The Decision to Downsize and Delay Claiming Retirement Benefits

A person entering retirement without a mortgage or with a negligible level of mortgage debt can often delay claiming Social Security benefits and disbursing funds from retirement plans. This strategy leads to a more prosperous and secure retirement.

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.

The House Downsizing Decision: Options for the 401(K) Rich Person with a Mortgage

A 401(k)-rich person entering retirement with a mortgage should probably downsize to a less expensive home.

Situation One:  A person with $1,000,000 in a traditional retirement plan has a house valued at $700,000 and an outstanding mortgage with a balance of $152,576.  The monthly mortgage payment is $2,387.   This mortgage payment and outstanding mortgage balance is consistent with the person taking out a $500,000 mortgage 24 years earlier.

The only other source of income for this person is her Social Security benefit of $20,000 per year.  Should this person downsize to a smaller house?

Analysis of Situation One:  This person is in a difficult situation.  This retiree is in danger of quickly depleting her retirement account or having insufficient funds for basic consumption, under standard guidelines governing the disbursement of retirement assets.  

Financial advisors often recommend retirees follow the 4.0 percent rule.  This rule sets the initial disbursement from the retirement plan at 4.0 percent of the plan’s assets and adjusts future assets for inflation.

Under the four percent rule, this retiree’s annual mortgage payment during the first year of her retirement is 71.6 percent of her total 401(k) disbursement.  Higher disbursements could lead to rapid depletion of the retirement account and higher taxes because disbursements from traditional retirement assets are fully taxed.

The most obvious solution to this person’s situation is to sell the home to pay off the mortgage.  The person might be able to pay off the mortgage and buy a home for $596,000.  (Assuming selling, buying, and moving costs are around 7.0 percent of the value of the home.). 

Other options involve a new traditional mortgage, or a reverse mortgage. Both options are unattractive and of limited practicality.

A refinancing of the $157,425 mortgage to a 30-year term would lead to a $728 monthly payment or annual mortgage payments of $8,741.  The mortgage is probably not available for someone without wage income.  Also, current interest rates are now higher than 4.0 percent.  

A reverse mortgage allows a person to tap equity and stay in their home. The largest amount a person could borrow on a reverse mortgage is 80 percent of equity. However, a 60 percent borrowing limit is more practical since the borrower is responsible for taxes and maintenance on the home.  Obtaining additional resources from a reverse mortgage might make sense for an older borrower nearing the end of her life.  A younger borrow using a reverse mortgage is highly likely to outlive both her 401(k) wealth and the additional wealth obtained from the reverse mortgage.

Concluding Remark:  The person in situation one prioritized savings inside a traditional retirement plan over the elimination of a mortgage during her working years. This person also chose to contribute to traditional retirement plans instead of Roth plans.   Go to my collection of essays Financial Decisions for a Secure and Happy Life for discussion on prioritizing debt reduction and the use of Roth retirement accounts.  

The only real option during retirement for the 401(K)-rich person with non-trivial debt is downsizing to a less expensive home.  More posts on the downsizing decision will follow.

Financial Impacts of 401(k) vesting requirements

Many people with unvested 401(k) contributions, who lose or change jobs for a wide variety of reasons, end up losing retirement wealth. Should workers with unvested benefits choose to forego 401(k) plans in favor of Individual Retirement Accounts or Health Savings Accounts? Should 401(k) vesting requirements be eliminated to better assist workers who are struggling to save for retirement?

Employer matching contributions are often called “free money.” Virtually, all financial advisors recommend workers take full advantage of employer matching contributions to 401(k) plans.  

However, workers at firms with 401(k) plans with vesting requirements do not immediately own the employer match.  

Information on the prevalence of 401(k) vesting requirements is found here.

  • Around 56 percent of plans have vesting requirements which delay receipt of the ownership of the 401(k) match. 
  • Around 30 percent of firms use a graded vesting schedule where the employer match vests over a five or six year period.
  • A saver with a 401(k) plan that has three-year cliff vesting will lose all benefits unless she stays at a firm for three years.

Many workers especially young adults will leave the firm prior to fully vested and will lose some or all the unvested employer matching contributions.  The high level of job mobility, especially among young adults, leading to a likely loss of some retirement wealth due to vesting requirements, is documented by this BLS report.

  • Americans born in the early 1980s had an average of 7.8 jobs between age 18 and 30.
  • Young adults from age 27 to 30 had on average 2.2 jobs during that period of life.

There are many reasons why people leave one job for another.  In 2022, 50 million people quit their jobs, there were 15.4 million layoffs and 40 percent of Americans had been laid off or terminated from a job at least once in their life.  A recent Gallup report found that 60 percent of respondents reported they were emotionally detached at work and that 19 percent of respondents reported being miserable.  

All workers with unvested 401(k) contributions who switch jobs will lose retirement wealth due to the change in their employment status, regardless of the reason for the switch in jobs.  

People in a work situation where their place of employment offers a 401(k) plan with slowly vesting employer contributions should forego contributions to the firm-sponsored 401(k) plan and consider some other tax-preferred investment vehicle.

Investments in Individual Retirement Accounts and Health Savings Accounts are both preferable to investment in a 401(k) plan when the receipt of matching contributions is uncertain.

Individual Retirement Accounts often have lower fees than 401(k) plans and the fee differential can result in a large loss of lifetime income as discussed here.  The use of short-term bond and CD ladders inside an IRA can substantially reduce risks associated with interest rate changes compared to investments in bond ETFs inside a 401(k) plan.

Health Savings Accounts allow for an immediate tax deduction, are available for immediate health expenses without penalty or tax and provide penalty-free access to all funds after age 65.  The use of funds in a Health Savings Account reduce medical debt and the number of people forgoing necessary medical procedures.  Finance tip number eight states that contributions to health savings accounts must take on a high priority even at the expense of contributions to 401(k) plans.

The Secure Act 2.0 mandated automatic enrollment for new workers inside 401(k) plans.  The existence of vesting requirements creates an incentive for savvy workers to opt out of their 401(k) plans.

There are compelling arguments for a new law outlawing all vesting requirements on firm 401(K) plans, even if this change increases turnover and training costs for some firms.   Taking money from an employee that the employer chooses to terminate or leaves because she is miserable seems unfair and is a recipe for low productivity.  The next generation of workers is likely to have a higher Social Security retirement age because of pending Social Security deficits.   The forfeiture of employer contributions because of vesting requirements will reduce the accumulation of retirement wealth. 

It is time for policy makers to abolish 401(k) vesting requirements.  People currently subject to 401(k) vesting requirements need to consider other investment options.

The Individual Retirement Account Quiz

Eighteen True/Fales Questions: Topics include – advantages of investing in IRAs, differences between conventional and Roth IRAs, permissible investments for IRAs, conversion strategies, state taxes and the choice between Roth and conventional IRAs, rules governing inherited IRAs, and the Secure Acts.

Question 1:  True or False: The sole tax advantage of conventional IRAs is the tax deduction in the year the contribution is made, and the sole tax advantage of Roth IRAs is the tax savings in retirement. 

FALSE:  People can trade inside both a conventional and Roth IRA without paying any federal or state income tax on capital gains, interest, or dividends in the year the of the trade.  The tax deferral provision inside retirement accounts allows investors to take profits and reallocate assets without paying tax.   

Question 2True or False:    An extremely successful investor that earns spectacular returns on their investment should choose a Roth IRA over a conventional IRA.   

True: There is no limit on the future balance of an IRA, hence successful investors should use a Roth account.  Disbursements from a large conventional account will be fully taxed while disbursements from a Roth will not be taxed during the lifetime of the owner of the account and for the first 10 years of the inherited account.  Investors receiving spectacular returns will be in a high tax bracket when they are forced to distribute funds.  Peter Theil provides the prime example of why successful investors use Roth accounts.

Question 3True or False:   Municipal bonds are an excellent investment to hold inside an IRA.

False:  Since the interest on municipal bonds is not taxed at the federal level and may not be taxed at the state level the yield on municipal bonds is less than the yield on federal or private securities of equivalent risk. (On January 5, 2024, the interest rate on three-month AAA municipal bonds was 3.67 percent while the interest rate on the three-month T-bill was 5.1 percent.). The IRA investor does not gain from the tax advantages of the municipal bond so the IRA investor should purchase the bond with the higher pre-tax yield.  

Question 4True or False:   A middle-income married couple where both spouses work should plan on putting a higher percent of retirement wealth in a Roth than a married couple with identical income where one spouse does not have a career outside the home.

True:  One of the tax advantages of Roth IRAs is that the distribution is not included in AGI and therefore does not impact the amount of Social Security benefits subject to federal or state income taxes.  The savings from the use of Roth IRAs from this provision is larger for the married couple with two working spouses than for the married couple with one working spouse.  

Question 5: True or False:  Both IRAs and 401(k) plans allow account holders to invest directly in Treasury bonds, corporate bonds, CDs, or agency bonds.

FALSE:  The investment options of 401(k) plans are determined by the plan sponsor and are usually if not always limited to a small number of equity and fixed income funds.  By contrast, a worker or retiree can roll over a 401(k) plan to an IRA at a firm like Fidelity, Vanguard, or Schwab and directly purchase fixed-income securities. This is a huge advantage of IRAs because the lack of a maturity date on fixed-income funds will result in large losses during a period of rising interest rates.  The bond investor can always hold the asset to its maturity.  The fund investor does not have this option.  

Question 6True or False:   Series I savings bonds and Series EE bonds can be purchased inside an IRA.

FALSE:  I read an article saying this was possible, but the article appears wrong because IRA contributions involve cash followed by investments and firms sponsoring IRAs do not allow for purchases on Treasury Direct, the primary place where Series I and Series EE bonds are purchased.

Question 7:  True or False:  The optimal disbursement strategy between spending from assets in brokerage accounts, conventional retirement accounts and Roth retirement accounts remains constant after retirement.


The appropriate disbursement strategy depends on the age of the retiree, whether the retiree is claiming Social Security and whether the retiree is attempting to maximize the wealth of an heir.

  • Early in retirement, prior to claiming Social Security, live on funds in brokerage accounts while converting traditional retirement assets to Roth assets.
  • Delay claiming Social Security to age 70 if possible.
  • After claiming Social Security distribute assets from the Roth account to both avoid tax on the distribution and reduce the amount of Social Security benefits subject to tax. 
  • Older taxpayers with heirs in a high tax bracket should spend from the conventional account to reduce tax burden on heirs.

This question pertains to Tip #7 here.  Go here, for an interesting discussion of reasons to convert traditional assets to Roth assets early in retirement.

Question 8True or False:  A 62 year-old retiree with a very small amount of liquid assets outside of her retirement plan, around $1,000,000 of assets in a traditional retirement plan and no assets in a Roth account is well positioned to convert the traditional retirement assets to a Roth.

False:  Since the retiree has little in the way of liquid non-retirement assets, she must distribute funds from the conventional asset to fund current consumption.  Both the funds she uses for consumption and the funds that are converted to the Roth are fully tax as ordinary income.   The incremental costs of the conversion are high because the person is in a relatively high tax bracket.  By contrast, a person with liquid assets outside of her retirement account will only be taxed on the capital gain and the capital gains tax rate is lower than the tax rate on ordinary income.

The cost of converting traditional retirement assets to Roth assets is substantially higher for a person who must use traditional retirement assets to fund current consumption. 

Question 9True or False: A person who graduated college, works four years, puts $20,000 in her traditional 401(k) and leaves the workforce for two years for graduate school should convert her assets in her traditional retirement account to a Roth account while in school?

True: Converting traditional retirement assets to Roth assets is probably the last thing on the mind of person a person in their twenties returning to school but it is a great move.

Any conversion by a person with AGI less than the standard deduction is taxed at the 0 percent rate.  Even conversions at a 10 percent rate (taxable income less than $11,000) or 12 percent (taxable income less than $44,725) will prove profitable.

Bottom line, as discussed here, is that costs of converting traditional IRAs to Roth IRAs are low when a person leaves the workforce.  

Question 10: True or False:  The total rate of return on a conversion of a traditional retirement asset to Roth by a 62-year person prior to claiming Social Security and who distributes funds in a Roth IRA after five years will be around 8.0 percent

False:  The total return from this transaction, under reasonable assumptions, will be around 30 percent.

Key features of the transaction:

  • Person relies on liquid savings and no Social Security benefits at age 62.
  • Converts around $35,000 in traditional retirement assets to Roth and pays an additional $1,975 in tax.
  • Assets in Roth earn 6.0 percent per year for five years.  
  • Roth assets grow to slightly over $46,000.
  • Person lives off Social Security and Roth assets instead of conventional assets after five years.
  • Tax savings from the use of Roth instead of conventional assets after five years is 
  • The use of Roth assets instead of traditional assets would reduce tax by $7,000 after five years and $700 after six years.
  • The return on this investment calculated with XIRR is 30.7 percent.

A detailed discussion of this calculation and the regulations governing Roth conversions can be found in this Tax Notes article.

Question 11True or False:  A workers who resides in California one year and Florida the next year should wait until moving to Florida before converting conventional retirement assets to Roth assets.

True:  The cost of conversion, the tax paid on the amount converted, depends on both federal and state income tax.   California will tax the conversion to a Roth.  Florida, which lacks an income tax will not.

Question 12True or False:  All else equal people who reside in California throughout their working and retired life should contribute to a conventional retirement account while people in Florida should always contribute to a Roth account.

False:  Benefits of tax deduction from the contribution to the conventional retirement plan are higher in California, the state with a state income tax but benefits from distributions from the Roth account in retirement are also larger in the state with the income tax.  All taxpayers should seek a mix of conventional and Roth assets regardless of the state where they are domiciled.

Question 13True or False:  The rules governing the tax and penalty on the distribution of funds contributed to a Roth IRA and funds from a conversion of traditional to Roth assets are identical.

False:  All distributions from a converted IRA are subject to a penalty for five years from January 1 of the year of the conversion.  

This penalty applies even if the taxpayer is over age 59 ½ at the time of the distribution.

A taxpayer who distributes funds on the converted Roth prior to five years from January 1 of the year of the distribution will pay both tax on the amount converted and a penalty. 

There also exists a five-year rule on contributions to a conventional IRA but it appears to only restrict access to investment earnings on funds that have been in the account for less than five years. 

Go here for a discussion of different aspects of the five-year rule.

Question 14True or False:  The Secure Act 2.0 requires the owners of all inherited IRAs to distribute all funds over a 10-year period after the death of the original owner.

FALSE:  There are two exceptions. 

  • Non-spousal beneficiaries who inherited IRAS prior to 2020 can stretch payments over their expected lifetime.
  • All spouse beneficiaries can spread payments out over their expected lifetime.

This article by TheStreet is a good resource.

Question 15True or False:   The increase in the age for required minimum distributions will substantially reduce the number of people who are likely to outlive their retirement savings.

FALSE:  Most people who are in danger of outliving their retirement savings are distributing sums earlier than 73, the new age where RMDs start and are distributing sums greater than the minimum once distributions become mandatory. The RMD is only 3.8 percent of retirement assets at age 73.  Go here for a useful RMD calculator.   

Bottom line, the new RMD rules benefit the relatively affluent retirees and firms managing IRAs and 401(k) plans, not people struggling to survive in retirement.

Question 16: True or False:  Some IRAs allow for alternative often non-liquid investments including real estate and private equity.

True:  But they are complex and entail risk.  Go to this nerdwallet article for some information.

Question 17: True or False:  An IRA is an excellent vehicle for investment in a vacation home.

False:  You can purchase real estate in a self-directed IRA, but it can’t be used as a vacation home, a second home or a place for your parents.  The IRS is very strict about this.  This Investopedia article is a good resource on this issue. 

Question 18:  True or False:  The recently enacted Secure Act 2.0 substantially expands the ability of IRA and 401(k) owner to distribute funds prior to age 59 ½.

True:  Although the increased access to funds prior to age 59 ½ is much larger for owners of conventional retirement plans than owners of Roth retirement plans because Roth accounts already allow for early disbursements of contributions. 

The Secure Act 2.0 allows for additional penalty-free withdrawals including – (1) one withdrawal per year up to $1,000 for unforeseeable financial needs, (2) withdrawals for permanent disabilities, (3) victims of domestic abuse, (4) medical insurance when unemployed, (5) qualified education expenses, and first-time home purchases.  

This Wall Street Journal article has a more complete list of expanded penalty-free disbursements.  

My view is that these liberalized disbursement rules will result in an increased number of people retiring with insufficient retirement income.   Go here for my empirical research on the issue of early disbursements from retirement plans.

Question 19. True/False:  When tax rates are certain and identical in working years and in retirement a person will be indifferent between saving X dollars in a conventional deductible IRA and (1-t)*X dollars in a Roth where t is the tax rate that would have been applied to the funds placed in the deductible IRA. 

True:  The easiest way to check this is true is to plug in some numbers

  • Tax rate 10 percent,
  • $2,000 contributed to a conventional IRA,
  • $1,800 contributed to a Roth IRA,
  • 8.0 percent annual return for 30 years,
  • Amount available for consumption in Roth after 30 years is $18,113 

(1.0830 * 2000),

  • Amount available for consumption in conventional account also $18,113.

0.90*(1.0830 * 2200),

Note the tax savings from Roth distributions instead of conventional distributions will be much larger than 10 percent for most workers who have some working-years in the 10 percent tax bracket because they will be in a higher marginal tax bracket based on lifetime earnings or high expenses and disbursements in a particular year and tax savings from the exclusion of Social Security benefits from AGI.

Question 20: True or False:  A spouse who is not in the workforce cannot contribute to a retirement account.

False:  A non-working spouse can create and contribute to a spousal IRA, if he or she files a joint return and satisfies the IRS contribution limits, income limits, and federal deduction limits.  Even if the joint return has a high AGI the non-working spouse will be able to create and fund a non-deductible IRA, which is legally owned by the non-working spouse.  Go here for more information.

Question 21:  True or False. A person with adjusted gross income over the income limits for Roth IRAs cannot add to a Roth IRA

False:  The income limits on Roth IRA contributions are easily circumvented through a procedure called a backdoor IRA.  The steps used to create a backdoor IRA involve:

  • Create and funds a non-deductible IRA.
  • Immediately convert proceeds in the non-deductible IRA to a Roth account.

Since the funds in the non-deductible IRA were fully taxed you will not owe any tax on the amount converted.  Conversions from a deductible IRA or a traditional 401(k) plan would be fully taxed, hence, people using the backdoor IRA should use funds from a non-deductible IRA to fund the conversions.  Additional conversions from deductible IRAs and 401(k) plans could occur when household earning is low. 

As noted in this Smart Asset article

“If your income leaves you locked out of the Roth option, you can simply contribute to a non-deductible IRA and then convert that IRA to a Roth IRA. Voila! You’ve got a Roth.”

Question 3: The benefits of early investment in Roth IRAs

Question on reasons why young adults need to use a Roth IRA.

Question 3:  The benefits of early investment in Roth IRAs

Question 3:  What is the amount available for consumption after tax from a $6,000 contribution to a conventional and a Roth IRA funded at age 20 and distributed at age 65 when the underlying assets earned 8.0 percent per year and the tax rate is 20 percent?   

What additional considerations favor the choice of the Roth IRA over the conventional IRA?


Basic Calculation:

  • The total wealth accumulated in a tax-deferred IRA of $6,000 invested for 35 years earning an average annual return of 8.0 percent per year is $88,712.
  • The distribution of the conventional IRA is taxed at a 20 percent rate, hence the amount available for consumption from the conventional IRA is $70,970.
  • The entire distribution of $88,712 from the Roth account is available for consumption. 

Additional Benefits of the Roth:

  • The contribution to the Roth could be used for an emergency without payment of tax or penalty.
  • The distribution from the Roth is not included in AGI and does not increase the amount of Social Security benefits subject to tax.  As a result, the tax savings for a person in the 20 percent marginal tax bracket may be higher than 20 percent of the distribution.
  • People in retirement who have a year where they must distribute substantial funds from their retirement accounts will be forced into a higher tax bracket if their only source of funds is a conventional retirement account.
  • All inherited IRA funds must be disbursed within 10 years, but Roth disbursements will not be taxed, and conventional IRAs will be taxed as ordinary income.

Go here for a list of financial tips, here for an article on why a Roth should be the vehicle of choice for young adults,  and here for an article on the advantages of Roth articles.

Question 2: Tax and penalties on early distributions from a conventional and Roth IRA

Info on tax and penalty from early distribution on different types of IRAs.

Question 2:  What is the tax and penalty on the withdrawal of all funds from both a conventional deductible IRA and a Roth IRA prior to age 59 ½ five years after an initial contribution of $3,000 assuming a 6 percent return on invested assets, and a marginal tax rate of 20 percent?

Answer:  The entire distribution from the conventional IRA is subject to tax and penalty while only the investment income portion of the distribution from the Roth IRA is subject to tax and penalty.  The calculations below assume a tax rate of 20 percent and a penalty rate of 10 percent on the relevant amount.

  • Total funds in both IRAs after five years is $4,015.
  • The penalty and tax on the conventional IRA is $1,204.40.
  • The penalty and tax on the Roth IRA is $304.40

Also, note the owner of the Roth IRA could have limited her withdrawal to $3,000, kept the investment return in the Roth and paid no penalty and tax.

The lack of penalty or tax on the distribution of the initial contribution makes the Roth IRA the better choice for people starting their careers or for people with limited liquidity.  For more information on the choice between a Roth IRA and a conventional IRA look at the first two financial tips here.

Question One: A question on fees and 401(k) plan rollovers

Even a slightly higer fee level can lead to a large loss of wealth. Don’t abandon your 401(k) to the whims of your ex employer.

True or False:  People with a small amount of funds in a 401(K) plan should leave funds in the employer-based 401(k) plan when they switch jobs.

False:  Many companies will move funds of departing employees to high-fee low-return IRAs.  These IRAs will not benefit their owners.  


  • The Secure Act 2.0 mandated automatic enrollment of new workers in the firm’s small 401(k) plan.
  • Many employees routinely leave 401(k) assets at their old employer.
  • Employers routinely move assets left behind in 401(k) plans to high-fee low-return IRAs.
  • Prior to the Secure Act 2.0 employers had the right to transfer all 401(k) plans with assets less than $5,000 to a high-cost IRAs.
  • The Secure Act 2.0 increased the transfer right to all plans with less than $7,000 in assets.
  • Even relatively small differences in retirement plan fees can lead to a large decrease in accumulated assets as shown in Example Two, here.

The logic of the automatic enrollment provision in Secure Act 2.0 was to encourage workers to start saving early for retirement because automatic enrollment was in their best interest.  Automatic transfers of 401(k) assets to well-run low-cost IRAs would also be in the best interest of workers but the law does not mandate or even recommend automatic transfers to low-fee highly diversified accounts.  

The combination of automatic enrollment and not automatic transfers seems to benefit the wall street firms sponsoring high-cost retirement accounts.

The Secure Act 2.0, a law that was passed with bipartisan support, does more for Wall Street investment firms than workers. It does seem as though that modern capitalism does more to manipulate rules to the advantage of the firm over the consumer than in providing a good reliable product or service.

Problems caused by the forced transfer of abandoned 401(k) assets to high-cost IRAs are discussed in this New York Times article.  Financial tip #5, presented in this list of tips, makes the case for routinely moving 401(k) funds to low-cost IRAs. 

Financial Tip 5: Rollover 401(k) assets to IRAs.

Tip #5: An employee leaving a firm can substantially increase retirement wealth by moving401(k) funds to an IRA.   Be careful though!  Protections against creditors are stronger for 401(k) plans than for IRAs in many states.

Examples of potential gain from rolling over assets in a high-cost 401(K) to a low-cost IRA

Example One:  A worker leaving her firm at age 50 can keep $500,000 in 401(k) funds in the firm-sponsored retirement plan that charges an annual fee of 1.3% or can move the funds to a low-cost IRA that charges an annual fee of 0.3%.   The return on assets prior to fees in both the 401(k) plan and the IRA is 6.0 percent per year.  

What is the value of the account at age if assets remain in the high-cost 401(k) and if assets are rolled over into the low-cost IRA?

  • Account value of high-fee 401(k) plan is $995,796.
  • Account value of low-cost IRA is $1,148,404.
  • Gain from rollover is $152,609.

Example Two: A worker changing jobs at age 30 can keep $20,000 in the firm 401(k) or move the funds to a low-cost IRA.  The annual fee for the 401(k) is 1.3 %, the annual fee for the IRA is 0.3%. The underlying returns prior to fees for both assets in the 401(k) and assets in the IRA is 8.0%.  

What is the value of the account at age 60 if the person keeps assets in the high-cost 401(k) or moves funds to a low-cost IRA?

  • Account value of high-cost 401(k) plan is $139,947.
  • Account value of low-cost IRA is $185,140.
  • Gain from rollover is $45,194.

Note: The impact of financial fees on the future value of the account can be calculated with the FV function in Excel.  The arguments of the FV function are the rate of return after fees, holding period in years, and the initial balance in the 401(k) plan.   

 Additional Comments:

  • Most roll overs from 401(k) plans to IRAs occur when a worker leaves a firm for another employer.  Some firms allow for some in-service rollovers.  
  • Some workers, in need of cash routinely, disburse funds from their 401(k) plan.  The disbursement of funds from a traditional 401(k) plan prior to age 59 ½ can lead to penalties or tax.   A roll over of funds from a 401(k) plan does not lead to additional tax or any financial penalties.
  • One motive for moving funds from a 401(k) plan to an IRA is the desire to place funds in a Roth account when a firm only offers a traditional retirement plan.   The act of rolling over funds from a 401(k) to an IRA and the act of converting the new conventional IRA to a Roth IRA are separate and do not have to occur together.  Conversion costs are lowest when a worker has low marginal tax rate.  Several future posts will examine the costs and benefits on converting traditional retirement accounts to Roth accounts.
  • The federal bankruptcy code protects both 401(k) plans and IRAs. However, 401(k) plans offer stronger protection against creditors than IRAs outside of bankruptcy.  Whether IRAs are protected from creditors is determined by state law.  ERISA, a national law, provides protection against creditors for 401(k) plans.  This difference can persuade some people to keep funds in a 401(k) plan, rather than covert funds to an IRA.  Go here for a state-by-state analysis of protections against creditors for owners of IRAs.
  • The calculations, presented above, of greater wealth from the rollover assumes identical pre-tax returns for the high-cost 401(k) plan and the low-cost IRA.  Most financial experts believe that low-cost passively managed funds tend to outperform high-cost funds.  Interestingly, Warren Buffet, probably the best active investor of all times suggests passive investing in low-cost funds is generally the better approach.
  • Factors other than transaction costs can impact the decision to rollover 401(k) funds or stay.   Some 401(k) plans allow investors to purchase an annuity at retirement.  The existence of automatic enrollment from a 401(k) plan to an annuity could induce some workers to keep funds in a 401(k) rather than roll over funds into an IRA.

Evaluating 2024 Social Security Reform Proposals

Republicans and Democrats are extremely far apart on how to reform the Social Security system and Medicare. This post examines and evaluates various proposals.


  • Two candidates, Haley and Christy, support phased in increases in retirement age and other changes in benefits for younger workers
  • Three candidates, Trump, DeSantis, Ramaswamy, do not support immediate actions.
  • Proposals by Democrats involve substantial increase in taxes on Americans with relatively high income and include expansions in benefits.
  • Republican proposals would not prevent automatic benefit cuts that are projected to occur under current law.
  • Democrat proposals could lower economic growth, reduce fiscal discipline, and increase the dependence of the elderly on Social Security.
  • There is a need for a compromise proposal that adjusts both benefits and revenues combined with improvements and expansions of private savings for retirement targeted towards households struggling to save.


The October 2024 Presidential debate helped clarify where Republican candidates now stand on entitlements – Social Security and Medicare.

Two candidates, Haley and Christie favor a higher retirement age for young adults now entering the workforce and for means testing Social Security benefits.  Haley also called for adjusting the rules governing the Social Security cost of living adjustments.

Haley supports increased use of Medicare Advantage plans to address imbalances with the Medicare Trust fund.

Trump, DeSantis, Scott, and Ramaswamy all appear to oppose reductions in Social Security benefits.

Ron DeSantis has said on the campaign trail that he would not mess with entitlements, but he had previously voted for an increase in the retirement age while in Congress.  DeSantis stated that part of his opposition to now raising the retirement age stems from recent declines in life expectancy.

Scott was concerned about the increase in the retirement age on people in jobs that required physical labor. 

Both Scott and Ramaswamy argued that cuts to the discretionary budget and economic growth could alleviate pending problems with the Social Security trust fund.  

The Biden Administration and Congress are grappling with the budget and there is very little active debate over ways to deal with the impending projected automatic benefit cuts to Social Security or long term reform proposals.

The Biden budget proposals includes higher taxes to fund Medicare but does not include a similar tax increase for Social Security.    Haley is supportive of increased use of Medicare Advantage plans to reduce costs.

Most Democrats do not support reductions in benefits or increases in the retirement age.  The approach preferred by many Democrats in Congress summarized here involves several substantial new taxes and more generous benefits.

The Congressional proposal includes three tax provisions. It would subject all wage income over $250,000 to the combined employer and employee Social Security tax.  Apply a 12.4 percent tax on investment income for high earners as stipulated by the provisions of the Affordable Care Act.  Apply a 16.2 percent net investment income tax on owners of S-corporations and limited partners.

The Congressional proposal includes several increases in benefits both for existing beneficiaries and future beneficiaries, increase the special minimum benefit, bases cost of living adjustments on a price index that reflects purchases by the elderly, and expands benefits for children of disabled and deceased workers until age 22.


The Republican Proposals

One of the reasons why Social Security should be a high priority 2024 issue is that under current law and current revenue projections Social Security benefits will be automatically cut by 23 percent in 2033.   None of the Republican proposals would prevent projected automatic benefit cuts.

The proposals for a higher retirement age applied to new entrants to the workforce offered by Haley and Christy would not prevent the automatic benefit cuts in 2034 because these future cuts would not be implemented until the new cohort of workers retires in 30 or 40 years.   

Proposals to do nothing will not prevent the automatic benefit cuts if trust fund revenue projections are accurate.   The idea that Republican policies that lead to higher economic growth will lead to increased trust fund revenues that will increase trust fund revenue is wishful thinking contradicted by the past relationship between Republican policies and economic growth.

The implementation of automatic benefit cuts to Social Security would be an economic disaster leading to a sharp decline in aggregate demand and a sharp increase in poverty among the elderly.  The failure to implement meaningful changes to either Social Security benefits or taxes sooner rather than later will lead to a political and economic shock substantially more severe than the annual debt crisis or government closure disputes. 

The proposal to increase the retirement age for younger workers is premised on the view that younger workers will be able to increase private retirement savings prior to retirement.  However, younger workers are failing to save for retirement due to record levels of student debt and increased use of retirement funds prior to retirement.    

It is very difficult to evaluate proposals for means testing of Social Security benefits without knowledge of the means testing formula.  Specifically, how many high-wealth households will be ineligible for Social Security benefits under the proposal.  Also, the proposal could reduce charitable gifts since many wealthy families give away most of their wealth.

The Democrat Proposals:  

The Social Security Administration projects the Congressional reform package would lead to a balanced trust fund for a 75 year period. However, some of the revenue would likely be diverted to Medicare given that the current Biden budget includes a proposal to raise the high-earner tax on investment income from 3.8 percent to 5.0 percent for Medicare related expenses.   

Revenue will invariably be lower than projected by forecasters.  High earners will respond to the new taxes by increasing contributions to tax-deferred accounts, which reduce AGI and investment income.  The tax increases in the Democrat proposal could reduce economic growth, which could reduce projected improvements in trust fund solvency.   

The new Social Security taxes would likely motivate future congresses to spend more or reduce general taxes applied to the elderly since money is fungible and the new taxes reduce the amount of funds the Treasury must borrow from the public.

The Democrats claim that the new taxes only impact rich people but some people who have high income in one or a few years do not have high lifetime income.  An analysis of lifetime earnings and lifetime tax payments could reveal that the Democrat tax proposals adversely impact some households with modest lifetime earnings.

From a perspective on inter-generational fairness, it is difficult to justify the use of taxes on the next generation to fund current increases in Social Security benefits, even current wealthy Social Security beneficiaries.   

The proposal for linking cost of living adjustments to a price index geared towards a basket of goods consumed by the elderly does not account for the fact that due to differences in insurance coverage elderly American households have lower out-of-pocket health costs than working-age American households.  Go herefor an explanation.

The expansion of Social Security benefits for children of disabled and deceased workers would affect a small slice of the population in need while ignoring the large number of young adults who are leaving college with substantial student debt.  The proposal is not means tested, hence some of the beneficiaries would be quite wealthy and not in need of the additional funds.

In general, the Sanders Social Security reform package would increase the dependence of Americans on the Social Security system.  They are likely motivated by previous efforts described here, which appear to primarily benefit the affluent.  My view is that progressive changes to private retirement savings are an essential part of a Social Security reform package.

An Alternative Approach: 

An alternative approach would include both relatively minor phased in adjustments to the retirement age, new revenue sources for both Medicare and Social Security, and new incentives designed to increase private retirement savings by younger workers who must prepare for a higher retirement age.

Relatively minor additional taxes are needed to prevent automatic cuts to the Social Security in 2034 and the adverse impact of these benefit cuts on the general economy and the elderly poverty rate.

The existence of new revenue will reduce the increase in the future retirement age and reduce pressure on future workers who due to health considerations cannot increase the length of their careers.  This combination will reduce future demand for disability benefits relative to the Haley and Christy proposals.

A strong argument could be made that policies expanding private retirement savings among the portion of the population that is unable to save for retirement would be more effective than expansions of Social Security benefits.  These reforms include:

  • Savings incentives for new entrants to the workforce as early as high school.
  • Incentives for automatic enrollment and contributions to Roth IRAS for workers without employer-based retirement plans.
  • Changes to Flexible Savings Account and Health Savings Account plans to reduce loss of retirement income due to out-of-pocket health expenditures,
  • Limited student debt relief households to facilitate increased retirement saving.

A first draft of an alternative approach to Social Security reform was published here.

Preliminary Discussion of the Cassidy/King Social Security Reform Proposal

The Cassidy/King proposal to increase the full retirement age for Social Security benefits would reduce benefits for most future retirees. A gradual phase in of the higher retirement age would not prevent required automatic benefit cuts under current law.

Introduction:  Two United States senators, Angus King of Maine, and Bill Cassidy of Louisiana, have announced plans to create a Social Security reform package.  The preliminary discussion of their plan stresses two changes to the current system, an increase in the full retirement age from the current age of 67 to age 70, and the creation of a sovereign wealth fund that would invest resources for Social Security in equities. 

A short article on aspects of the Cassidy/King proposal can be found here.  A short press release, mentioning the desire to create a plan that maintains the early retirement age at 62, is found here.  

The primary reason for the Social Security reform proposal is to prevent automatic reductions in Social Security benefits after depletion of Trust Fund assets.  The trustees of the Social Security trust fund believe these automatic benefit cuts could start in 2033.

The purpose of this post is to provide a quick impression of the admittedly preliminary Cassidy/King proposal.


Comment One:   The articles and the press releases pertaining to this preliminary proposal do not contain or refer to an explicit analysis of the impact of the policy change on benefits.  However, the headline of the yahoo new article  “Under latest social security reform proposal millions receive more  and no one receives less” appears misleading. 

An increase in the full retirement age to 70 and the retention of 62 as the early retirement age would lead to a decrease in benefits for everyone with the exception of people who retire at age 62.   The combination of a change in the retirement age and no change to the minimum age for retirement will also reduce the incentive for older people to remain in the workforce and/or delay claiming their Social Security benefit. 

The current full retirement age for people born after 1960 is 67 and under current law people born after 1960 will receive a 30 percent decrease in the retirement benefit and a 35 percent reduction in the spouse’s benefit if they retire at age 62 instead of age 67.  

This publication from the Social Security Administration reveals that under current law a person eligible for a $1,000 benefit at the full retirement age will receive $700 if she retires at age 62 and $1,240 if she retires at age 70.  

An increase in the full retirement age to 70 would reduce the benefit at age 70 to $1,000, which is a 24 percent reduction in benefits.

Under current law, a person born after 1960 gets an annual increase in benefits of 7.4 percent for each year of delaying claiming Social Security between age 62 and 67. 

The annual increase in benefits under Cassidy/King is 4.6 percent.

This means a person retiring at age 67 under Cassidy King would get an annual benefit of $875.

The Cassidy/King proposal (or at least my understanding of it) would result in a 12.5 percent in reduction for benefits for the person retiring at age 67.

Comment Two:  The final Cassidy/King plan could also include other modifications to the benefit formula, specifically a change in the number of years worked on final benefits.  This change could offset benefit cuts from the change in the full retirement age for some workers and augment it for other workers.   An analysis of policy change would require information on past lifetime work histories and might require assumptions on how the policy change impacts retirement and workforce participation. 

Comment Three:  Most politicians advocating Social Security reform stress that their plan should not adversely impact benefits of people nearing retirement.  An abrupt change in the full retirement age would abruptly change benefits.  The Cassidy/King proposal would have to be phased in to avoid abrupt benefit changes, however,a gradual phase in would not avoid the projected mandatory 2033 benefit reductions described here.

Comment Four:   Alicia Munnell points out that the Cassidy/king proposal for the creation of a sovereign wealth fund to increase returns and decrease cost of funding Social Security cannot be achieved by diverting funds from the current trust fund, which is nearing its depletion date.   Any diversion of funds from the trust fund would speed up the date of automatic benefit cuts. 

Concluding Thoughts:  Any viable Security reform that deals with the impending automatic benefit cuts without reducing benefits for people nearing retirement will have to include both new revenue and gradual alterations to the benefit formula.  Plans for Social Security reform should also account for the fact that young adults are, for a variety of reasons, not saving enough for retirement.  Go here for an article on the need for linking Social Security reform to policies that would increase savings by young adults.