Retirement

Q&A: Social Security Payouts

May 12, 2014 By Liz Weston

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: What to do with an old IRA?

April 27, 2014 By Liz Weston

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: Home equity loans, mortgages and retirement

April 21, 2014 By Liz Weston

Dear Liz: I wish to add a little more information for the retired individual who had trouble getting approved for a home equity loan because he had no regular income (although he had plenty of assets). I’d suggest consulting a mortgage broker, not a bank. An independent broker is not captive to one set of policies. My broker suggested that I set up automatic withdrawals from my IRA to show that I had income in addition to Social Security. Once this was done and I met all the other credit requirements, I closed on a refinance in less than 30 days at a very good interest rate. Then, I discontinued my automatic withdrawals and went back to taking my funds as needed. I learned to use a qualified mortgage broker many years ago after a divorce and not having a job. I could not get a mortgage on my own, but my mortgage broker did and at very good terms. Each time I’ve used a broker, the process went smoothly and was stress free.

Answer: Many people don’t realize that lender policies differ quite a bit. In this case, mortgage buyers Fannie Mae and Freddie Mac have clarified that mortgage lenders can calculate a retiree’s income based on his or her assets, but not all lenders are willing to do the extra work these loans require.

People who are W-2 employees with solid income histories and great credit scores probably don’t need help finding a loan, because plenty of lenders will want to compete for their business. When your situation is outside the norm, however, a mortgage broker may be able to track down a lender when others balk. The National Assn. of Mortgage Brokers at http://www.namb.org offers referrals.

Social security switch

April 13, 2014 By Liz Weston

Dear Liz: When I turned 66, I applied for and then suspended my Social Security benefits so that my husband could take spousal benefits based on my work record. Shortly after he turned 69, he decided to start taking his full benefit from his own work record, so we canceled the spousal benefits.

After he applied to take his full benefit, I applied for spousal benefits from his account. Since I am only 67, the plan was for me to collect spousal benefits until I reached 70 and then collect off my account. Since I am the primary breadwinner, that allows the maximum lifetime funding should something happen to either of us. I sat with an employee at the local Social Security office. Together we processed all the appropriate documentation and she submitted it.

I just received a notice of denial that says, “We cannot approve your request because we received it after the 12-month limit.” I took the letter to the Social Security office for an explanation, and the woman had never heard of the rule it cited. The rule, it turns out, was designed to prevent people from repaying all the benefits they’ve received over the years so that they can restart their benefit at age 70. The rule says that they can pay back only benefits received in the prior 12 months to restart their benefits. But that is not what I did.

Answer: No, it’s not, but what you tried to do still won’t work.

Here’s the simplest way to explain it: There’s only one spousal benefit for each couple. Once you filed for your own benefit, allowing your husband to claim spousal benefits, you aren’t allowed to switch even though you hadn’t started receiving checks yet.

If it’s any consolation, you chose the right spouse to receive spousal benefits, since you’re the higher earner. It would have been best if your husband had waited to switch at age 70, when his benefit reached its maximum, but his checks are still substantially larger than they would have been if he had started earlier.

Another point that should be made because it’s often misunderstood, is that your husband was allowed to switch from spousal benefits to his own benefit because he started Social Security at or after his own full retirement age. If he’d started benefits before his full retirement age, which is currently 66, he would have been stuck with a discounted spousal benefit and couldn’t have switched to his own benefit later.