Retirement Puzzle: Spend IRA First or Delay Social Security?

When it comes to retirement planning, one crucial decision can have a significant impact on your financial well-being: whether to spend down your Individual Retirement Account (IRA) first and delay Social Security benefits, or claim Social Security early and let your portfolio ride. The wrong order can cost you six figures over a long retirement, making it essential to understand the implications of each strategy.

The Bridge Strategy

The bridge strategy involves using a combination of investments to fund the gap between your last paycheck and your first Social Security check. This approach aims to minimize the impact of market volatility on your retirement income. Four Exchange-Traded Funds (ETFs) play a crucial role in this strategy: the iShares 0-3 Month Treasury Bond ETF (SGOV), the JPMorgan Equity Premium Income ETF (JEPI), the Vanguard High Dividend Yield ETF (VYM), and the iShares Core U.S. Aggregate Bond ETF (AGG).

Understanding the ETFs

Each of these ETFs serves a distinct purpose in the bridge strategy:

  • SGOV: This ETF holds Treasury bills maturing in zero to three months, providing a low-risk investment that moves with the front end of the yield curve. It pays monthly and has a trailing 12-month total distribution of $3.711615 per share.
  • JEPI: This actively managed low-volatility equity sleeve sells S&P 500 call exposure through equity-linked notes to convert market premium into cash. It has returned 9.22% over the past year and pays monthly.
  • VYM: This ETF tracks the FTSE High Dividend Yield Index and has heavy weightings in Broadcom, JPMorgan Chase, Exxon Mobil, Johnson & Johnson, and AbbVie. It pays quarterly and has a trailing 12-month total distribution of $3.6303.
  • AGG: This ETF tracks the Bloomberg U.S. Aggregate Bond Index, blending Treasuries, agency mortgage-backed securities, and investment-grade corporates. It has a rock-bottom expense ratio of 0.03% and pays monthly.

Choosing the Right Strategy

The decision to spend down your IRA first and delay Social Security benefits or claim Social Security early and let your portfolio ride depends heavily on your longevity. If you live a long life, delaying Social Security can be a more valuable strategy. However, if you have a shorter life expectancy, need the income immediately, or have limited assets available to fund the gap, claiming Social Security earlier may be the better option.

It's also essential to consider the potential survivor benefit for a spouse. Delaying Social Security can increase this benefit, making it a crucial factor in your decision-making process.

Implications and Next Steps

The 2027 Cost-of-Living Adjustment (COLA) is currently estimated near 3.1%, meaning the benefit being delayed will continue to receive inflation adjustments. This highlights the importance of considering inflation when making your decision.

Ultimately, the advantage of either strategy depends on your individual circumstances and longevity. It's essential to carefully weigh the pros and cons of each approach and consider seeking professional advice to make an informed decision.

By understanding the bridge strategy and the role of these four ETFs, you can make a more informed decision about how to fund your retirement and ensure a comfortable late life.