Take a fresh look at your lifestyle.

I have a $2 million pension and $1 million investment account. I’m not retired, but should I claim Social Security when I do?

Dear MarketWatch, 

I have a pension worth $1.5 to $2 million depending on my and my wife’s longevity. It passes to her when I die, and she is six years younger. I am still working part time, and earn about $75,000 a year. I plan on retiring in 1.5 years when I reach my Full Retirement Age. We have zero debt and newer vehicles so I don’t anticipate any major expenses in the next few years. 

Our investment portfolio, which I manage, is worth about $975,000 with some moderate and higher-risk investments with an asset allocation of 90% stocks and 10% bonds. I’m debating on drawing Social Security at my FRA and investing some of that rather than waiting until I am 70 to draw. I can also start drawing from some of our investments rather than Social Security to increase that benefit amount.

We do not live an extravagant lifestyle, but we enjoy traveling domestically and overseas once a year. When I retire, if I draw Social Security and take 3% annually from our investment income, I anticipate my annual income to be $100,000; my wife will retire in three years and possibly draw her Social Security at that time. 

What are your thoughts as far as a retirement strategy?

See: I’m 56 and have $3.4 million in assets. I’m semi-retired, but my spouse, 64, has no savings. How do we move forward?

Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com

Dear Reader, 

You’re in a great position for retirement, so kudos to you.

It’s great that you’re getting so granular with your retirement planning. Not everyone considers the balancing act it takes between Social Security and retirement-plan distributions, but that may be because many people simply must claim Social Security earlier than their Full Retirement Age, or FRA, to afford their cost of living. That being said, a lot of it will come down to running numerous projections. 

There’s no crystal ball, unfortunately, but you can still make some well-informed calculations. Let’s start with your Social Security benefits. 

You probably already know this, but you can get a decent estimate from the Social Security Administration itself as to what your benefits will be at FRA versus age 70. There will also be cost-of-living adjustments in the years to come. If you know what the base figures are, however, you can use that for benchmarks when comparing what you’d need from your investments. 

Break-even analysis

Now let’s do a quick break-even analysis. In this example, if you started at 67, you’d be $64,800 ahead from if you started at 70 (the monthly benefit for three years). If you divide that figure by the excess monthly benefit for delaying ($432 per month), you would find it would take you 12.5 years to break even. The break-even analysis doesn’t consider COLAs or other factors, of course, but it does give you an idea of when your delayed benefits would surpass the benefits you would receive if you decided to take them at an earlier age. You can use it to compare to your expected life expectancy, which is another determining factor when choosing the time to claim Social Security benefits.  

Other things to consider with delaying your Social Security benefits: I hate to use the word “guaranteed” for anything in retirement planning, but with Social Security, you can count on it being inflation-protected. Whether it’s a big annual increase every year is of course variable, since some recent years we’ve seen practically no COLA and others we’ve had a larger jump, but it’s more certain than investment returns, which rely on a market that can be volatile year to year. 

The delay would also benefit your wife, who could see a larger survivor benefit because of the delayed retirement credits, should you predecease her. 

However, if you were to claim Social Security at your FRA and not delay, you’d allow your retirement account to grow over time untouched.

Going back to basics

I suggest going back to the basics and looking at what you actually need in retirement income, then providing yourself with numerous scenarios, ones in which you mix various claiming ages for Social Security with distributions from your pension and investments. Keep in mind the implication of taxes, investment returns, inflation rates (for your benefits as well as expenses). A qualified financial planner can help you with this if you want to get specific with the numbers. 

As you enter retirement, you might want to reconsider your asset allocation so that it isn’t completely at the hands of market volatility — retirees need to strike a balance with conservative and aggressive assets so their investments continue to grow but they aren’t at risk of losing a huge chunk of it in a downturn — in which case a qualified financial planner could also assist. 

Overall, you have something not many others have when entering retirement — a pension — and that provides you with an incredible amount of flexibility when adding in Social Security and an additional investment account. It’s great that you’re taking the distribution and claiming strategy so seriously. Now it’s just a matter of the specifics.

Also see: I’m 76 with $73,000 in an investment account that has not increased in 2 years. Should I abandon the 50/50 strategy?

Readers: Do you have suggestions for this reader? Add them in the comments below.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More