Ask Liz Weston

Get smart with your money

Retirement

Q&A: Medicare premiums

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Dear Liz: I wanted to comment on the person who was wondering why her multimillionaire friend receives less Social Security. One reason could be that higher-income people pay more for Medicare, the health insurance program for people 65 and older. Instead of the standard $104 a month that most people pay, my wife and I pay about $375 each per month for Parts B and D. So if the person writing to you is thinking about net Social Security checks, Medicare would make quite a difference.

Answer: That’s a very good possibility. Some people don’t make the distinction between Social Security and Medicare. They’re separate government programs, but Medicare premiums are typically deducted from Social Security payments.

Q&A: An Update

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Dear Liz: I think you were way too hard on the young man who said his 30-year-old girlfriend’s lack of retirement savings was a potential deal breaker. You told him to get off his high horse. He was just being prudent.

Answer: It would be prudent to regard massive debt, alcoholism or drug use as deal breakers for a relationship. Elevating the young woman’s lack of retirement savings to this level is just over the top. But let’s hear what the young man himself had to say:

Dear Liz: I want to say thank you for taking the time to write on my question. I was able to find a few charts online and show her [the power of compounded returns]. She got excited about it and is now putting in to get the company match (5%).

Thank you very much for putting me in my place. I did not mean to come across as if I was better. I have been very lucky to have been able to save and be taught about compounding at an early age.

Answer: One of the potential hazards of being good with money is arrogance. We can become convinced that we know better and that other people should do things our way. It takes some humility to understand that not everyone has had the advantages we’ve had or been able to take in the information as we’ve done. Understanding that makes it easier to find compromises in a relationship that work for both parties.
Good luck with your relationship. She sounds like a keeper.

Q&A: Social Security Payouts

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Dear Liz: My wife and I, 63 and 62, plan to continue working till at least 65. We will begin collecting Social Security benefits in September. Our combined income is $58,000, we own our home outright, and we have no debt, no children, $84,000 in a traditional IRA and $90,000 in a stock portfolio.

I just sold a portion of a mutual fund for a $30,000 gain that is in the bank for the time being. How long do we have to reinvest without paying a capital gains tax? Or would it be best to pay the tax now, leave the money in the bank and be done with it?

Answer: Unless you sell another investment for a $30,000 loss to offset the gain, you’re going to have to pay taxes on your profit.

“There is no way to do a tax-free reinvestment,” said tax professional Eva Rosenberg, an enrolled agent who runs the TaxMama.com site. “And the time to ask questions like that is before you sell the mutual funds.”

You still have time to avoid a much bigger mistake: signing up for Social Security now.

Your Social Security checks would be reduced $1 for every $2 you earn over a certain level, which this year is $15,480. That “earnings test” applies until you reach your full retirement age (which is 66, not 65, for both you and your wife). What’s more, you would lock in lower benefits for life and give up a chance to boost your Social Security payout in a way that’s available only to married couples who wait until full retirement age to start benefits. (More on that in a moment.)

Your savings are too small to generate much income, particularly if you want to minimize the chances of running out of money. You should be looking to maximize your Social Security benefits to help make up for that deficit. Your benefits grow substantially each year you put off applying for them, and most people will live past the break-even point where delaying benefits until full retirement age results in more money than taking them early.

Many people erroneously think they should grab Social Security as early as they can, but the Social Security system isn’t going away, and you are likely to regret settling for a smaller check. Remember that your wife probably will outlive you and will have to get by on one check, so you should make sure your benefits are as big as they can be.

One way to do that is for the lower-earning spouse to claim spousal benefits at his or her full retirement age. Once the lower earner’s benefit maxes out at age 70, he or she can switch if that benefit is larger.

But spousal benefits can’t start until the higher earner files for his or her own benefit. If the higher earner waits until full retirement age to apply, he or she has the option to “file and suspend” — a maneuver that lets the spouse claim spousal benefits while leaving the higher earner’s benefit untouched so it can continue to grow.

This “claim now, claim more later” strategy is available only to people who wait until their full retirement age to start.

Your tax question and your plan to start Social Security early indicate you could really use some sessions with a fee-only financial planner. Such a consultation is a good idea for everyone as they’re approaching retirement, but in your case, it’s essential.

Q&A: Millionaires and social security

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Dear Liz: I have a friend who is a multimillionaire. He told me what he collects in Social Security, and it was much less than what I receive even though my income while I was working was small. He said because of his status, Social Security pays him much less. Is that true? I thought your benefits are based on what your income was.

Answer: They are. The Social Security system was designed to replace a larger percentage of income for lower-paid workers, based on the idea that these workers had less opportunity to save for their future. The higher your income, the lower the percentage of your pay the system is designed to replace.

But people who earned high salaries during their working lifetime will reap bigger checks than those who didn’t, all other factors being equal.

Assuming your friend is telling the truth about his benefit, there are several explanations for why he’s getting less. One is that he was a business owner who controlled his own pay and deliberately kept down the amount of his salary that was subject to payroll taxes. (People think they’re saving money by doing this, until it’s time to claim Social Security and they realize what it has cost them.)

Another possibility is that he has income from another source, such as a public pension, that would reduce his check because of the government’s windfall elimination provisions.

Other possibilities: Perhaps he started his benefits early, while you delayed yours to let them grow. Or maybe he was one of those diligent, frugal people who built wealth on a smaller income. Or it could be he was talking about his after-tax benefit, since Social Security benefits are taxable once your income exceeds certain amounts.

Those are just some possibilities, but he definitely isn’t receiving a smaller check than you just because he’s rich.

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.