How to manage a retirement portfolio?

[intercst]

Thejusticer asks,

If one has taken his or hers retirement at the end of 2021 at the peak of the market. S/he would be down 20 or 30% or more down after they took their initial 4%. What would you tell them? you are fine. Just follow the 4% rule (initial 4% and same yearly sum+inflation adjustment)?

Yes, I would tell them 4% is still fine.

Actually, we had an even more distressing case than today’s stock market in the year 2000 during the dot.com crash. People panicked and questioned the “4% rule”. Someone with a 60/40 stock/bond portfolio who retired in 2000 still has more money than they started with after 22 years of inflation-adjusted withdrawals – there’s little chance they won’t make it to 30 years.

Besides investing, from where have your income and cashflow come from? if all have come from your portfolio, do you simply put your money in indexes or do you manage your portfolio’s composition?

I started back in 1994 with a portfolio of about 20 stocks split between Tech and Drugs. Over the past 15 years or so I’ve been transitioning to index funds, to the extent I do so without incurring any additional tax liability. I’m about 70% individual stocks and 30% indexes today.

Over 90% of my income has been from portfolio withdrawals. I earned $8,000 to $9,000/yr in author’s royalties for some stuff I wrote years ago and I had to start 2 small corporate pensions that I earned for 5 year stays at Exxon and another Chemical company at age 65.

Waiting from age 62 to 70 increases your monthly Social Security check by about 75%

For someone who paid the maximum FICA tax for 35 years, the benefit at age 70 is $50,328/yr. Obviously, I’ll get less since I quit working at age 38, but it’s astonishing that I’ll still be getting about $35,000/yr from Social Security at age 70 in about 3-1/2 year’s time. See link for an explanation.

What happens to my Social Security benefit if I retire early?
https://retireearlyhomepage.com/soc_security.html

intercst

[thejusticier]

I guess 10X from 1994 to 2022 is basically what the S&P500 has given over that period, and your example gives ~3% inflation increase each year. If you had more or less follow the market growth then that’s would be what you have. But you attribute the growth from 2 particular stocks that have given you outsized gain and it sounded that help you for your retirement funds.
The problem with a stock portfolio is that it is never straight up and it could go sideways for some portfolios. Obviously looking back on just the S&P 500index it has basically risen over the long term. Not sure if a particular portfolio couple ‘beat the market’ like the Fool wants you to believe it can be done. Of course it can but still not every does or most does not?
But we don’t need to beat. If we can follow the market, and we have faith in the future of particularly US businesses then as an aggregate the stock market should still rise for the most part.

At this juncture, I am wrestling with keeping my current portfolio or re-adjusting it more towards something like an index. These past 6 months have been extremely volatile.
The other thing is after retiring I will not have fresh money to contribute to my stock portfolio so I just want to make the calculation I can at the least draw what we need out of my portfolio and keep our current level of spending for at least 40 years.

I think by adhering strictly to the 4% rule and not increase your draw from your portfolio even if it has grown well has helped you grow it even more. I like that. You need to leave some for the longer term to help you grow the portfolio. This is about securing future income which one need 10, 20, 40 or more years down the road. I also want to leave my portfolio to my child after we pass.

Gene (gdett) has spoken about a multi-year cash cushion which I think is a very good idea. So you go FIFO and you have a buffer between the market cycles and your more regular yearly or monthly needs/expenses. Do you use such a device, or have you drawn from your portfolio every year of these past 28?

[JLC]

I see little utility in having dividend income in excess of my annual spending needs, paying taxes on that dividend income, and then reinvesting it.

All depends on how you manage it. It is not like I have $100k of dividends coming in and only $50k. I might have an excess of $10k that gives a little cushion for unexpected costs and inflation. If neither of those occur, take a little tax hit but also what wood working project, concert, trip, etc., do I want now.

JLC

[1poorguy]

Get out, travel, while you can!

Agreed. We were coasting just fine three years ago, making plans. Then I had a suspected glioma (which, fortunately, wasn’t). Then 1poorlady got cancer, and had surgery and chemo. She’s still not completely recovered from that (and may never be). She can’t do the more strenuous hikes we could just a few years ago.

We’ll still get “out there”, but we have limitations that we didn’t have three years ago.

Travel while you can, because you don’t know when you won’t be able to anymore. And then it’s too late.

1poorguy (retired completely last week, even with the market down…have two trips planned for the rest of 2022)

[1poorguy]

The only gotcha is SS rules may change between now and then (e.g. the next 10 years). Republicans in particular have been wanting to cut that program in various ways, with some extremists wanting it gone entirely.

We can only operate on what we know today, but one should probably pay attention to the political winds. That always makes me nervous because the political winds change direction frequently, and often radically.

[wecoguy]

We were coasting just fine three years ago, making plans. Then I had a suspected glioma (which, fortunately, wasn’t).

Excellent… Our daughter , 2 years back now had a tingling in her left arm/hand, wanted to know what was going on, Kaiser and her Doc jumped right on it, and found a glioma on her right hemisphere… too dangerous for surgery, so chemo and a tuned RF setup (Optune), focussed on it, kept it in check for nearly 18 months, but then another showed up on her left hemisphere and while they surgically removed it, they had to back of the RF and chemo to let that heal… Well that let the original go free, and shortly more deficits, one after another until her passing this past October at 55 years young… Frustrating for her, all of us, as until then there had been hope of beating it… Great doctors, surgeons, in their high level facility in Redwood City, plus the RF Optune setup, all fully covered, but in the end that glib won its war…Nasty, nasty cancer, so aggressive, makes n sense that any disease kills it’s host, but it sure did… We all learned a lot, she shared it all to family, friends, from the scans, photos, great attitude throughout until it was obviously the end game…

In the midst of it all, their two girls married, inlay moved to Carson City, NV, gave them their home, as well as a lightly use motor hone, we took all of the family to Yosemite, she managed the hike to Vernal Falls, they moved, sold their old home… Crazy hectic couple years in the midst of Covid…

Never know what lies ahead, make the most of today!

weco

[CuriousQ]

Not starting SS at 62 is wise, waiting until 70 is wiser. Where can you get an annual 8% pay raise with a cost of living escalator?

I’ve been thinking about how to address this blanket statement without disputing its central element. Here’s what I thought of:
To know when is the best age to begin social security, one needs to know the date he will die, the date his spouse will die, the return he’d earn on the money he would have had if the money were left in his accounts instead of spent on living expenses due to delaying social security, and finally whether his spouse will be taking her SS based on own earnings or the spousal benefit. There are some other factors that count for something but maybe not as much, like optimizing for the spouse’s survivor benefits if the main earner passes away first. Even if there’s no spouse in the picture, there are critical assumptions that have to be made. Also, if one just doesn’t have any other money at age 62, the answer might be practical rather than calculated/optimized.

Clearly, if one knew he would he would die at age 68, delaying SS to age 70 is a losing choice. So, we end up having to make trade-offs. I am much more worried about living into my 90s on the lower amount from taking early than I am about optimizing the amount the government pays me (or repays me). So, there’s a reverse-life-insurance aspect baked in the decision to delay. I also baked in a lower return for my own investments for my analysis, which could easily occur in real terms. A lot of people on this board use 10% annually for their returns, not factoring in volatility or the fact they don’t hold assets in 100% of categories that returned 10% historically.

All that said, based on my conservative assumptions (long life, non-stellar real returns), taking SS at 67 and 70 are roughly equal, and 62 is the obvious loser. I’ll wait until age 66 and have several years results become history rather than assumptions, and recalculate, then decide about taking at age 67. With luck, I will still have the added complexity of needing to make spousal assumptions.

Finally, you can switch “he” for “she” above and it still applies.

[reallyalldone]

Not starting SS at 62 is wise, waiting until 70 is wiser. Where can you get an annual 8% pay raise with a cost of living escalator?

But how much would you have received between 62 and 70 and if you wait until 70, how long does it take to make that up ?

[buynholdisdead]

But how much would you have received between 62 and 70 and if you wait until 70, how long does it take to make that up ?

You make it up in your 80’s just in time for Alzheimer’s to set in and somebody to change your diapers.

Andy

[RHinCT]

But how much would you have received between 62 and 70 and if you wait until 70, how long does it take to make that up ?

I didn’t run the number for 62. I just did a quick spreadsheet that assumed Full Retirement Age (FRA) of 66 (for anyone born in 1954 or earlier), with one calculation starting payments at FRA of 66, the other at age 70 after four annual 8% increases. The lines crossed in the year of age 77. As of the end of the year for age 77, retiring at 66 paid, cumulatively, 12 times the FRA amount; the total for delaying to age 70 paid, cumulatively, came to 12.8 times the FRA amount. Through age 80 the numbers were 15 and 18.92, respectively. Nothing was done to try to factor in cost of living changes.

UPDATE! I dug up the numbers for retiring at age 62, with all the same assumptions as above. At 62 the benefit is 75% of the FRA benefit. At the end of the year of age 77 it comes out EXACTLY the same as starting at FRA. Through age 80 it comes to 14.25.

The information to do your own calculations:
https://www.ssa.gov/benefits/retirement/planner/agereduction…

Earlier in the thread there was a list of factors to consider. It is really even more complicated, as one’s entire financial situation should be considered. Personally, I have enough saved that I always planned on waiting until 70. That became an even simpler decision when my wife died, as I have been receiving survivor benefits based on her SS for four years. On my next birthday, at 70, I will change to collecting based on my own SS, which I estimate will be about double what I’ve been getting as a surviving spouse.

[telegraph]

“But how much would you have received between 62 and 70 and if you wait until 70, how long does it take to make that up ?”

The breakeven point is about 86. The IRS figures on average half of all people will be dead by then and no longer collect SS.

Thus, if you start at 62 or 70, you’ll collect the same amount of money till age 86. If you live past 86, you’ll be in fat city if you waited till 70, getting 70% more money than having started a 62. Each month. Till you die.

Now, if you smoke, on average you’ll die 13 years earlier than non-smokers. So consider.

It’s all averages. And genes. If your parents both lived to 100, and you are healthy , no bad habits, and likely to live to 100, then wait if you can.

If your family tree ends for everyone in their 70s…well…that’s how your family cookie crumbles, unless they were smokers and did themselves in earlier (on average).

Right now, the leading cause of death, more than heart attacks or traffic accidents is drug overdoses.

t.

[Daryll44]

The breakeven point is about 86. The IRS figures on average half of all people will be dead by then and no longer collect SS.

Thus, if you start at 62 or 70, you’ll collect the same amount of money till age 86. If you live past 86, you’ll be in fat city if you waited till 70, getting 70% more money than having started a 62. Each month. Till you die.

I think, at least for upper middle class retirees, that there is a big point that’s missing. And that’s the longevity insurance factor of SS. True, if you defer until age 70 and die before 86, you lose. But you’re dead. If, on the other hand, you make it to 90, 95, 100+, you win and you are alive. You won’t know, perhaps ever, until you survive to age 86 or develop a terminal illness before, if you win or lose. But for many, the longevity insurance factor is a good reason to delay to age 70. It’s not JUST about getting the most dollars out of SS. Plus, the survivor might benefit even if you do die before 86.

[MCCrockett]

“But how much would you have received between 62 and 70 and if you wait until 70, how long does it take to make that up ?”

How long it takes depends on several factors. Your occupation, employment history, and retirement age are significant. Also significant are Social Security’s COLA from age 62 to age 70 or whenever you claim Social Security retirement benefits.

I was a software engineer. My highest earning years were between ages 62 and 68 when I retired. This eliminated all of the years after graduation from college when my earnings didn’t exceed Social Security’s cap on insured earnings. I was considered a “maximum earner” for the 35 years used to calculate my PIA (Primary Insurance Amount).

COLA is earned from age 62. Earned but unclaimed COLA is recursively applied to your PIA calculated when you claim Social Security benefits.

I retired at age 68. My PIA included a 16% increase for claiming 2 years after my FRA. Earned but unclaimed COLA was applied to my PIA and increased my monthly benefit by another 15.3%. As a result, by age 77 I had received more in Social Security benefits than I would have received by retiring and claiming benefits at age 62.

[Rayvt]

But how much would you have received between 62 and 70 and if you wait until 70, how long does it take to make that up ?

If you spend it, the break-even point is age 81.

[Rayvt]

“But how much would you have received between 62 and 70 and if you wait until 70, how long does it take to make that up ?”

You make it up in your 80’s just in time for Alzheimer’s to set in and somebody to change your diapers.

Heh, that’s why I call it getting a better grade of gruel.

To see some figures, here is a spreadsheet: https://www.dropbox.com/s/gebanzrbr3g33qf/My%20SS%20breakeve…
Assume you put all the SS payments into a savings/investment account, using the starting date and payment at age 62 and 66
The age 62 account starts earlier but the payments are lower. The age 66 account starts later but the payments are bigger.
So the age 62 account has a head start, but grows slower.
At some point the age 66 account balance will exceed the age 62 balance. This is the break-even point.
You should look at how long it takes to break even, and look at your age at the break-even point, and compare that
to your life expectancy.

If you invest it (at 62) and earn 5% above inflation the breakeven age is 91. If you can earn 6% above inflation, the BE is 98.

[irasmilo]

But how much would you have received between 62 and 70 and if you wait until 70, how long does it take to make that up ?

This is a common false argument. The purpose of Social Security isn’t how much can you get back from the government. It is to guarantee that you have at least a minimum level of income throughout your retirement regardless of what happens to the rest of your assets.

If your financial situation is such that you can’t foresee any circumstances where you would exhaust your other assets in retirement, then it doesn’t matter when you take Social Security. If you are so asset poor that you can’t survive between 62 and FRA (or 70) without taking Social Security, then you don’t have a choice but to take it early. For those in the middle, the calculation of an “optimal” Social Security strategy is not a trivial exercise. There can be significant lifetime advantages (up to 6 figure differences) of one plan over another. Some of this information can be found in books such as “Get What’s Yours: The Secrets to Maxing Out Your Social Security” by Kotlikoff, Solman and Mueller. There is a whole new industry of Social Security advisors who specialize in running “what-if” analyses for clients. Professionals usually acquire RSSA or NSSA certification.

Disclosure: While I have neither certification, I am considering them as an adjunct to my tax practice.

Ira

[reallyalldone]

But how much would you have received between 62 and 70 and if you wait until 70, how long does it take to make that up ?

This is a common false argument.

It was pretty much a rhetorical question because it is rarely part of the never-ending argument on this board about when to take social security. I did the calculations starting when I was around 58.

Just so everyone has something to do today, perhaps throw in the calcs for married people to include the possibility of different amounts and tax rates with the death of a spouse.

In my case, a death changed all the calcs

[jjaym]

This is no replacement for actually running the numbers, but…

I believe that the standard advice for couples is for the lower-earning spouse to take Social Security early and for the higher-earning spouse to take Social Security as late as feasible. At some point, I used a benefits optimizer and in fact that is what it spit out for us. We’ll investigate again when my wife and I approach 62 and finalize our decision then. It makes little difference for us. We have enough in investments and enough projected Social Security that we will do well enough regardless of which way we approach it. Of course, they have and may again change the rules for Social Security benefits, so it’s best to revisit before making the leap. Between 62 and 65, we will have to consider the effect of SS income on our MAGI for purposes of ACA (Obamacare) premium subsidies and adjust accordingly.

[Rayvt]

“We have enough in investments and enough projected Social Security that we will do well enough regardless of which way we approach it.”
and
“If you are so asset poor that you can’t survive between 62 and FRA (or 70) without taking Social Security, then you don’t have a choice but to take it early. For those in the middle, the calculation of an “optimal” Social Security strategy is not a trivial exercise.”

There are 3 categories of people here.

1. Those who are so poor that they need to take SS as soon as they retire.
2. Those who have enough assets (including pensions) that they will do well enough without taking SS.
3. Those in the middle.

It’s only those in the middle who even need to even think about their optimum filing strategy.

A $2 million in investment assets at 4% gets you $80,000/yr
An above average SS benefit of $2500/mo at FRA is $1,875 at 62 and $3,300 at 70.
The total comes to $102,500 for 62 filers at 62 and $119,600 for 70 filers.
There’s not a whole lot you can do at $119K that you can’t at $103K.
Keep in mind that the age 70 filer takes until they are 81 before they pull ahead.

There can be significant lifetime advantages (up to 6 figure differences) of one plan over another.

This large lifetime only happens if they live significantly longer than the mortality tables predict. This is a very very small number of people. Yeah, yeah, us upper-middle & upper income people live longer. But not that much longer.

Life Expectancy of 70 year olds is about 15 years. That’s age 85.
SS breakeven age (defer from 62 to 70) is 11 years (actually 10.5). That’s age 81.

How much longer we us live? 10 more years? That would take us to 95. Rare.

[irasmilo]

There can be significant lifetime advantages (up to 6 figure differences) of one plan over another.

This large lifetime only happens if they live significantly longer than the mortality tables predict. This is a very very small number of people. Yeah, yeah, us upper-middle & upper income people live longer. But not that much longer.

That’s only part of the story. The large lifetime differences typically occur when a married couple analyzes their benefits separately and fails to consider the impact on the survivor (second to die).

And as others have pointed out previously, those in the middle group should consider the impact of tapping other resources such as retirement accounts before starting Social Security. The potential reduction in future RMDs and IIRMA charges can provide significant financial advantages over their remaining lives.

Ira