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As people approach retirement age, they are faced with a major decision: when should they begin receiving benefits from their individual retirement accounts (IRAs) and social security benefits? While the traditional retirement age for receiving social security benefits is 65, many individuals choose to defer these benefits until later in life to receive a higher monthly payout. At the same time, living expenses must still be paid. One option may be to live off your IRA while deferring social security.
First, it is important to understand the difference between IRAs and social security benefits. IRAs are funded by an individual’s own contributions and investments, and are typically set up through an employer or financial institution. These funds are available for withdrawal at any time, but may result in penalties or taxes if withdrawn before a certain age. Social security benefits, on the other hand, are funded by taxes and are designed to provide a fixed income during retirement.
By living off your IRA while deferring social security, you may be able to maximize your monthly social security benefit amount once you begin receiving it. When you delay social security benefits past the traditional retirement age, your monthly payout increases until age 70. The longer you defer, the closer your benefit may be to the maximum amount allowed.
During this time, living expenses can be covered by withdrawing money from your IRA. It is important to remember that withdrawing funds from your IRA prior to age 59 1/2 may result in a 10% penalty, so careful planning is necessary. Additionally, living expenses should be managed to ensure that the funds last until social security benefits begin.
Choosing to live off your IRA while deferring social security benefits can have its advantages and drawbacks. On the one hand, you are able to maximize your social security payout by deferring benefits, which can provide a steady stream of income in retirement. On the other hand, depending solely on your IRA for living expenses can be risky, as the funds may deplete before social security benefits begin. It is important to weigh the pros and cons and make an informed decision based on your financial situation and retirement goals.
In conclusion, living off your IRA while deferring social security benefits can be a viable option for some individuals. However, careful planning and consideration is necessary to ensure that living expenses can be covered and that social security benefits can be maximized. Consulting with a financial advisor can help navigate this complex decision and provide guidance on the right path forward.
Based on his income and pension , he should only take the IRA out if he needs the money but not to reduce the potential taxes on his RMD at 72 or now it 75. Because when he has to take it out if his bracket don't change the taxes are not bad. Is there any situation – high income level- where this would make sense? What is your opinion of QLAC annuity for taxable IRA's to reduce the RMD
Nice job breaking down this situation which is relevant to many people.
Keep deferring till 75, 80 or whatever suits you…& paying in, while you punch that clock….might end up deferring SS's demise… we early retirees are, well…grateful….
If he had $1,000,000 in his IRA, would ROTH conversions be a good idea?
Most times when I do calculation for deferring SS for clients the break even is anywhere from 8-12 years. The next question usually is how's your health, goals and family history before I can advise to defer social or take it early. Seems like when I have conversation like this with clients taking early may make more sense. What's your opinion on this?
In this particular scenario laid out then sure it doesn’t make sense to perform the Roth conversions but had the same advice been given in 2010/2011 then the person would have seen huge double digit growth and not be in a good situation with RMD?
Considering that if a 12% bracket exists it seems more wise to convert than not convert.
If the choice to convert at 22% bracket then I don’t think it’s a good move.
I’m already salivating to turn 64/65 and when I retire and my income is way down then I will aggressively convert from traditional 401k to Roth IRA until I start to take SS at 67.
I hope the 12% bracket exists in around 5-8 years. Who knows maybe by this time frame the income level for this bracket would have even increased.
The goal is to move as much out of my tax infested savings at 12% or even 15% into Roth.
The Roth is just gravy. Long term care may come into play and at least the money is there for this well into mid 80’s and longer.
I don’t want to burn through all the deferred tax savings as I also want to take advantage of the standard deduction offset on income each year.
live off 401k and wait for SS. Die age 70-76 and leave all your SS money you could have gotten to the government. Since already spend most of your 401k, children cannot inherit anything and uncle Sam wins again..
Thanks Feller! I bet ol’ Ronald appreciates this video!
This was a easy no brainer, no discussion, obvious answer @ 200K IRA! would have been a more informative video had Jay submitted his query based on 1 million IRA.
Yes; too many people are jumping on the conversion bandwagon without understanding the tax implications. Do a little research and forecasting or consult a CPA. My CPA mentor advised me as a young junior not to attempt to out guess the Feds on future tax changes; you'll be wrong a majority of time. I heeded and have passed this on to many. 40+ years later I see ever more the wisdom of his advice. Just pull down Traditional's to keep me in lower brackets. I drew SS at FRA vs using IRA's . SS goes up ~7.5% a year while my IRA's have been earning over 14% per year the last 4 years. I think I made the correct decision. Having too much to worry about RMD's is my dream.
Is it possible to retire on 7 trillion dollars? I know I'm in the top 50% of retirees but….
totally agree, thats my plan as well. I have already done Roth conversions for the past few yrs. so what is left in my IRA will cover until SS kicks in and we hope that will zero out the IRA and we never have to worry about RMD;s. great video Josh
I like the guy knows what a RMD is but frankly, he does not have enough in savings to worry about RMD’s. The exact number varies based on situation and other factors, but I think most people need to start worrying about RMD’s around the million dollar mark
could even take more from his TIRA and party like it is 1999 until age 72 and pay the taxes over a decade leaving the $100k Roth for his senior years
So, I should quit working @ 62. Live off my military retirement and mutual funds. If I defer Social Security till 70 will it decrease what I would normally get or will that amount stay the same as my statement from ssa says? I have worked for 35 years required by Social Security.
Hey Josh – I don't understand why it would hurt to do a Roth conversion? I have a similar situation where I will be living off cash and 401k for about 5 years until ss so if we have to pay taxes on it anyway, why would it hurt to roll it over into a Roth and never have to pay taxes on it again? i mean if he takes 1700 a month but just spends 1500 a month of that and has some left over, why should he let it sit anywhere where he would need to pay taxes on interest, etc? why not just roll his money out, pay the taxes and then keep it in a Roth. There are so many places where it could be in a Roth account where you pay no fees.
When I read the title with the thumbnail, I read, living off the Irish Republican Army……. The picture looks like an Irish guy.
Josh, Did you remove my post?
One thing to keep in mind about social security is that if you want a hedge against inflation, it may be the cheapest “investment” out there. What do I mean? If you have a investment portfolio of stock and bonds, it becomes a purely financial exercise whether to delay SS to 70 and use investments (suggest bonds) to bridge the income gap until then. TIPs, and SPIA’s indexed to inflation are expensive compared to delaying SS. That is what I’m doing. Also my wife gets a teacher pension, so there is another consideration – the Government Pension Offset (GPO) that will not allow her to get any of my SS if I go 1st unless I can maximize SS.
How **STUPID** can you be to spend IRA instead of taking SS!!
You cannot pass on SS to loved ones.
I don’t understand why someone have to spend their hard earned money while waiting to take SS. I would rather take SS early even at a smaller 5-30% less depending on what age you take SS and hopefully my Roth or 401k will be growing. All because, once you die, your heirs cannot inherit your SS while your heirs will inherit your Roth and 401k.
Great video I had a similar question you have now answered it.
Every time I run the numbers, it is better to take SS at 62 rather than defer to 67. You pull less money from your IRA which will be growing at a faster rate than your SS payments. The breakeven date is in your mid 80's depending upon your rate of return.
Don’t see how the Roth conversions are a definite no. He mentions planning on $3900 per month income from 62 to 67 and that will keep him well below exceeding the 12% tax bracket. And he’s planning on the same $3900 per month income after 67. But the way Sniffy Joe is printing money, there’s no way of knowing how long that 12% tax bracket will continue to exist. Instead of paying 12% on his planned income and Roth conversions while that 12% tax bracket still applies, he could be paying a much higher income tax rate by the time he reaches 72 and has to take the RMDs..
Better idea is to keep working, then you won't have to worry.
What a predicament I am in. At 62 I have as of the last statements 6-30-2021 a little over $617,000 in 3 different IRA Accounts. House is almost paid for too. I am still working and not collecting social security yet. My thought process has always been take social security at 65 when medicare kicks in. I was going to take my RMD'S at what-ever age it would be. Then you do a video on IRD'S and the taxes. involved for my children. If we knew when we were going to die it would be so less complicated.
Fat finger hit send. I will have pension of a couple thousand when I turn 60 from Air Force Reserves. Don't plan on touching Social security till I need it, to take care of the Spousal benefit, which I learned from you several years ago. If we do it right, my social security, plus my wife's bumped up ss will equate to about $3400 month, AF pension, 2200-2600 with pay increases, should allow us to live a decent retirement, to go along with about 500 to 600 K in IRA's. Thanks for your videos!
Hi Josh, good topic. Similar to my plan. I like the idea of living off of cash the first 2 to 3 years of retirement. Instead of Roth conversions, I'm thinking of taking the amount out of my 401k without jumping up to the next tax bracket, roughly 20 thousand a year. Putting that in a cash account. Do this for 3 years, retire at 63 , Which I will have it in a different instrument when I can move it at 59 1/2, about a year from now.
We plan to start increased pull downs on our IRAs 5 to 7 years before we hit 72 ( or perhaps 75 if they up the age for RMDs again ) So that way we will have decreased the principle some to have more manageable RMD numbers when they hit. Take the money you don't need for living expenses and put in a taxable brokerage account or buy into an annuity. etc. Lots of ways to reduce the RMD amount should you be in that boat.
I am considering the same situation. Should I live off my IRA and small pension and hold off on Social Security? I am concerned SS will not be there at age 70 for me in 2127
Looks like this person is in a very good position. I've been hung up on the Roth math over the last 15 years at least. If you follow my strategy, this person would have $500K in their 401K and zero in their Roth (same amount set aside). Ok, you have to pay taxes in retirement. Sometimes paying taxes is a good problem. At some point I started to see a little bit of the logic of Roth, it would give me a little tweaking room on my tax bracket if I were lucky enough to be in that situation. But again, a good problem, not a bad problem.
I've put it in a spreadsheet and ran the numbers. $500K vs $300K is about right.
I still have my rollover Roth and traditional IRAs locked in my accounts growing reinvesting interest and dividends.
Doing fine with my 20% of my income right now.
Haven't really touched my taxable savings/investments, and cash or dipped into other income sources.
Going to wait until FRA for social security.
What I've been hearing and reading about needing to live on 70% or more of your income from back since the 90s was totally false.
I love my kids but my primary focus for retirement is not them getting a boatload of cash. I provided well for them when they were growing up. If they get any money when I die will be an advantage for them. I'm going to enjoy the money I worked hard to save. They can sell my house (paid for) and reap that benefit. I don't understand why people worry so much over how much money to leave their heirs.
He could convert but his social security and pension will put him right at the edge of taxation under current tax law. Maybe it would save him a very small amount but hardly worth the trouble unless he wants to leave Roth rather than IRA funds to an heir.
Great video. Much like me when first started watching your channel. You told me to save my money don’t hire me(josh)
Wellington and Wellesley. Thanks josh.
I wonder if he could do even better by delaying Social security until 69 or whenever his non-Roth IRA money is gone. It is probably moot, since he will be in a low tax bracket even with RMDs
Yes thank you brother!
I will be in the same position except no pension. Should have about 300k to 400k by 62. I will retire at 62 and defer social security until 70. No job during retirement is planned and as for taxes, once I hit 70 my taxes will be zero. RMD's don't matter to me at all.
Why not just take the SS at 62, which would be $1,900 per month. With his part-time retirement job he would bank $200/month and have an additional $12K saved by 67 and NOT eating into his IRA at all. Then at 67, he draws from his IRA, it's additional earnings for that 5 year period and the extra $12K, at only $800/month to supplement the $2700 total??
I have never understood people who want to start eating into their own assets to gamble against the house (government) in hopes that they will live long enough to surpass the so-called break-even point….which will be at an age where your spending statistically goes down in every category except health care. You KEEP your money which can be left to heirs. You eat away at your assets and die before break-even (which many people do) the government keeps it all. Your family gets nothing and you doubled that pain by eating up your own assets.
Not to mention he'd have his full IRA amounts continuing to work uninterrupted during that additional five years. So when he finally started tapping the IRA he'd have even more to supplement the $800 shortfall.
I will never eat into MY assets just to prolong saving the government money. It's a bad gamble in which MOST people will lose. But people get all caught up in that bigger SS check in their mind without truly calculating what they are actually paying to get it.
To each their own. But no thanks. Only way I'm not collecting SS at 62, is if I am making too much money doing something I love.
My situation is I’m the high earner in our marriage by a significant amount. I’m 62 now and still working, the wife is 54. My thought was to quit working at 65.5, delay SS until 70, and start Roth conversions of my TSP between 65-70. I plan to roll the TSP into a traditional IRA and then start the Roth conversion. I want to provide the best tax free situation for my wife should I pass first. Wouldn’t it be a better plan to convert the TSP before SS starts rather than wait for RMDs? I would also use some of the TSP for expenses between 65-70, if needed. Enjoy your videos as always. Cheers, Tim
It’s a shame that people don’t pay themselves first when they’re young. There are no excuses for not retiring a millionaire in your 60s.
This is something I always question with holding off on SS until later. I don't know how to access and use tax liability calculators for an overall picture of one's overall wealth. Here is my question. Without calculating cost of living increases to SS or interest generated on IRA accounts it will take aproximately 11 years to pay back the money from taking SS at 62 as opposed to 67. If you are pulling money from one's IRA, in this case $102,000.00, does that not have to be recognized that this money will also need to be paid back to one's overall wealth? I have ran this for myself using simple numbers, no SS cost of living or IRA interest, for drawing SS at 62 as opposed to 70. I come up with aproximately 20 years to pay these back, which would make you 90 years old. In Josh's other video's he refers to having an 85% plus chance of being dead by then.
Thanks Josh you are the Man
Definitely do the Roth conversions up to the max of the 12% tax bracket. He isn’t ever going to pay less taxes on those distributions than that anyway.