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Retirement Category

Q&A: Roth IRA

Oct 13, 2014 | | Comments (0)

Dear Liz: I have a 401(k) that has a required annual distribution because I am over 71 1/2 years old. Can I use this distribution as qualified income to invest in a Roth IRA? I have no W-2 earnings, although I do have other income sources that are reported on 1099 forms.

Answer: To contribute to a Roth or other individual retirement account, you must have taxable compensation, which the IRS defines as wages, salaries, commissions, tips, bonuses or net income from self-employment. The IRS also includes taxable alimony and separate maintenance payments as compensation for IRA purposes.

So if the money reported on one of those 1099 forms is from self-employment income, then you can contribute to a Roth IRA. If the form is reporting interest and dividends or other income that doesn’t meet the IRS definition of taxable compensation, then you’re out of luck.
If you don’t have income that meets the IRS definition of taxable compensation, but your spouse does, you may still qualify for IRA contributions, provided you file a joint return that meets the required income thresholds.

Categories : Investing, Q&A, Retirement
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Dear Liz: I am 13 years older than my wife. Is it possible for me to receive Social Security spousal benefits based on her earnings when I reach full retirement at age 66? I’d like to shift to my benefit when it reaches its maximum at age 70. If I can do this, what impact, if any, would there be on the benefits she ultimately receives?

Answer: Spousal benefits wouldn’t reduce her checks, but she has to be old enough to qualify for Social Security for you to get these benefits. Given your age gap, waiting for that day probably isn’t an optimal solution.

On the other hand, she could file for spousal benefits when she reaches her own full retirement age (which will be somewhere between 66 and 67, as the full retirement age is pushed back). That would give her own benefit a chance to grow, and she could switch to that amount if it’s larger at age 70. If she starts benefits before full retirement age, she would lose the option to switch.

AARP’s free Social Security calculator can help you figure out the claiming strategy that makes the most sense for your situation.

Categories : Q&A, Retirement
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Q&A: Widow’s Social Security benefits

Sep 29, 2014 | | Comments Comments Off

Dear Liz: I’ve been reading your answers to Social Security questions, but they do not address my situation, which is extremely unconventional. I was a quasi-widow at 31 with three children under age 9. My husband was institutionalized because of an accident when he was 33. He died 23 years later, having outlived all his insurance. I never remarried. I was disabled at 61 and started receiving my deceased husband’s Social Security benefit at age 62, after the expiration of my disability benefits from work. I am now 73. Am I eligible to also begin receiving my own Social Security benefits as well as my late husband’s? I hope your answer is positive.

Answer: It’s not. Although the details may not be conventional, your situation doesn’t change the fact that widows (and widowers) are entitled to only one check. They can’t collect their own benefits plus survivor’s benefits. They can and should, however, choose the larger of the checks to which they’re entitled.

It is possible that you’ve earned a larger benefit on your own work record than the survivor’s benefit you’re currently receiving. You should call Social Security at (800) 772-1213 and ask.

Categories : Q&A, Retirement
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Dear Liz: My wife and I are both 59. We expect to retire in two or three years. We would not take Social Security until probably 67 because we will not need it when we retire. But would our Social Security benefits be less because we do not work for those five years before applying to Social Security? Is Social Security affected at all by the last few years of income or simply by the total lifetime deposits into the system?

Answer: Your Social Security benefits are based on your 35 highest-earning years. So if you’ve worked more than 35 years, a few years at the end of your career in which you earn less or don’t earn anything at all shouldn’t affect your benefits.

While you’re researching your options for claiming Social Security, check out the “claim now, claim more later” strategy that would allow one of you to claim spousal benefits while allowing his or her own benefit to grow. It’s one of a number of strategies available to married couples that can significantly increase the amount of Social Security benefits over a lifetime. Another important factor to consider is that one of you is likely to survive the other, perhaps by many years, and will have to get by on a single check. You should make sure that check is as large as it can be to lessen the chances the survivor will face poverty in old age. You can find more information about Social Security claiming strategies at the AARP site (aarp.org).

Categories : Q&A, Retirement
Comments (3)

Dear Liz: I am 64 and happily, gratefully receiving early Social Security benefits. My wife is 59, and when she turns 62 she will get half of my $1,650 monthly benefit. My question, though, is this: If she starts getting half of my benefit at 62, can she later switch to her own benefit? If she can get spousal benefits at 62 and switch to her own benefit when it maxes out at age 70, then starting early would be a no-brainer.

Answer: Yes it would, but that’s not how Social Security works.

First, your wife will not receive an amount equal to half of your check if she applies for spousal benefits before her own full retirement age, which is 66. Instead, she would be locked into a significantly discounted amount — closer to 35% of your benefit than 50% if she applies at 62. She also would lose the option of switching to her own benefit later. The “claim now, claim more later” strategy of starting with spousal benefits and then switching to one’s own benefit isn’t available to those who start early.

You’ve already left a lot of money on the table by starting benefits before you reached your own full retirement age. Having her begin benefits prematurely would just compound the problem. Remember too that when one of you dies, the other will have to live perhaps for many years on a single check. It makes sense to make sure that check is as large as it can possibly be.

AARP has excellent information on its site about Social Security claiming strategies, as well as a calculator that can help you see how much it pays to wait. Please educate yourselves before making a decision that you, or she, could live to regret.

Comments (2)

Dear Liz: A friend of mine has told me that he thinks that I can apply for spousal benefits at my full retirement age and hold off getting my Social Security under my own work record until I am 70. Here is the scenario: My husband is 77 and has been collecting Social Security since he was 62. He continues to work. I will be 66 in November and I am still working. I plan to take Social Security at age 70. Can I apply for spousal benefits and receive an amount equal to half of what my husband receives from the age of 66 until I turn 70 and then apply under my own account at age 70 and receive my maximum benefit at that age? My friend feels strongly that this can be done, but I called Social Security and explained it clearly (or at least I thought I did) to them and they said that this could not be done. Then I went into the Social Security website and looked under “Spousal Benefits,” but the wording did not clearly say that this couldn’t be done.

Answer: What you’re describing is the “claim now, claim more later” strategy that can boost a couple’s lifetime Social Security by tens of thousands of dollars. It’s one of the approaches outlined in AARP’s excellent primer, “How to Maximize Your Social Security Benefits,” which you’ll find on its site, http://www.aarp.org, along with a calculator to help you understand how different claiming strategies could affect what you get.

These strategies capitalize on the fact that delaying the start of Social Security benefits results in substantially larger checks for life. In the case of two-earner couples, the “claim now, claim more later” strategy allows one spouse the option of getting checks (the spousal benefit) for a few years while allowing her own benefit to grow to its maximum.

As long as you wait until your own full retirement age to apply for spousal benefits, and your spouse is already receiving benefits, then you should be allowed to switch to your own benefit when it maxes out at age 70. If your spouse weren’t receiving benefits yet, but had reached his full retirement age, he could file for benefits and immediately suspend his application (“file and suspend”) so that you would be eligible for spousal benefits and his own benefit could continue to grow.

It’s not clear why you would have been told otherwise, since this isn’t exactly a secret strategy. But not all Social Security employees are equally informed. Sometimes calling back and asking your question again of another representative will result in a different or more complete answer.

When you file for benefits, make clear on the form that you are restricting your application to the spousal benefit only and aren’t collecting your own retirement benefit

Comments (7)

Dear Liz: My in-laws just informed us that they have gone through their retirement fund and soon won’t be able to pay their mortgage. They borrowed against the house they’ve lived in for 30 years and currently owe $325,000. They are devastated, so I am trying to figure out the best way for them to stay in their house in their final years, as they are both 73. They have about $300,000 in equity but do not want to sell. They are willing to sell the house to my wife and me at their current balance. We would make the payments and they remain in the house. When they pass, the house would be ours. They looked into a reverse mortgage but this would cover only the payments, not taxes, insurance or maintenance. What is the best way to do this? Do I get a loan and purchase outright? Do I contact their bank and see if I can assume their loan? Do they quit-claim the home to my wife and me? My wife and I can afford to do this, but we want to make the right financial decision.

Answer: Before you do anything, please consult a tax professional and an attorney with experience in estate and elder law.

It’s unlikely the lender will allow you to assume the loan, so you probably would need to set this up as a sale of the home with you and your wife obtaining a new mortgage.
But their plan to sell the house to you at a below-market value could create gift tax issues and could delay their eligibility for Medicaid, should they need help paying for nursing home care.

There are other risks to your in-laws. Your creditors could come after the home if you lose a lawsuit, for example. You could sell the home without their consent, and you would have a claim on the property if you and your wife split up.

Then there are the risks to you. You say you can afford to make the payments (and presumably pay the taxes, insurance and maintenance as well), but what happens if you lose a job or suffer another financial setback?

All of you need to understand the risks involved, and your alternatives, before proceeding.

A sale of the home or a reverse mortgage may well prove to be a better choice. A reverse mortgage wouldn’t completely eliminate their home costs, but would substantially lower them — whoever winds up paying the bill.

Categories : Q&A, Real Estate, Retirement
Comments (7)

Dear Liz: My husband works for the government and will be receiving a pension when he retires. Am I still supposed to save the recommended amount for retirement from my income or can that amount be reduced since we know we have the pension? We are starting a family and could use any extra money we can get right now.

Answer: If your husband is just a few years away from collecting that pension, counting on it to be there is reasonable. Since you’re just starting a family, though, it’s much more likely that retirement is decades away, and a lot can happen in that time.

Your husband could be laid off or fired, or he could quit. Even if he sticks it out, the government could change the way his pension is accrued to make it less generous. (The rising cost of public employee pensions concerns many lawmakers and taxpayers.) Even if he gets what he expects, his pension may not be enough to support the two of you in old age.

So yes, you should be saving for retirement. A cautious person would save as if no pension existed. Someone who’s comfortable with risk might simply aim to fill the gap between the expected pension and future living costs. Others might find a comfortable saving rate between those two points. You can use AARP’s retirement calculator to help you create a plan that allows you to take care of your family today without depriving yourselves in the future.

Comments (2)

Dear Liz: I am 54 and considering retiring in three or four years. I have been fortunate to work at a Fortune 100 company for 30-plus years and have both a defined benefit pension plan and a 401(k). When I retire, we have the option of taking a lump sum or an annuity. Most financial people I talk to strongly recommend taking the lump sum, though I wonder if it is not just so there is more money to manage? My current inclination is to take the annuity (with survivor benefit for my wife). I think we can live off the annuity alone and use the 401(k) for emergency/fun/help-the-kids money, etc. I think if I took the lump sum and invested it, I’d always worry about what the market was doing. Am I off base?

Answer: Not at all.

Theoretically, you often can make more money by taking a lump sum and investing it than by accepting the annuity, which offers a lifetime stream of payments. But perhaps you’ve heard the quote “In theory, theory and practice are the same; in practice, they are not.” Anyone who knows much about behavioral finance knows there are many, many ways such a plan can go wrong.

You could pick the wrong investments, take too much or too little risk, trade too much or spend too much, and wind up much worse off than if you’d chosen the annuity. You could turn over the investing decisions to a pro, but there’s no guarantee that person won’t make mistakes. Even if he or she chooses great investments and allocates your assets well, your nest egg could still take a hit from the market.

If you were comfortable taking that extra risk to get the extra possible reward of more cash, accepting the lump sum would be the way to go. Since you’re not, there’s nothing wrong with taking the annuity. Opting for a survivor’s benefit means your wife will have guaranteed income should you die first.

Before you pull the plug at work, though, make sure you talk to a fee-only planner who charges by the hour to make sure your retirement plan makes sense. (Planners paid by the hour won’t have a vested interest in how you opt to manage your retirement funds.) Your assets probably will have to last 30 or 40 years, and you’ll have to figure out how to pay for the ever-escalating cost of health insurance. This can be a tricky process, so you’ll want expert, unconflicted help.

Categories : Annuities, Q&A, Retirement
Comments (5)

Dear Liz: I don’t know where to turn. My husband is 76. He has a federal government pension and collects Social Security but he has only a $17,000 life insurance policy. We still have a $229,000 mortgage and no savings other than my small 401(k). I am 59 and also a federal worker. Do you have any suggestions or guidance for me? Is there such a thing as an insurance policy that could pay off the mortgage if he passes before me?

Answer: Buying a life insurance policy on your husband that would pay off your mortgage isn’t necessarily impossible, but it would be expensive and might not be the best use of your funds. You can explore that option, of course, but you also should research your own retirement resources and what’s likely to remain after he’s gone.

Will your husband’s pension make payments to his survivor or will it end when he dies? How much will your own federal pension pay you when you retire? How much will Social Security pay you, and how does that compare with your survivor’s benefit (which is essentially equal to what your husband is receiving when he dies)? What are your options for maximizing those benefits?

You also need to know if your Social Security benefits could be reduced because of your public pensions. Some federal employees and employees of state or local governments receive pensions based on earnings that were not subject to Social Security taxes. When that’s the case, their benefits could be reduced by the Windfall Elimination Provision or the Government Pension Offset. Most federal employees hired after 1983 are covered by Social Security, but just in case you should check out the information at http://www.ssa.gov/gpo-wep/.

Once you have an idea of your income as a widow, you can compare that with your expected expenses and see whether continuing to pay your mortgage will pose a burden. If that’s the case, you might consider downsizing now to a place you could afford to buy with cash or a much smaller mortgage. Reducing your expenses also could help you build up that 401(k), which will help provide you with a more comfortable retirement.

Establishing a relationship with a fee-only planner now will help you prepare for the future and give you someone to turn to for financial advice should you be left on your own.