Ask Liz Weston

Get smart with your money

Retirement

Q&A: Don’t miss out on spousal Social Security benefits

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Dear Liz: How far back can Social Security go for someone who did not know to apply for spousal benefits? I’m 69, still working and did not know I was eligible for spousal benefits from my retired wife when I turned 66. Social Security is indicating six months of retroactive benefits is the maximum.

Answer: Unfortunately, that’s correct. You’ve missed out on at least two and a half years’ worth of spousal benefits based on your wife’s work record.

You still can file a restricted application for spousal benefits only and get a lump sum payment for the previous six months. You also still have the option to switch to your own benefits when they max out at age 70. These strategies aren’t available to younger people because Congress changed the rules last year.

Social Security rules can be complex, and the penalty for misunderstanding or missing deadlines can be huge. “Get What’s Yours,” a book about Social Security-claiming strategies that recently was updated, should be required reading for anyone approaching retirement age.

Q&A: Tips for divvying up your retirement investments

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Dear Liz: With all the investment options offered in 401(k) plans, how as a contributor do I know where to place my money?

Answer: Too many investment options can confuse contributors and lower participation rates, according to a study by social psychologist Sheena Iyengar of Columbia University in cooperation with the Vanguard Center for Retirement Research. The more options, the more likely participants are to simply divide their money evenly among the choices, according to another study published in the Journal of Marketing Research. That’s a pretty random method of asset allocation and one that may not get people to their retirement goals.

As a participant, you want a low-cost, properly diversified portfolio of investments. For most people, that means a heavy weighting toward stock funds, including at least a dab of international stocks. Your human resources department or the investment company running the plan may be able to help with asset allocation.

Some plans offer free access to sophisticated software from Financial Engines or Morningstar that can help you pick among your available options. Once you have your target asset allocation, you’ll need to rebalance your portfolio, or return it to its original allocation, at least once a year. A good year for stocks could mean your portfolio is too heavily weighted with them, while a bad year means you need to stock up.

If that feels like too much work, you may have simpler options. Many plans provide a balanced fund, typically invested 60% in stocks and 40% in bonds, that provides automatic reallocation. The same is true for target-date funds, which are an increasingly popular choice. Pick the one with the date closest to your expected retirement year. If you’re 35, for example, you might opt for the Retirement 2045 fund.

It’s important, though, that you minimize costs because funds with high fees can leave you with significantly less money at retirement. The average target-date fund charged 0.73% last year. If you’re paying much more than that, and have access in your plan to lower-cost stock and bond funds, choose those instead.

Q&A: No wedding, no Social Security benefits

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Dear Liz: I’m a female who has been with her male partner for 20 years. We are not married. In the event one of us dies, is the other entitled to the partner’s Social Security benefits? Or do we have to be legally married to qualify for benefits?

Answer: Your genders don’t matter. Your marital status does. To get Social Security benefits based on the other person’s work record, you need to make it legal.

Marriage offers hundreds of legal, financial and estate-planning advantages, and Social Security is certainly one of those. With married couples, lower-earning partners may qualify for bigger benefit spousal benefits than the retirement benefits they would receive on their own work records. After a death, the surviving spouse gets the larger of the couple’s two benefits. Social Security makes up more than half of most elderly people’s income, so this is no small deal.

Q&A: State pensions’ effect on Social Security

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Dear Liz: Recently someone wrote to you about plans to receive a state pension and apply for Social Security benefits. You said if the person’s job didn’t pay into Social Security, the Social Security benefit might be reduced because of the state pension. I have a state pension from a job that did not pay into Social Security and was under the impression that I would not be eligible for Social Security benefits. Am I wrong about that?

Answer: If you previously worked at a job that paid into Social Security, you may be able to receive both your state pension and a Social Security retirement benefit. Your Social Security benefit is typically reduced, but never eliminated, because of pensions received from jobs that didn’t pay into the system.

This reduction, known as the windfall elimination provision, does not apply to people who worked for 30 years or more in jobs that paid into Social Security. Its effect is greatest on people who worked less than 20 years in such jobs. Between 20 years and 30 years, the impact declines year by year.

Your state pension also affects — and can eliminate — any spousal or survivor benefits you might have received based on a current or former spouse’s Social Security work record. This separate provision is known as the government pension offset. You can learn about both the windfall elimination provision and government pension offset on the Social Security site, www.ssa.gov.

Q&A: Do the math on retirement benefits

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Dear Liz: My full retirement age for Social Security benefits is 66. To receive that amount, do I have to keep working until I am 66? I was going to retire at 63 and receive a state pension and wait until 66 to apply for Social Security. I wasn’t planning on working full-time from 63 to 66.

Answer: You don’t have to keep working. When to retire can be a separate decision from when to start Social Security benefits.

Before you do either, though, find out how your state pension may affect your Social Security benefits. If you’re receiving a pension from a job that didn’t pay into the Social Security system, your Social Security benefit may be reduced. If that’s the case, it can make sense to delay taking your pension and start taking Social Security earlier. You can use claiming software such as MaximizeMySocialSecurity.com or SocialSecurityChoices.com to see what might be the best approach.

Q&A: Retirement account bears close scrutiny

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Dear Liz: About five years ago, I transferred a 401(k) account to an IRA with a financial advisor recommended by a friend. I receive monthly statements, but like most people, I am busy and do not study them, which is my fault. The statements are very confusing, even though I am a college graduate with a business degree. I recently realized that the account has not grown at all, even though it’s invested in stock mutual funds. The Standard & Poor’s 500 has been up about 10% each year on average, so I feel that I should have a much better return. How do I best go about finding out why I am not making any money? Approaching this financial advisor is useless.

Answer: It appears your advisor is worse than useless; he or she is a hazard to your financial health.

A properly diversified retirement portfolio may not grow at exactly the same rate as a stock benchmark such as the S&P 500, but it certainly should have grown significantly in the past five years. It could be that the advisor has been trying to “beat the market” with actively managed funds, which typically fall far short of the mark and do little other than cost investors too much. Or the advisor could be pushing high-cost funds that pay fat commissions and benefit the firm far more than they benefit you.

The Department of Labor recently instituted regulations that should stop many of these shenanigans by requiring advisors giving retirement advice to put their clients’ interests ahead of their own. You shouldn’t wait for those changes to be implemented, though, because you’ve already lost enough ground. Transfer your IRA to a low-cost provider such as Vanguard, Fidelity or T. Rowe Price and consider investing in a target-date retirement fund that will take care of asset allocation and rebalancing for you.