9
Morningstar FundInvestor
October
2013
Let’s also assume she has $
500
,
000
in financial
assets, including $
400
,
000
in a
401
(k) or some other
tax-deferred account, and $
100
,
000
in a taxable
account. (We’ve added more of the assumptions in
the aforementioned downloadable
PDF
.)
Finally, we’re assuming that her primary insurance
amount, or
PIA
, from Social Security is $
1
,
500
—
that is the monthly payment she’d be entitled to if she
files for benefits at her full retirement age of
66
.
The chart shows the impact on portfolio longevity
assuming she retires at
62
but files for benefits at
ages
62
,
66
, or
70
.
Question:
Why did delaying Social Security benefits
allow the portfolio to last longer?
Reichenstein:
There are two reasons delaying Social
Security would allow the portfolio to last
10
-plus
years longer. First, assuming this
30
-year lifespan, de-
laying Social Security benefits from
62
to
70
would
increase the purchasing power of lifetime Social Secu-
rity benefits by $
117
,
720
. It is like she has an addi-
tional $
117
,
720
of retirement assets.
Second, by delaying Social Security benefits until
70
,
she would reduce the portion of benefits that are
taxable. After
70
, she would receive a relatively large
Social Security benefit and need relatively little
from the
401
(k). Because of the formula used to deter-
mine the taxable portion of Social Security bene-
fits, this would cause less Social Security benefits to
be taxable.
Question:
Let’s explore that a bit further—the ques-
tion of a tax-efficient withdrawal strategy and how
it can add longevity to the portfolio. Before we get to
the results, give us your thoughts on how retirees
should think about constructing a tax-efficient
approach to Social Security and portfolio drawdowns.
Meyer:
What you want to do is avoid the so-called
tax torpedo, which is the rise—and then fall—in
marginal tax rates that can be caused by taxation of
Social Security benefits. A single individual will owe
federal income tax on part of her Social Security
benefits if her adjusted gross income (including tax-
exempt interest), plus half of her Social Security
benefits, add up to $
25
,
000
or more. This threshold
is $
32
,
000
for joint filers. Taxes are never levied on
any more than
85%
of your benefits.
This year, the
15%
bracket for married couples filing
jointly applies to taxable income between $
17
,
851
and $
72
,
500
. For an individual, the range is $
8
,
926
to
$
36
,
250
.
Question:
What are the implications there for Social
Security and a withdrawal strategy?
Reichenstein:
Many planners would suggest that
this retiree draw down her taxable assets first and
then her
401
(k). But it makes sense for her to with-
draw some money from her
401
(k) each year, as long
as those withdrawals would be taxed at a low rate,
and then withdraw additional funds from her taxable
account. If she doesn’t do that, she would miss the
opportunity to convert some of her pretax dollars in
her
401
(k) to aftertax dollars at low tax rates.
œ
$600k
$480k
$360k
$240k
$120k
Projected Portfolio Longevity at Different Filing Ages
2013 2017
2021
2025
2029
2033
2037
2041
2045
2049
2053
Social Security begins at age:
62
66
70
Delaying filing for Social Security until age 70 significantly boosts your
portfolio longevity.
