Spend down cash to bridge to social security?

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namajones
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Spend down cash to bridge to social security?

Post by namajones »

Will be 62 in a couple of weeks. Got a pile of cash separate from my 401k. It's my safe money, invested in low-growth/no-growth vehicles because, well, what else is there that's safe these days?

I'm thinking it's wise to use this low-performing, depreciating asset (cash and cash equivalents) to spend for living expenses to bridge to age 66/67 at FRA. Might tap into the 401k a bit, too, just to lessen the required minimum distribution amount when I turn 70/72.

Anyone else done this? How well did it work?

Thanks.
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David Jay
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Re: Spend down cash to bridge to social security?

Post by David Jay »

It depends on how large the 401K is. If you have over a half million in the 401K then you will want to spend to at least the top of the 12% bracket (about $53,000 if filing single) from the 401K to prevent even larger RMDs in the future.

If the 401K is small, then spending the cash is fine.

I would recommend a full portfolio review for better answers: viewtopic.php?f=1&t=6212
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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namajones
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Re: Spend down cash to bridge to social security?

Post by namajones »

David Jay wrote: Fri Apr 16, 2021 1:51 pm It depends on how large the 401K is. If you have over a half million in the 401K then you will want to spend to at least the top of the 12% bracket (about $53,000 if filing single) from the 401K to prevent even larger RMDs in the future.

If the 401K is small, then spending the cash is fine.

I would recommend a full portfolio review for better answers: viewtopic.php?f=1&t=6212
Good point about the tax bracket. I'll have to look at that.

One advantage I saw in spending down cash is that my income in those years would be next to nothing--ergo, hardly any taxes.
TNWoods
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Re: Spend down cash to bridge to social security?

Post by TNWoods »

namajones wrote: Fri Apr 16, 2021 2:23 pm
David Jay wrote: Fri Apr 16, 2021 1:51 pm It depends on how large the 401K is. If you have over a half million in the 401K then you will want to spend to at least the top of the 12% bracket (about $53,000 if filing single) from the 401K to prevent even larger RMDs in the future.

If the 401K is small, then spending the cash is fine.

I would recommend a full portfolio review for better answers: viewtopic.php?f=1&t=6212
Good point about the tax bracket. I'll have to look at that.

One advantage I saw in spending down cash is that my income in those years would be next to nothing--ergo, hardly any taxes.
If you have any taxable investments at all with LTCG, this could be an opportunity to realize the gains with no taxes.

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diy60
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Re: Spend down cash to bridge to social security?

Post by diy60 »

namajones wrote: Fri Apr 16, 2021 1:27 pm I'm thinking it's wise to use this low-performing, depreciating asset (cash and cash equivalents) to spend for living expenses to bridge to age 66/67 at FRA.
This is just mental gymnastics, and will increase your overall portfolio stock allocation over time. Why not just spend from both equities and bonds as needed?
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Watty
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Re: Spend down cash to bridge to social security?

Post by Watty »

namajones wrote: Fri Apr 16, 2021 2:23 pm One advantage I saw in spending down cash is that my income in those years would be next to nothing--ergo, hardly any taxes.
That could mean that you are in a low tax bracket which could make it a good time to do 401k withdrawals.

Most likely the best choice will be to spend money from a mixture of account types to minimize your taxes. For example you could make enough 401k withdrawal to account for the standard deduction and the 10% federal tax bracket then spend cash for the rest of income needs.

There will be other things that come into play too like interest and dividends, state taxes, Roth conversions, ACA healthcare subsidies, and the federal 0% long term capital gains tax bracket.

You also really need spend the time to understand how your Social Security will be taxed since it may make sense to pay some taxes now to avoid paying more taxes after you start Social Security. It is complex so it may be easier to do dummy tax returns to see how your taxes will work.

https://www.bogleheads.org/wiki/Taxatio ... y_benefits

Most likely you will not be able to plan out the details years in advance and you will just need to figure out which accounts to spend money out of each year as your situation changes.
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namajones
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Re: Spend down cash to bridge to social security?

Post by namajones »

diy60 wrote: Fri Apr 16, 2021 2:31 pm
namajones wrote: Fri Apr 16, 2021 1:27 pm I'm thinking it's wise to use this low-performing, depreciating asset (cash and cash equivalents) to spend for living expenses to bridge to age 66/67 at FRA.
This is just mental gymnastics, and will increase your overall portfolio stock allocation over time. Why not just spend from both equities and bonds as needed?
May do this. However, I view the cash as a depreciating asset; therefore, it makes more sense to me to spend that sooner. To turn it into a nondepreciating asset would require me to put it into riskier vehicles that would potentially erode the principal faster than would inflation.
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namajones
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Re: Spend down cash to bridge to social security?

Post by namajones »

Watty wrote: Fri Apr 16, 2021 2:45 pm
namajones wrote: Fri Apr 16, 2021 2:23 pm One advantage I saw in spending down cash is that my income in those years would be next to nothing--ergo, hardly any taxes.
That could mean that you are in a low tax bracket which could make it a good time to do 401k withdrawals.

Most likely the best choice will be to spend money from a mixture of account types to minimize your taxes. For example you could make enough 401k withdrawal to account for the standard deduction and the 10% federal tax bracket then spend cash for the rest of income needs.

There will be other things that come into play too like interest and dividends, state taxes, Roth conversions, ACA healthcare subsidies, and the federal 0% long term capital gains tax bracket.

You also really need spend the time to understand how your Social Security will be taxed since it may make sense to pay some taxes now to avoid paying more taxes after you start Social Security. It is complex so it may be easier to do dummy tax returns to see how your taxes will work.

https://www.bogleheads.org/wiki/Taxatio ... y_benefits

Most likely you will not be able to plan out the details years in advance and you will just need to figure out which accounts to spend money out of each year as your situation changes.
Good points. I'll have to do a spreadsheet on standard deduction and tax brackets relative to draws from cash and 401k pools. I also have a smallish pension from the government and govt health care until age 65 (or beyond if I'm abroad), so health insurance is not at issue.

But yes, I recognize that there is back-of-the-napkin or spreadsheet planning in advance, and then there is actual practice. Just playing with the back-of-the-napkin part for now. Course correcting is easy when I could just pull from cash.
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namajones
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Re: Spend down cash to bridge to social security?

Post by namajones »

TNWoods wrote: Fri Apr 16, 2021 2:28 pm
namajones wrote: Fri Apr 16, 2021 2:23 pm
David Jay wrote: Fri Apr 16, 2021 1:51 pm It depends on how large the 401K is. If you have over a half million in the 401K then you will want to spend to at least the top of the 12% bracket (about $53,000 if filing single) from the 401K to prevent even larger RMDs in the future.

If the 401K is small, then spending the cash is fine.

I would recommend a full portfolio review for better answers: viewtopic.php?f=1&t=6212
Good point about the tax bracket. I'll have to look at that.

One advantage I saw in spending down cash is that my income in those years would be next to nothing--ergo, hardly any taxes.
If you have any taxable investments at all with LTCG, this could be an opportunity to realize the gains with no taxes.

TNWoods
Yup. Did that. Had LTCL, too, so the gains were all "tax free," so to speak, offset by old carry-forward losses.
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David Jay
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Re: Spend down cash to bridge to social security?

Post by David Jay »

namajones wrote: Fri Apr 16, 2021 2:23 pm
David Jay wrote: Fri Apr 16, 2021 1:51 pm It depends on how large the 401K is. If you have over a half million in the 401K then you will want to spend to at least the top of the 12% bracket (about $53,000 if filing single) from the 401K to prevent even larger RMDs in the future.

If the 401K is small, then spending the cash is fine.

I would recommend a full portfolio review for better answers: viewtopic.php?f=1&t=6212
Good point about the tax bracket. I'll have to look at that.

One advantage I saw in spending down cash is that my income in those years would be next to nothing--ergo, hardly any taxes.
Yeah, you shouldn’t exchange a zero/low tax bracket now in exchange for a much higher tax bracket after start of RMDs. Leveling your tax brackets will provide the lowest net taxes.

Also, tax rates are scheduled to revert in 2026 so the same “bracket” will cost more later: 12% becomes 15%, etc.
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Re: Spend down cash to bridge to social security?

Post by cpumechanic »

Hello

Please be sure you understand the ACA subsidies before you make your decisions.
Having cash in the bank to live on from XX retire date to 65 medicare date ... allows you to take advantage of the ACA and get $20k or more in healthcare subsidies/year from our guberment. (government for those with passions easily inflamed.)


Hope this post doesn't offend or inflame passions in anyone.. that is surely not my intention.



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BolderBoy
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Re: Spend down cash to bridge to social security?

Post by BolderBoy »

namajones wrote: Fri Apr 16, 2021 1:27 pm Anyone else done this? How well did it work?
I did this from age 61 -> 70 (SS) while making Roth conversions each year. Worked splendidly. Had set aside $400k to carry me through and at age 70+ still had $250k+ left over (goodly market appreciation).

Pay attention to the other advice you got upthread (eg. David Jay).
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Re: Spend down cash to bridge to social security?

Post by livesoft »

namajones wrote: Fri Apr 16, 2021 1:27 pmAnyone else done this? How well did it work?
Haven't done that. Instead, I spend any cash I find on stock ETFs and bond ETFs so that my 60/40 portfolio grows. In order to pay expenses, I do sell stock ETFs and bond ETFs as needed.

I feel that whether I have any cash or not is NOT going to save my 60/40 portfolio from losses nor gains, so I might as well not have any cash at all.
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SnowBog
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Re: Spend down cash to bridge to social security?

Post by SnowBog »

livesoft wrote: Fri Apr 16, 2021 6:45 pm
namajones wrote: Fri Apr 16, 2021 1:27 pmAnyone else done this? How well did it work?
Haven't done that. Instead, I spend any cash I find on stock ETFs and bond ETFs so that my 60/40 portfolio grows. In order to pay expenses, I do sell stock ETFs and bond ETFs as needed.

I feel that whether I have any cash or not is NOT going to save my 60/40 portfolio from losses nor gains, so I might as well not have any cash at all.
Sorry if this is posted elsewhere, but would your view change if you (or OP) were <= 55 with 4+ years before you can [easily] access your retirement accounts and needed to balance "income" for ACA?

In my view, cash gives more options for income/tax management in those early years... Just curious if you think differently.
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Re: Spend down cash to bridge to social security?

Post by livesoft »

SnowBog wrote: Fri Apr 16, 2021 8:52 pmSorry if this is posted elsewhere, but would your view change if you (or OP) were <= 55 with 4+ years before you can [easily] access your retirement accounts and needed to balance "income" for ACA?

In my view, cash gives more options for income/tax management in those early years... Just curious if you think differently.
No it would not. I stopped working full-time and I haven't paid any capital gains taxes in decades. Return of capital is tax free and realized capital gains are offset by tax-loss harvesting.
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Re: Spend down cash to bridge to social security?

Post by SnowBog »

livesoft wrote: Fri Apr 16, 2021 9:00 pm
SnowBog wrote: Fri Apr 16, 2021 8:52 pmSorry if this is posted elsewhere, but would your view change if you (or OP) were <= 55 with 4+ years before you can [easily] access your retirement accounts and needed to balance "income" for ACA?

In my view, cash gives more options for income/tax management in those early years... Just curious if you think differently.
No it would not. I stopped working full-time and I haven't paid any capital gains taxes in decades. Return of capital is tax free and realized capital gains are offset by tax-loss harvesting.
Sadly (or for the good :D) I don't have any losses accrued... Reset about 1/2 of my taxable account last year with TLH for only about $40k, which I used to sell off older highly appreciated (and unfortunately more concentrated than I'd like) holdings. So unless we drop well below March 2020 levels, I'll be dealing with LTCG going forward.

I figure having a mix of cash (no income or tax impact) to balance out harvesting from taxable and Roth conversions gives me more control/flexibility. But I suspect I might feel differently if I had large "losses" to use up...
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Re: Spend down cash to bridge to social security?

Post by brian91480 »

cpumechanic wrote: Fri Apr 16, 2021 4:45 pm Hello

... allows you to take advantage of the ACA and get $20k or more in healthcare subsidies/year from our guberment. (government for those with passions easily inflamed.)

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JoeRetire
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Re: Spend down cash to bridge to social security?

Post by JoeRetire »

namajones wrote: Fri Apr 16, 2021 1:27 pm Will be 62 in a couple of weeks. Got a pile of cash separate from my 401k. It's my safe money, invested in low-growth/no-growth vehicles because, well, what else is there that's safe these days?

I'm thinking it's wise to use this low-performing, depreciating asset (cash and cash equivalents) to spend for living expenses to bridge to age 66/67 at FRA.
Won't depleting your "safe money" make you less safe? Are you okay with that?

Check out https://opensocialsecurity.com/ to see if 66/67 is the optimal age, or if delaying to 70 would be better for you.

Your approach makes complete sense to me.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
bberris
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Re: Spend down cash to bridge to social security?

Post by bberris »

Here is the ancient thread that opened my eyes to do exactly what you have planned (except that the thread advocated delaying to 70 to maximize social security benefits.)

viewtopic.php?t=102609

This would work even if you have to take taxable withdrawals to fund the claiming delay.
Edit to explain this a little:


Social security income is taxed less than ordinary income. When you use taxable withdrawals from an IRA to fund the delay in SS benefits, you are trading off assets that will be taxed at a higher rate (IRA) for a lower rate (SS).
Last edited by bberris on Sun Apr 18, 2021 8:51 am, edited 1 time in total.
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Re: Spend down cash to bridge to social security?

Post by bsteiner »

bberris wrote: Sat Apr 17, 2021 6:53 am Here is the ancient thread that opened my eyes to do exactly what you have planned (except that the thread advocated delaying to 70 to maximize social security benefits.)

viewtopic.php?t=102609

This would work even if you have to take taxable withdrawals to fund the claiming delay. Social security income is taxed less than ordinary income.
Agreed. If you can afford to do so, you might consider deferring Social Security until 70. Also, if you can afford to do so, you might consider Roth conversions rather than withdrawals to take advantage of your lower brackets until Social Security and required distributions begin.

An interesting question is, If you can't afford to do both, whether to take Social Security before 70 or to take IRA/401(k) distributions before they're required. The analysis may be different under the SECURE Act than it was before.
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Re: Spend down cash to bridge to social security?

Post by aristotelian »

I am planning to do this with I Bonds and EE bonds that will be maturing around ages 66-68.
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Re: Spend down cash to bridge to social security?

Post by ObliviousInvestor »

In my opinion, spending down cash or other low-risk parts of the portfolio in order to delay Social Security should be the default strategy.

I used the slide below in a presentation for a Bogleheads event recently (video here) to demonstrate the concept visually. It's easiest to understand with actual narration of course, but the general idea is that:
1) The black line at the top reflects the desired total level of spending. So in the case in question, the desired level of total spending declines later in retirement (e.g., because the household is intending to travel more during early retirement, or maybe because the mortgage gets paid off some years into retirement).
2) Social Security begins at some date later than the date on which the person(s) retires.
3) Therefore, spending from the portfolio (green vertical line) is highest in the early years.
4) To satisfy that extra portfolio-funded spending in early retirement, an asset-dedication plan makes sense to help alleviate the high degree of sequence of returns risk that would normally come from a high rate of spending early on. (For example, in the bottom left corner, if it's 3 years of additional spending from the portfolio until the first Social Security benefit begins, a 3-year CD ladder would be an easy solution.)
5) For the rest of the portfolio (i.e., the piece of the portfolio that is meant to last throughout the person's or couple's lifetime), a stock-oriented allocation and low initial spending rate generally makes sense. (Of course for some people this last piece of the portfolio will be very little -- or even zero -- while for some people it will be very large.)

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namajones
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Re: Spend down cash to bridge to social security?

Post by namajones »

JoeRetire wrote: Sat Apr 17, 2021 6:31 am
namajones wrote: Fri Apr 16, 2021 1:27 pm Will be 62 in a couple of weeks. Got a pile of cash separate from my 401k. It's my safe money, invested in low-growth/no-growth vehicles because, well, what else is there that's safe these days?

I'm thinking it's wise to use this low-performing, depreciating asset (cash and cash equivalents) to spend for living expenses to bridge to age 66/67 at FRA.
Won't depleting your "safe money" make you less safe? Are you okay with that?

Check out https://opensocialsecurity.com/ to see if 66/67 is the optimal age, or if delaying to 70 would be better for you.

Your approach makes complete sense to me.
Thanks. I've studied the 66/67 vs 70 decision and decided on the compromise of 66/67 simply because what I'd get at 66/67 is more than enough and I'd rather not continue the poker game with Mr. Death by waiting. Actually I've decided to take the SS decision on a year-by-year basis, as the split between 62 and 67 or 70 is artificial; one may claim at any time if circumstances change.

To answer your question, if I actually depleted the safe money, yes, I'd not feel so good, I imagine, but I don't actually plan to spend it all down--I've left a 1/2 buffer in planning/funds.

What I plan is to take my moderate gov pension at 62 and supplement it with safe money spend and some moderate withdrawals from 401k (primarily to keep the balance from ballooning for when I have to do RMDs). The SS at 66/67 will more than make up for the discontinuation of safe money spend-down, and of course 3 years later I'd have to up my draw from 401k because of RMDs. So I'll worry about that situation when it comes.

Asset allocation in 401k is *not* influenced by NPV of pension and social security because I see those pots as separate income streams and do not wish to play mental games with myself by increasing risk in the 401k as a result of the other streams. 401k consists of 40 percent safe assets and 60 percent equities. May go down to 50/50 or 45/55 shortly.
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namajones
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Re: Spend down cash to bridge to social security?

Post by namajones »

BolderBoy wrote: Fri Apr 16, 2021 6:42 pm
namajones wrote: Fri Apr 16, 2021 1:27 pm Anyone else done this? How well did it work?
I did this from age 61 -> 70 (SS) while making Roth conversions each year. Worked splendidly. Had set aside $400k to carry me through and at age 70+ still had $250k+ left over (goodly market appreciation).

Pay attention to the other advice you got upthread (eg. David Jay).
Thank you. I guess one of my main concerns is that the value of social security might be cut. I suppose that would be telegraphed, though, and I could adjust accordingly.
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Re: Spend down cash to bridge to social security?

Post by JoeRetire »

namajones wrote: Mon Apr 19, 2021 9:50 am
JoeRetire wrote: Sat Apr 17, 2021 6:31 am
namajones wrote: Fri Apr 16, 2021 1:27 pm Will be 62 in a couple of weeks. Got a pile of cash separate from my 401k. It's my safe money, invested in low-growth/no-growth vehicles because, well, what else is there that's safe these days?

I'm thinking it's wise to use this low-performing, depreciating asset (cash and cash equivalents) to spend for living expenses to bridge to age 66/67 at FRA.
Won't depleting your "safe money" make you less safe? Are you okay with that?

Check out https://opensocialsecurity.com/ to see if 66/67 is the optimal age, or if delaying to 70 would be better for you.

Your approach makes complete sense to me.
Thanks. I've studied the 66/67 vs 70 decision and decided on the compromise of 66/67 simply because what I'd get at 66/67 is more than enough and I'd rather not continue the poker game with Mr. Death by waiting.
Once you are dead, you won't care. It's the "long life" scenario where you could care.

Anyway, good luck.
Last edited by JoeRetire on Mon Apr 19, 2021 10:03 am, edited 1 time in total.
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namajones
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Re: Spend down cash to bridge to social security?

Post by namajones »

ObliviousInvestor wrote: Sat Apr 17, 2021 1:28 pm In my opinion, spending down cash or other low-risk parts of the portfolio in order to delay Social Security should be the default strategy.

I used the slide below in a presentation for a Bogleheads event recently (video here) to demonstrate the concept visually. It's easiest to understand with actual narration of course, but the general idea is that:
1) The black line at the top reflects the desired total level of spending. So in the case in question, the desired level of total spending declines later in retirement (e.g., because the household is intending to travel more during early retirement, or maybe because the mortgage gets paid off some years into retirement).
2) Social Security begins at some date later than the date on which the person(s) retires.
3) Therefore, spending from the portfolio (green vertical line) is highest in the early years.
4) To satisfy that extra portfolio-funded spending in early retirement, an asset-dedication plan makes sense to help alleviate the high degree of sequence of returns risk that would normally come from a high rate of spending early on. (For example, in the bottom left corner, if it's 3 years of additional spending from the portfolio until the first Social Security benefit begins, a 3-year CD ladder would be an easy solution.)
5) For the rest of the portfolio (i.e., the piece of the portfolio that is meant to last throughout the person's or couple's lifetime), a stock-oriented allocation and low initial spending rate generally makes sense. (Of course for some people this last piece of the portfolio will be very little -- or even zero -- while for some people it will be very large.)

Image
Very nice. Thanks.
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