If you are like most people in their 50s, you’ve been zipping along on auto-pilot, not thinking a whole lot about retirement. Sure, you have your 401(k) and some equity in your home – and have a decent nest egg. But could you miss out on a significantly improved financial outlook for your retirement years? The answer might be “yes,” if you haven’t created a plan that allows you to take control of your tax bill, optimizes your income, and invests wisely.
Meet Maureen and Kirk. They are 57 and have a 26-year-old son, Rodney. They live in Cleveland, Ohio. They have both worked most of their adult lives. While they don’t want to retire just yet, they do want to reprioritize to focus on more time with family, friends and time on their boat. They have a nice nest egg of $3.3 million. $500,000 is in a taxable brokerage account, the rest in 401(k) and IRA accounts. Their combined salaries are $225,000. Maureen wants to work until 62, while Kirk hopes to work until he is 67. Kirk is skeptical that a “financial plan” is worth the money. Maureen thinks, “we don’t know, what we don’t know,” and wants to investigate further.
Maureen and Kirk are not alone. It’s natural to wonder if retirement planning is worth the money and hassle. When I am asked, “does this type of planning make a difference?” My answer is: “Well, it depends. But typically, it makes a difference, and sometimes it can make a big difference.”
We’ll put aside the emotional and psychological benefits of feeling in control of your destiny and the reduced concern about whether your retirement will be what you hoped it would be—we’ll focus only on the potential tangible financial benefits.
In the Figure 1 below, I have summarized these tangible gains. The “Optimal Plan” column shows the results of implementing their well-considered retirement plan—including Roth conversions, tax bracket management, and optimizing Social Security benefits. The “Ending Value” is the amount remaining in their investment accounts at the end of the planning horizon—which in this case, we assumed to be when Maureen and Kirk reach 95. “Longevity” refers to how many years each plan met their spending needs—37 years is the maximum and is the end of the planning horizon (when both Maureen and Kirk pass away at age 95), so the Optimal Plan lasted until both were 95, and still had nearly two million to spare. The taxes and Social Security rows give the accumulated total of each item over the planning horizon. The “Conventional Wisdom” column assumes little planning other than keeping their current tax bill as low as possible. In this case, we also gave the couple the benefit of the doubt and assumed they would delay receiving their SS benefits until they were 67-- the most common age to begin is 62. The “Difference” column summarizes the results—Nearly $2 million in additional resources at the end of the plan, $360,000 in additional social security benefits, and $1.25 million in lower taxes. Oh, and by the way, the “Conventional Wisdom” plan runs out of money before our couple passes away—something we take great pains to avoid with our clients!
Figure 1. Summary of Difference between an Optimal Plan and Conventional Wisdom (hypothetical case)
So in this hypothetical case, yes, it made a big difference. Let’s look at how that happened.
Remember, we are assuming the same number of work years, the same salaries, and the same spending in both approaches. In other words, we did not assume they work longer in the Optimal Plan, cut their expenditures, or invest more aggressively. All these things are identical in both plans. So, where did these additional resources come from? From excellent planning.
Social Security
Let’s start with Social Security benefits, as this is straightforward. The Social Security Administration penalizes people for taking Social Security before that person’s Full Retirement Age (FRA). In the case of Maureen and Kirk, their FRA is 67. They also reward those who delay taking their benefits each year after 67 to age 70—it turns out the difference between taking benefits at age 62 and age 70 is often more than 75% each year—and this goes on for life. As we are fond of saying: “Social Security is better than any annuity you can buy—and you have already paid for it!” It is essential to maximize this value.
This doesn’t mean everyone should delay Social Security to 70. There are clear cases where this would not be wise—most notably when life expectancy is on the shorter end or when there are not enough resources to bridge the income need in years between ages 62 and 70.
______________________________________________________________
Before deciding when you should start Social Security benefits, take these steps:
- Go to SSA.gov/myaccount/ and open an account. Verify they have accurate records on your income by year and be sure their assumption about future earnings is also accurate.
- Go to LongevityIllustrator.org and estimate your expected lifespan according to actuarial tables. Consider that if you have a health condition that you believe significantly alters that outcome.
- When considering the primary bread earner’s Social Security benefit, it is essential to maximize the benefit because the surviving spouse can claim the larger Social Security benefit upon the death of the higher-earning spouse.
- We recommend erroring on the side of too long a lifespan when doing retirement planning rather than too short. This reduces the likelihood that you run out of money later in life.
- The break-even age for benefits is usually in the early 80s. In other words, it often pays to delay benefits until 70 if you expect one or both spouses to live to their mid-80s or beyond.
- If you believe you are best served by delaying benefits based on the above considerations, then evaluate if you have the resources that allow you to wait.
- Brokerage balances, retirement resources like 401(k)s, IRAs, and even Roth IRAs (as long as retirement resources are past any penalty phase) are fair game to consider.
- You should not consider emergency funds or funds which would incur a penalty for their use, and generally, you should not consider borrowing for this purpose.
______________________________________________________________
In the case of Maureen and Kirk, we obtained their data from their SSA.gov account. We agreed on an expected lifespan of 95 for each of them. We also recognized that their sizable nest egg gave them the flexibility of when to decide to take benefits. In their case, they decided to hold off on benefits until age 70.
Figure 2. Comparison of Social Security Benefits Taken at 70 yrs. (green line) vs. at 67 yrs (red line) 
Taxes
Now let’s consider the impact of Roth Conversions and tax bracket management. Figure 3 illustrates Taxes Paid per year for the “Optimal Plan” in blue vs. “Conventional Wisdom” in green. The Optimal Plan includes, among other things, Roth Conversions in the plan's early years. Maureen and Kirk would consider Roth Conversions to lock in their taxes at relatively modest tax rates. Once converted, and assuming they meet the holding period requirements, no additional taxes will be due on those balances, nor gains on them, even if passed on to heirs. So as time goes on, notice the green bars become considerably higher than the blue bars. This is because of the sizable Required Minimum Disbursements (RMDs) on Traditional IRA balances that remain in the “Conventional Wisdom” approach. You can see the actual size of the RMDs in Figure 4. Right off the bat, you see that the Conventional Wisdom RMDs are higher—because they didn’t convert any of those balances to Roth IRAs previously. Looking to the far right of Figure 4, you may notice that those RMDs for the Conventional Wisdom plan (green bars) decline---that’s a good thing, right? NO! It’s a terrible thing. This happens because Maureen and Kirk are running out of money using the conventional wisdom approach, so there is little left to pull from the account.
Figure 3. Total Taxes Optimal Plan (blue bars) vs. Conventional Wisdom Plan (green bars)
Figure 4. Required Minimum Disbursements Optimal Plan (blue bars) vs. Conventional Wisdom Plan (green bars) 
In Figure 5, you can see the balances under the alternatives. The blue is the “Optimal Plan,” and the green is the “Conventional Wisdom” plan. Here it is more evident that the “Conventional Wisdom” plan leaves our friends without the resources they need for the last few years. Notice how the blue line goes down first before it levels out and eventually remains higher than the green line? This is because Maureen and Kirk have pulled money out of their accounts to pay the taxes due on the Roth Conversions—thus lowering the balances early.
Figure 5. Conventional Wisdom Plan (Green) vs. Optimal Plan (Blue)
Another factor that lowers taxes and increases the balance under the Optimal Plan is tax bracket management. That is because Kirk and Maureen have money in various accounts (taxable=brokerage, tax-deferred=traditional IRA, tax free=Roth IRA) in the Optimal Plan; they have flexibility as to when they pull money from which of those accounts. This gives them increased control of their tax bill each year.
Disclaimer: All information contained here is hypothetical and for education only. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax, legal, or investment advice. It is purely educational in nature. Please consult legal, tax, or investment professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.