Cover the Nut?

2006 “‘cover your nut is an accounting term meaning to sell enough goods or services to meet your expenses. The term originally came from the Old West, he said. When a peddler came into a hotel and needed a room but didn’t have any money, the hotelkeeper would take their hub, or ‘nut,’ from the wagon wheel as a deposit. If the peddler sold enough, the nut was covered.”—Omaha World-Herald (Omaha, Nebraska), 6 August>

I was recently hired by one of the largest car dealers in Texas to speak to all their employees over age 55 on Social Security benefits and claiming strategies.  The one issue that comes up at every meeting is the need for immediate INCOME upon retirement, which only makes sense since once retired they will have to replace their bi weekly paychecks.  Their 1st thought is to claim Social Security immediately and then determine where else can they generate additional income.

A better strategy is to determine what expenses do I have and how do I categorize the importance of each expense;

  • NEEDS – what do a HAVE to HAVE (The Nut)  Essential expenses (Food, Clothing, Shelter, Insurance, Etc.)
  • WANTS – what do I WANT to HAVE (Travel, Country Clubs, Charities, 2nd Homes, Etc.)
  • WISHES – what would I LIKE to due or leave for my children & grandchildren or charities

Covering the Nut means covering the Essential Expenses which requires Protected Lifetime Income.  There are only 3 sources of Protected Lifetime Income;

  • PENSIONS –  Only 16% of American’s are now covered by employer paid pensions

The key is to create a source of income that generates Protected Lifetime Income and to know how and when to create such income.  If you don’t have a pension your options are somewhat limited, so you’ll have to accept personal responsibility to create your own.

  • SOCIAL SECURITY – as tempting as it might be to claim your Social Security at age 62 should you decide to retire at that time, one has to realize that whatever your check is at age 62 at age 70 it will be DOUBLE!!!!!  As an example if your FRA (66) check is $2800, claiming at age 62 will mean a 25% reduction or a check of $2100/mo. waiting until age 70 assuming a 2% COLA would mean a check of $4071/mo.  NOTE:  Not only is the check a DOUBLE but should either spouse live to age 90 the difference in monthly checks would be over $3,000/mo. or $36,000/yr. of Protected Lifetime Income which will be used To Cover the Nut / Essential Expenses at that time!

Possible Alternative Strategies:

  • Continue to WORK part time (PHASED RETIREMENT) and earn enough to replace the $2,100 that Social Security would have paid had you claimed.
  • Have lower earnings spouse claim on their own record assuming they are not working and their benefits are less than their spouses.  Those Social Security benefits in conjunction with part time work could cover the nut!
  • Create a Bridge – the use of an annuity, CD ladder, etc. in order to create an 8 year bridge to generate $2100/mo. that would have come from Social Security.  The money to purchase that bridge could come from within a Qualified Account (IRA, 401k, etc.)  NOTE:  By proactively drawing down on Qualified Money it also reduces RMD issues at age 70 1/2 and takes advantage of today’s relatively low tax brackets!!!
  • Combination of the Above

My main point is to explore ALL alternatives prior to making any decisions, especially those related to the claiming of Social Security benefits.  Remember the Carpenter’s Rule – Measure Twice, possibly even 3 times – Saw Once.

Always here for you!  Never hesitate calling if you think I can be of assistance!

Dave Zander, CFP®