Ask Liz Weston

Get smart with your money

Retirement

How couples can maximize Social Security

By

Dear Liz: I will be 68 this summer and plan on working two more years. My wife retired in 2011 after turning 60. We would like to maximize our Social Security and are planning on having her take spousal benefits when I retire. When she turns 70, she can switch to her own benefit. How much of my benefit will she receive if she starts receiving it when she is 64 and I’m 70?

Answer: If your goal is to maximize your Social Security benefits as a couple, you should rethink having her apply before her full retirement age.

If she applies before she turns 66, she won’t have the choice of switching benefits later. The Social Security Administration will compare the benefit she has earned with her spousal benefit (basically half of your benefit, reduced by the fact that she is applying early). If her spousal benefit is larger, she will get her own benefit plus an amount of money to make up the difference between the two. What she won’t get is the option to let her benefit continue to grow so that she can switch to that larger check later. The option to switch is available only if she waits until her full retirement age to apply.

There are several good online calculators to help you compare your Social Security options, including ones at AARP and T. Rowe Price.

Social Security curtails “do over”

By

Dear Liz: In a recent column, you answered a question from someone who had started receiving Social Security benefits at 62. You mentioned the many advantages of delaying the start of Social Security checks until full retirement age but then said, “In your case, it’s too late for second thoughts anyway.”

Why didn’t you mention the option of repaying all the Social Security checks you’ve received and then restarting your benefit at a higher amount, based on your age? I first learned about that option from one of your columns a few years ago, and actually did it. It sure worked out great for me. Viewed as purchasing a fixed annuity in the amount I paid back, I’ve been getting about a 9.5% annual return. Thanks so much for alerting me to that option!

Answer: The payback option was indeed a good one for people who regretted starting their benefits early and who had the means to pay back everything they’d received from the program. This “do over” allowed them to lock in a higher benefit amount for themselves and for their surviving spouses. In essence, they were able to “invest” the money they paid back and get a higher return than they could get from any other safe investment.

Unfortunately, after the payback option started receiving a lot of publicity, the Social Security Administration decided in 2010 to end it. So it’s no longer possible to correct the mistake if you start benefits too early unless you do so within the first year after applying.

This just underscores why it’s so important to research and understand your options before you apply for Social Security. Good resources include the AARP website, which has an easy-to-use retirement planner, and the book “Social Security for Dummies” by Jonathan Peterson. Another resource is the “Maximize My Social Security” calculator developed by economist Laurence Kotlikoff at www.maximizemysocialsecurity.com. For $40, the calculator will allow you to play with different scenarios and show you which options will increase your lifetime benefits.

Why delaying Social Security can make sense

By

Dear Liz: Your comments about the benefits of delaying Social Security misled readers. While a cost-of-living increase was standard for many years, it no longer is. You might want to check back over the last 10 years to get details. In addition, a reader might interpret your points about the increased benefit at full retirement age versus the benefit amount at 62 as a promise for the future. Factors such as health and family longevity are also involved. Depending solely on one’s Social Security check for living expenses will most likely bring derisive laughs for those who unfortunately have to do just that.

Answer: Your comments are a good example of why it’s important to get a second opinion on Social Security benefits, because what we think we know about the program may not be true.

One of the best reasons for delaying Social Security is to claim a bigger benefit down the road, a benefit that has nothing to do with cost-of-living increases. “Retirement benefits increase by 6 2/3% each full year an individual waits between age 62 and 65,” said Patricia Raymond, regional communications director for the Social Security Administration. “For each additional year an individual delays benefits from age 65 until full retirement age, the benefit increases 5%.”

The full retirement age is now 66 and will increase to 67. Even if Social Security is restructured sometime in the future, it’s highly unlikely that the system would stop rewarding people for delaying retirement or that cost-of-living increases would be discontinued (although they may be reduced).

By the way, there have been only two years in the last 10 when there was no cost-of-living increase, as you can see at http://www.ssa.gov/cola/automatic-cola.htm. Increases have ranged from 1.7% this year to 5.8% in 2009. The average for the last decade was 2.56%. Whether these increases truly keep up with inflation is questionable, especially with increasing Medicare costs, but to say cost-of-living adjustments are no longer “standard” simply isn’t true.

Trying to decide when to take Social Security based on your current health or your family history of longevity is tricky, at best. Taking Social Security early might turn out to be a good decision if you die relatively early, or it could be a big mistake if you live longer than expected or you have a surviving spouse who may depend on your benefit. (Starting your retirement early would reduce not only your check but also the check a survivor would receive.)

The AARP website has a Social Security calculator that can help you understand the ramifications.

Obviously, some people have little choice but to apply for Social Security as soon as they’re eligible because they need the money. But delaying Social Security for a bigger benefit can be seen as a kind of longevity insurance for those who can afford to do so. Even people in poor health or who lack a family history of longevity might want to hedge against the possibility of outliving other assets, either for themselves or their spouses.

Ideally, no one would rely solely on Social Security benefits, but unfortunately many do. Social Security constitutes 90% or more of income for nearly half of single retirees and more than 1 in 5 married couples. For most people who receive Social Security, the checks represent half or more of their income. So it makes sense to learn how to maximize your benefits using information from reliable sources. In addition to the Social Security and AARP websites, you can learn more from the excellent primer “Social Security for Dummies” by Jonathan Peterson.

Waiting to take Social Security has hidden benefits

By

Dear Liz: When I was 62, I started Social Security and I’m currently saving half of my monthly benefit after taxes (about $750). My decision to take my benefits early was influenced by a financial columnist who suggested that if I started at 62 and invested half or more of it until I reached full retirement age, the lower early benefits would be matched by the investment returns by the time I’m 85. Is this advice still reasonable?

Answer: In today’s investing environment, it’s hard to match the guaranteed annual return you get from delaying Social Security benefits. You may do better investing in the stock market, but there isn’t an investment that can guarantee 6% returns right now, which is the approximate amount Social Security benefits increase annually between the earliest age you can take benefits (62) and your full retirement age (currently 66). The higher benefit you get by waiting is then increased by inflation adjustments each year, making it an even harder target to beat.

That’s not to say it can’t be done. In your case, it’s too late for second thoughts anyway. But most people are better off waiting, if they can afford to do so.

There are other good reasons to delay, even if you’re an investing genius. If you’re married, your spouse would be eligible for a survivor’s benefit should you die first. That benefit is equal to the Social Security check you’ve been getting. A bigger check could make it easier for him or her to make ends meet down the road.

Spouses who wait until full retirement age also have the option of taking spousal benefits first, and then switching to their own benefits later, after those benefits have had a few more years to grow. When you take benefits early, you lose the option to switch.

Even if you’re not married, you can look at Social Security as a form of longevity insurance. A larger benefit could be a big help if you live a long time and spend down your other assets.

Hopefully you understood all this before you put your retirement plan into motion. If you didn’t, then your situation could serve as a cautionary tale for anyone who’s trying to make decisions about retirement based solely on his or her own research. It’s vitally important to get a second opinion from a fee-only comprehensive financial planner. Even the most ardent do-it-yourselfer can miss important nuances when it comes to retirement, and those nuances can have a dramatic effect on your future quality of life.

High, safe returns don’t exist

By

Dear Liz: I’m getting about $500,000 from the sale of my business this year and next year will be getting an additional $1 million. What’s the best way to invest the money so I can make $150,000 to $200,000 a year? I am 55 years old and will have no other income than what I can earn with this money.

Answer: You probably know that “guaranteed” or “safe” returns are very low right now. If you’re getting much more than 1% annually, you’re having to take some risk of loss. The higher the potential returns, the greater the risk.

So even if you could find an investment that promised to return 10% to 13% a year, there are no guarantees such returns would last, plus you would be at risk of losing some or all of your investment. A down draft in the market or an extended vacancy in your real estate holdings could cause you to dig into your principal.

That’s why financial planners typically advise their clients not to expect to take more than 4% a year or so out of their portfolios if they expect those portfolios to last. If you try to take much more out or invest aggressively to earn more, you run a substantial risk of running out of money before you run out of breath.

Are sons plotting–or genuine?

By

Dear Liz: I read your response with interest regarding the two sons in their 60s who were pressuring their parents into taking a reverse mortgage, according to a neighbor who wrote to you about the situation. You may be correct that the sons are trying to get an early inheritance, but you may also be very wrong. The sons may feel well off enough that they don’t need an inheritance and that the money would be better spent by the parents to enjoy their remaining years.

As a reverse mortgage loan officer, I’ve had seniors who are not cash-poor and house-rich go on extended vacations, purchase income properties, buy long-term healthcare policies and fund a research and development project for an invention, to name a few uses. I even know someone who bought a Ferrari, which had been a lifelong desire.

Reverse mortgages are no longer considered to be a loan of last resort. They are, in fact, a source of tax-free cash used in a variety of ways such as preserving and prolonging taxable cash assets, and for seniors who don’t need cash to live on, they may be used by their financial planners for arbitrage purposes.

By the way, I did like your reference to elder care attorneys. Many seniors think it’s a waste of time or way too expensive, but I frequently refer my clients to them as well. They are almost always able to justify the expense in the savings they produce for their clients.

Answer: While there can be many reasonable uses of reverse mortgages, remember that the parents in this case are in their 90s. This may not be a time in their lives when they’re longing for adventure travel, hot cars and investment real estate. It’s certainly not a time in life when they could buy affordable long-term care policies.

There could, however, be another explanation, as the following reader outlines:

Dear Liz: I just read your column about the neighbor’s concern that an elderly couple was being pressured by their sons to get a reverse mortgage. I am glad you mentioned the possibility of fraud by the sons. The elderly are vulnerable and need advocates.

The concerned writer needs to consider another option. Maybe the elderly couple is not doing as well financially as they portray. I was once a concerned neighbor to an elderly widow. As a ploy to remain independent, she was not always upfront about how well (or not well) she was doing. In her case it was health issues that she would hide or downplay (money was not an issue). Though all the neighbors cared and looked out for her, we did not have all the facts that the family had and the family was not aware of all we knew. The concerned neighbor should reach out to the sons. Hopefully the sons are looking out for their parents’ best interests and the neighbor can assist the sons in that common goal.

Answer: Your neighborhood is to be commended for trying to help an elderly person in poor health. Intervening in a financial matter, however, could be fraught with peril and lead to an ugly confrontation with the sons. That’s why directing the parents to an elder law attorney — one affiliated with the National Academy of Elder Law Attorneys at http://www.naela.org — probably would be a better course. The attorney could better protect the parents against potential financial abuse while assessing whether they might need more help than they’re letting on.