Joe Anderson
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As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Published On
November 10, 2014

Some people have an age or date in mind for when they would like to retire, but unfortunately, unexpected things may happen where people are forced to retire early. In fact, according to Employee Benefit Research Institution, 47% of people were forced to retire sooner then they had planned in 2013. This leads to many common financial challenges that people need to overcome, but with the proper planning, there are ways to overcome these challenges.

One thing people often wonder when they are forced to quit work early is whether they should take their Social Security benefit early. There are several Social Security strategies that you can integrate into your financial plan to ensure you maximize your Social Security benefits in retirement. Before determining if you should start or delay taking your Social Security, it’s important to follow the following steps in order to best develop a successful retirement strategy.

  1. If you delay Social Security benefits, in most cases you will receive an 8% increase in benefit per year from age 62 to age 70.  – it’s great to delay as long as you can– but if you need the money, then you need the money. Those who are in poor health and may not benefit from the increased earnings by delaying receipt of their Social Security Benefit may also be more inclined to take their benefit sooner than full retirement age.
  2. It’s important to determine your current living expenses and how much money needs to come out of your portfolio on a year-to-year basis without any other income factors (without your social security benefit). This may be around the same during your retirement years but it could also be higher or lower. Certain expenses like your mortgage and support of children who are now independent may go away, but it’s also important to remember that every day will be Saturday, potentially leading to increased spending.
  3. Determine total investments you have saved for retirement
    1. Estimate the amount of money spent each year and divide the derived income from total
      investments to project the distribution rate.
  4. Analyze other factors that will affect the cost of living including life expectancy, projected healthcare costs, taxation of income and where all your assets are located. None of us know for sure how long we will live or what specific tax rates will be in ten years. You will need to make an estimate. A good estimate is better than making arbitrary decisions without planning since it can always be adjusted and modified as changes occur.
  5. If all retirement income is coming from tax-deferred accounts such as 401(k)’s or IRA’s then it’s important to view strategies to lower the taxes. Roth IRA conversions can be a good strategy to reduce taxes, but it’s crucial to plan conversions in a timely manner so that they are done in the most tax-efficient way.  Roth distributions may also lower the taxation of their social security benefit. This is because the amount of your Social Security benefit included in taxable income is based on your “provisional income” which includes a variety of sources including withdrawals from tax-deferred retirement account but does not include withdrawals from Roth accounts.


Steps after projecting how much money you need to retire:

After you are able to project how much money you will need to retire based on your lifestyle and the factors listed above, you need to determine your distribution rate or the percentage of the money you will be taking out of your portfolio annually.

To find distribution rate:

Divide total expenses by total assets, not including Social Security benefit. If the distribution rate is 4% or lower, we feel confident that it is probable that you can maintain your lifestyle throughout retirement without running out of money. If the distribution rate is higher than 4%, we might recommend taking Social Security early to get you to that 4% range to avoid running out. If you are still not at the 4% distribution level then it’s time to look at working part-time, reducing living expenses or a combination of both. For working part-time, you can calculate how much you will need to make. For example, if you were making 150K a year, you may only need to make 30K a year for the next few years to bridge the gap to make your retirement work.

However, if possible it’s always best to push out Social Security as long as you can to maximize the benefit. If you combine that with reducing expenses, working part-time and doing Roth IRA conversions, it can make a significant difference in your retirement. These strategies could add several years of added income or an additional few hundred thousand dollars to spend in retirement. Ages 60 to 66 are the most critical years in planning your retirement. It could be the difference between dying broke or leaving a legacy.

Learn more strategies to deal with a forced retirement in this episode of “Your Money, Your Wealth”

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