Listener Submitted Retirement Questions (Asked & Answered #3), Ep #71

Most people have retirement questions – and this podcast is aimed at helping answer them – so I’m thankful when I get to do these “Q&A” sessions on the podcast. In this episode, you’re going to hear 4 questions from listeners like you. The first one highlights my advice to those who do NOT contribute to Social Security. The second has to do with a 401K rollover: should it be done before or after retirement? The third addresses the question of taking Social Security benefits at age 62 VS waiting until age 66. The fourth is about getting the best rate of return between Social Security VS other investments through deferring Social Security.

If you would like to submit your own retirement questions to be answered on a future episode of the podcast, feel free to visit www.RetirementStartsTodayRadio.com and click on the “Ask A Question” tab. You’ll have the option to send me a message or to record your own voice asking the question, which I’ll use on the broadcast.

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Outline of This Episode

[0:46] Answering listener questions – and more this year
[1:54] What about city and state employees who do not participate in Social Security?
[10:39] What should be done with a Roth 401K after my husband retires?
[12:31] Are there benefits to taking Social Security at age 62 as compared to age 66?

Retirement Question #1: Can you give some advice to those of us who don’t pay into Social Security?

A quick Google search reveals that public employees in many states are not covered by Social Security. That fact brings a couple of different questions to the forefront.

First, we have to remember that SS isn’t only about retirement benefits. There are survivorship, death, and disability benefits that are part of the Social Security package. If you don’t contribute to SS, you’ll need to address those.

Generally speaking, city & state employees likely have access to group benefits to fill those gaps, but it would be prudent for you to check into the details of your specific municipality’s benefits just to make sure.

As far as replacing the retirement benefits offered by SS, hopefully, you are covered by a government pension plan in conjunction with a 403(b) or a 457(b). But be careful about fees when funding these plans, especially a 403(b). There are plenty of horror stories about teachers and other municipal employees paying over 5% in fees during their first year. Ask questions and demand your answers in plain English.

I’ve got more advice regarding how these plans function, how to choose investments within the plans, and why it’s advantageous if the plan includes a Roth IRA option. And finally, I’ll address what you’re going to need to do if you are not covered by any kind of government pension plan. Be sure you listen!

Retirement Question #2: Existing Roth 401K – What to do with it after retirement?

Peggy’s husband has a Roth 401K through his current employer. Her concern has to do with what happens if they leave the funds in the employer’s plan after retirement. Is that best or should they do something now to get things started?

Her main concern is that she’s read that they may be required to have a new account open for 5 years before money can be withdrawn. There are two issues here – one having to do with the 401K and another having to do with how Roth IRAs work. But suffice it to say that in order to avoid required minimum distributions from a Roth 401k, you simply roll your Roth 401k into a Roth IRA before age 70.5.

Regarding the rule about waiting five years before being able to take anything out – that only applies in the case of Roth IRA contributions, not rollovers. In Peggy’s situation, any change would be considered a rollover, so they don’t have anything to be concerned about on that front.

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Retirement question #3: Is it a good idea to take my Social Security at age 62 instead of age 66?

When you look at your Social Security statements, the expected benefits shown there are based on the theory that you will continue to work at a similar wage until your full retirement age. From there, the benefit is calculated on the average of the highest 35 years of your contribution history, adjusted for inflation.

So think about what that means if you choose to retire but choose not to take your benefits yet. Those years will show zeros at the end of your career in terms of what you contributed to SS those years – because you’re NOT contributing to the program. But it likely won’t matter because you’ll have plenty of work history that would be used in the calculations instead of those particular years.

In my way of thinking, I don’t see that as a reason to collect early, as your PIA at 66 will be the same whether you quit work at age 62 and defer collecting until age 66, or quit work at 62 and immediately collect Social Security at age 62 with a 25% penalty.

It’s hard to explain in text, so be sure you listen to understand the details and nuance of the various scenarios.

Retirement question #4: Is deferring Social Security really providing an 8% growth rate?

In this question, I think what Steve is getting at is that the growth rate of the investments he has to liquidate in order to defer SS need to be figured into the decision. I agree, talking about 8% Social Security growth isn’t taking into account the entire retirement picture.

But I will say this… especially in a market (like the one we are experiencing now) where…

Stocks are in the red,
Rising interest rates are beating out fixed income positions, and
Cash is the only bright spot in many portfolios

Wouldn’t the prudent thing be to take the highest guaranteed return? Keep in mind, the KEY word there is “guaranteed.”

For example: If I can defer one year’s SS, let’s say $18,000 – and sell $18k from one of my investments that I’m pretty confident will NOT beat the 8% return of simply waiting to collect my SS, I should do that.

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