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Retirement

Q&A: Social Security and government pensions

January 17, 2022 By Liz Weston

Dear Liz: You recently mentioned the windfall elimination provision that affects pensions from jobs that don’t pay into Social Security. I’m wondering what those jobs are. Are they just part of the gig economy, or is there some other category of jobs that don’t pay into Social Security?

Answer:
Gig economy jobs are supposed to pay into Social Security, just like the vast majority of other occupations. People with gig jobs are often considered to be self-employed, so instead of paying just 6.2% of their gross wages into Social Security like most workers, they also pay the employer’s 6.2%, for a total of 12.4% of their earnings.

Some state and local governments have their own pension systems that don’t require workers to pay into Social Security. People who get pensions from those systems and who also qualify for Social Security benefits from other jobs can be affected by the windfall elimination provision, which can reduce their Social Security benefit. They also can be affected by the government pension offset, which can reduce or even eliminate spousal and survivor benefits from Social Security. Here’s an example:

Dear Liz: I am 59, retired, and receive a pension of approximately $150,000 a year. My husband receives a small pension, about $1,000 a month, and Social Security disability due to a diagnosis of Stage 4 lung cancer. I am the sole financial support of my 88-year-old destitute mother, who requires care that costs approximately $5,000 a month. I retired earlier than anticipated to care for my ailing mother and husband.

Although I worked many years where I paid into Social Security, I knew I would receive only about half of my Social Security check due to the windfall elimination provision that affects pensions received from jobs that didn’t pay into Social Security. What I didn’t know is that when my husband passes, I will receive no survivor benefits from his 41-plus years of paying into the system.

Our entire retirement planning was based on his Social Security combined with my pension. He’s just a few months from passing, and I will not be receiving anything, which will immediately put me in an untenable financial position. How is it that after 30 years of marriage I will receive nothing because I have a pension? This just doesn’t seem right. Do I have any options?

Answer: Your situation shows why it’s so important to get sound advice about Social Security before retiring because many people don’t understand the basics of how benefits work.

Even if you didn’t have a pension, for example, your income would have dropped at your husband’s death. When one spouse dies, one of the couple’s two Social Security benefits goes away and the survivor gets the larger of the two checks the couple received.

Your pension is much, much larger than the maximum you could have received from Social Security in any case. If you can’t get by without your husband’s benefit, consider ways to reduce your expenses. Because your mother is destitute, she may be eligible for Medicaid, the government healthcare program for the poor. Unlike Medicare, Medicaid pays the costs of nursing home and other custodial care expenses. Contact your state Medicaid office for details.

Filed Under: Q&A, Retirement, Social Security Tagged With: Pension, q&a, Social Security, windfall elimination provision

Q&A: Lump sum or annuity?

December 13, 2021 By Liz Weston

Dear Liz: You recently answered a question about whether to take a lump sum or an annuity payout from a pension. I think you need to be more cautious about making a blanket statement about the payout being the only viable option. There are other reasons for taking the lump sum, such as the pension fund’s stability. My mother’s friend lost her entire pension when Bethlehem Steel went bankrupt. Also, I like the idea of being able to access the lump sum in the case of a catastrophic need (call me a control freak!).

Answer: You certainly can access more of your money with a lump sum, but that’s a double-edged sword. You could withdraw too much too fast and run out of money. You could lose money to bad markets, bad investments, bad decisions and fraud. Even if you’re making good financial decisions now, that may not always be the case as our cognitive abilities tend to decline with age.

The column you’re referencing didn’t say that an annuity is the only viable option, however. In that particular case, the annuity option came with retiree health insurance while the lump sum option did not. It would be pretty hard to top guaranteed income for life plus medical benefits, but that doesn’t mean it’s impossible.

A lump sum could be a better option if the pension is particularly generous and the pension fund isn’t solvent. Your mother’s friend’s pension, for example, was covered by the Pension Benefit Guaranty Corp., so she didn’t lose the whole thing when Bethlehem Steel went under. Workers there lost part of what was promised them because their pensions were larger than the amount covered by the PBGC.

Filed Under: Q&A, Retirement Tagged With: Pension, q&a

Q&A: Windfall elimination provision

November 15, 2021 By Liz Weston

Dear Liz: I just read your answer regarding the windfall elimination provision question. I receive a pension after having retired from law enforcement. I was fortunate to be able to retire at 46. Then I landed a great job with excellent pay. I expect to pay into Social Security for a total of 17 years and I’ve been contributing the maximum for the last six. How will this affect my benefits? Will I still be penalized?

Answer: The only way the windfall elimination provision wouldn’t affect you is if you paid into Social Security for 30 years or more. If you pay Social Security taxes for 20 years or less, you’ll face the full impact of this provision, which affects those who get pensions from jobs that didn’t pay into Social Security. Starting at year 21, the effect begins to lessen until it disappears at year 30.

You can learn more about what to expect on Social Security’s site. Some of the paid Social Security claiming strategy sites, including Maximize My Social Security and Social Security Solutions, can incorporate the windfall elimination provision into their calculations if you want to model how different retirement dates might affect your benefits.

Filed Under: Follow Up, Q&A, Retirement Tagged With: windfall elimination provision

Q&A: Lump sum or monthly payout?

November 15, 2021 By Liz Weston

Dear Liz: I need advice on choosing between a lump sum retirement benefit and a monthly payout till death (with a cost of living adjustment). The monthly payout option also includes health insurance benefits but the lump sum option does not.

Answer: It’s hard to imagine a better option than a guaranteed, inflation-adjusted stream of income for life — particularly if that option includes retiree health insurance benefits, which are increasingly rare.

If you take the lump sum, you’ll be responsible for investing the money with no guarantees that you’ll get as much as if you’d picked the payment option. A bad market or bad investments could dramatically reduce your nest egg, as could fraud or improvident spending.

Even if you’re a good investor now, there’s no guarantee you’ll remain so. Our financial decision-making abilities tend to decline with age, although our confidence in those abilities often remains high — a truly scary combination.

The devil’s always in the details, though, so take the paperwork describing these options to a fee-only, fiduciary financial planner so you can get customized advice based on your situation.

You can get referrals to fiduciary financial planners from the National Assn. of Personal Financial Advisors, the Alliance of Comprehensive Planners, the Garrett Planning Network and the XY Planning Network. The Garrett network represents advisors willing to charge by the hour; XY Planning Network advisors offer the option of paying a retainer fee.

Be absolutely sure you’re dealing with a fiduciary financial planner — one who agrees, in writing, to put your best interests first.

Most advisors are held to a lower “suitability” standard that allows them to recommend investments and strategies that pay them more, rather than those that may be the best fit for you. An advisor held to this lower standard may urge you to take the lump sum not because it’s in your best interest but because they can earn commissions by selling you various investments.

Filed Under: Q&A, Retirement

Q&A: Retiring early doesn’t mean losing affordable health insurance

August 30, 2021 By Liz Weston

Dear Liz: I am 55 and have health issues that I don’t talk about at work. I want to retire soon. I know that getting health insurance is going to be hard. I am just at a loss as to how I am going to keep working when I don’t feel well. What are my options?

Answer: In the past, getting health insurance could be difficult or prohibitively expensive if you had even relatively minor health conditions. That changed with the Affordable Care Act, which requires insurers to extend coverage without jacking up the premiums for preexisting conditions. In addition, most people qualify for tax subsidies that reduce the premiums, and those subsidies were expanded this spring when President Biden signed the American Rescue Plan into law. You can start your search for coverage at HealthCare.gov.

Before you quit, however, consider whether your employer could make accommodations that would allow you to continue working. Many people at 55 don’t have enough saved for a comfortable retirement that could last decades. Shifting to part-time work, if your employer allows it, could help you continue to save or at least reduce the amount you need to withdraw from your savings.

Filed Under: Health Insurance, Q&A, Retirement Tagged With: health insurance, q&a, Retirement

Q&A: Refinancing in your golden years

August 30, 2021 By Liz Weston

Dear Liz: I just wanted to comment on a recent question about refinancing a mortgage in retirement. The writer wrote: “… at 67 and 72 years old, it’s unlikely that both of us will survive for another 15 years to pay off this loan.” This seems an old way of thinking about age. The obituaries in my paper are full of people who have lived into their 90s and even past 100 years old!

Answer: Good point. People often misjudge life expectancies, which over time have lengthened considerably. At 67, a typical female could expect to live nearly 19 more years, according to Social Security’s life expectancy tables, while a male at 72 has a 13-year life expectancy. People with higher incomes, good health and good habits (nonsmokers, for example) could add many years to those estimates.

Filed Under: Q&A, Retirement Tagged With: q&a, Retirement

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