Withdrawal Sequence: Single, Age 66 with $1,500,000 of 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 beyond age 85 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 a few years to his portfolio’s longevity.
By judiciously choosing when he begins Social Security and withdrawing funds tax efficiently, he was able to extend his portfolio’s longevity by about six years.
Financial Facts:
$1,000,000 in 401(k)s
$500,000 in regular taxable accounts
Tim Age 66 with $1,500,000 of assets
He plans on retiring in January 2010. He wants to know how long his financial portfolio may last if he spends $89,450 after taxes in 2010 and an inflation-adjusted equivalent amount each year thereafter.
Tim is a fictional representation of an actual retiree. The numbers involved in this case study are real.
Options Compared
Option 1: He begins Social Security at age 66 and withdraws the funds from the 401(k) first and then the taxable account.
Option 2: He begins Social Security at age 70 and withdraws funds from the 401(k) first and then the taxable account.
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 tax efficiently from his 401(k) and taxable account in a fashion that is designed to increase the longevity of her 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 66 and his portfolio runs out of money in January 2035, 25 years hence.
In Strategy 2, he begins Social Security at age 70 and his portfolio runs almost runs out of money in January 2037; his portfolio provides some of his spending needs for 2037.
In Strategy 3, he begins Social Security at age 70 and withdraws the funds tax efficiently from his portfolio, and it runs out of money in 2041; his portfolio provides much of his spending needs in 2041.
Altogether, by judiciously choosing when he begins Social Security and withdrawing funds tax efficiently, he was able to extend his portfolio’s longevity by about six 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. His Primary Insurance Amount for Social Security is $1,667 a month and her Full Retirement Age is 66. So, if he begins Social Security benefits at age 62, he will receive $1,250 per month, while if he waits until age 70 to begin benefits then his benefits will be $2,200 per month with all payments expressed in today’s dollars. All three strategies allocate stocks to the taxable account and bonds to the 401(k) to the degree possible while maintaining the 50% stocks-50% bonds after-tax asset allocation. Based on today’s Tax Code, he will usually be in the 28% tax bracket in retirement. We assumed inflation of 3% per year with all tax brackets, standard deduction, over 65 tax exemption, and personal exemption amount rising with inflation.
