Q&A: The end of “claim now, claim more later”

Dear Readers: Congress just killed the Social Security strategy known as “claim now, claim more later” that allowed married couples to boost their benefits by tens of thousands of dollars.
The changes, which were part of the budget deal signed into law last week, also eliminated the option of getting a lump-sum payout if you suspended an application for benefits and later changed your mind. Today’s column will focus on those changes.

Dear Liz: My husband is 68 and drawing Social Security. I will be 62 in the spring and plan to retire. May I file for spousal benefits at 62 and delay filing for my benefits until my full retirement age of 66?

Answer: No.

Even before Congress changed the rules, you would have had to wait until age 66 to file for a spousal benefit first if you wanted to switch to your own benefit later (typically when it maxes out at age 70).

When you apply for benefits before full retirement age, you are deemed to be applying for both spousal and your own benefits and essentially given the larger of the two. Only when you reached full retirement age did you have the option of filing a “restricted application” for spousal benefits only.

If you were just a few months older, you would still have that option.

Congress has eliminated restricted applications for people born after 1953.

People who are 62 and older before the end of this year will still be able to file a restricted application at 66 and get spousal benefits, but only if their partners are either receiving benefits or were able to “file and suspend” — to file an application and suspend it before May 1, 2016.

That’s when the law’s grace period ends, eliminating people’s ability to file-and-suspend in order to trigger benefits for a spouse or child.

The potential payouts from using these two techniques, which together were called the “claim now, claim more later” strategy, were so great that advisors typically recommended that people tap their retirement accounts early if that was the only way they could delay their Social Security applications long enough to benefit.

Now that these strategies are off the table, people will need to take another look at their retirement strategies to see what makes sense.

In general, couples should try to maximize the larger of the two benefits they get, since that will be the amount the survivor has to live on.

Dear Liz: I am 65 years old and my wife is 63. We have enough savings so neither of us needs to start taking Social Security.

My plan is to file and suspend when my part-time job ends, which could happen starting a year from now. I believe my wife can file for spousal benefits then. Assuming we don’t need the money but at the same time wish to maximize our benefits, what’s the best way to proceed?

Answer: You may be one of the few couples who can still take advantage of the “claim now, claim more later” strategy, or at least the restricted application part.

If you’ll turn 66 before May 1, you can file and then suspend your application. That will preserve your wife’s ability to claim a spousal benefit when she turns 66 while allowing your own benefit to grow until it maxes out at age 70. Then she can switch to her own benefit at 70, if it’s larger than her spousal benefit.

If you’ll turn 66 after May 1, consider putting off your application until your wife turns 66. Once you start receiving benefits, she’ll be able to file a restricted application for spousal benefits only and then switch to her own benefit at 70.

Another possibility is that you could be the spouse to file a restricted application, but your wife would need to start her benefits early, which could stunt the amount you get overall.

Consider using Social Security claiming strategy software to evaluate your options, but make sure it’s been updated to reflect the recent changes.

At this point, most calculators seem to be using the old rules, although MaximizeMySocialSecurity.com, one of the leading options, promises to be updated by Nov. 16.

Dear Liz: I’m single and was never married long enough to qualify for spousal benefits. This change doesn’t affect me, right?

Answer: Wrong. File-and-suspend also could function as a kind of insurance policy for people, whether they were married or single.

Those who wanted to maximize their benefits could file and suspend their applications at full retirement age. If they later changed their minds, they could get a lump-sum payout back to the date of those applications.

But not for long. That option won’t be available to people who haven’t filed and suspended before May 1.

Q&A: 401(k) and job changes

Dear Liz: I had to resign from my job as a phlebotomist at a hospital. Did I lose the money that was in my 401(k) or do I still have it? How do I find out?

Answer: Any money you contributed to a 401(k) is yours.

Money contributed by your employer may be subjected to vesting rules that could limit how much you can keep. Company matches may vest over time, giving you access to a portion of what’s contributed each year, or they may vest after a certain number of years, giving you access to all the money.

Say your match vests at 20% each year starting with the second year. You would get nothing if you quit after the first year. After the second year, you would get 20% of the match balance (the company’s contribution thus far plus or minus any gains). After the third year, you would get 40% of the match balance, and so on until you are entitled to 100% of the match balance after the sixth year.

You should contact your company’s human resources department to find out what your options are for your account. You may be able to leave it where it is to grow, which may be your best option until you find another job.

At that point, your next employer may allow you to roll the account into its retirement plan. If you can’t keep the money where it is, open an IRA and have the 401(k) provider send the check directly there.

What you don’t want to do is withdraw the money, since you’ll lose a big chunk to taxes and penalties. Even having the check sent to you to deposit into the IRA is a bad idea, since 20% will be withheld, and you’ll have to come up with that cash from another source to avoid taxes and penalties.

Q&A: Missing 401(k) plan

Dear Liz: I have two 401(k) plans that have vanished into the night. They are both more than 20 years old and the companies I worked for have been bought, sold, merged, spun off, and nobody knows anything anymore. Between them, the accounts are worth six figures. Do you know of any way I can find out what happened to my money (and hopefully retrieve it)?

Answer: There’s no central repository for missing 401(k)s as there is for missing pensions, which typically can be found at the Pension Benefit Guaranty Corp. So tracking down your money can be tough.

If you still have paperwork from the missing accounts, you might check with the plan providers — the financial services companies that provided the investment choices.

If that’s a dead end, the U.S. Department of Labor’s Abandoned Plan Database shows plans that have been or are about to be terminated, typically with contact information for the plan administrator.

It’s possible that your money was turned over or escheated to a state unclaimed property department. You can check at Unclaimed.org, the official site of the National Assn. of Unclaimed Property Administrators. NAUPA also endorses the site MissingMoney.com.

Another place to check is the National Registry of Unclaimed Retirement Benefits, which is run by a private company called PenChecks that says it’s the largest private processor of retirement checks.

If you do find your money, understand that you may still have missed out on a lot of growth. Your investments may have been converted to cash, which has earned next to nothing in the last two decades, particularly after inflation.

Leaving a 401(k) account in an old employer’s plan can be a convenient option, but only if you’re willing to keep track of the money — and let the administrator know each time you change your address. If that’s too much work, you should roll the account into a new employer’s plan or into an IRA. Your retirement may depend on it.

Q&A: Understanding pension vs Social Security

Dear Liz: I recently retired as a lifelong federal employee after 40 years of service. I participated under the old Civil Service Retirement System. My pension is about $85,000 per year. I will be 64 this year.

Twenty years ago, my ex-wife and I divorced after 17 years of marriage. Friends of mine have indicated that because we were married more than 10 years, I am eligible for a spousal Social Security benefit. I thought because I was covered under the CSRS, any Social Security received would be offset against the monthly pension payment.

I think this is due to the government pension offset, which has been in effect since 1983. My Social Security benefit would in effect be zero. Is my understanding accurate?

Answer: Yes. If you’re receiving a government pension based on work for which you didn’t pay Social Security taxes, then the pension offset typically reduces the amount of any so-called dependent benefits you might receive by two-thirds of the amount of that pension.

That reduction can wipe out any spousal or survivor benefit you might otherwise get.

Before the offset, people with government pensions that didn’t pay into Social Security could wind up better off than people who had paid into the system their entire working lives.
Those who paid into the system would get the larger of the checks to which they were entitled — either the dependent check or their own — while those who had pensions outside the Social Security system could get both their own benefit and dependent benefits.

There is a way you could have received a spousal benefit, and that’s if you had put off receiving your pension, said Laurence Kotlikoff, coauthor of “Get What’s Yours: The Secrets to Maxing Out Your Social Security.”

If putting off the pension would have increased the amount you received, it could have made sense to do so and take the spousal benefit in the meantime.

There are various other exceptions to these rules, so you should check out the government pension offset information available at the Social Security site, www.ssa.gov.

Q&A: Social Security spousal benefits and divorce

Dear Liz: My former husband is 11 years older than I am, and we were married for 15 years.

I am 54 and have never remarried. When I turn 62, can I claim spousal benefits based on his work record because he will be past full retirement age? Or do I have to be at my own full retirement age of 67 before I can claim the divorced benefit?

I was thinking that I could start claiming spousal benefits at 62 and then wait until I am 70 (letting my benefit grow). At that point, we can see which benefit is larger — half of his benefit or my full benefit. He has made much more money than I have through the years, but he has also been unemployed off and on while I have been employed consistently.

Answer: You can claim divorced spousal benefits as early as age 62 long as you remain unmarried and your marriage lasted at least 10 years.

But you lose the option to switch from a spousal benefit to your own benefit if you start Social Security before your own full retirement age.

So if your plan is to get the maximum benefit, it’s important to wait until you turn 67 to apply. At that point, you can file a restricted application for spousal benefits only and receive an amount equal to half of your ex’s benefit while letting your own grow a guaranteed 8% each year until age 70, when your benefit maxes out.

Q&A: Rolling 401(k) into an IRA

Dear Liz: I’m leaving my job later this month and am trying to decide what to do with my 401(k) account. Some of my friends say to leave it where it is, and others say to roll it into a traditional individual retirement account or Roth IRA. Which is best?

Answer: You can’t roll a 401(k) directly into a Roth IRA. You would first need to roll it into a traditional IRA, then convert that to a Roth and pay the (often considerable) tax bill.

But let’s back up a bit. There are few reasons you might want to leave the money where it is, if you’re happy with your employer’s plan. Many large-company plans offer access to low-cost institutional funds that are cheaper than what you might find as a retail customer with an IRA.

Money in a 401(k) also has unlimited protection from creditors in case you’re ever sued or wind up filing for bankruptcy. When the money is in an IRA, the protection is typically limited to $1 million.

If you’re not happy with your old employer’s plan, you could transfer the account to your new employer’s plan if that’s allowed. If not, you can roll the 401(k) into an IRA, but choose your IRA provider carefully.

You’ll want access to a good array of low-cost mutual funds or exchange traded funds (ETFs). The costs you pay to invest make a huge difference in how much you eventually accumulate, so it’s important to keep those expenses down.

If you want help managing the money, many discount brokerages offer access to financial planners and some, including Vanguard and Charles Schwab, offer low-cost digital investment advice services. The services, also known as “robo-advisors,” use computer algorithms to invest and monitor your portfolio.

You’ll want to arrange a direct rollover, in which the money is transferred from your 401(k) account into the new IRA.

Avoid an indirect rollover, in which the 401(k) company sends a check to you. You would have 60 days to get the money into an IRA, but you’d have to come up with the cash to cover the 20% that’s withheld in such transfers. You would get that cash back when you file your taxes, but it’s an unnecessary hassle you can avoid with a direct rollover.

Before you decide to convert an IRA to a Roth, consult a tax professional.

Conversions can make sense if you expect to be in the same or higher tax bracket in retirement, which is often the case with young investors, and you can tap some account other than the IRA to pay the income taxes. But these can be complex calculations, so you should run your plan past an expert.

Q&A: Home remodel

Dear Liz: I would like to add on and remodel so my home will be nice for me when I retire in a few years (probably around age 65).

I have a recently refinanced 30-year mortgage at 4.1%, but I’ve been making additional principal payments on a 20-year schedule. I think I can do what I want for around $200,000. (But of course it may be more.)

Post-construction, I’m estimating that the house would have a market value of $800,000 to $900,000, but the real motivation is to have new heating and air conditioning, new windows and floors, and electrical wiring.

I think I deserve it, despite the major disruption that remodeling provides. My question is: Do I do this with cash, or should I finance it?

If things work out as planned, I’ll have a pension of around $7,000 a month that should take care of my living expenses (including the ability to pay a bit of a higher mortgage), and I have about $350,000 in post-tax savings.

I additionally have about $500,000 in pretax retirement accounts that I plan to draw off of for inflation as the years go by.

I have never been comfortable with a lot of risk — I’ve never even had a car payment — but I probably could have amassed more if I hadn’t been so financially conservative.

Answer: You’re contemplating adding a considerable amount of debt at a time in life when most people are eager to pay theirs off.

They want to reduce their living expenses and the amount they have to pull from retirement funds. Being debt-free is one way to reduce the chances of running short of money after you quit working.

That’s not to say debt in retirement is always bad — especially for people like you, who have enough pension income to cover living expenses plus a good amount of other savings.

Your investments, if properly deployed, are likely to earn a better return than the after-tax cost of your debt. That said, your conservative nature could make it hard for you to sleep at night if you face significant house payments after you stop working.

You should discuss your options with a fee-only financial planner who can evaluate your entire financial situation.

You can discuss tapping your savings for the remodel, taking on more debt, changing the scope of what you want or moving. If what you’re after is a more modern home, it may make more sense to move than to endure the expense and disruption of a major remodel.

If you do remodel, consider adding features that will allow you to age in place more safely, such as installing grab bars, widening hallways and doorways, improving lighting and eliminating steps where possible.

The National Assn. of Home Builders has an Aging-in-Place Remodeling Checklist on its site, at www.nahb.org.

Q&A: Social Security benefits

Dear Liz: My husband and I will be retiring at the end of 2016. He will be 70 and will start taking his Social Security; I will be 65 soon after.

Thanks to your advice, I plan to sign up to get 50% of his Social Security benefit when I’m 66 (my full retirement age) and switch to my own benefit later.

But will my own Social Security be less because I won’t be earning any money between age 66 and 70? If so, would I be just as well off taking my own benefit at 66 or should I still wait until I’m 70? Money needs will not be an issue.

Answer: Your benefit will grow 8% every year you put off filing for your own retirement checks between age 66 and age 70. That’s a powerful incentive to delay, especially when you can get spousal benefits in the meantime.

If you did work after age 66, your benefit might increase a bit more depending on how much you earned.

Your Social Security benefit is based on your 35 highest-earning years, so a higher-earning year late in life could replace a lower-earning year earlier in life.

Your continued employment would have the biggest effect if those lower-earning years showed no or very little income.

Q&A: Homeowners association fees

Dear Liz: I am a single woman 10 to 15 years away from retirement. My town home will be paid off next month. Does it make better financial sense to sell my town home to avoid significant monthly homeowners association fees and invest in a single-family home?

Answer: It depends. Many single-family homes, particularly in newer developments, also have sizable HOA fees. Even when that’s not the case, you can face significantly higher repair and maintenance costs with a single-family home compared to a town home.

You also need to factor in the costs of selling your home and moving. Real estate commissions can eat up 5% to 7% of the value of your home, and moving expenses can add thousands of dollars to your costs.

Now would be an excellent time to consult a fee-only financial planner who can review your plans for retirement and discuss your alternatives.

Mistakes you make in the years immediately before and after retirement can be particularly devastating, so make sure you have an objective second opinion.

Q&A: How to get millennials to save for retirement

Dear Liz: We have 90 employees, many of them millennials, and only about 30% take advantage of our retirement plan. What resources and advice can I use to get our employees to take control of their retirement future?

Answer: The youngest generation of adults and near-adults vividly remembers the stock market crash and financial turmoil of 2008-09. So they’re understandably wary of investing, plus more of them are dealing with student loan debt than previous generations. Getting them to focus on investing in their futures can be difficult.

That said, employers have discovered that one of the most effective ways of getting this and other generations into retirement plans is to enroll them automatically. Status quo bias — the human tendency to accept the current situation rather than struggle to change — pays off in this case, since once in the plan few people decide to opt out. You can take further advantage of this inertia by offering an auto-escalation feature that increases employees’ contributions 1% or so each year.

Company matches, simpler investment choices such as target-date funds and access to advice (human or computerized) also can increase participation. If your plan provider isn’t offering you suggestions for increasing enrollment, it may be time to look for a new one that can.