For nearly your entire adult life, you’ve focused on accumulating assets for retirement. When you stop working, though, your focus will likely turn to how you should generate income from those assets. It’s not a simple task. There are a number of factors and variables that may play into the decision.
One of the biggest questions may be which streams of income you should tap first. For instance, you may have retirement assets saved in an IRA. You also may be eligible to file for Social Security benefits. If you don’t need income from both sources, it may be difficult to decide which one to utilize first.
Unfortunately, there are no easy answers. There are reasons why each should be the first income stream you use. The answer depends on your unique needs, goals and concerns. Below are cases for why you should choose each first. Consider the points below and then compare them to your situation.
Why You Should Start IRA Distributions First
Conventional wisdom is that you should always delay Social Security benefits as long as possible. There’s good reason why so many people buy into that advice. The longer you wait, the greater your annual benefit is likely to be.
Your benefit amount is based on your earnings and work history, and it assumes that you’re filing at your full retirement age (FRA). Most people’s FRA lands between their 66th and 67th birthdays. You can file for Social Security as early as age 62, but you could see a permanent benefit discount of up to 35 percent if you file early.1
Similarly, you can delay filing until after your FRA and receive a credit for doing so. Social Security awards an 8 percent annual credit for every year past your FRA that you wait to file. You can delay up to age 70. If your FRA is 66 and you wait until age 70, you would get a permanent 32 percent benefit credit, or 8 percent each year for four years. As you can see, it pays to wait on Social Security.2
Why You Should File for Social Security First
Of course, there are also reasons why you may want to start Social Security first and delay IRA distributions. One is that you may want to maximize the tax-deferral of the IRA and continue to realize investment gains in a tax-efficient manner as long as possible.
Another possible reason is liquidity. It’s possible that you may face significant unplanned expenses later in retirement. One potential expense could be long-term care. You may need liquid assets to pay for an in-home health aide or even for a stay in an assisted living facility. If you’ve drawn down your IRA, you may not have the funds you need to pay for the kind of care you want.
Planning a distribution strategy can be complicated. If you’re not sure how to schedule your retirement income, let’s discuss it. Contact us at Gregory Financial Group. We can analyze your needs and goals and help you develop a plan. Let’s connect soon and start the conversation.
This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
The material is not intended to be legal or tax advice. The insurance agent can provide information, but not advice related to social security benefits. Clients should seek guidance from the Social Security Administration regarding their particular situation. The insurance agent may be able to identify potential retirement income gaps and may introduce insurance products, such as an annuity, as a potential solution. Social Security benefit payout rates can and will change at the sole discretion of the Social Security Administration. For more information, please consult a local Social Security Administration office, or visit www.ssa.gov
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