Situation: A 62-year-old person is debating whether to immediately claim Social Security and start 401(k) disbursements or downsize, live off her capital gain for five years, and start spending retirement benefits at age 67.
She lives in a $1,500,000 house with no mortgage. She has $1,000,000 in a 401(k) plan. She cannot afford to delay spending retirement savings unless she downsizes to a smaller home.
- What are the potential consequences of these decision on the person’s financial well-being in retirement?
Analysis: The cost of downsizing (sale commissions, purchase commissions and moving costs) from a $1,500,000 home to a $1,000,000 home might be $80,000. The person would net $420,000 after selling the $1,500,000 home and purchasing a $1,000,000 home. This $420,000 should be more than enough to live on for five years without tapping retirement savings and without claiming Social Security benefits.
A person born after 1960 claiming at age 62 receives 70 percent of the Social Security benefit of the person who claims at age 67 as noted here.
- Projected annual Social Security benefits are $15,960 at age 62 compared to $22,800 at age 67.
The delay in disbursing retirement plan benefits delays depletions from spending and allows for increased accumulation from compounding of investments inside the retirement account. Projected retirement plan balances assume a 5.0 percent annual return on invested assets and disbursements based on the four percent rule with an annual inflation rate of 3.0 percent.
- The projected retirement balance at age 67 are $1,024,527 for the person initiating retirement plan disbursements at age 62 and $1,276,282 for the person delaying disbursements until age 67.
The person who delays retirement plan disbursements could implement the four percent rule at age 67 and receive an annual inflation adjusted benefit of $51,000. The person who downsizes and delays retirement savings has more to spend early in retirement prior to spending retirement resources and more to spend after age 67.
Concluding Remarks: The decision to downsize and delay spending retirement assets will often lead to a more prosperous and secure retirement.
Authors Note: David Bernstein is the author of both Financial Decisions for a Secure and Happy Life and A 2024 Health Care Reform Proposal.