When Members Are Claiming Social Security

Comments on “Using Portfolio Returns to Determine When to Claim Social Security Benefits,” by Brian L. Betker, in the August 2019 AAII Journal:

Betker’s analysis is valuable and could be helpful as part of a retiree’s consideration when choosing when to begin Social Security payments.

I am single, have just turned 66 and recently retired. My decision to wait until age 70 was determined by an analysis of the following factors: 1) Tax considerations: Between 66 and 70, if I have no income, I will have an opportunity to convert traditional IRAs to Roth IRAs, pay a lower tax rate to do so and leave me and my heirs in a better position. 2) My good health: In my analysis, the breakeven is 82 years old. If I were in poor health, I should take Social Security benefits earlier. 3) As Betker alluded, by delaying the onset of Social Security payments, I can reconsider my options annually (or more!) in the interim. I am not locked into waiting until age 70.

Thank you to Betker for his cogent and timely analysis. For many, the simpler answer (to take Social Security immediately) will be the best answer.
—TWheeler from Vermont

I believe a good look at the work done by the Stanford Longevity Center on this very subject would be invaluable! Essentially, there are few situations where one should NOT wait.
—Ronald McNay from California

Regarding Table 2 for portfolios over $500,000, it does seem logical that as portfolio sizes increase the probability of failure also increases. Is this caused by the assumption that everyone spends 4% of their portfolio? I would assume if one spent the same amount regardless of portfolio size that there would be more incentive to wait until 70 to claim, all else being equal.

Another way to think about this is to consider whether claiming earlier and investing the excess funds would beat the 8% risk-free yield the government is offering.

Overall, the most important factors are ones that are not definitive: When will my spouse and I die?
—Joe from Washington

I had uncovered this effect in my own projections recently and wondered if there were any studies on it. I found situations where claiming at 62 would allow a higher withdrawal rate while still keeping my desired size of estate at end of life. It depended on investment return and tax rates.

Thanks for a timely article, and thanks also to TWheeler for pointing out the additional benefit of a Roth conversion period.
—Adam from Massachusetts

This is much too oversimplified to be drawing conclusions like this. You should consider working longer, taxes, consumption patterns, etc. I strongly suggest anyone confronted with the claiming decision to consult the work of Laurence Kotlikoff at Boston University: https://maximizemysocialsecurity.com.
—Scott Neal from Kentucky

Rebalancing in Practice

Comments on “A Question of (Re)balance,” by Sam Stovall, in the August 2019 AAII Journal:

We have tried the rebalancing technique. We have found that just leaving our assets 100% invested in growth mutual funds works the best.

Since the first dollar we invested 50 years ago works harder for us today than the last dollar we invest at age 70, investing 100% of retirement savings during the last three to five years into a money market account is a good strategy.

It also guarantees that we do not have to go through the mental anguish of selling if the market is down. We have averaged over 10% over the past 30 years.

When the market hits a new high, I sell a growth fund to replenish the money market account.
—Randall Knowles from Montana

Thinking Outside the ETF Guide

Comments on “The Individual Investor’s Guide to Exchange-Traded Funds 2019,” by AAII Staff, in the August 2019 AAII Journal:

Excellent explanation of tax impacts from capital gains, etc., resulting from managing the fund portfolios. What happens if there is a net outflow over time? Wouldn’t this trigger capital gains or losses as a result of the managers having to liquidate assets?

Also, I believe Vanguard has a patented process called “heartbeat trading” that allows them to reduce the capital gains’ impact on long-term investors from the managers having to liquidate assets.
—Rick from Virginia

Charles Rotblut, CFA, responds:
One of the ways ETFs differ from mutual funds is the use of creation units. These large blocks of shares are traded between authorized participants (market makers and other institutional investors) and the ETF sponsor. They facilitate inflows and outflows so ETF shareholders don’t bear the costs or the capital gains taxes of outflows.

There has been some debate about whether ETFs investing in lower-volume assets would be able to handle a sudden and significant spike in redemptions. Such an event hasn’t truly occurred in many years, so there is an unknown risk involving ETFs. My guess is that such an event would have a greater impact on niche ETFs and those tracking more mainstream indexes. (Such an event would impact mutual funds investing in the same assets as well.)