At the risk of sounding boastful, I was fully aware of Bitcoin really early on. I want to say one Bitcoin was worth around a buck when I read the first article about them.
I scoffed at it, and I still cannot see the use-case for it. I fully expect Bitcoin to be a fad that collapses.
But I sure wish I’d thrown a hundred bucks at it back in 2011-ish.
(Interestingly, The Economist did a long article about Bitcoin when it was fairly newly invented, and that’s where I remember I first learned of it)
What retirement means to me is start collecting SS at 62 while continuing to work a part time job.
I am sure the general subject I am about to ask about has been discussed before but can’t find any of the times. So putting it here as a bump. And I am doubting my own conclusion for my specific circumstance. Please no WAGs.
65 year old male who has had the epiphany that I can consider myself retired while going into work every day because that is what I enjoy doing. The mindset includes being willing to dip into retirement portfolios to supplement my income for trips, house projects, a kid’s graduate program, so on. There is enough in the retirement funds that I could comfortably retire now if I wanted but pretty much that’s all the savings other than the cash buffer in our savings and checking accounts.
So the issue is timing Social Security withdrawals. Yes I get the basic idea that I get more each year if I wait until 70, and I honestly expect a long healthspan, not anticipating an early demise. I had always been on board with waiting.
But let’s assume that I will take the same amount as a Social Security payout each year going forward, or take it out of my retirement fund. If the latter I am paying tax, high marginal rate, on all of that amount, and it is being removed from its tax free appreciation.
What average rate of return in my funds for the next 20 to 25 years (assume a high tolerance for year to year volatility) would make taking social security now and leaving the same amount invested appreciating tax free worthwhile?
I am not sure how to even set up the math for that but I don’t think it is the 8% that the payout goes up each year.
If you are working now, you should check the penalty on the Social Security you would get. I’ve just read about it, but it seems fairly high. Plus, taking Social Security before your retirement age (66 1/2 now or so) has some downsides.
On the other hand, as you said, taking money from your 401K now has problems because you are still at a high tax rate. I delayed until 70 to get my social security and took money from my IRA, and I could control the withdrawal to keep the tax rate low.
So the real problem is you taking retirement money out while you are still working with a reasonably high income.
BTW, to calculate the money you get from Social Security also goes up with inflation. The rate of increase is the same no matter when you take it, but if you wait and get a bigger amount the amount of the increase will be greater.
The biggest surprise for me when I retired was that cash flow, not the balance in my account, was the most important thing. With social security and the earnings of my account from interest and dividends I get more money than I need, so what the balance happens to be doesn’t matter at all. I have a lot of stable income generating funds which went up less during increases and go down less during decreases. Not recommended at 40, but it works great at 70.
Those are really good questions, and I am also having a hard time throwing it all onto a spreadsheet to run numbers while I procrastinate from my regular job… 
But of everything you wrote, this is the most important:
I am going to wager a guess that once someone who has fewer distractions comes along to run the real numbers (maybe even including RMDs and marginal tax rates and SS withdrawal penalties…), the final figure is going to make you say, “oh, I guess I can still comfortably retire now if I wanted”.
It sounds like there’s a lot of things you’d like to spend your time and money on, and people you’d like to spend that time and money with. Run the numbers for today, and see if the conclusion makes you happy.
That’s just my $0.02.
This. If you are drawing any meaningful W2, and certainly if you’re making the W2 appropriate to a physician, taking SS prior to your FRA of 66-1/2ish is a totally bad move. It will kill your 7% growth, and you’ll receive no, as in zero point zero zero, dollars of SS; they’ll confiscate every penny because you “make to much”. Zero upside, all downside.
Once you’re past 66-1/2, that issue disappears completely. You can take your SS then and work W2 and keep both. With the ordinary income taxation features of both.
If your work income is in the form of 1099 I can’t speak confidently to the SS pre-FRA earnings penalty for that. But it’s a simple yes/no question.
As to the OP’s overall question, I will strongly suggest / recommend this app:
Their whole schtick is doing these sorts of tradeoffs between withdrawing from SS, from non-qual funds, from traditional IRA/401K and from Roth IRA/401K.
I used it heavily in the years leading up to retirement. Can highly recommend. It has far more insight and better models than any spreadsheet. And I’ve whipped up some real doozies of planning spreadsheets.
The penalty is 50%, not 100%. But the point stands - don’t do that. Also, that’s not what DSeid is asking about.
You lose 50 cents of SS for each dollar of W2 over $23,400 in 2025.
Somebody like our OP with high lifetime earnings would be looking at an age 62 benefit of WAG $28K/year. Given that WAG value for concreteness, if their W2 exceeds 28,000 * 2 + 23,400 = $79,400, then 100% of their SS payment will be confiscated.
Darn good bet a physician working full time all year has W2 in excess of $80K.
Nevermind - you are absolutely correct.
Nevermind.
I’ll have to look at that tool!
I’d assume at 67, and while I am assuming I am going to keep working for the foreseeable future (again, enjoy my day to day, and am framing it that I am retired with this as part of what I do for fun) I will simplify the question. (After all once I hit RMDs some/most of my SS will be taxable too, and I may keep having W2s from work well into my late 70s if I keep enjoying work.) But interesting on how taking it before 67 is definitely a bad idea.
Assume for simplicity actually stopping work at 67. High tolerance for yearly market volatility.
I could in that case “bridge” to 70 by pulling more out of funds, assume the S&P500 index fund, or start taking the “full” SS benefit.
Depending on time period S&P inflation adjusted has returned 7.7 over the last 20 years, 8.3 over the last 30. Of course past does not guarantee future but it is the best predictor we’ve got.
My default belief has been that bridging would make the most sense when funds are sufficient. But I think most of the articles use balanced withdrawals from a conservative portfolio and thus 4 to maybe 5% return as what is being lost. And just simplistically compare that to the 8% annual increase in payouts of SS. Which does not sound right to me.
So I am questioning if my default belief is correct. I’ll try that tool out over the weekend!
Of course then comes the psychological and philosophical portion. What is the point? There are always “concerns” about an exceptionally long life, especially one that costs more for support care in the final years. Having more built up in assets means more to last through that possibility as comfortably as possible without being a burden to anyone. Who knows? I have a great GF who lived over a hundred. But if that is the concern maximizing the relatively sure thing of SS payments is insurance of a bigger minimal base if the market has an exceptionally poor run over the next decades. It could. And I hope to someday have grandchildren whose 529s I’d like to fund as fully as the law allows. Leaving a bigger estate is not my highest priority.
Not so sure I’m curious enough to pay that much! Of course very cheap compared to hiring an advisor!
Sorry for the multi post but another bit I don’t get: the rule of thumb that expenses are less in retirement. Taking on the retirement frame of mind comes with wanting to spend more for me. I want to do the whole slew of bucket list trips, and in my case some of that would be with the four adult kids who couldn’t afford it on their own dimes. If any of them ever have kids you can bet I will spoil the shit out of them. And we will not be moving out of the house or going down to one car. I anticipate spending more in retirement not less (as long as I am confident funds suffice). What am I missing?
In general, people downsize their home in retirement. They spend more time cooking for themselves, rather than eating out. Most people drive less, since they’re not going back and forth to work every day.
Each of these things may not be true for you. You’re also not paying Social Security, Medicare and other payroll taxes, and you’re not saving for retirement Anymore, which reduces your pre-tax/take home income needs (most people think in terms of “my salary is X” rather than “my take home pay after taxes et al. is taken out is Y”).
Some of your social security will be taxable anyway. It depends on how much you get and your income from other sources, which you will have if you keep working. When I took Social Security at 70 it, and my investment income, added up to quite a lot, and my tax bill went up. That was before RMDs.
What you are missing is that while you may take a lot of trips in the ten years after retirement, you might cut back as you age as they become a pain in the neck. My spending has gone down. Lower clothes budget. We hardly drive anywhere now I’m not commuting. More time to look for sales. Spoling grandkids is fine, but there is a limit to that. We haven’t down sized since we can’t afford to sell our house, but we did pay off the mortgage which helps the cash flow. Spending is not constant with age.
We decided to go with a top Medigap plan, and we’ve hardly spent anything out of pocket on doctor and hospital bills despite cancer, two new knees and a new hip, cataract surgery, and some heart problems.
Don’t forget, the market has been on quite a run, but nothing lasts forever.
Plenty of free tools out there. Take your pick. I suggest starting with FIRECalc 3.0. That will give you plenty to play with and think about.
As you start out, you’re likely to discover that there are many things that you either don’t understand or only partially understand. Don’t worry about that, it just means that you have some learning to do in these areas. You can ask here, but I also recommend the bogleheads forum and early-retirement.org for deep dives into retirement questions.
That’s a very general guideline that may work for some people but not everyone of course. The way to approach retirement spending is to determine your income requirements (which, as you point out may be more than you are spending while working), and then looking at your income sources when you are retired to see if they can adequately provide the income you need. If so, then great. If not, then plan on working longer, saving more, and adjusting your anticipated spending down to a level that your income sources can support for your entire retirement.
I agree with you. We downsized a few years ago, but still have more house than we really NEED. We probably will not do so again until we have to move into something very small - likely an apartment. As my wife and I age, I can imagine we’ll be spending more to have people do what we currently do ourselves - yard care/snow removal, housecleaning/maintenance, grocery deliveries, Ubers…
But even if you downsize, you aren’t going to move to a dumpy shoebox in podunk Kansas. Nice smaller homes - or apartments - aren’t cheap. Have you checked what condos/apartments go for in your area? My house has appreciated considerably. I got a lot of comfort by checking rents at nice places in my area, and seeing that the sale proceeds would easily cover my rent for my expected lifetime.
And - like you - I’d just as soon spend money on my kids and grandkids when I’m alive and can see them enjoy it, and when they are in their 30s-40s and really need it. Yeah - we’ll likely travel some, but not crazy. I’m just not seeing that I’m going to spend a heck of a lot less.
You are going through very much the same calculation we recently went through. I’m not going to go into detail b/c I HATE money matters, and having reached some conclusions we are going to go with, I’m not putting much thought into them day-to-day. But you are at a point where I believe you would derive comfort from really setting up a plan. Maybe even see if you can set something up with a fee-for-service advisor. And, if you haven’t already, set up your will, trust (if you wish), etc.
My personal position is that although I do not want to stupidly piss away tons of $ in taxes, I’m not interested in making it a major job to try to spend as little taxes as usual. In short, I value governmental services and do not begrudge paying taxes.) The big thing is that at this point I’ve won at life, and will be able to retire comfortably, while still leaving a decent chunk of change to our 3 kids.
I think I’m pretty similarly situated as you. Wife and I are 64/63. Decent - not crazy - income, saved consistently, but not what I would call stupid rich. I could retire at any time, but for whatever reason, I’ve decided 3 years at 67. I think I chose that because I’d be at full SS retirement, but it really doesn’t matter, b/c I’m going to put off SS until 70.
We looked at our assets and intended income, and even if we continued spending as we currently are, our eventual income from pensions, SS, and RMDs is going to greatly exceed our current spending. So the question is simply which pots we draw money from when.
Looking at our savings and RMDs, the biggest issue is going to be taxes on the income we receive in retirement from tax-deferred (401k) investments. So right now we are planning on maximizing our Roth contributions and conversions, converting to Roth up until the next tax rate threshhold. That was a key factor for us - figuring out what we expect to earn in the next few years, and what income we could take on Roth conversions which would keep us in our same tax bracket. (I’m pretty sure you and I are in the same bracket. Of course, that will change if the taxe rates//brackets change.)
For the 3 years between 67 and 70, we are going to withdraw funds which will reduce our eventual RMDs. So, again - we’ll be paying taxes now to reduce our taxes later.
A couple of issues - depending on the earnings history and pensions of you and your spouse, make sure you consider the different effects if one of you dies before the other. For example, I’ve historically earned more than my wife. If I drop dead much earlier than her, she gets only 1/2 of my pension. And while she can get my higher SS bens, she loses hers. Just a wrinkle we hadn’t paid attention to previously.
Also, I am not planning on needing any longterm, end of life care. So I’m not needing to plan for any pricey extended stays in nursing homes. Just my personal opinion. We’ll see if I stick with it.
Good luck. The things you bring up are the good sorts of problems to have!
And however well-intentioned, I’m not terribly interested in folk explaining how my thoughts are stupid. Like I said, I hate this sort of thing and we’ve come up with a plan that seems to work for us, so we’ll stick with it for a while, while monitoring for any major changes.
My plan is to delay withdrawing from my IRA/401(k) plans until I reach the age of required minimum distribution and taking Social Security until 67 (full retirement age) or 70, if I can instead rely on other savings and investments.
Even if they don’t, retirement is right around the time a lot people manage to finish paying off their mortgage. You’ll still be paying insurance and taxes after that, but for most folks, ending principal and interest payments represents a big reduction in annual expenditures.