Q. I plan to retire soon. I’m 62 and hope to live well into my 90's. I need about $80,000 a year to live comfortably, plus inflation adjustments each year. I have $1.2 million saved in my 401(k). My estimated Social Security benefit will be about $21,660 a year if I take it at 62. It will be $39,288 if I wait until age 70.
To get to my $80,000 goal, the 2 most obvious options are delaying Social Security benefits and using a higher withdraw rate from the 401(k) plan until age 70, or taking Social Security at 62 and using a lower withdraw rate. Which option would give me a better chance of maintaining my standard of living into my 90's? Or is some hybrid of the two a better option? —R.S., Seattle, WA
A. You didn't mention whether you are married or not. If you are, delaying Social Security benefits is a slam-dunk because a joint life expectancy is so much longer than a single life expectancy. As a consequence, a married household is virtually certain to get back more money than was given up by deferring. The decision is a bit harder for a single individual, but the basics still favor deferring for three reasons.
First, the benefits of deferral can't be duplicated in private investment markets. Taking benefits at age 62 rather than full retirement age of 67 reduces benefits. If wait the eight years until age 70 take benefits, the inflation adjusted benefit you finally receive will be nearly double. That’s an annual increase of about 8 percent each year until you reach age 70.
In effect, each year of income deferred buys additional annuity income equal to 8 percent of your starting benefit, with a lifetime inflation adjustment. On immediateannuities.com, I found that a 62-year-old male buying a $100,000 single life annuity would receive an income flow of 6.52 per cent of original investment—- with no inflation adjustment. So drawing down your investment money in exchange for a Social Security life annuity is a good trade.
(Here's a link to check the details: http://www.ssa.gov/OACT/quickcalc/early_late.html#calculator)
Second, you don't have a pension to provide a portion of your retirement income. Deferring Social Security benefits, in effect, is buying pension income— except that it is a better deal than any private pension or private life annuity. It’s nice to have more guaranteed income.
Third, deferring Social Security benefits for 8 years means that you won't pay any taxes on Social Security benefits for the entire deferral period. It may also work to reduce your lifetime tax bill. As I demonstrated in a recent column, the taxation of benefits can increase your tax burden substantially.
I'm sure there are readers snorting, "No, no! Social Security is going broke. You'll never get your money back!" Well, I worry about Social Security too, witness having co-authored two books on underfunded government promises, "The Coming Generational Storm" (2004) and "The Clash of Generations" (2012).
But here are the realities:
- First, current employment taxes can, and will, support about 75 percent of benefit commitments.
- Second, how do you think private investments of any kind will be doing if Social Security has trouble paying benefits? My bet is that other investments will have lost more of their value than Social Security benefits would be cut.
Q. I would like to invest more of my retirement funds in bonds. If I invest in a short-term bond fund it will be more stable but the interest rate will be very low. What do you suggest that would give me a little more return but still be stable? —M.W., Austin, TX
A. That's a "you can't get there from here" proposition. If your return is safe (i.e., the borrower is good for the money) and the money will be repaid in a short time, the only way you can increase the yield is to either lend the money for a longer period or lend it to a borrower whose credit isn't as good. Either way, the value of your investment will be less stable and more vulnerable.
Everyone hopes there is some secret stash of vintage CDs that are perfectly safe but yielding 8 percent. Millions of naïve investors lose money every year because someone tells them that the equivalent of that vintage stash exists. But let me assure you, it does not exist and no amount of wishing will bring it into existence.