22 Jul I’m going to retire. What’s the best strategy to have enough income?
Q. My retirement portfolio is $1.3 million in mutual funds within IRAs and $100,000 in cash. I’m 60 and I’m planning to retire in two years. How can I start to position my money so I can have enough to live on? My monthly expenses are about $3,200, which I think will go down when I retire. And should I take Social Security soon and start to bank it?
A. Congratulations on your approaching retirement.
There are a lot of things that come into play when it’s time to plan your retirement budget.
Based on the information you provided, it appears that between the amounts you have saved and your Social Security income, you should be able to support the $3,200 a month lifestyle you have, said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton.
This assumes your investments are well-diversified and that you have protected yourself from catastrophic occurrences such as large medical expenses, long-term care needs and possible liability from being sued — and losing, he said.
Hook said he recommends his clients have access to three years’ worth of their cash needs in cash and short-term bonds or bond funds.
These are the assets you would draw from first, he said.
“As you draw from them you would replenish the three years such that you always have three years’ needs in your portfolio,” he said. “What this allows is for you to not have to sell stock market investments during a stock market decline. This is particularly relevant given the current stock market performance.”
Understanding the tax implications of your distributions is important, too.
If you expect to be in a lower tax bracket now than in the future, you may want to access the IRA accounts upon retirement and pay less tax than you would by waiting to take from the IRA later, Hook said. If that’s not the case, then taking Social Security at retirement and deferring taking from your IRAs until later on would make sense.
It’s hard to answer that question without knowing your tax situation, he said.
One benefit of waiting to collect Social Security to at least your full retirement age is that you will get a larger benefit. You can delay collecting until age 70. If you do, your benefit increases 8% per year, which could increase your benefits by a third, Hook said.
The “take Social Security early and bank it” strategy sounds appealing as the breakeven for doing so is about 12 years. But there’s another way to look at it, Hook said.
“Remember the goal. You want to maximize the amount of Social Security income you collect, especially later in life when, due to inflation, your costs are going up significantly,” Hook said. “Waiting to collect until age 70 — if you are able to — gives you the highest monthly benefit later in life. Sure, you can mathematically lose that bet by dying before the breakeven point is reached. But if that happens, you probably did not run out of money.”
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This story was originally published on July 21, 2022.
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.