Should the maximum Social Security claiming age be raised to age 72? Yes, says Wade Pfau

If the Securing a Strong Retirement Act of 2021, which passed the House Ways and Means Committee Wednesday, is eventually passed by Congress and enacted into law, the age at which required minimum distributions from retirement accounts begin will be raised gradually to 75 from 72.

But perhaps a better idea would be to raise the maximum age for claiming Social Security from 70 to 72, and to extend delayed retirement credits — which increase benefits by 8% for every year a retiree waits to claim — to that age.

That, contends Wade Pfau, may be a better way to give retirees a chance to spend down their IRAs and make strategic Roth conversions to help reduce taxes on their Social Security benefits.

Pfau is professor of retirement income in the Ph.D. in Financial and Retirement Planning program at the American College of Financial Services. He also is co-director of the New York Life Center for Retirement Income. He is a certified financial analyst and retirement income certified professional and runs the RICP program for the college. Pfau has authored several books on retirement income and spending strategies.

BenefitsPRO’s sister site ThinkAdvisor spoke with him recently about the RMD age change, retirement spending strategies and Social Security. Here are excerpts of the conversation:

In a podcast recently, you mentioned another option rather than Congress pushing the RMD age to 75. Could you discuss?

Wade Pfau:  If you’re doing tax-efficient retirement planning, unless you’re not spending anything in retirement, generally the RMDs won’t be binding on you. Likely you’ll want to spend more than your RMD anyway. When the RMD age was 70, it and Social Security were pretty well lined up. You could have this period, if you retired before 70, [to do] some strategic Roth conversions that would help you to lower subsequent taxes on your Social Security benefit.

With the way Social Security taxation works, once people hit 70 and turn on Social Security, delaying their RMD age later may not have much impact. I don’t know what the motivation of delaying the RMD age would be.

But if you’re trying to help retirees more, let them have further deferral on Social Security to be more aligned with them being able to do more strategic Roth conversions and [the like] before Social Security begins. Reward them by [offering] additional delay credits on Social Security.

[Pushing the RMD back to 75] is only affecting people with a lot of assets anyway.

Then what Congress is doing is counterintuitive?

Yeah, if you could wait till later to start Social Security and be rewarded for it through delayed credits, that would just give you more time to engage in tax strategies so that when RMDs begin and when Social Security begins, you’re in even better shape at that point. You’ve gotten down the value of your IRAs [etc.] so that the RMDs are not going to be very large.

But does raising the RMD age help the general population?

Well, and that’s the thing, it’s not really going to help the general population because already only a couple percent of people delay Social Security to 70. So it’s just going to be a subset of them who get any further benefit.

You’re working on a new book on strategies on spending down in retirement?

I like the idea of tax-efficient spending strategies. The basic starting point is about spending taxable assets, then tax-deferred, then tax-free. But what you’re really trying to do is tax bracket management.

[So] I may want to increase my taxable income, in some cases, to fill up a lower tax bracket, with the idea that in the future, I’ll be able to avoid going into a higher tax bracket. Then you spend [a blend] from your taxable and your tax-deferred accounts in the early years to get you up to the target. And then later when the taxable account runs out, you spend a blend of your tax-deferred and tax-free Roth accounts.

You can even do Roth conversions as part of that. It’s called the Social Security tax torpedo. If your income falls in the range where if you have just $1 of taxable income [more], that can also cause you to have to pay tax on another 85 cents of a Social Security dollar. So you might be in the 22% tax bracket, but really your marginal tax rate is over 40%. That’s what you really want to be focused on.

Also focus on Medicare: If you have $1 too much, depending on which threshold you’re at, you might have to pay another $800 in Medicare premiums as a single person just because you’ve hit that one extra dollar around $87,000, somewhere in that ballpark, this year. One more dollar and figure $800 more of Medicare premiums.

So try to avoid that. That’s where you don’t want to waste tax space. If you’re only in the 10% tax bracket, you might want to, at the very least, potentially fill up 12%. That just gets you better positioned later in life when you have Social Security. And then when you have RMDs, you don’t have as much in your IRA by that time. You’re better able to manage avoiding taxes.

Your book, then, is talking about retirement spending strategies. We just spoke with (York University professor) Moshe Milevsky, who discussed why decumulation advising should cost more. That is, it is more expensive going down than going up?

That’s absolutely right. Traditionally we’ve had wealth management, which is focused on growing wealth, and it’s only been in the last 10 or 15 years that there’s really this appreciation that retirement is different. And that mountain climbing analogy is used commonly, that it’s easier to climb up to the top of the mountain than it is to climb back down. Like with Mount Everest, most of the accidents happen when people are going down, not when they’re going up.

And it applies to retirement, where before we thought, just like people think the goal of climbing the mountain is to make it to the top, well, the goal of retirement planning is to get to that number where you have enough assets to retire. But no, the reality is it’s getting down the mountain. It’s not outliving your assets and meeting your retirement goals. That’s more complicated than just hitting that wealth target at the beginning.

Like at The American College, for example, we started the RICP [Retirement Income Certified Professional] designation for advisors in 2012. It started from this recognition. They had a conference to just discuss what’s different about retirement. And what should a retirement advisor know? What do they do post-retirement, not pre-retirement.

Should firms be set up, then, with specialists handling those in the decumulation stage?

It can be the same person for both. As long as that advisor recognizes how things changed, like in the five or 10 years before retirement, [and they] start thinking about matters differently and positioning people for retirement. It doesn’t have to be different [advisors], but there’s a growing trend of having teams of advisors. And in that regard, on a given team, someone might be more focused on the accumulation phase and someone else more on the distribution phase.

What about Social Security — do you see changes in the future? 

I’ve been waiting for the new Social Security Trustees’ report to come out. Last year it came out [in late April], and this year it’s still not out yet. So we haven’t been able to see what the Social Security Administration believes the impact of COVID will be. But as of the 2020 report, they were expecting the trust fund to last till 2035. There’s reports [that] probably is going to [run out even earlier].

And a big factor is lower interest rates. We’re going to have less interest on the trust fund assets. That’s going to be the most important factor, not so much unemployment, which kind of has a mixed impact, but mainly the low interest rates.

How should a near-retiree deal with that?

For one thing, Social Security won’t disappear. If nothing’s done [by Congress], benefits may have to be cut across the board by 20% to 25% to be aligned with the incoming payroll taxes. So I don’t think people should change their claiming strategies. If somebody wants to check their plan by seeing how well it would work if their Social Security benefit was cut by 20% to 25%, that would be a reasonable approach.

A 25% cut in Social Security benefits is a lot for many people. Should advisors be looking at other options, such as recommending annuities, reverse mortgages, etc.?

Social Security is a reliable income asset where you’re not having to rely on the stock market to support your spending. If you have a particular spending goal that you want to support reliably without market risk, and feel that if the Social Security benefit goes down, you’d like to fill that gap [it could be] an annuity or the 10-year payment option on a reverse mortgage — something not having additional stock market exposure necessarily.