Social Security Choices: Single, Age 62 with $500,000 of assets

This case demonstrates the additional longevity that is possible by judiciously choosing the date that you begin Social Security benefits.

Delaying the start of Social Security benefits from 62 to 70 added 15+ years to this portfolio’s longevity.

Financial Facts$400,000 in 401(k)s
$100,000 in regular taxable accounts

Ruth, Age 62 with $500,000 of assets

Ruth plans on retiring in January 2010. She wants to know how long her financial portfolio may last if she spends $36,140 after taxes in the first year and an inflation-adjusted equivalent amount each year thereafter.

Ruth is a fictional representation of an actual retiree. The numbers involved in this case study are real.

Options Compared

Ruth will follow one of five strategies that vary only in the date that she begins Social Security benefits.

Option 1: She begins Social Security benefits at 62

Option 2: She begins Social Security benefits at 64

Option 3: She begins Social Security benefits at 66

Option 4: She begins Social Security benefits at 68

Option 5: She begins Social Security benefits at 70

The Social Security starting date is the only difference.

In each Strategy, she is assumed to withdraw funds tax efficiently from her portfolio in a fashion that is designed to increase the longevity of her portfolio. She maintains a 50% stocks-50% bonds after-tax asset allocation with stocks earning 7% per year and bonds earning 3%, both historically conservative assumptions.

In Strategy 1 of the Figure, Ruth begins Social Security at age 62, and her portfolio runs out of money at the end of 2034. The $36,140 after-tax annual real spending amount was set so that the portfolio barely lasts 30 years; that is, her portfolio is exhausted at the end of 2039.

In Strategy 2, she begins Social Security at age 64, and her portfolio runs out of money after providing part of her financial needs in 2042. Delaying the start of Social Security benefits from 62 to 64 added 2+ years to her portfolio’s longevity; that is, the portfolio provided funds for two full years plus part of a third.

In Strategy 3, she begins Social Security at 66, and her portfolio runs out of money in 2044. Delaying the start of Social Security benefits from 62 to 66 added 4+ years to her portfolio’s longevity.

In Strategy 4, the portfolio lasts until 2049 when she would be 101. Delaying the start of Social Security benefits from 62 to 68 added 9+ years to her portfolio’s longevity.

In Strategy 5, the portfolio lasts until 2055 when she would be 107. Delaying the start of Social Security benefits from 62 to 70 added 15+ years to her portfolio’s longevity. For Strategies 4 and 5, the Figure shows the after-tax value of her portfolio in 2048 when she would be 100 years old.

Figure 1 illustrates the costs and benefits of delaying the start of Social Security benefits. If she dies before 2027 when she would be 79, her beneficiaries would inherit the most money if she starts benefits at age 62. If she lives at least to 2031 when she would be 83, then her beneficiaries would inherit the most if she starts benefits at 68 or 70. If her major concern is not outliving her resources and being a financial burden on her children, she should delay the beginning of benefits until age 70.

Delaying the start of Social Security benefits from 62 to 70 added 15+ years to this portfolio’s longevity.

Assumptions:
They maintain a 50% stocks-50% bonds after-tax asset allocation with stocks earning 9% 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, begin Social Security benefits at 66, and receive their Primary Insurance Amounts. We assume one partner dies in 16 years at age 78 and the survivor lives on 75% of the real amount they lived on when both were alive. Both Strategies locate stocks and bonds in the accounts (i.e., taxable account and 401(k)s) in a tax-efficient manner, while maintaining the 50% stocks-50% bonds after-tax asset allocation. We can help clients with this asset-location decision, which may further extend the portfolio’s longevity. Based on today’s Tax Code, they will usually be in the 25% tax bracket in retirement. They take the standard deduction each year. Inflation is 3% per year with all tax brackets, standard deduction, over 65 tax exemption, and personal exemption amount rising with inflation.

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