The Case for Delaying Social Security in Retirement

I am a fan of building a retirement portfolio - and planning how you are going to retire on that portfolio - BEFORE you retire. A key component of that plan is delaying your Social Security if at all feasible. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.

Q: My wife and I plan to retire at age 65. What would be a good “spending in retirement” plan that might leave a residual estate for our two adult children?

A: This is a common concern for folks approaching retirement and your plan should be based on your family’s specific circumstances. Assuming that you are saving, investing and taking advantage of 401(k) opportunities, I would focus on three things: Social Security (SS) and when to take it; setting aside an amount of secure liquid assets to “fund” five or so years of Social Security delay (until age 70); and arranging the balance of your retirement and non-retirement account portfolios, if need be, to fund what let’s call “other” spending you might wish to do until you reach age 70.

Social Security Delay

If both of you are healthy, I suggest delaying the larger of your two Social Security paychecks until age 70 and take the smaller SS check at age 65 to help fund the delay of the first one.

Next, consider funding the balance of any shortfall with assets from your “non-retirement" fund portfolio, particularly if a sufficient portion is invested in fairly liquid, safe (FDIC insured) funds and/or short-term bonds. Or, instead of liquidating those non-retirement mutual funds along the way, you might consider liquidating some of them up front and building a bond ladder or purchasing an annuity with the proceeds to fill the pre-70’s gap. Remember, these funds will be replacing workplace paychecks until age 70.

If you still face a shortfall, cover it with a portion of your required minimum distributions (RMDs) from your retirement funds (401(k)s), but avoid this if possible to allow your retirement account balance to grow until at least age 72 untaxed. Once you reach 70, the delayed SS check (having increased both in size and adjusted for inflation) and your remaining RMDs should allow you to live comfortably through your post-70 retirement phase.

That 70s Show

After delaying your Social Security check, and assuming that both of your retirement and non-retirement portfolios are still healthy, you should be able to enter your 70s at a comfortable income level.

You might also consider opting for an above average level of stock allocation in the RMD portion - a target-date fund, perhaps - adjusted, of course, for your advancing ages and swings in portfolio performance.

In my opinion, it makes more sense to adjust your spending levels based on your stage of life and on annual portfolio performance rather than some arbitrary percentage. In fact, I’ve found that those IRS RMD Tables based on year-end asset values are very consequential in helping determine spending levels for the next year. They certainly affect my thinking.

Take Your Meds

You can't forget medical insurance. Perhaps you’ll be covered under a corporate plan. If not, Medicare Parts A, B, and D along with a supplemental (Medigap) plan should blend nicely with your retirement funds.

Although more expensive, I prefer a supplemental plan that helps pay for out-of-pocket costs not typically covered by Medicare advantage plans (also called Medicare Part C plans). However, both Medigap and Part C may come with additional costs. You may have to spend money to save money - that’s insurance in a nutshell.

Rainy Day Fund

As during pre-retirement years, don’t forget to set aside several months in a Rainy Day Fund to cover those unexpected emergency expenses that will inevitably occur. I recommend that this money, too, be placed in a highly liquid FDIC-insured bank account.