Serving Cumming, Forsyth County GA and surrounding John's Creek, Alpharetta, Milton, Duluth, Buford, Suwanee, Flowery Branch, and Gainesville
The Five Big Mistakes of Delaying Your Social Security
- By Travis Echols
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- 15 Oct, 2020
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Delaying Social Security makes a lot of sense for many retirees; but there are common pitfalls that can cost you a bundle. As you know, the longer you delay your Social Security Retirement benefit, the higher your lifetime monthly payments are figured to be. This increase in delaying continues until age 70, after which there are no further increases for delaying. This increase for each month that you delay filing is not small, especially considering the current low interest rates. Even after full Social Security age, your payment goes up by 8% per year until age 70. Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation. Here are the five big mistakes of delaying your Social Security retirement benefit. |
1. Delaying Social Security if you really need the income now
Delaying Social Security can promise a higher lifetime income, but you may simply need the money now. Even if you think you may live long enough to benefit by delaying, you may not have enough cash flow now, from other sources, to delay. If that is the case, be thankful for it and file now.
If you anticipate not living long enough to hit the
breakeven age, you probably want to file as soon as possible (earliest is age 62 in
most cases). Read more on the government Social Security website.
You could file early, and if you are in a better financial position after full Social Security age, suspend and allow your Social Security payment to build credits for later.
You may choose to file early thinking Social Security will not be there for you due to financial problems with the program. This is a legitimate concern you can read about here, but the most likely solutions to fix the problem involve raising the payroll tax limit and delaying benefits for younger workers versus taking away benefits from senior citizens.
2. Delaying Social Security for the wrong spouse
With a couple, there are many more what-if scenarios to consider than if you are single. While I have seen it make sense for the higher income earner to file early, in most cases it makes more sense for the higher income earner to delay. In the big picture, the lower income earner’s decision to delay is not usually as impactful.
Part of your decision-making process should involve considering scenarios of a premature death. This what-if often makes it even more attractive for
the higher income earner to delay.
This is because at the death of either spouse, the lowest Social Security check will disappear. Maximizing the payment of the higher earner can therefore benefit the surviving spouse, whichever one it is, with a higher income. See What Happens to Your Social Security When You Die.
3. Delaying Social Security when it forces you to draw down too much of your retirement assets
You may choose to retire but delay taking your Social
Security for a higher income guaranteed for life. Social Security is a type of
annuity that insures against living a long time, and it is not subject to
market or interest rate changes. You can read more on the benefits of longevity planning in my article, "What is Safety-First Retirement Planning?".
But to retire and delay Social Security means you must pay for your living expenses with other income sources. Often this means carving out a piece of your retirement assets to live from during the gap years. This gap must be managed carefully to ensure you don't sell assets during a down market. A high-quality bond ladder can be set up to have maturing bonds to cover expenses during the gap years.
However, this strategy makes no sense if there are too little
remaining retirement assets after the gap period, no matter if your Social
Security benefit is higher. The reason is that you'll need liquidity for spending shocks
(and perhaps inheritance goals). Lifestyle and
longevity are not usually your only goals.
In other words, you want to have available assets for big expenses that may arise; and increasing your Social Security income would not be worth spending down your retirement assets too low to cover these expenses.
4. Delaying Social Security but not long enough to get the maximum overall financial benefit
Though you may not have filed early, you may be tempted to file for Social Security while your are still working and/or are in a high tax bracket. This not only subjects you to a lower lifetime benefit, but also to higher taxes on your Social Security.
Social Security has a peculiar taxation method that creates a “tax hike” and a “tax torpedo”. The effect is your tax rate significantly rises for each additional dollar of ordinary income at certain points. This chart below illustrates how your tax rate on your Social Security dollars can spike to over 40% (the Social Security tax torpedo).
By delaying Social Security until your tax rate is lower, you may be able to minimize or avoid these high tax rates altogether.
You want to coordinate your Social Security timing with your earned income, capital gains, planned
medical expenses, charitable giving, taking a pension, and other financial events for maximum financial gain to you. This requires a holistic planning approach.
5. Delaying Social Security without maximizing your tax savings
If you are able to retire early and delay Social Security, you may have other tremendous tax saving strategies available to you.
For example, if you have IRA/401k assets and savings in bank accounts or taxable brokerage accounts, there are various ways you can flatten your tax curve and save thousands or hundreds of thousands of dollars.
Flattening your tax curve is the idea of paying taxes at lower rates to avoid paying taxes at higher rates. Sometimes it means paying zero taxes when you can. For example, a couple’s long-term capital gains (LTCG) tax rate is zero up to $80,000 of taxable income.
During the gap years (between retirement and Social Security and/or RMDs), a couple could spend some from their excess
non-IRA savings while selling their highly appreciated securities in taxable accounts at a zero tax rate to
avoid a higher rate later. The chart below illustrates the LTCG tax hike at
$80,000 (for married filing jointly in 2020). This strategy is called tax gain harvesting.
Another strategy is withdrawing your assets in the most tax-efficient order along with doing partial Roth conversions during low tax years to avoid much higher tax rates in later years. This requires tax planning, which is looking ahead several years to estimate your future taxes.
Here is a graphic example of a fictitious couple who represents a real-life retired couple:
The proposed tax strategy above could save this couple more than $1,000,000 over their lifetimes!
Note: With CARES Act waiving the Required Minimum
Distribution (RMD) in 2020, this would be a great year to consider flattening
your tax curve by filling up a lower bracket this year to minimize your
exposure in higher brackets later.
A Case Study
In our firm, we help our retiring clients optimize their Social Security income by evaluating hundreds of what-if scenarios and identifying the three to six best options based on their situation and goals. We are first looking at how to get the most benefit without leaving money on the table.
Here is an example of two fictitious characters, Jo and Janet, who represent a real-life married couple. Here are three what-if scenarios that show how much they would leave on the table compared to the maximum lifetime amount, assuming they lived into their 90s.
From the short list of best options, Joseph and Janet selected the plan that best fulfilled their cherished goals. In this case study, one spouse delayed and the other spouse filed early. Here is the plan:
Janet files her own at 09/2018 at which point Joseph files for a spousal. Joseph files for his own at age 70 at which point Janet files for a spousal.
Filing Dates
- Joseph files for spousal benefits in Sep 2018, the year Joseph turns 67
- Janet files for retirement benefits in Sep 2018, the year Janet turns 66
- Joseph files for retirement benefits in Nov 2021, the year Joseph turns 70
- Janet files for spousal benefits in Nov 2021, the year Janet turns 69
- Janet files for widow(er)'s benefits in Dec 2044, the year Janet turns 92
This decision was not made by prioritizing the absolute maximum Joseph and Janet could receive assuming they lived into their 90s. The decision had to be coordinated with other aspects of their finances and personal goals.
Delaying Joseph’s benefit made a lot of sense in this case,
especially since it allowed him to file for a spousal benefit when Janet filed. This is a strategy called restricted application, which is not available to younger retirees.
Now, think about the impact of combining this filing strategy with timely Roth conversions before Joseph's large Social Security payments begin at age 70 and his large Required Minimum Distributions (RMDs) begin at age 72. Joseph and Janet have optimized their income by increasing their Social Security payments for life (for both or either survivor if one dies early) and decreasing their lifetime taxes.
The financial impact of this strategy is enormous, giving them more money to fund their goals and dreams.
For more, see my PDF book, How to Maximize Your Social Security Income.
Receive free Social Security Guide by email
Investment Advisory Services offered through JT Stratford, LLC. JT Stratford, LLC and Echols Financial Services, LLC are separate entities.
- Liquidity--Retirement assets are not being locked up or annuitized such that capital is not available for emergencies.
- Income—Using an optimized withdrawal rate, an increasing income is produced to combat inflation (unlike many pensions, bank and insurance strategies that are not inflation-adjusted).
- Growth--assets that can combat inflation over a 20 to 30-year period, giving the retiree more income and upside potential under normal and good economic times.
- Safety--manages the myriad of investment risks like market risk, inflation risk, and credit risk. Under worst-case scenarios, if withdrawal amounts are adjusted by using guardrails, the portfolio can still provide a lifetime income.
Here is an executive summary of how to build up a portfolio for retirement in seven steps.
1. Values clarification and goal-setting . Figure out the income objective and capability of your retirement assets in lifestyle terms, then financial terms. In other words, set realistic, specific, financial goals based on your core life values.
2. Asset allocation glide path . Figure out how to diversify your retirement assets among stocks, bonds, and cash, based on your age, risk tolerance, retirement goals, and changing market values.
3. Valuation-dependent efficient frontier . Figure out which areas of the markets are historically inexpensive, and which are historically expensive. Don’t take on more volatility than you need to for the growth you need or desire.
4. Multi-asset class approach . Diversify one more step for more growth and less volatility. Put more money in the specific market areas that are less expensive and less money in the specific market areas that are more expensive.
5. Tax-aware asset location and distribution . Save as much on taxes as possible by figuring out which type of investments should be held in which types of accounts. If you are drawing an income from your assets, figure out the least-costly order for making withdrawals.
6. Investment selection based on account type (qualified, nonqualified) and asset-class propensity and magnitude of outperformance (passive, factor, managed, etc. ). Figure out what kind of investment to use (index mutual fund, factor mutual fund, actively managed mutual fund, single factor ETF, multifactor ETF, passive ETF, individual stocks, individual bonds, Unit Investment Trust, closed-end fund, etc.) based on the account type, asset class, and growth and income needs.
7. Rules-guided rebalancing based on retirement glide path and multi-asset-class approach . Readjust the investment mix based on your changing personal situation and changing market values.
Sign up to receive my free monthly email articles...because you want to make the most out of your retirement
.
Here is a summary of the details backing this approach. Also, click here for more background information regarding my investment philosophy.
1. Values clarification and goal-setting
Investment planning for (or in) retirement starts with retirement planning. You start with thinking about your life goals...your dreams...your ideal life in retirement. It could involve doing no work, working part-time, or doing seasonal work. Your ideal life could be going back to school, spending more time with family, traveling, ministry, etc.
Ask yourself questions like, "What would I want to do if I
didn't need to work for money?" or "What are the most important
dangers, opportunities, and strengths I need to address?" or“Ten years from now, if I am looking back on a successful
ten years, what will I have achieved?”
This conversation allows you to create specific
goals around your most cherished values. And your goals will be unique to you.
You then design an investment plan to help you live your ideal life.
This kind of goal-focused, plan-driven approach minimizes the
chances of making bad investment choices based on current events and emotions.
Instead, you can choose and maintain the
specific mix of investments that can best deliver the results you need--using a
disciplined, research-driven approach.
2. Asset allocation glide path
The next major question is what kind of investments do you need to meet your goals. All investments have risk. Even "safe" investments over long periods have inflation risk. No single investment delivers growth, high income, and safety of principal. The key is designing a portfolio that balances them in a way that supports your retirement objectives.
And this mix may change over time. For example, for most people, it makes sense to gradually decrease their exposure to high-growth, high-volatility assets like stocks (i.e., equities) as they approach retirement. In retirement, it is usually best to maintain a flat equity glide path, dynamically adjusted for valuation. This approach protects you from the retirement-danger-zone risks of portfolio size effect and sequence risk, while allowing you to take advantage of bear markets and market corrections. See How to Navigate the Retirement Danger Zone .
- Liquidity--Retirement assets are not being locked up or annuitized such that capital is not available for emergencies.
- Income—Using an optimized withdrawal rate, an increasing income is produced to combat inflation (unlike many pensions, bank and insurance strategies that are not inflation-adjusted).
- Growth--assets that can combat inflation over a 20 to 30-year period, giving the retiree more income and upside potential under normal and good economic times.
- Safety--manages the myriad of investment risks like market risk, inflation risk, and credit risk. Under worst-case scenarios, if withdrawal amounts are adjusted by using guardrails, the portfolio can still provide a lifetime income.
Here is an executive summary of how to build up a portfolio for retirement in seven steps.
1. Values clarification and goal-setting . Figure out the income objective and capability of your retirement assets in lifestyle terms, then financial terms. In other words, set realistic, specific, financial goals based on your core life values.
2. Asset allocation glide path . Figure out how to diversify your retirement assets among stocks, bonds, and cash, based on your age, risk tolerance, retirement goals, and changing market values.
3. Valuation-dependent efficient frontier . Figure out which areas of the markets are historically inexpensive, and which are historically expensive. Don’t take on more volatility than you need to for the growth you need or desire.
4. Multi-asset class approach . Diversify one more step for more growth and less volatility. Put more money in the specific market areas that are less expensive and less money in the specific market areas that are more expensive.
5. Tax-aware asset location and distribution . Save as much on taxes as possible by figuring out which type of investments should be held in which types of accounts. If you are drawing an income from your assets, figure out the least-costly order for making withdrawals.
6. Investment selection based on account type (qualified, nonqualified) and asset-class propensity and magnitude of outperformance (passive, factor, managed, etc. ). Figure out what kind of investment to use (index mutual fund, factor mutual fund, actively managed mutual fund, single factor ETF, multifactor ETF, passive ETF, individual stocks, individual bonds, Unit Investment Trust, closed-end fund, etc.) based on the account type, asset class, and growth and income needs.
7. Rules-guided rebalancing based on retirement glide path and multi-asset-class approach . Readjust the investment mix based on your changing personal situation and changing market values.
Sign up to receive my free monthly email articles...because you want to make the most out of your retirement
.
Here is a summary of the details backing this approach. Also, click here for more background information regarding my investment philosophy.
1. Values clarification and goal-setting
Investment planning for (or in) retirement starts with retirement planning. You start with thinking about your life goals...your dreams...your ideal life in retirement. It could involve doing no work, working part-time, or doing seasonal work. Your ideal life could be going back to school, spending more time with family, traveling, ministry, etc.
Ask yourself questions like, "What would I want to do if I
didn't need to work for money?" or "What are the most important
dangers, opportunities, and strengths I need to address?" or“Ten years from now, if I am looking back on a successful
ten years, what will I have achieved?”
This conversation allows you to create specific
goals around your most cherished values. And your goals will be unique to you.
You then design an investment plan to help you live your ideal life.
This kind of goal-focused, plan-driven approach minimizes the
chances of making bad investment choices based on current events and emotions.
Instead, you can choose and maintain the
specific mix of investments that can best deliver the results you need--using a
disciplined, research-driven approach.
2. Asset allocation glide path
The next major question is what kind of investments do you need to meet your goals. All investments have risk. Even "safe" investments over long periods have inflation risk. No single investment delivers growth, high income, and safety of principal. The key is designing a portfolio that balances them in a way that supports your retirement objectives.
And this mix may change over time. For example, for most people, it makes sense to gradually decrease their exposure to high-growth, high-volatility assets like stocks (i.e., equities) as they approach retirement. In retirement, it is usually best to maintain a flat equity glide path, dynamically adjusted for valuation. This approach protects you from the retirement-danger-zone risks of portfolio size effect and sequence risk, while allowing you to take advantage of bear markets and market corrections. See How to Navigate the Retirement Danger Zone .
Protecting your lifetime retirement savings from excessive taxes is a crucial part of holistic financial planning. This involves protecting your IRA, 401k, lump sum pension rollover, Social Security, and any other type of retirement account or income stream from crushing tax rates.
So let's be sure to differentiate tax preparation
from tax planning
.
Tax preparation , also called tax return preparation, looks backward, one year at a time, to get the numbers right to accurately calculate your tax liability (and how much you owe or overpaid).
Tax planning on the other hand looks at taxes in the context of your overall financial picture. A tax planner not only looks in the rear-view mirror but will look forward 20 to 30 years at your projected tax liability and ask what can be done to lower your lifetime tax bill.
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If you have savings outside of pretax retirement accounts invested in capital assets (like stocks, bonds, ETFs, mutual funds, precious metals, jewelry, and real estate) which have large unrealized capital gains, this article is for you. You may be missing the opportunity to pay zero taxes NOW instead of 15% or higher rates in the future. Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation
.
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Originally written on Aug 2, 2018 and updated for tax law changes.
If you are no longer working and have reached the age of 72,
you probably know about Uncle Sam’s rule for you to take a Required Minimum Distribution
(RMD) from your traditional and rollover IRA(s) each year for the rest of your life. You can always withdraw more,
but this requirement is the minimum
you must take or be severely penalized. Fortunately,
this rule does not apply to Roth IRAs. (The SECURE Act of 2019 changed the starting RMD age from 70½ to 72 starting in 2020, but fortunately you can still make a Qualified Charitable Distribution (QCD) starting the year you turn 70½.)
Sign up to receive other helpful email articles on retirement planning--free of charge
.
If you have delayed paying taxes in your pretax IRA, 401(k), or 403(b), etc, there comes a time when the IRS wants their taxes. And if you don’t give them their taxes based on their required withdrawal schedule, you'll get hit with a 50% penalty on top of what you owed.
Along with Social Security and other retirement income, this RMD can significantly raise your tax rate. Also read How to Dodge the Social Security Tax Torpedo . There are not many ways to reduce this tax burden. In the past, retirees have used various deductions including charitable cash contributions and gifting of highly appreciated assets to charities. (The latter not only gives you, the donor, a deduction but also avoids a long-term capital gains tax bill.)
However, with the passing of the Tax Cuts and Jobs Act of 2017 (TCJA) , with its almost doubling of the standard deduction, itemizing deductions won’t make sense for near as many retirees. Ah, but there is still a strategy. But first let’s better understand the RMD.
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The latest book I am reading is “ The Psychology of Money ” by Morgan Housel. Chapter 3 is entitled “Never Enough”. In this chapter, Housel talks about when rich people do crazy things. He tells stories of wealthy people who never had a sense of enough and wrecked their reputations, families, freedom, and happiness because of it. I have also talked to older couples who tell me they once had a much better retirement in view, but the quest for more led them to make unwise investment decisions that left them financially crippled in retirement. The importance of knowing when you have enough is not only vital to when you retire but also how you retire. It can affect how you invest, how you withdraw, and your overall satisfaction before and during retirement. Be sure to read to the end where I summarize a few key takeaways. Housel makes the four following observations in chapter 3 of his book. Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation
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Whether you do mini-Roth conversions over several years or big Roth conversions in a few strategic years, the Roth conversion strategy could save you tens if not hundreds of thousands of dollars over your retirement. This article will get deep into the issues of Roth conversions for retirees and the ten steps to take to be sure it is done properly. Be sure to scan or read to the end where I will give you the simple answer to getting your Roth conversion questions answered. Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation
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Making big financial decisions immediately following the death of a close family member can be dangerous. It is often best to allow some time before tackling big financial decisions. On the other hand, some people find getting immersed in the finances is helpful in coping with the loss. Whatever way is best for you, you will need to give it your
careful attention to avoid big financial mistakes. The different types of accounts have different rules. I'll address the most common types. In the case of the death of a parent or anyone other than your spouse in which you are a non-spouse beneficiary, there are many rules that you must know to make the best decision for you and your family. (In this article, I use the common parent-child inheritance, but the planning strategies can apply to other non-spouse situations.) Your decisions can have major tax and investment consequences, both now and in the future. And some of these decisions have time deadlines keyed to your parent’s date of death. Also, some of these decisions are irreversible. You can download my free Estate Planning Survivor Checklist here
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So, you don’t want to rush in and make decisions without knowing the rules, and you don’t want to wait too long and be stuck with fewer options. (In this article, I am not addressing estate taxes. As of 2021, only estates valued at $11.70 million or more are subject to federal estate tax. But there are plenty of other tax pitfalls to navigate around. I am also going to focus on liquid savings like investment and retirement accounts, versus real estate which will be for another time.) Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation
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Are you wondering about the impact of the
2020 election results on your retirement? If so, you are not alone. The two political parties are greatly polarized. While the Democrat party has moved further toward ethno-centric socialism, the Republican party has moved further toward nationalistic populism. The difference in the two parties’ goals for our country is wider than ever. Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation . |
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Investment Advisory Services offered through JT Stratford, LLC. JT Stratford, LLC and Echols Financial Services, LLC are separate entities.
Serving Cumming, GA, Forsyth County, and the surrounding areas of John's Creek, Alpharetta, Milton, Duluth, Buford, Suwanee, Flowery Branch, and Gainesville
