Dear Liz: I’m way behind on retirement funds. I did get pension funds from my employer after 25 years of service but used a large portion to pay debt that was crushing me. I’m widowed, age 62 and work full time as a nurse. I rent my place. How do I catch up? I have $200,000 in an IRA.
Answer: This answer comes too late for you but may help others who are overwhelmed by debt as they approach their retirement years.
People understandably want to pay what they owe, but bankruptcy is sometimes the best of bad options. This is particularly true as you approach the end of your working years and don’t have enough time to replenish your savings. The typical bankruptcy filing can erase debt while protecting the retirement funds you’ll need for the future. Before using your lump sum pension payout to pay debts, you should have discussed your situation with a bankruptcy attorney.
At this point, your best options may be to work as long as possible, save as much as you can and figure out a smart Social Security strategy. As a widow, you may qualify for Social Security survivor benefits as well as your own retirement benefit. You can’t receive both simultaneously, but you would be allowed to switch between benefits. For example, you could start survivor benefits and then switch to your own when it maxes out at age 70, if that amount is higher. Typically you would want to wait until at least your full retirement age to start benefits, because otherwise you’ll face the earnings test that reduces your benefits by $1 for every $2 you earn over a certain amount, which in 2024 is $22,320. Paid services such as Maximize My Social Security or Social Security Solutions can help you determine the best approach.
can a spouse declare bankruptcy for her debts alone independent of joint debt shared between and wife and a husband?
That’s a great question to ask an attorney. Bankruptcy law does allow a spouse to file independently but in community property states, debts incurred during marriage are typically considered joint debts.
In your response, you state: “… because otherwise you’ll face the earnings test that reduces your benefits by $1 for every $2 you earn over a certain amount, which in 2024 is $22,320” While this is accurate, you leave out a very critical element. As I understand it, when you turn your full retirement and your earnings remain under the higher full retirement earnings cap, your payments will be recalculated to give you credit for the withheld portion of your benefit. For me it was recalculated that it would take about 10 years to recoup the withheld benefits. If someone is making a long term plan that is assuming collecting benefits over those ten years, they will have suffered no total benefits loss and will have continued to receive income they otherwise would have passed up. This recouping of benefits was rarely mentioned yet because important to me.
While the withheld amounts are eventually repaid, you lose forever the benefit increases you could have received by simply waiting. If you’re the higher earner, you’ve also reduced the survivor benefit. Using sites such as Maximize My Social Security and Social Security Solutions can help you create a claiming strategy that makes sense.