Social Security Choices: Couple Age 66 with $1,500,000 of assets
This case demonstrates the additional longevity that is possible by judiciously choosing the date that you begin Social Security benefits.
Financial Facts:
$1,000,000 in 401(k)s
$500,000 in regular taxable accounts
Mike & Jen, Age 66 with $1,500,000 of assets
This couple is beginning retirement in January 2010. They are questioning how long their financial portfolio may last if they spend $110,000 after taxes in 2010 and an inflation-adjusted equivalent amount each year thereafter while both spouses are alive, but 85% of that amount after the death of the first spouse.
This couple is a fictional representation of actual retirees. The numbers involved in this case study are real.
Options Compared
Option 1: They both begin Social Security benefits at age 66 and withdraws the funds from the 401(k) first and then the taxable account, a very typical strategy
Option 2: The wife begins Social Security at age 66 and the higher-earning husband delays benefits until age 70, and they withdraw funds from the 401(k) first and then the taxable account.
Option 3: The wife begins Social Security at 66 and the husband begins at 70, and they withdraw funds in a tax-efficient manner from their financial portfolio. Each year, they will withdraw funds tax efficiently from his 401(k) and taxable account in a fashion that is designed to increase the longevity of their portfolio, and they use a partial Roth conversion when appropriate.
In Strategy 1 in the Figure, they both begin Social Security at age 66 and their portfolio runs out of money in January 2035, 25 years hence.
In Strategy 2, she begins Social Security at age 66 and he at 70 and their portfolio runs out of money in January 2037; their portfolio provides about $11,000 of spending for 2036 (plus Social Security benefits).
In Strategy 3, she begins Social Security at age 66 and he at 70 and they withdraw funds tax efficiently from their portfolio. It runs out of money in January 2040.
Altogether, by judiciously choosing when they begin Social Security and withdrawing funds tax efficiently, they were able to extend their portfolio’s longevity by about five years.
Assumptions: They maintain 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 $2,500 a month and hers is $1,500 a month. They both have Full Retirement Ages of 66. In Strategy 1, they both begin benefits at 66 and receive their Primary Insurance Amounts. In Strategies 2 and 3, she begins benefits at 66, thus receiving $1,500 a month, while he delays the start of benefits based on his earnings record until age 77. He receives spousal benefits of $750 a month from age 66 until he turns 70, at which time he switches to benefits based on his record and receives $3,300 a month. We assume he dies in 13 years at age 79 and, after his death, she receive his Social Security benefits for the rest of her life. All Social Security amounts are 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, they will usually be in the 25% 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.
