Time is that one element in life that frequently appears to slip through your fingers faster than water. However, occasionally, you have the ability to buy time. Yes, buy time. Sounds crazy to think that you can buy something that typically disappears before you can even put your arms around it. Yet there is one area where buying time can be done and is very beneficial: retirement savings.

Retirement savings, whether they are in the form of an IRA, Roth IRA, 401K, or any other retirement savings vehicle, can benefit from exercising patience and “buying time” for them to continue to grow so that they will last longer. When you reach the age of 59 ½, you are permitted to make penalty-free withdrawals from any of your tax-deferred retirement accounts, such as an IRA. The same is true about social security. You can begin getting paid your social security at age 62. However, in both cases you have the option to wait – to buy time. In the case of social security, getting paid at 62 means you are willing to accept a discount on the amount you are eligible to receive at full retirement, which today (for anyone born after 1954) often falls between ages 66 to 67 depending on your date of birth. That means “buying time” for social security benefits to rise in value from 62 to retirement age can be a significant benefit. Furthermore, waiting until the latest you can take social security benefits (age 70 in this scenario) can earn you a tax-free growth of 8% per annum in delayed retirement credits.

Now let us look at retirement funds. Making immediate withdrawals when you turn 59 ½, will diminish the longevity of your savings. In other words, your portfolio will not last as long in continuing to provide cash flow for your retirement needs. Waiting before withdrawing funds from a retirement account will permit it to grow even more, increasing its longevity and “buying time” on the other end. This is particularly important during down markets when your funds have been reduced and withdrawing from the fund means that the portion withdrawn will never have the chance to grow back. As an example, let’s assume you had $500,000 in a retirement account before the market fell by 20%. At this time, your account has a value of $400,000. The market now must go up by 25% for you to get back to $500,000. However, let us say you withdraw $50,000 from the account when it is at $400,000. For the portfolio to get back to $500,000 the market now must rise by more than 42%. Consequently, that withdrawal has become very costly for the future growth of the account and future cash flows.  The chart below, which was produced by Schwab, provides further visual insight on how important it is to buy time regarding retirement savings accounts.*

Both investors start out with $1 million, but a market decline causes their portfolios to lose 20% per year at ages 60 and 61. Plus, Investor 2 makes two early withdrawals of $30,000 per year. Both investors then allow their portfolios to grow untouched until age 67, when they take initial annual withdrawals of $50,000, which are adjusted for inflation in subsequent years. Because of his two early withdrawals, Investor 2 starts his 85th year with $27,744 left in his portfolio. Investor 1 has $163,198 left.
Source: Schwab (see below)

The concept of buying time may seem impossible, but when it comes to retirement savings and social security, the concept is not only real but meaningful. Like any purchase, buying time for retirement funds to continue growing means a sacrifice on the front end in terms of withdrawals you are not currently taking. And certainly, we recognize that every situation is different and there are circumstances that require early withdrawals or signing up for social security as soon as possible, but discussing all the options with your financial advisor should always be the first step. They are there to help you make the best decision when it comes to choosing the best path forward.

Chief Investment Officer
Xavier Urpi


* As per Schwab: “This chart is hypothetical and for illustrative purposes only. Neither investor made contributions to his portfolio after age 59, and withdrawals in retirement increased 2% annually for inflation after the first year. Both portfolios declined 20% in value in the first and second years and increased 4.9% annually every year thereafter. Neither portfolio reflects the effects of fees or taxes. Performance is based on Schwab’s moderate hypothetical portfolio.”