Ask Liz Weston

Get smart with your money

Retirement

Q&A: “File and suspend” Social Security

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Dear Liz: You’ve been writing about the “file and suspend” option that allows you to delay taking Social Security while still reserving the ability to get a lump sum if you later change your mind.

If I file and suspend but choose not to take a lump sum before my benefit maxes out at 70, what happens to those funds? What happens to those funds if I die before 70?

Answer: Remember that Social Security is a pay-as-you-go program. The Social Security taxes you pay aren’t piled up in some kind of account, waiting for you to retire. Your taxes pay current retirees’ benefits, just as future workers’ taxes will pay yours.

When you delay starting Social Security, you’re rewarded with a potentially larger check each year you put off claiming until age 70. Your benefit grows by about 7% each year between age 62 and your full retirement age, which is currently 66.

Between full retirement age and 70, your benefit grows at 8% each year in what’s called “delayed retirement credits.”

If you file and suspend at your full retirement age, then change your mind, you can get a lump sum equal to all those checks you passed up since you filed. However, you lose the 8% delayed retirement credits you could have otherwise claimed.

Your benefit is reset to the lower amount you would have received at full retirement age, and that’s the benefit on which all future cost-of-living calculations would be made.

Should you die after filing and suspending, your surviving spouse would be able to benefit from those delayed retirement credits. His survivor’s benefit would be equal to what you could have claimed as of the date of your death.

Q&A: Waiting on Social Security

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Dear Liz: I started Social Security at 62 and did the spreadsheet myself showing the break-even point. I would have to be 80 before the graphs even cross.

You, and others, have to stop that business about waiting on Social Security if you can. My own mother lived to 90 and it is about quality of life, not collecting lots from the government.

Answer: Exactly. And since you have longevity in the family, you especially should have paid better attention to the message about the importance of delaying benefits.

If your mother started benefits at 62, or ended up living on a survivor’s benefit from a husband who started early, then her checks were 30% to 50% smaller than they could have been. That difference can be especially crucial in a person’s later years, when she’s far more likely to have outlived her other assets and need the additional money.

Remember that the decision to claim Social Security is separate from the decision to retire. People can retire early and draw from other accounts while putting off Social Security to maximize their checks.

Most people who try to do the math on spreadsheets fail to factor in the effects of inflation and taxes, among other factors.

You can get better calculations from one of the free calculators, such as the ones at AARP and T. Rowe Price. You can find a more robust calculator for about $40 at MaximizeMySocialSecurity.com and SocialSecurityChoices.com.

Another option is to read the recent bestseller published by Simon & Schuster: “Get What’s Yours: The Secrets to Maxing Out Your Social Security.”

Q&A: 401(k) employer limits

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Dear Liz: My company doesn’t allow us to contribute more than 50% of our paycheck to our 401(k). This limits my contribution to far less than the IRS’ $18,000 annual limit because I’m low paid.

How can I tackle this situation, as I would want to contribute more but am being constrained by the 50% contribution cap?

Answer: Your zeal to save for retirement is admirable. Your company may not have anticipated that anyone in your situation would be able to save so much, so consider simply asking if the limit can be raised.

You can explore other avenues as well, such as contributing to an IRA or a Roth IRA. Many people incorrectly believe they can’t contribute to these individual retirement accounts if they have a workplace plan, but that’s not true.

You can contribute up to $5,500 to a Roth (plus a $1,000 catch-up contribution if you’re 50 or older) if your income is below certain limits. The ability to contribute is reduced between modified adjusted gross incomes of $116,000 and $131,000 for single filers and $183,000 and $193,000 for marrieds filing jointly. Alternatively, you can contribute $5,500 (plus the $1,000 catch-up contribution) to an IRA regardless of your income, although your ability to deduct your contribution if you have a workplace plan is phased out for incomes between $61,000 and $71,000 if single and $98,000 to $118,000 for marrieds.

Q&A: “File and suspend”

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Dear Liz: You recently encouraged a reader to listen to his financial advisor, who wanted him to file for his Social Security benefit at his full retirement age of 66 but then suspend the application until his benefit maxes out at age 70.

Another good feature of this “file and suspend” maneuver is the ability to ask for all the unpaid benefits in a single lump sum in the event one develops a terminal illness or needs funds for some other exigent circumstance, such as long-term care. The potential lump sum “back pay” can be a pretty good insurance policy while waiting for age 70.

Answer: Thanks for highlighting this important feature. Many people who are on the fence about delaying Social Security don’t understand that their decision is reversible — as long as they wait until their full retirement age to file.

At that point, they have the option to file and suspend. If they later change their minds, they can request a lump sum for all the benefits back to the date they filed.

They lose any “delayed retirement credits” from waiting — in other words, their benefit is reset to what it would have been had it started at full retirement age — but they get a big chunk of cash when they may need it most.

People who file before their full retirement age, which is currently 66 and rising to 67 for people born in 1960 and later, don’t have the option to file and suspend.

Q&A: Max contributions to 401(k)s

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Dear Liz: I understand that anybody with a 401(k) can contribute up to $18,000. Does the amount you can contribute depend on your salary? Say you make $45,000. Therefore I would assume you could put in the full $18,000, or 40% of your salary. Am I wrong?

Answer: The maximum the IRS allows someone under 50 to contribute to a 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan is $18,000 in 2015. The additional “catch up” contribution limit for people 50 and older is $6,000.

The plans themselves, though, may impose lower limits. Even if the plan doesn’t cap contributions, your contributions may be limited if you’re considered a “highly compensated employee.” Last year, highly compensated employees were those who earned more than $115,000 or owned more than 5% of the business. If lower-earning employees don’t contribute enough to the plan, higher earners may not be able to put in as much as they’d like.

Q&A: Postponing Social Security

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Dear Liz: My question is on when to take Social Security. My financial advisor recommends that I file for my benefit at age 66 but suspend the application so my benefit can continue to grow until it maxes out at age 70. At 66, I would receive $2,614 per month. At age 70 I would receive $3,451 per month. In those 48 months I would have received $125,472. I calculate that it would take me 12.49 years to make up the difference of $837 a month. So why should I postpone until age 70? What am I missing?

Answer: There’s a big difference between postponing Social Security until your full retirement age of 66 and postponing again until age 70.

Postponing until full retirement age is pretty much a slam-dunk, if you can afford to do so. That’s because most people will live beyond the break-even point, which is typically somewhere between ages 77 and 78.

The break-even point for postponing until age 70 is between age 83 and 84, which is cutting it closer in terms of average life expectancy. A man who reaches age 65 is expected to live on average until age 84. Women reaching 65 are expected to live until 86.

But focusing just on break-even points ignores other, more important factors.

One is that waiting offers an 8% annual return between age 66 and 70. No other investment offers a built-in, guaranteed return that high.

Another has to do with survivors. If your spouse earned less than you, she would end up depending on your check alone should you die first. (Survivors get the larger of their own benefit or their spouse’s, but not both.) The larger the check, the better off she’ll be.

You can think of Social Security as a kind of longevity insurance that protects you against poverty in old age. The longer you or your spouse live, the greater the chance that your assets will be exhausted and that one or both of you will end up depending on Social Security for the greatest part of your income.