Ask Liz Weston

Get smart with your money

Liz Weston

Q&A: Social Security and spousal benefits

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Dear Liz: I just got laid off and will be collecting unemployment. In January, I will be eligible for Social Security at my full retirement age of 66. Can I collect 50% of my spouse’s benefits (he is 76) instead of collecting on my record and continue to let my Social Security benefits grow until age 70?

Answer: Yes. As long as you wait until your own full retirement age to apply for spousal benefits, you retain the option of switching to your own benefit later. If you apply for spousal benefits early, you are locked into the smaller payment and can’t switch.

Q&A: What to do with an old IRA?

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Dear Liz: I left a job several years ago to become a full-time freelancer. I have a SEP IRA and a SIMPLE IRA from that job that have basically just been sitting there. What are my options in moving this money to a better retirement investment?

Answer: SEPs and SIMPLEs are just the tax-advantaged buckets into which you (and your then-employer) put money. It’s the investments you choose within those buckets that determine what kind of returns you’ll get. The financial institution that’s holding these accounts can be a factor as well: If it’s charging a lot of fees, your returns will suffer accordingly.

Your best bet is to make sure the accounts are being held at a low-cost provider and that you have sufficient exposure to stocks to offer growth that will offset inflation over time. Most discount brokerages and mutual fund companies offer target-date maturity funds that give you diversification, professional asset allocation and automatic rebalancing at a low cost.

Q&A: What to do with a big tax refund?

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Dear Liz: I got a big tax refund this year and am trying to figure out what to do with the money. Right now I have school loans with a 4% interest rate that I do not need to make a payment on until 2024 with my current payment plan, but the amount I owe is pretty hefty and I know it’s going to compound more over time. I also have a very low-interest car loan (1.9%) that will be paid off in 31/2 years. I also could put that money in the market in hopes that it will grow. I should add I am 27 years old. Any advice?

Answer: Yes: Please review the terms of your student loans, because it’s likely you’ve misunderstood your obligation.

Federal education loans typically don’t allow you to go 10 years without payment, said financial expert Mark Kantrowitz, publisher of Edvisors Network.

“With federal education loans, the economic hardship deferment has a three-year limit and most forbearances have a three-year limit, with one or two having a five-year limit,” Kantrowitz said.

“One could potentially consolidate the loans after getting a deferment and forbearances to reset the clock and thereby get a new set of deferments and forbearances on a new loan. But most of the forbearances aren’t mandatory, so one can’t count on stacking deferments and forbearances to get a 10-year suspension of the repayment obligation.”

Another possibility is that you’ve signed up for an income-based repayment plan that has reduced your payment to zero, but your eligibility is determined year by year. “2024 is a very specific date, so it seems unlikely that this is [income-based repayment],” Kantrowitz said.

“The most likely scenario is this borrower is misunderstanding the terms of his loan,” Kantrowitz said. “The next most likely scenario is that this borrower is not referring to a qualified education loan, but to a particular personal loan that he was able to obtain that few other borrowers would be able to obtain.”

Whatever the case may be, one of the best uses for a windfall is to boost your retirement savings. Even if you don’t have a workplace plan, you could set up an IRA or a Roth IRA as long as you have earned income.

Once you’re on track for retirement, your next goal would be to build your emergency fund, since you don’t have any high-rate debt. Once those goals are met, you can start paying down lower-rate debt (such as your student loans).

Social Security statements make a comeback

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Zemanta Related Posts ThumbnailUntil a few years ago, Social Security sent annual statements to just about everybody who was still working to let them know what they could expect to receive in retirement, survivor and disability benefits (minus a 25% or so haircut if Congress never gets its act together to fix the system). Those statements got axed by budget cuts, but now Congress wants them resumed.

Here’s the scoop from Reuters columnist Mark Miller:

Starting this September, the Social Security Administration (SSA) will resume mailings at five-year intervals to workers who have not signed up to view their statements online, an agency spokesman told Reuters. The statements will be sent to workers at ages 25, 30, 35, 40, 45, 50, 55 and 60, he said, adding the agency would continue to promote use of the online statements.

We won’t be getting these in the Weston household, since we signed up for online accounts. (If you decide to go that route, note that some people have had trouble setting up their Social Security accounts because they have security freezes on their credit reports at Experian, the bureau that Social Security uses to verify identity. Investment News columnist Mary Beth Franklin says you’ll have to unfreeze your report, or visit a Social Security office in person with a government-issued ID to set up an online account.)

Social Security tends to be a pretty vague concept for most people until they start closing in on retirement age–or they’re unlikely enough to need its survivor or disability benefits. But the system contributes half or more of most people’s retirement income, so it’s worth knowing what you’ve been promised. Perhaps knowing might even inspire you to lean on your lawmakers to get the system’s problems fixed while there’s still time.

 

A Social Security “do over” you should consider

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Delete "MISTAKE"For years Social Security had a loophole that allowed people to hit “reset” on their benefits.

Those who had made the mistake of starting benefits early had the option of paying back all the money they’d received from Social Security. Then they could restart their checks at a higher rate that they would enjoy for the rest of their lives. For those who could afford it, this “do over” was similar to buying an annuity with a risk-free annual payout of 7% to 9%.

Social Security closed the loophole in 2010, and now you have only 12 months from the time you start benefits to pay back what you’ve received and hit the reset button. This limited do over could help those who make smaller mistakes, such as starting benefits right before their full retirement ages, but doesn’t represent the great investment deal that it used to.

But there’s another potential do over that people should know about, and it has to do with the “file and suspend” strategy.

This strategy is typically recommended for married couples. The first to reach full retirement age (currently 66, gradually increasing to 67) files for Social Security benefits but then immediately suspends the application. This move allows spouses to file for spousal benefits while leaving the older spouse’s benefit alone to grow.

If the younger spouses wait until their own full retirement age to begin spousal benefits, they’ll have the option of switching to their own benefit later, say at age 70 when it maxes out.

This strategy can add as much as $250,000 to the lifetime benefits a married couple can receive.

But the file-and-suspend strategy has other applications. It can be a kind of insurance policy for single people as well as married couples. Those who file and suspend can later change their mind and receive a lump-sum payout.

Let’s say you’re single and want to leave your benefit alone to continue growing at 8% a year until age 70. So you file and suspend at your full retirement age of 66. But if you should lose your job, run into financial problems or get a bad medical diagnosis, you can start your checks and request a lump-sum payout of your benefits back to the date you suspended.

Anyone who files-and-suspends so a spouse can get benefits could do the same thing, of course. For those who want to maximize their benefits but still give themselves a safety net in case of disaster, file and suspend can make a lot of sense.

 

Friday’s need-to-know money news

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download (1)Today’s top story: Poll reveals Americans are feeling better about their personal finances. Also in the news: How to raise financially savvy kids, learning how to balance saving for the future with enjoying the present, and five credit card fees you should try to avoid.

Americans’ Ratings of Their Personal Finances Inch Up
Does your opinion match up?

How to Rear Money-Smart Kids
Starting kids off on the right foot with money.

How To Balance Enjoying Life With Saving For Your Goals
Saving for the future doesn’t mean you can’t enjoy the present.

5 Credit Card Fees to Avoid
There’s no need to give the banks extra money.

5 Ways to Save for a One-Time Expense
Saving for and expecting the unexpected.