“If he had debt, we would pay that off first, especially if he did not want any equity exposure in his investments, because his fixed-income investments would not be paying a big return. We advised him to delay Social Security until at least full retirement age and take from his taxable accounts in the meantime,” said the advisor, who didn't want to be named.
In order to delay taking Social Security until at least full retirement age, Larry Rosenthal, president of Rosenthal Wealth Management Group in northern Virginia, says he tiered investment withdrawals for a client who lost his job in the telecom industry in his early 60s.
Without a pension and with a wife who is not working, the client, who has $1.4 million in a 401(k) and other assets, had to decide which buckets of money to start drawing from.
“We started drawing from an annuity with lifetime benefits, then took from municipal bonds because they are tax free and yield the least, and then from nonqualified accounts,” Rosenthal says. “We will eventually move to qualified accounts. The plan is based on product design and tax efficiency.”
A tiered approach also is utilized by Joseph Anderson, president of Pure Financial Advisors in San Diego, in determining which assets to draw on for his clients. The starting goal is to have a 4 percent distribution rate from investments. If the distribution rate is higher than 4 percent, Anderson recommends taking Social Security early to avoid running out of investment money in later years.
If even that move does not reach the goal, the client will have to consider working part time and reducing living expenses.
“Ages 60 to 66 are the most critical years in planning your retirement,” says Anderson. Planning correctly “could be the difference between dying broke and leaving a legacy.”