IN MY NERDY PERSONAL finance world, there are perhaps two dozen folks I pay close attention to—and one of them is Mike Piper, the blogger behind ObliviousInvestor.com. He’s also written nine books in his “made simple” series, which offer great primers on financial subjects like taxes, Social Security and retirement, all in 100 pages or less.
An accountant by training, Piper brings his analytical mind and detailed knowledge of government rules to the topics he tackles. I recently spent time with him at a conference organized by another website, WhiteCoatInvestor.com, and came away with four intriguing insights:
1. Are you pondering early retirement—but worried what it will mean for Social Security? Your monthly benefit will be based on the 35 years during which you had the highest earnings. In 2018, the maximum earnings subject to the Social Security payroll tax is $128,400.
But Piper says that, to get a healthy benefit, you don’t need 35 years of super-high earnings. Instead, you might aim for 20 to 21 years. “That’s the sweet spot,” he says. “After 20½ years, there’s diminishing returns. If your earnings are less than the maximum, the point of diminishing returns will kick in later. How much later will depend on how much less than the maximum you earn.”
2. Retirees should aim to keep themselves in the same marginal tax bracket throughout retirement, Piper says. That means thinking carefully about which accounts to pull income from each year, because withdrawals might trigger income taxes, capital-gains taxes—or perhaps no taxes at all.
Piper notes that, for those who retire before they’re eligible for Medicare at age 65, there’s an additional consideration: As they ponder their annual tax bill, they should factor in the potential federal tax credit toward insurance purchases through one of the health care exchanges. That credit is available if their income equals 400% or less of the federal poverty level. In most states in 2018, that means household income of $48,560 for single individuals and $65,840 for couples.
3. What’s the best strategy for drawing down a portfolio in retirement? It’s a topic that’s endlessly debated. But Piper offers a simple two-part strategy.
First, delay Social Security until age 70 to get the largest possible benefit, while drawing on other savings to cover your expenses until then. Second, once you reach age 70, find out the percentage of your retirement account that the government requires you to withdraw each year, otherwise known as the RMD, and then apply that percentage withdrawal rate to all your savings, not just retirement accounts. The strategy got a thumbs up in a recent study by three well-respected retirement experts.
For instance, at age 78, the RMD is typically 4.93% of your beginning-of-year retirement account balance. (To find the percentage, divide 100 by the distribution period for your age.) If your investments have had a rough time over the prior year, the required dollar withdrawal would be reduced.
“Something that adjusts for investment performance is a good idea,” Piper argues. “It also adjusts for changing life expectancy,” with the percentage withdrawal rate increasing as you age.
4. Many financial experts fret endlessly over precisely how much to invest in small-cap stocks, real estate investment trusts, emerging markets and other market sectors. But Piper says he worries far less about such things these days, in part because he feels it distracts from more important issues, such as minimizing taxes and proper estate planning.
In fact, Piper’s entire retirement savings are in Vanguard LifeStrategy Growth Fund, which offers a globally diversified index-fund portfolio in a single mutual fund. You can open an account with $3,000 and the fund charges a slim 0.14% of assets per year, equal to 14 cents for every $100 invested.
“Obviously, there are plenty of people who don’t spend enough time on their portfolio,” Piper says. “But there are also plenty of people who get lost in the minutiae. Once you have a decent low-cost diversified portfolio, you should probably spend your financial planning time on other topics.”