Archives for June 2020

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Investing Blog Roundup: 2020 RMDs (You Can Put Them Back)

The CARES Act waived RMDs for 2020, but of course many people had already taken their RMD for the year by the time the CARES Act was passed on March 27. This week the IRS announced that you can roll those assets back into a retirement account (by 8/31/20), without having to worry about the normal “60-day rule” or “once-per-year rule.”

Other Recommended Reading

I hope you are well, and thanks for reading!

Open Social Security: New Feature & Social Security Planning Takeaways

The Open Social Security calculator has a new feature.

Specifically, the output now includes a color-coded graph that shows the desirability of many of the different filing dates all at once. (In most cases, it shows all of the options, but there are some situations where a 2-dimensional graph simply cannot represent every possible option.) The benefit is that you can immediately see which filing dates are almost as good as the recommended filing date(s), which dates are “pretty good,” and which dates are not so good.

In addition, you can click on that graph to very quickly compare many different alternative options. (It functions as an alternative to the dropdown inputs for filing dates on the “test an alternative claiming strategy” part of the page.)

Also, when the option to assume a future cut in benefits is activated (under “advanced options”), the graph has radio buttons that allow you to quickly flip back and forth between “benefits are cut” and “benefits are not cut” calculations to see how different strategies fare under the different assumptions.

Credit where credit is due: both the original idea for this feature and the overwhelming majority of the code involved were contributed by Brian Courts.

For reference, the new feature is intentionally designed to not be displayed when the calculator is being used on a device with a display width of 710px or less. (On a larger display you can quickly click all over the graph and see the corresponding output, but on mobile you would have to constantly scroll back and forth. So, with the goal of providing the best mobile experience, the calculator still works how it always has.)

In short, the new feature allows you to make a lot of comparisons in a short time, which can both:

  1. Help you make a more informed decision about your own Social Security benefits, and
  2. Speed up the learning process about Social Security planning in general.

With regard to that second point, some of the things that you will likely find include:

One: what matters most isn’t picking the very best strategy. What matters most is just avoiding a really bad one. There are usually plenty of strategies that are practically as good as the very best strategy. That is, for most people, moving the filing date a few months in one direction or the other won’t have a huge impact. (So, for example, if there’s a compelling tax-planning reason to do so, go for it.)

Two: the filing ages that work best for a person depend significantly on their marital status and earnings history.

  • It’s usually very advantageous for the higher earner in a married couple to wait.
  • It’s usually somewhat advantageous for an unmarried person to wait. (But anywhere from age 68-70 is generally pretty similar.)
  • It’s not especially advantageous for the lower earner in a married couple to wait. But it’s not usually very impactful (in either direction) either.

Three: whether the strategies that work well in a “benefits will not be cut” scenario also work well in a “benefits will be cut” scenario depends significantly on your date of birth.

To be clear, these are the very same things that people have been telling me that they’ve learned from the calculator over the last couple of years. But, again, I hope that this new feature can help speed up that learning process.

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Investing Blog Roundup: State and Local Taxes as a Retiree

Many people consider moving when they retire — sometimes to be closer to family, sometimes to pursue certain interests/hobbies/adventures, and sometimes simply for financial reasons. Cost of living is of course an important factor in such decisions, and this week Christine Benz explores the various ways in which taxes play a role in cost of living. (A key point being: there’s more to pay attention to than just income tax rate!)

Other Recommended Reading

I hope you’re well, and thanks for reading!

Implementing and Refining the “Spend Safely in Retirement Strategy”

A couple of years ago, we discussed a paper by Steve Vernon, Joe Tomlinson, and Wade Pfau, which looked at an assortment of retirement spending strategies and evaluated them based on several different criteria. The authors then put forth a strategy that they referred to as the “Spend Safely in Retirement Strategy,” which generally does a good job of satisfying the various (often competing) criteria.

Broadly speaking, the strategy involves creating two sources of retirement income:

  1. A safe floor of guaranteed lifetime income. The authors refer to these as “retirement paychecks.” This includes Social Security, pensions, and annuity income. These retirement paychecks would be used to cover the necessities like housing, utilities, food, transportation, medical care, etc.
  2. A liquid mutual fund portfolio, from which you pay yourself a “retirement bonus” — used for discretionary expenses. The level of spending from this portfolio varies with investment performance.

And again speaking broadly, the strategy has two steps:

  1. Implement the safe floor of income. Usually this means delaying Social Security if you are single or the higher earner in a married couple. Sometimes it means delaying for the lower earner in a married couple as well. And sometimes it means buying an annuity for additional guaranteed income.
  2. For the remainder of the portfolio (the “retirement bonus” portion), invest in a low-cost stock index fund or all-in-one fund (e.g., target-date fund, balanced fund, or LifeStrategy fund). Then use the IRS’s RMD tables to determine how much to spend from this part of the portfolio each year.

This strategy tends to work well as a rough-draft plan, for a few reasons:

  • Satisfying basic needs via guaranteed income minimizes your exposure to investment risk, longevity risk, investment mistakes, cognitive decline, fraud, or mistakes that might otherwise be made after the death of the more financially knowledgeable spouse.
  • To the extent that the guaranteed income is made up of Social Security, your exposure to inflation risk is minimized as well.
  • Using the RMD tables for discretionary spending accounts for the facts that it is wise to adjust spending based on investment performance, as well as the fact that you can safely spend a greater percentage of the portfolio per year the older you are.
  • The plan is reasonably simple and can in many cases be implemented without needing a financial advisor.

Real-World Implementation

But the basic, two-step plan described above (and in the original report) leaves an assortment of open questions. And when it comes time to actually implement the strategy in a real-world situation, you must come up with answers to those questions.

So I was happy to learn recently that the authors released a follow-up paper that addresses those real-life implementation questions one-by-one. (To be clear, the follow-up paper was published last year. I only recently learned about it though.)

The newer paper addresses questions such as:

  • How would you implement the RMD portion of income before the normal RMD age? (In brief: use the same life-expectancy-based calculation that the IRS uses. The authors provide a table with per-year spending percentages.)
  • How would you select an asset allocation for the RMD portion of the portfolio? (In brief: if your basic needs are completely satisfied by guaranteed sources of income, you can afford a stock-heavy allocation with remaining assets. Whether you want to use such an allocation is up to you and your preferences.)
  • How can you plan for the fact that the portfolio-funded level of spending has to vary as the level of income from other sources (e.g., work income or Social Security) changes over time? (In brief: create a “retirement transition fund” — a portion of the portfolio that has been carved off and invested in something like a bond ladder that will be used to fund the additional spending over the years in question.)
  • How can you plan for an uneven desired amount of total spending, such as a desire to front-load spending in the early years of retirement? (The authors propose a few options here. One such proposed method is to multiply the RMD for each year by a factor such as 1.25 or 1.5, which would increase spending early — and thereby result in less spending later, since you’d be spending a percentage of a portfolio that is smaller than it otherwise would have been. They run through a few examples of how such adjustments would have played out, given various assumptions.)

If you have the time, I’d encourage you to give the newer follow-up paper a read — or at least bookmark it for future reading. As I’ve written previously, I think the strategy that the authors describe is a great rough-draft approach to funding retirement spending (i.e., a sort of “cookie cutter” plan, which you can then adjust based on your own circumstances and preferences).

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