Here are strategies for people ages 60-72 who have left the workforce.
1. Postpone Social Security.
Social Security is a low-risk, inflation-adjusted, lifetime annuity. Is valuable. When you get paid before your 70th birthday, you are actually selling a portion of that asset and probably getting a low price for it.
Do people understand this? Not many. Only a small fraction of retirees expect to start receiving benefits in their 70s, when the monthly payment reaches its peak.
The question of when to cash out can be tricky, and if in doubt you should invest in one of those optimizers that dictates your moves. But here’s a quick answer that works for most people who no longer work: If you can, wait.
Here’s a slightly longer answer:
(a) If you are single, collect late if your health is good and early if you expect to die young.
(b) If you are married, collect late if you are the one who earns the most in the couple and earlier if you are the one who earns the least.
The reason for (a) is that the mortality tables built into the profit formulas are too pessimistic. A healthy single person will probably live long enough to get by by waiting.
The reason for (b) has to do with the fact that the surviving partner gains his or her own benefit or that of the spouse, whichever is greater. Suppose, for example, the wife’s benefit is $ 2,600 per month and the husband’s is $ 2,500. As long as they are both alive, they receive $ 5,100. When one dies (it doesn’t matter which one dies first), the survivor receives $ 2,600 and the $ 2,500 benefit disappears.
In short, the high income benefit will come until both of you are gone (long time away), while the low income benefit will be collected only until one of you dies (short time away). This rather important distinction is not reflected in any part of the Social Security formula that dictates your reward for waiting.
To oversimplify the actuarial figures: the government assumes that everyone dies at age 82 and therefore all benefits will be collected until age 82. It sets up a formula that gives someone starting at age 62 and collects for 20 years the same total for life as someone starting at 70 and accumulates over 12 years.
By using the strategy in (b) you beat the system. In all likelihood, you receive the highest earner benefit for considerably better than 12 years. However, the low-income benefit will likely come in less time than the formula assumes, so it is not worth the wait.
2. Don’t look at performance.
You may need to extract 3% per year from your portfolio. A combination of stocks and bonds will produce only half. To do?
When faced with a universe of small returns, people make big mistakes. They risk everything and own junk bonds and stocks of companies with unsustainable dividends. Or they go foolish over Wall Street’s latest complicated and expensive concoction that puts a high payout before their eyes.
There is a better way. Buy a cheap index fund that combines stocks and bonds (a good one: the Vanguard Balanced Index Fund). Collect the 1.5% dividend and then sell 1.5% of your shares each year.
3. Cash in taxable accounts before cashing in an IRA.
Let’s say you are 64 years old, you have some appreciated stocks in a taxable brokerage account, and you also have an IRA. You need money to live. You could sell the stock, paying capital gains tax, or you could withdraw the IRA, paying tax on the distribution. Which is better?
Short answer: Cash on taxable assets. That’s always the best strategy if you are destined to eventually use both your taxable assets and your tax-protected assets for living expenses. Keep that IRA going for as long as you can. Withdraw money from the IRA when you have run out of other options or when you have reached your 72nd birthday, when withdrawals are mandatory.
Some financial planners are wrong. Their fallacious reasoning is as follows: Stocks you hold in a taxable account benefit from a favorable rate on dividends and long-term earnings, while stock earnings generated within an IRA are eventually earned as distributions taxed at ordinary rates plus. high. Therefore, you must first pay off the IRA.
This is the wrong way to see what is happening within that IRA. Suppose you have $ 100,000 and your ordinary income tax level (state and federal combined) is 30%. What you actually own is an asset of $ 70,000.
The other $ 30,000 belongs to the government. You are simply the custodian of this part; someday you will have to turn it over, along with all the proceeds, to the tax collector. If your IRA of $ 100,000 is doubled to $ 200,000, $ 140,000 belongs to you and $ 60,000 belongs to the government. To put it in other words: the $ 70,000 that is truly yours is made up effectively tax-free.
When you interpret the IRA this way, you see that the correct comparison is not between a taxable account taxed at a favorable rate and an IRA taxed at a high rate. The correct comparison is between a taxable account taxed at some rate and an IRA taxed at a 0% rate. Forced to choose, you must keep 0% IRA. Cash in the taxable brokerage account.
When might it make sense to speed up IRA withdrawals to pay your bills? Only when you expect to avoid a capital gains tax on appreciated assets. There are three ways to do this: (a) give prized assets to charity, (b) give them to a low-ranking relative, and (c) leave them to the heirs. (Note that Joe Biden has proposed denying the last two tricks to wealthy families.)
But if giving to others is not the destination of your taxable account – that is, if you will eventually need all of your savings to cover vacations and nursing homes – then spend the taxable money before making unnecessary withdrawals from your IRA.
It often makes sense to prepay taxes on part of your retirement money by converting a part of your IRA to a Roth IRA. In the example above, with the IRA of $ 100,000 and a tax bracket of 30%, you could write a check to the tax collector for $ 30,000, using non-IRA money, thereby increasing the cash value of this tax-free retirement asset of $ 70,000 to $ 100,000.
How much to convert? Not too much. Slowly, and the time between the time you quit your day job and the time you start collecting pensions is a particularly good time.
There are more details and a useful calculator in this conversion story: Roth Strategy: Calculate Your Profit.
5. Don’t withdraw money you don’t need from an IRA.
Suppose you are in a low tax bracket this year and you expect to be in a higher tax bracket later. Should you spread a little more from your IRA to take advantage of the lower rate?
No. Any additional retirement you have in mind should be a Roth conversion.
Not too much. Probably no more than 15% of your savings.
The type of annuity to buy is one that pays a fixed monthly sum for a lifetime. There are many complicated variations on this simple product, and they are complicated for one simple reason: the complications allow the supplier to overcharge. Say no to those. Opt for the fixed payment.
Among fixed annuities, the most powerful is the one that starts late. At age 60 or 65, you buy something that pays a certain monthly sum starting at age 75 or 80. The payout will be large, partly because it includes a return on equity and partly because it involves a longevity gamble. You lose the bet if you die young. But if you live long, the money keeps coming.
With this partial insurance against the survival of your assets, you can take more risks with the rest of your portfolio. You can live better.
The strategy is explained here: The QLAC old-age annuity.
7. Watch out for Irmaa.
There is a tax penalty for older people with higher incomes. It comes in the form of a surcharge on Medicare premiums and is known as the “monthly income-related adjustment amount.”
It’s a “gotcha” tax, with the potential to hit a couple with an additional $ 2,600 tab for going $ 1 over an income limit. These are the tax brackets for this surcharge:
The Irmaa tax is applied with a delay of two years. Premiums charged in 2021 are based on 2019 reported income.