Q&A: Here’s a case where taking retirement funds early might make sense

Dear Liz: My wife and I are both retired and receiving annuity payments. In addition, we have about $1.3 million in traditional IRAs and $350,000 in another annuity that will pay us each about $1,000 per month. We are moving from Texas to Arkansas sometime in the next year. Texas has no state income tax and pretty high property taxes, while Arkansas has lower property taxes but about 6% income tax. We plan to put down about $200,000 on a new home and obtain a mortgage for about $350,000 at about 4% interest.

Does it make sense to withdraw money from the IRA to pay down the amount we need to borrow for the mortgage? I can withdraw about $90,000 without putting us into the next higher federal tax bracket, if that makes any difference, and end up saving $5,400 in Arkansas income tax at the same time.

By my calculations, the return on the $90,000 would be almost $8,000 every year in reduced mortgage payments if we took out a 15-year mortgage. If we did the 30-year loan, that savings would be over $5,000. I don’t think we’ll achieve the same returns on $90,000 leaving those funds invested as they are in bonds or cash.

Answer: It usually doesn’t make sense to tap retirement funds to pay down a mortgage, but your case may be one of the exceptions. You have enough saved that the withdrawal won’t claim a big chunk of your available funds and leave you cash-poor.

We’ll assume you’re over 59½ and won’t face penalties for early withdrawal. If that’s the case, then you’ll also be facing required minimum distributions within a few years. These mandatory withdrawals, which must start after you turn 70½, would subject at least some of this money to taxation. The question is whether you want to pay those taxes now or later, and you’re making a pretty good case for now.

Before you withdraw any money from a retirement fund, however, you should consult with a tax pro or a fee-only financial planner, or both. Mistakes made in early retirement often have irreversible consequences, so you want an objective second opinion before you proceed.

Q&A: Bad Social Security math

Dear Liz: Regarding when to begin receiving Social Security payments: I would think that people should begin taking payments as early as possible if they can invest it rather than spend it, as a lot of money is “left on the table” between ages, say, 62 and 70. Your thoughts?

Answer: That argument was more compelling a few decades ago when you could get a 7% or 8% return on an FDIC-insured certificate of deposit. These days, there’s no investment that offers a guaranteed return as high as what you’d get from delaying the start of Social Security.

The “take it early and invest” approach also ignores the longevity insurance aspect of Social Security benefits. Most people face a real risk of outliving their savings, which could leave them relying on Social Security for most if not all of their income. Maximizing Social Security benefits by delaying your application can help you live more comfortably, should that happen.

Also, starting early can cause harm to whichever spouse survives the other. When one spouse dies, one of the two Social Security checks the couple was receiving will stop. The remaining spouse will get only the larger of the two checks, which is known as a survivor’s benefit. Maximizing that benefit can help ease the shock of going from two checks to one, so financial planners generally recommend that the higher earner in a couple delay his or her application if possible.

Thursday’s need-to-know money news

Today’s top story: Why you shouldn’t give up on public service student loan forgiveness. Also in the news: The life-changing magic of working a bit longer, why your financial aid may plummet after freshman year, and 7 thoughtful and unique graduation gifts — all under $25.

Don’t Give Up on Public Service Loan Forgiveness
The odds are slim, but still worth trying.

The Life-Changing Magic of Working a Bit Longer
It’s worth it.

Why your financial aid may plummet after freshman year
How you can prepare.

7 thoughtful and unique graduation gifts — all under $25
Celebrate without going broke.

The life-changing magic of working a bit longer

Retirement experts frequently recommend working longer if you haven’t saved enough. But you may not realize just how powerful a little extra work can be.

Researchers who compared the relative returns of working longer versus saving more last year reached some startling findings. In my latest for the Associated Press, how working just a few months longer can bolster your retirement.

Friday’s need-to-know money news

Today’s top story: 8 ways to keep your travel credit card working for you. Also in the news: How being neighborly can save you money, why new federal student loans are getting cheaper, and to save more for retirement, add this to your budget.

8 Ways to Keep Your Travel Credit Card Working for You
Making sure your card is pulling its weight.

How Being Neighborly Can Save You Money
Borrowing tools and beyond.

New Federal Student Loans Are Getting Cheaper
Interest rates are dropping.

To Save More for Retirement, Add This to Your Budget
Making savings a line item.

Thursday’s need-to-know money news

Today’s top story: Planning to work into your 70s? Why you need a Plan B, too. Also in the news: How your income can peak before you’re ready, college-bound students could face $37,400 in loans, and how to sell or recycle your old electronics.

Planning to Work Into Your 70s? Why You Need a Plan B, Too
Strategies to keep in mind.

Your Income Can Peak Before You’re Ready
How to prepare for stagnation.

College-Bound Students Could Face $37,400 in Loans. Here’s How to Ease the Load
Projected annual borrowing is on the rise.

How to Sell or Recycle Your Old Electronics
Good for your wallet and our planet.

Q&A: His Social Security claiming decision could use a second opinion

Dear Liz: I retired in 2013 at 55. I purchased an annuity, which will pay $1,000 a month for life for me and my wife as well. That starts in February 2020. My retirement fund, meanwhile, was rolled into an IRA and I’m withdrawing about 10% of that annually. The balance is about $650,000.

My advisor wants me to start my Social Security at age 62. I would receive $1,800 a month and could reduce my withdrawal rate to 4%. I’ve also been told, however, that it would be better to wait until my full retirement age (66 and 6 months) or 70, when my benefit maxes out. At full retirement age, my monthly benefit would be about $2,500, and at 70, it would be $3,000.

I’m not sure what to do. My wife will be retiring next year and her monthly pension will be about $3,700. We still owe on our house and have other debt as well. What’s my best option?

Answer: There’s a lot of research showing that single people and “primary earners” — the higher wage earner in a married couple — are better off delaying the start of their Social Security benefits. (The article “Understanding Social Security Claiming Decisions Using Survey Evidence” in the November 2018 issue of the Journal of Financial Planning does a good job of summarizing the research.)

Longer life expectancies mean most people will live beyond the “break even” point at which the larger benefit more than makes up for the checks they pass up in the early years. These larger checks are a kind of longevity insurance, as well. The longer you live, the more likely you will have spent your other resources and wind up depending on your Social Security income to live.

Having the primary earner delay is especially important for married couples because at the first death the number of checks the household receives will drop from two to one. Because the survivor receives the larger of the two checks, it’s usually wise to make that check as large as possible.

The benefits of delay are so substantial — one study shows that the sustainable standard of living is 30% higher for people who start at 66 rather than 62 — that advisors often recommend tapping other resources, including retirement funds, if it enables people to put off starting their checks.

Your situation may be a bit different, though because you mention that your wife has a pension. If the pension is from a job that did not pay into Social Security, it would affect her ability to receive survivor’s benefits from the Social Security system. Something known as the government pension offset would reduce her survivor check by two-thirds of the amount of her pension, which could eliminate her survivor benefit entirely. If that’s the case, it wouldn’t be as crucial for you to delay.

Given how much is at stake, though, you might want to get a second opinion from another advisor who can review the specifics of your situation.

Friday’s need-to-know money news

Today’s top story: Are you robbing your parents’ retirement. Also in the news: When is your credit score high enough, when a cash back card is better than travel rewards, and how to pay for your pet’s healthcare.

Are You Robbing Your Parents’ Retirement?
Parents helping their adult kids at the expense of their future.

When Is Your Credit Score High Enough?
Your credit health matters.

It’s OK If Travel Rewards Cards Aren’t for You
A cash back card could be better.

How to Pay for Your Pet’s Healthcare
Taking care of your furkids.

Your 401(k) just got more valuable

If your tax refund this year was disappointing, you may be able to do something about it: Contribute more to a retirement fund.

Tax-deductible contributions to 401(k)s, IRAs and other retirement accounts are among the few remaining ways to reduce taxable income if you don’t itemize deductions. And few of us do these days: Only about 1 in 10 taxpayers is expected to itemize now that Congress has nearly doubled the standard deduction, tax experts say. That’s down from about 1 in 3 before the law changed.

As a result, many of the traditional tips and tricks for reducing tax bills either no longer work or are of limited help.  In my latest for the Associated Press, how to use your 401(k) to reduce your taxable income.