Ask Liz Weston

Get smart with your money

Retirement

“File and suspend” can boost Social Security benefits

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Dear Liz: I am 63 and not nearly ready to collect Social Security. In fact I probably won’t be ready for quite a few years. My husband, who is 64, wants to collect on my Social Security as it is higher than his. Is there a way for him to do this that would not hurt me? I have called the Social Security office five times and have received five different answers. My husband went into the local office and they told him to have me apply for benefits and then after a short time send them a letter rescinding my application. That would allow him to collect on my work record and wouldn’t hurt my eventual benefit. I am not comfortable doing this. What do you suggest?

Answer: At your current age, you must start your own benefits for your husband to get a check based on your work record. The so-called spousal benefit is basically half your retirement benefit, and it will be somewhat reduced because your husband hasn’t achieved “full retirement age” (which is 66 for both of you). When he applies for spousal benefits, the Social Security Administration will compare that benefit with the one based on his own record and give him the larger of the two.

Starting benefits now, however, would lock you into a lower payment for the rest of your life. Your checks could be further reduced based on your earnings, if you continue to work.

If you can wait three years, you have another option called “file and suspend” that would allow your husband to collect a spousal benefit without reducing your eventual checks. Once you reach your full retirement age of 66, you can go to your local office to file for your benefit and then immediately suspend your application. That would allow your husband to collect a spousal benefit while your own uncollected benefit could continue to grow.

Another advantage for your hubby if you wait: He will have achieved his full retirement age when he starts receiving spousal benefits, so he would be allowed to switch to his own benefit later, if it’s larger. If he starts receiving spousal benefits before his full retirement age, he loses the option to switch.

You can learn more about the file-and-suspend strategy on the Social Security site at www.ssa.gov/retire2/yourspouse.htm. You may want to bring a printout of that page with you to the Social Security office. File and suspend is not an obscure strategy, but it doesn’t appear that your local office is quite aware of all the details.

Should you take a lump sum now or an annuity check later?

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Dear Liz: My former employer is offering the one-time opportunity to receive the value of my pension benefit as a lump-sum payment. The other option is to leave the money where it is and get a guaranteed monthly check from a single life annuity when I reach retirement age. I am 40 and single, and I have been investing regularly in a 401(k) since graduating from college. I have minimal debt aside from a car payment. When does it make financial sense to take a lump sum now instead of an annuity check later?

Answer: Theoretically, you often could do better taking a lump sum and investing it rather than waiting for a payoff in retirement. That assumes that you invest wisely, that the markets cooperate, that you don’t pay too much in investing expenses and that you don’t do anything foolish, like raid the funds early.

That’s assuming a lot. Another factor to consider is that the annuity is designed to continue until you die. It’s a kind of “longevity insurance” that can help you pay your bills if you live a long life.

Some financial advisors will encourage you to take the lump sum, since they may be paid more if you invest it with them. Consider consulting instead a fee-only financial planner who charges by the hour — in other words, someone who doesn’t have a dog in this particular fight. The planner can walk you through the math of comparing a lump sum to a later annuity and help you understand the consequences of both paths. This is a big enough decision that it’s worth paying a few hundred bucks to get some expert advice.

Many goals, few resources: How do you focus?

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Dear Liz: I have read tons of books on finance and debt repayment, but I’m having trouble deciding what to do next. My husband and I are 52. He receives a monthly disability income, and I work two days a week. We still have about $105,000 left before our mortgage is paid off. We also owe about $7,000 in credit card debt and $5,500 in overdraft charges.

Should I concentrate solely on paying off debt, including the mortgage? Should we modestly renovate our 20-year-old home because after six kids, it is in need of a little TLC? We could downsize, but I’m somewhat emotionally attached to this house, and downsizing would still mean renovating to get the house in shape to sell. At the same time, we’d like to start a small business in our town. It wouldn’t be a huge investment of money, but it’s an outlay nonetheless. I don’t really want to wait five or 10 years to have to do this because it would mean income for one of our children who needs it and sometimes has to rely on us financially. How should I focus?

Answer: You didn’t say a word about retirement savings, but that should be a priority for most people.

If you don’t make a lot of money, Social Security is designed to replace 40% to 50% of your earnings. (The more you make, the less Social Security will replace, on the assumption that you’ve had more opportunity to save.) But most people, of any income level, would have trouble adjusting to living solely on their Social Security checks.

You can estimate your future benefit checks by using the Social Security Administration’s calculator at http://www.ssa.gov/estimator. Your results will be based on your actual earnings. Then you can use the AARP calculator (in the “work and retirement” section of the website) to figure out how much you need to save to have a comfortable retirement. You may not be able to reach that goal, but you should at least try to put aside something to improve your future life.

You don’t need to be in a rush to pay off your mortgage, but you should target that credit card debt and that shocking amount of overdraft charges. You also should know that renovations rarely pay for themselves when you’re ready to sell a home. At best, you typically get back 80 cents for every dollar you spend. A better approach is to make some cosmetic fixes that don’t cost a lot, such as new paint, clean windows and freshened-up landscaping.

As for opening a store, understand that small businesses can take a while to get off the ground. If you don’t have adequate savings or access to a line of credit, the business could fail and take your investment with it. The Small Business Administration at http://www.sba.gov has resources and Small Business Development Centers to help you understand what lies ahead. Do your research before you begin, and consider holding off at least until your toxic debts are repaid.

Finally, you didn’t explain why your child needs your money. If he or she is still a minor, that’s one thing. If he or she is an adult and not disabled in some way, however, then the parental dole needs to stop. It doesn’t sound like you and your husband are adequately providing for your futures. Your kids need to know they have to provide for their own.

How to shoot yourself in the foot

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Dear Liz: I want to stop contributing to my 401(k). How do I cancel it and withdraw my funds?

Answer: You can stop contributing to most workplace retirement funds by contacting your human resources department. You typically won’t be able to withdraw the money, however, unless you can prove a hardship or you leave your job.

You should think long and hard before you discontinue your contributions, in any case. For many workers, contributing to a 401(k) is their best shot at a comfortable retirement. You may be unsettled by volatile investment markets now, but over time a diversified mixture of stocks and bonds should give you the returns you’ll need to overcome inflation and have a reasonable nest egg.

Not contributing to your 401(k) could mean giving up free money in the form of a company match and could trigger a larger tax bill, since your contributions usually are tax-deductible. Money saved within retirement accounts, including 401(k)s and IRAs, is also protected from creditors should you ever be sued or have to file for bankruptcy.

If you’re disgruntled with your plan because you think the fees are too high, ask your employer to look for a more reasonable-priced option. Now that 401(k) administrators must fully disclose their fees, many companies will be looking for better deals.

Will your pension hurt your Social Security benefit?

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Dear Liz: Could you please address the issue of Social Security for those with pensions? I understand that if you have a pension, you won’t get 100% of the standard monthly Social Security benefit. I believe that this happens even if you only have a defined contribution account. But I’ve never seen this discussed in news reports. Many people are surprised when I tell them this.

Answer: Perhaps they’re surprised because what you’re saying isn’t true.

Defined contribution plans, such as 401(k)s, don’t affect your Social Security benefit at all. Neither do most pensions. The time that a pension might affect your benefit is if you didn’t pay into Social Security while you were earning the pension.

Here’s how the Social Security website puts it: “A pension based on work that is not covered by Social Security (for example, federal civil service and some state or local government agencies, such as police officers and some teachers) may cause the amount of your Social Security benefit to be reduced.”

The reduction can come under one of two provisions. The first, called government pension offset, applies if you get a government pension not covered by Social Security and are eligible for Social Security benefits as a spouse or survivor. The spousal or survivor benefit may be reduced in that case. You can learn more at http://www.socialsecurity.gov/retire2/gpo.htm.

The second provision is the windfall elimination provision, which may reduce your Social Security or retirement benefit if you receive a pension from a job not covered by Social Security. You can learn more at http://www.socialsecurity.gov/retire2/wep.htm.

These provisions were put into place because some people with a pension from a job that didn’t pay into Social Security were getting more Social Security benefits than the system intended. If they worked mainly in the job with the pension, but also had jobs that paid Social Security taxes, their Social Security benefits were often calculated as if they were long-term, low-wage workers. Since Social Security is designed to replace a larger percentage of earnings for low-paid workers — and a smaller percentage for higher-paid workers — these folks wound up with a bigger benefit than their earnings actually justified.