Deciding when to delay Social Security collection is tricky

Q: I am 64 and just retired. I haven't taken my Social Security yet. My husband will be 60 and plans on taking an early retirement next year. So, I am holding out on Social Security until then. We don't have huge savings. But my husband will get a pension, and he’ll be able to collect on my Social Security until he takes his. He also has a 401(k) plan. Do we have to rollover his 401(k) plan once he retires? Or do we leave it there? If we have to roll it over, what's best to put it in? Savings, IRA? We don't think we should do any investing since it's all we have besides our home and cars.

 – Jackie Bogdanski, Illinois

A: So, it’s never easy to tell someone what to do with their money in the absence of knowing all the facts and circumstances. But there are some observations and general recommendations worth making.

First, you’re to be commended on not taking Social Security yet. Many people, about 62% according to recent research on the subject, do take it early and that decision costs them 8% of their income for every year they take early, says Joe Clark, a certified financial planner and managing partner of The Financial Enhancement Group.

In your case, Clark says delaying was probably the right call assuming you’re in reasonable health.

That said, your husband and you should probably talk to a qualified, competent and knowledgeable expert (and/or crunch your numbers using any of the online Social Security claiming calculators) whether your plan to claim Social Security next year makes the most financial sense, whether it will produce the largest possible benefit to your household.

For instance, Clark says it might make more sense from a financial and income-tax perspective for your husband to collect his pension, for he and you to withdraw money from your 401(k) plans/IRAs for living expenses, and for both he and you to delay claiming Social for as long as possible, even to age 70 if possible. Doing so would likely result in the largest possible monthly benefit for your husband and you.

“Given that you don’t have a large savings I would recommend that you consider living off the 401(k) savings as long as possible and continue to allow your Social Security income to build,” says Clark. This will allow you to manage the amount of income that goes on your tax return each year as you can control the distributions and you add 8% to your future Social Security income each year. If the 401(k) has enough you can delay collecting up until age 70.”

Q&A: Spousal issues with Social Security leave couples perplexed

Now, the decision to roll all or some of the money in your 401(k) account to an IRA requires a good deal of analysis as well. For instance, at a minimum, you’ll want to compare and contrast fees, expenses and investment options. You’ll also want to determine what sort of services you require, whether you want to pay for advice or not and how much, whether you need creditor protection, whether you currently own a good deal of company stock in your 401(k), whether consolidating your respective investment accounts makes sense (note: you can only consolidate your own IRAs not each other's); whether you’ll need to use the money in your IRA to pay for higher education expenses; whether – if you plan to keep working – you might want to delay taking required minimum distributions (RMDs), and so on. Unfortunately, it’s not so easy to tell you want to do in the absence of learning more about your situation. As for how to invest your money, that too is another difficult question to answer. There are at least two strategies to consider: the floor-and-upside approach and the bucket approach.

With the floor-and-upside approach, you would use guaranteed sources of lifetime income – your pension and Social Security benefits – to pay for your essential expenses, however you define them. If you have a gap, you would buy additional lifetime income – an annuity, for instance. Or you might consider buying bonds and/or CDs and laddering the maturities.

Then, once your essential expenses are covered with guaranteed sources of lifetime income, you would invest whatever was left over in so-called risky assets – stocks and bonds – to pay for discretionary expenses and to pay for living expenses many years from now. After all, you will want some of your investments to be safe and some to keep pace or outpace inflation, or the cost of living.

The other approach would have you invest in safe assets to pay for expenses over the next one to five years, a mix of safe and risky assets to pay for expenses five to 10 years from now, and risky assets to pay for expenses more than 10 years from now.

Great retirement planning looks at spending, not income

“Keep in mind that actuarial science suggests that when a couple makes it to age 60 and in reasonable health, there’s a high probability one of you will be alive at age 90,” says Clark. “That’s 25 years. The days of not having any investments because of age or retirement have passed. You do need to consider reduced volatility in your decision making but it shouldn’t be all cash.”

Now, should you decide to use the strategy suggested above and spend down your husband’s 401(k) and delay your Social Security benefits then you could consider a more cash-type position for your IRA if it will be exhausted in the next two to three years,” says Clark. “Keep in mind that your 401(k) should also have a money market or short duration bond choice so you don’t have to transfer to an IRA to reduce volatility. Remember investing is not as much about age as it is purpose and need.”

Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch. Got questions about money? Emailrpowell@allthingsretirement.com.