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Q&A: "I'm About to Turn 65 and Have $400K in an IRA, Plus a Couple of Pensions and Social Security. How Much Can I Draw Down on the IRA to Last Until I Am 90?"

Retirement Accounts Retirement Income Social Security Tax

Question and background: 

I'm just about to turn 65 and have not worked for just over two years. I have about $400K in an IRA in addition to a couple of pensions and social security. How much can I draw down on the IRA to last until I am 90? I am drawing from two different pensions of $800 and $2000 per month. I am about to start taking Social Security of about $2300 gross. My wife is still working and will be for another year. She earns $12-20K per year. Is 90 a bit optimistic? Yes, but family history says plan on it.

Answer: 

Hold the phone! :-)

Just saw your question and I'd urge you to revisit your plan to draw your social security now. In fact, I think the answer to your question is not how much you can draw from your IRA to age 90, but rather how can you re-strategize your financial picture for the biggest overall retirement income to age 90 (and beyond) with possibly less tax hit. 

Here's what I'm thinking you'll want to consider . . . .

  • When you combine your two pensions and your wife's income, if you both still need additional income to fund your lifestyle now, then consider drawing what's needed from your IRA.
  • Don't file for your social security until you reach your Full Retirement Age (FRA) of 66. Why? Because filing early creates a permanent reduction. And that will affect both you and your wife (see later comments).
  • When you do file for your social security at age 66, then immediately suspend collection of benefits until age 70. You'll earn delayed retirement credits so that your age 70 benefit will be 132% of what your age 66 benefit would've been (plus cost-of-living increases). That's a guaranteed 8% per year "return" and you won't find that anywhere else in the current environment.
  • When your wife reaches her Full Retirement Age (presumably 66), it may make sense for her to only file for the spousal benefit (which is 50% of what your age 66 benefit is). If her own social security benefit is larger at her age 70, then she could switch to it at that time.
  • Drawing any needed income between now and age 70 from your IRA (instead of social security) will reduce your IRA balance, which means your Required Minimum Distributions (RMDs) at age 70 and beyond will be smaller, which means less tax at age 70+ than you'd otherwise pay.
  • The amount of social security that's taxable depends on a concept called "provisional income." Recipients will have to claim 0%, 50%, or 85% of their social security in taxable income. So at most, only 85% of your social security will be taxable vs. 100% of your IRA distributions. The bigger you can make your social security income, potentially the less overall tax you'll pay. And if you live in a state that doesn't levy income tax on social security but does on other sources of income (i.e. IRA distributions), this strategy works even better.
  • You indicated the family genes suggest planning for a life expectancy of age 90 or beyond. All the more reason to have a guaranteed source income like social security providing resources for your lifetime (in addition to the pensions).
  • You'll want to think about social security strategy from a "survivor benefit" perspective instead of a regular benefit perspective. Why? For a married couple, the survivor receives 100% of the highest benefit between the two. So if, for example, your social security benefit is larger than your wife's, all the more reason to delay and increase that benefit as large as possible. The ladies tend to outlive us fellows and, all else being equal, there's a good chance your wife will need that larger social security survivor benefit for some time after you've passed.

Married couples often make social security elections that leave $100,000 or more on the table over their joint lifetime. I'd encourage you to consult a financial advisor well-versed in these matters and have them run some projections for you--and then let that guide your claiming decision. You'll be glad you did. 

Hope that helps.