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I'm retiring next year at 60 yrs old. Currently I have funds in 4 separate accounts. I have a 25% in a Taxable Account, 13% in a Roth IRA, 42% in a Tax Deferred 401K and 20% in a Roth 401K. I will be rolling the 401K funds into a IRA and rolling the Roth 401K to my existing Roth account when I retire. I have a Defined Pension that I will get at 60. My pension will cover 50% of my monthly expenses. I plan to withdraw from my investments until I reach 66 and at that time file a Restricted Application on my ex husband's Social Security and defer my own until 70. Once I file for my ex husbands Social Security, that plus my pension will cover 100% of my expenses.
Here is my first question: I currently have a total of 55% of my investments in equities. Currently I don't consider the pension and Social Security in my asset allocation. Should I consider my pension and Social Security as the Bond portion or Fixed Income portion of my Asset Allocation thereby investing the remainder in equities? That would mean putting about 100% of my current investments in equities. (I do understand how to place my assets for tax efficiency).
My second question is withdrawals. I won't get retiree medical so I would qualify for subsidised insurance under Obamacare from 60-65. If I withdraw from my Tax Deferred IRA account first, I would no longer get a subsidised rate on medical insurance. Would it be better to withdraw from my taxable account from 60-65 and then at 65 do a Roth Conversion over 5 years. I would have to convert about 500K. That way I would not have to take RMD's at 70 and I would also pay less taxes on Social Security. Or should I withdraw from my Tax Deferred IRA account at 60 and give up the subsidised insurance?
What do you think?
Thanks,
Should I go to immediateannuities.com to get the dollar amount needed to generate that income? Then add that to my investments and go from there?
Social Security as fixed income
Written by Paul Merriman
August 11, 2009
"Retirees often ask us if they should consider their Social Security as part of their portfolios. It’s income, and it seems to many people as if Social Security should be in the fixed-income part of their asset allocation. Though a lot of people take that view, we think this is a bad idea. For several reasons we discourage our clients from doing this.
Your Social Security (the same is true for a pension once you begin taking it) represents important, reliable income. But it’s not an asset. This may seem like an arcane distinction, but it’s not.
As I will show, if you think of your Social Security as an asset instead of income, you are making a mistake in the way you think about your money. And errors like this can lead to mistakes in the way you manage your money.
You can sell most financial assets and turn them into cash. You can’t do that with Social Security, which is a stream of income subject to end at any time upon your death.
You can put a reasonably accurate value on a piece of real estate or a mutual fund. But because your Social Security can’t be sold, you can’t put a value on it for asset allocation purposes.
If you’re 68 years old and receiving $2,000 a month, the value of those payments depends on how long you’ll be around to keep collecting them. If you live another 32 years, to age 100, $2,000 monthly payments could total $768,000. If you die at age 69, you might collect only $24,000. So what’s the asset value of your Social Security? Unless you’re on your deathbed, you have no way to know.
That’s the theoretical reason why this is a bad idea. There’s a practical reason that’s just as important.
Assume you have an investment portfolio worth $600,000 and somehow, against my advice, you decide that your Social Security is worth $400,000. You conclude that your “total” portfolio is worth $1 million, and (wanting to be conservative) you decide that half your money will be ($500,000) invested in stock funds and the other half ($500,000) in fixed-income.
If you count $400,000 in Social Security toward the fixed-income part of that portfolio, you’ll own $100,000 in bond funds and $500,000 in equity funds. That means your investment portfolio will be more than 80 percent in equities instead of the 50 percent target you set. That puts you at greatly increased risk.
In a serious bear market, that heavy equity allocation could wipe out your portfolio’s ability to keep generating the income you need for retirement. You’d still have your Social Security, but you might not have much else. You could be forced to drastically cut back your lifestyle – an unfortunate result that started when you didn’t think clearly about this.
Social Security is a great thing to have coming in every month. Fortunately, it’s not hard to put that income in its proper perspective in your retirement planning.
The right approach is to treat Social Security as income, entirely separate from your investment portfolio. That income reduces the amount you need to take out of your portfolio in retirement.
The basic formula is this: Compute your cost of living in retirement. Subtract the income you already have from Social Security, pensions, fixed annuities and other sources. The difference is what you need from your investment portfolio, either monthly or annually depending on how you do the calculations.
As I have pointed out in other articles and in my book, knowing how much income you need from your portfolio is an essential building block in getting your finances to do the most for you in retirement."
Per Mr. Bogle a pension and also SS should be considered as bonds in your asset allocation. This is from an interview Scott Burns had with our Mr. John Bogle in October 2003, Dallas Evening News, about pensions see at the end of this excerpt :
....
"First, look at all of your assets. The most important thing is asset allocation – how much is in equity and how much is in bonds."
"Think about everything, not just your investment program. That means think about Social Security. If you're fortunate, it can be $25,000 a year. It's great money. When you do your asset allocation, you want to include that. At 5 percent, that $25,000 is like having $500,000 [in assets]. As a life income, it's more like $350,000. That should be part of your calculation."
Suppose, for example, that your Social Security income is $17,000 a year – a typical figure for a couple – and your 401(k) rollover account and other financial assets are $400,000. Then you start your asset allocation with a conservative value for your Social Security at 14 times the income, or $238,000. Added to your $400,000 in savings, this means you have the equivalent of $638,000. In effect, 38 percent of it is already allocated to a bond equivalent.
"Don't count your house as long as you are going to live in it," Mr. Bogle said.
Bonds by your age : "Your bonds should be your age as a percent, including the Social Security value."
This means someone retiring at 65 should have 65 percent of his investments in bonds. It also means, using the example above, that only a relatively small portion of the financial assets should be invested in bonds. Why? Since 35 percent of the $638,000 "full portfolio" should be in equities, you'll need to invest $223,300 in equities. That leaves only $176,700 of the $400,000 in financial assets to be invested in bonds.
"Why would you do that?" Mr. Bogle asked rhetorically. "Because you have much less time to recoup losses. You want to have less risk. Also, you've got a lot more money than when you were young, so you can afford to be more conservative.
"Another reason is that bonds produce income. It may not seem like much, but they produce about 2 ½ times as much income as stocks – call it 5 percent vs. 1.8 percent. You'd need a lot of money to meet your spending plans if you only invested in stocks.
"You also get more conservative as you age. The fear factor is much larger. You could even argue, at some stage, that you should own no stock. And I almost forgot – if you have a company pension, you should capitalize that, too, just like Social Security."
....
For myself, I keep Mr. Bogle's directive in mind. I have a pension equal to the size of my SS. Being conservative, I do only change my 70% in bond (70 years age, wife 65) into a 50:50 asset allocation.
Bernd
It is possible to have an income target that is less than your pension, SS, annuity streams combined. You can treat the difference between them as part of your asset allocation. Multiplied by the value ofbyourbinvestments.
I'm retiring next year at 60 yrs old. Currently I have funds in 4 separate accounts. I have a 25% in a Taxable Account, 13% in a Roth IRA, 42% in a Tax Deferred 401K and 20% in a Roth 401K. I will be rolling the 401K funds into a IRA and rolling the Roth 401K to my existing Roth account when I retire. I have a Defined Pension that I will get at 60. My pension will cover 50% of my monthly expenses. I plan to withdraw from my investments until I reach 66 and at that time file a Restricted Application on my ex husband's Social Security and defer my own until 70. Once I file for my ex husbands Social Security, that plus my pension will cover 100% of my expenses.
Here is my first question: I currently have a total of 55% of my investments in equities. Currently I don't consider the pension and Social Security in my asset allocation. Should I consider my pension and Social Security as the Bond portion or Fixed Income portion of my Asset Allocation thereby investing the remainder in equities? That would mean putting about 100% of my current investments in equities. (I do understand how to place my assets for tax efficiency).
My second question is withdrawals. I won't get retiree medical so I would qualify for subsidised insurance under Obamacare from 60-65. If I withdraw from my Tax Deferred IRA account first, I would no longer get a subsidised rate on medical insurance. Would it be better to withdraw from my taxable account from 60-65 and then at 65 do a Roth Conversion over 5 years. I would have to convert about 500K. That way I would not have to take RMD's at 70 and I would also pay less taxes on Social Security. Or should I withdraw from my Tax Deferred IRA account at 60 and give up the subsidised insurance?
What do you think?
Percentages don't mean much to me without numbers. My rule of thumb is to draw down principal in a taxable account first before taking anything from tax-deferred accounts (which I've never done). Because why pay taxes if you don't have to? OTOH - I'd be sure that the absolute minimum amount of money in the taxable account in cash/cash equivalents is enough to cover at least 2-3 years worth of living expenses. I used to keep a lot less cash on hand. But increased the allocation when I got to age 65 (and started to realize I wasn't a spring chicken anymore ). If I die before my husband - I want to make sure he has plenty of cash on hand while he's sorting out his life (including financial things).
Do not assume anything when it comes to your expenses 5 years down the road - especially when it comes to Medicare. If you qualify for an ACA subsidy now - you may well wind up paying more - perhaps a lot more - for Medicare. Depending on the Medicare landscape then.
I personally think the idea of converting about $100k/year from regular to Roth IRAs starting at age 65 is nuts. I at most have done about $30k/year - and even those amounts don't seem to make "dollars and cents" now at my age. Do you know how much you'd pay in taxes on those conversions? A TON (about 30%)! And RMDs really aren't a huge deal IMO for most people compared to numbers like that. Our tax code is pretty regressive - especially if you're filing as a single taxpayer.
IMO - you are putting the cart (very small tax things and costs) before the horse (very big tax things and potentially big costs).
Also IMO - I think you need a good accountant of the numbers crunching variety to evaluate this stuff for you. To lay things out for you. Robyn
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). If I die before my husband - I want to make sure he has plenty of cash on hand while he's sorting out his life (including financial things).
