(PUB) Morningstar FundInvestor

October 2013

Morningstar FundInvestor

9

fits, this would cause less Social Security benefits to be taxable.

Projected Portfolio Longevity at Different Filing Ages

Social Security begins at age:

$600k

62

Question: Let’s explore that a bit further—the ques- tion of a tax-efficient withdrawal strategy and how it can add longevity to the portfolio. Before we get to the results, give us your thoughts on how retirees should think about constructing a tax-efficient approach to Social Security and portfolio drawdowns. Meyer: What you want to do is avoid the so-called tax torpedo, which is the rise—and then fall—in marginal tax rates that can be caused by taxation of Social Security benefits. A single individual will owe federal income tax on part of her Social Security benefits if her adjusted gross income (including tax- exempt interest), plus half of her Social Security benefits, add up to $ 25 , 000 or more. This threshold is $ 32 , 000 for joint filers. Taxes are never levied on any more than 85% of your benefits. This year, the 15% bracket for married couples filing jointly applies to taxable income between $ 17 , 851 and $ 72 , 500 . For an individual, the range is $ 8 , 926 to $ 36 , 250 . Reichenstein: Many planners would suggest that this retiree draw down her taxable assets first and then her 401 (k). But it makes sense for her to with- draw some money from her 401 (k) each year, as long as those withdrawals would be taxed at a low rate, and then withdraw additional funds from her taxable account. If she doesn’t do that, she would miss the opportunity to convert some of her pretax dollars in her 401 (k) to aftertax dollars at low tax rates. œ Question: What are the implications there for Social Security and a withdrawal strategy?

$480k

66 70

$360k

$240k

$120k

2013 2017

2021

2025

2029

2033

2037

2041

2045

2049

2053

Delaying filing for Social Security until age 70 significantly boosts your portfolio longevity.

Let’s also assume she has $ 500 , 000 in financial assets, including $ 400 , 000 in a 401 (k) or some other tax-deferred account, and $ 100 , 000 in a taxable account. (We’ve added more of the assumptions in the aforementioned downloadable PDF .) Finally, we’re assuming that her primary insurance amount, or PIA , from Social Security is $ 1 , 500 — that is the monthly payment she’d be entitled to if she files for benefits at her full retirement age of 66 . The chart shows the impact on portfolio longevity assuming she retires at 62 but files for benefits at ages 62 , 66 , or 70 . Reichenstein: There are two reasons delaying Social Security would allow the portfolio to last 10 -plus years longer. First, assuming this 30 -year lifespan, de- laying Social Security benefits from 62 to 70 would increase the purchasing power of lifetime Social Secu- rity benefits by $ 117 , 720 . It is like she has an addi- tional $ 117 , 720 of retirement assets. Second, by delaying Social Security benefits until 70 , she would reduce the portion of benefits that are taxable. After 70 , she would receive a relatively large Social Security benefit and need relatively little from the 401 (k). Because of the formula used to deter- mine the taxable portion of Social Security bene- Question: Why did delaying Social Security benefits allow the portfolio to last longer?