Worried you won’t have enough for a comfortable retirement? If you’re willing to spend down your assets, as well as take a few other steps, you could boost your annual income by perhaps 30%.
Imagine a couple, both 62 years old. We’ll keep things simple and assume there’s just one breadwinner-and we’ll be politically incorrect and assume it’s the husband. They claim Social Security right away, even though they can’t receive full benefits for another four years. He qualifies for $15,000 a year and his wife is eligible for spousal benefits worth $7,000.
Meanwhile, they own a $300,000 home with no mortgage and have $500,000 in savings. If they use the 4% portfolio withdrawal rate that’s often recommended by financial planners, that $500,000 would generate $20,000 in first-year retirement income, with withdrawals rising in subsequent years along with inflation.
Add that to their Social Security and our hypothetical couple would have $42,000 a year. Here’s how they could do better.
Paying to delay
Instead of claiming benefits at age 62, the husband files for Social Security at 66-which is his full Social Security retirement age-but immediately suspends his benefit. This maneuver allows his wife to claim spousal benefits, which would be worth $10,000 a year, thanks to the four-year delay. There’s no point in postponing spousal benefits beyond full retirement age, because you don’t get any further credit for delaying.
Meanwhile, the husband claims Social Security at age 70, the latest possible age. Because of the delay, he receives $26,400 a year, while also guaranteeing a larger survivor benefit for his wife, assuming he predeceases her.
“The best annuity you can buy is Social Security,” argues Baylor University investments professor William Reichenstein. “The higher-income earner should delay benefits unless they’re both in poor health, because his benefit will be paid until the second spouse dies.”
At age 70, our couple would have $36,400 in combined Social Security income. This figure is in today’s dollars and ignores any intervening inflation-driven increases in Social Security benefits. To keep things simple, we’ll also assume that their portfolio’s return rivals the inflation rate.
But delaying Social Security comes at a steep price: The husband missed out on eight years of benefits and his wife missed four years’ worth. Let’s say they pulled enough from savings to keep their income at an inflation-adjusted $36,400 a year during this stretch. That would shrink their $500,000 nest egg to just $248,800.
What should they do with this $248,800? They could stick with the conventional approach and use a 4% withdrawal rate, which would give them $9,950 in annual income starting at age 62. Add that to the $36,400 they’d receive first from savings and later from Social Security, and they would be up to $46,350.
That’s not bad. But there’s risk involved: A 4% withdrawal rate might prove too high, given today’s rich stock-market valuations and low bond yields. Indeed, if our couple’s portfolio performance merely matched the inflation rate, they’d be out of money after 25 years. That would be at age 87, which is the median life expectancy for a woman at retirement age.
As an alternative, they might spend down $200,000 of their savings in equal inflation-adjusted annual amounts over the first 20 years of their retirement, which would give them $10,000 a year in current dollars. With the remaining $48,800, they could purchase a deferred income annuity, sometimes called “longevity insurance,” which would pay them income starting at age 82.
At that juncture, the annuity would kick off $12,140 a year for life, based on a quote from New York Life. That’s equal to $8,170 in today’s dollars, assuming 2% annual inflation during the intervening two decades. That means they would have roughly $1,800 less to spend-but they’d also be collecting a stream of income they couldn’t outlive.
Betting the house
If our couple want yet more income, they could tap home equity. Let’s say they took out a reverse mortgage at age 62. That would involve hefty fees-but it would give them additional income of some $9,700 a year for as long as they occupy their home, according to the calculator
This $9,700 won’t increase with inflation. To protect against rising prices, our couple might set aside, say, $1,900 each year in the early part of their retirement and use that to supplement their reverse-mortgage payments later in retirement, leaving them with roughly $7,800 a year to spend.
The bottom line? By depleting their portfolio, delaying Social Security, taking out a reverse mortgage and buying longevity insurance, our couple might have somewhat over $54,000 a year, or almost 30% more than if they simply claimed Social Security at 62 and plunked for a 4% portfolio withdrawal rate.
Moreover, the strategy is arguably less risky, because they’re locking in various income streams that will keep paying no matter how long they live.
There’s an obvious downside: little or no inheritance for the children. Don’t like that idea? Before you opt for a penny-pinching retirement, do yourself a favor: Ask your children for their opinion. I suspect they’d rather have happy parents than a fat inheritance.