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I didn't read your link, but if I understand your post, the study doesn't take into consideration the recipient's OTHER money. That is, if you receive SS early and don't need it to live on, does it consider the normal gain you'll be getting on that? Or if you use it, the money of your own that you don't need to spend can now be getting returns. The returns will be compounded every year. You get 5% one year, then 5% of the initial amount and the prior year's 5% gain, and so on.
But there's no vehicle available today that will give 5% on a consistent basis. One either needs to accept a lower return, or more variation in return from one year to the next. Either one of these will lead to a less optimistic outcome.
Even Peter Lynch, who is a pretty sharp guy, did not appreciate how much volatility can affect portfolio withdrawl. He authored an article in Worth Magazine many years ago, claiming that one could spend 7% each year from a stock portfolio, since 7% has been the long-term return from the market after inflation. Now we know this is way too high to be "safe".
To give you my perception I would not take at 62 or 70. Honestly I would probably look at the time you are signing up for Medicare. It isn't that you need it for anything but it is at a point where you could use that income to pay for the Medicare parts B and D.
Thanks for the input. I can maintain employer health insurance till Medicare's age 65 sign up for a cost. Once Medicare kicks in I've always used the figure of $20k per year for a couple to cover the additional costs such as B and D as well as supplemental and out of pocket expenses. Admittedly that number is not exact science but is based on what I've seen my mother pay as well as my in-laws plus some other folks we know over 65. It's also partially derived from the figure often stated on CD that a couple needs between $250k-$300k to cover health costs in retirement.
But there's no vehicle available today that will give 5% on a consistent basis. One either needs to accept a lower return, or more variation in return from one year to the next. Either one of these will lead to a less optimistic outcome.
Even Peter Lynch, who is a pretty sharp guy, did not appreciate how much volatility can affect portfolio withdrawl. He authored an article in Worth Magazine many years ago, claiming that one could spend 7% each year from a stock portfolio, since 7% has been the long-term return from the market after inflation. Now we know this is way too high to be "safe".
as i explained to bpolen it does consider the other money .
investing the ss money is no different then spending the ss money and either not spending down your own invested assets or in the case of other sources like a pension it assumes you could live off the ss money and have invested the pension money instead so either way it is counted as spending down invested assets to live.
it is all the same thing when you pull money from somewhere to live on just different pockets
With the numbers you mention, most of that $30k you're pulling from the 401k will be effectively taxed at 27.75%. You are in the 15% marginal bracket, but each dollar pulled from the 401k also creates 85 cents of additional taxable SS income. So the real tax rate becomes 15% x 1.85 = 27.75%.
It might be possible to pay less in taxes over you retirement by delaying SS for a few years and pulling larger amounts from the 401k during that time.
I've given plenty of consideration to delaying SS in order to get as much out of my 401 at a lower tax rate as possible. I've even considered biting the bullet and withdrawing at a higher rate just get the funds in to a Roth to allow it potentially grow tax free (too much Ed Slott's PBS special). It's one of the two factors that makes me consider delaying. The other being that if we delay, our SS and pension income would be completely free from NYS income tax.
The part you're confusing me on is where you get the 27.75% real tax rate from? Any way I look at it, delay or don't delay we'll be paying tax on 85% of our SS. The pension income plus half of our SS (at 62, FRA, or 70) put us over the $44k couple amount. After that point it's a question of how much we withdraw from the retirement fund so that we stay in the 15% bracket after exemptions and deductions. Your calculation makes it appear as if it's being taxed twice?
as i explained to bpolen it does consider the other money .
investing the ss money is no different then spending the ss money and either not spending down your own invested assets or in the case of other sources like a pension it assumes you could live off the ss money and have invested the pension money instead so either way it is counted as spending down invested assets to live.
it is all the same thing when you pull money from somewhere to live on just different pockets
Yes, I agree.
I was only mentioning that it's not accurate to assume a steady return of 5% on investment (in today's environment) when making the comparison (I.e., take SS now or later).
The part you're confusing me on is where you get the 27.75% real tax rate from? Any way I look at it, delay or don't delay we'll be paying tax on 85% of our SS. The pension income plus half of our SS (at 62, FRA, or 70) put us over the $44k couple amount. After that point it's a question of how much we withdraw from the retirement fund so that we stay in the 15% bracket after exemptions and deductions. Your calculation makes it appear as if it's being taxed twice?
The $32k pension plus $38k SS gives a provisional income of $51k, so yes it's above the $44k threshold. At that point, however, something less than 85% of your SS check is being taxed. For every extra dollar of income you get from another source (in your case it's from the 401k) you are adding $1.85 of taxable income. This continues until you have the maximum amount of SS being taxed. I had plugged a few numbers into TaxCaster before I replied above, and IIRC you will hit that point at a little under $25k of 401k w/d.
In your case you might always end up paying on 85% of the SS. But even then it's worthwhile to look at it carefully and see if you could ever hit the so-called torpedo rate of 46.25%. If that's likely, it would make sense to proactively pull money out of the 401k even at 28% or 31%, until you know you've dodged the torpedo.
Thanks for the input. I can maintain employer health insurance till Medicare's age 65 sign up for a cost. Once Medicare kicks in I've always used the figure of $20k per year for a couple to cover the additional costs such as B and D as well as supplemental and out of pocket expenses. Admittedly that number is not exact science but is based on what I've seen my mother pay as well as my in-laws plus some other folks we know over 65. It's also partially derived from the figure often stated on CD that a couple needs between $250k-$300k to cover health costs in retirement.
You are welcome. I believe that it is a good idea even for me. Since I am 58.6 now and just retired I have a bit of a ways to go before I even decide to delay really.
Quote:
Originally Posted by hikernut
The $32k pension plus $38k SS gives a provisional income of $51k, so yes it's above the $44k threshold. At that point, however, something less than 85% of your SS check is being taxed. For every extra dollar of income you get from another source (in your case it's from the 401k) you are adding $1.85 of taxable income. This continues until you have the maximum amount of SS being taxed. I had plugged a few numbers into TaxCaster before I replied above, and IIRC you will hit that point at somewhere between $20k and $25k of 401k w/d.
Great points there. I think that even helps answer what will happen for me with similar numbers. Thanks for the post.
Why does everyone talk COLA with social security? It would have to get up to a fairly high percentage to make that much difference.
It is better to have a COLA making what ever impact it does compared to none at all. Also with compounding over time it becomes even more something. It is all a part of a puzzle that is personal and different for many of our situations. For us a pension and SS COLA is very significant especially when compounded.
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