and bonds earning 3% interest per year. For the stocks, 20% of capital gains are realized each year with all gains being long term. The original cost basis of assets held in the taxable account is set at the market value and the cost basis of the non-qualified annuity is $85,000. His Primary Insurance Amount for Social Security is $2,000 a month and his Full Retirement Age is 66. So, if he begins Social Security benefits at age 62 he will receive $1,500 per month, while if he waits until age 70 to begin benefits he will receive $2,640 per month with all payments expressed in today’s dollars. All three strategies allocate stocks to the taxable account and bonds to annuity to the degree possible while maintaining the 50% stocks-50% bonds after-tax asset allocation. We assume he takes the standard deduction each year. Furthermore, we assume inflation of 3% per year with all tax brackets, standard deduction, over 65 tax exemption, and personal exemption amount rising with inflation.
Disclaimer:
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. You should consult your tax or legal advisor regarding such matters.
