Q&A: Profit sharing and retirement

Dear Liz: I work for a wonderful company that has a generous profit-sharing plan. I am 61 years old and plan on working until I am 65 and eligible for Medicare. Due to some health issues, I am reducing my hours and this will significantly reduce my income for the next four years. I thought this was a good plan because it keeps my health insurance intact, but now I am wondering if the lower earnings will affect my profit sharing when I retire. I know the final distribution is based on earnings and time on the job. Should I retire now, while my income is up, or should I wait until I am 65?

Answer: There are a lot of moving parts to any decision about retirement. How much will health insurance cost and how will you pay for it? How much do you have saved and how long are those funds likely to last? What’s the best time to apply for Social Security and how will that affect your retirement fund withdrawals? (It’s often best to delay Social Security as long as possible and draw down retirement savings instead, especially if you’re the primary earner, but individual situations vary.)

Money is a finite resource, but so are time and energy. Every additional year you work could put you in better financial shape, but means one less year in which you could be enjoying retirement.

Consider talking to your human resources department to find out exactly how your reduced hours are likely to affect your profit sharing payout. Then take those numbers to a fee-only financial planner who can examine the rest of your finances and talk with you about the best glide path into retirement.

Q&A: Social Security is insurance

Dear Liz: My wife died in March 2020. I receive nothing from her Social Security (other than $255) and will receive only a portion of mine due to the windfall elimination provision. Is there anything I can do since I am receiving none of what she paid into Social Security and only a fraction of mine?

Answer:
In a word, no. If you’re receiving a pension from a job that didn’t pay into Social Security, the government pension offset reduces any Social Security survivor or spousal benefit by two-thirds of the amount of your pension. If two-thirds of the amount of your pension is greater than your survivor benefit, you don’t get a survivor benefit.

Is that an outrage? Perhaps, if you think that Social Security should act like a retirement account. In reality, it’s insurance. (The formal name for Social Security is Old Age, Survivors and Disability Insurance.)

With a retirement account, what you take out usually bears some relationship to what you put in. With insurance, that’s not necessarily the case. You may take out more than you put in, less or nothing at all.

Many people pay Social Security taxes for decades but ultimately get more from a spousal or survivor benefit than from their own work record. Then there are those, like you, who have their retirement benefit reduced, or a survivor benefit eliminated, because they have a generous pension from a government job that didn’t pay into the Social Security system. In these cases, it can feel like the Social Security taxes paid — the “premiums,” if you will — have been wasted even if financially you’ve come out ahead.

Monday’s need-to-know money news

Today’s top story: Are cash offers better for home sellers? Also in the news: A new episode of the Smart Money podcast on savings tips and the Child Tax Credit, 4 smart insurance moves for hurricane season, and how to find unclaimed money that’s owed to you.

Are Cash Offers Better for Sellers?
An all-cash offer for your home might seem like the golden ticket, but take the time to weigh all your options.

Smart Money Podcast: Savings Tips and Updates to the Child Tax Credit
Saving money can involve both cutting expenses and knowing how to make saving easier for you.

4 Smart Insurance Moves to Make for Hurricane Season
Checking your coverage and deductibles in advance can help you protect yourself financially.

How to Find Unclaimed Money That’s Owed to You
Finding your unclaimed property.

Tuesday’s need-to-know money news

Today’s top story: 5 things agents wish people knew about insurance. Also in the news: 10 factors affecting COVID-era travel, how the new stimulus bill will affect unemployment, and how to spend your FSA before the grace period expires.

5 Things Agents Wish People Knew About Insurance
Agents from across the U.S. clear up a few of the most common insurance misconceptions.

10 Factors Affecting COVID-Era Travel in 2021
Traveling during COVID-19 means making more advance reservations and planning for vaccine or testing rules.

How the new stimulus bill will affect unemployment
PUA benefits are extended.

How To Spend Your FSA Before the Grace Period Expires
Use it or lose it.

Wednesday’s need-to-know money news

Today’s top story: 7 Halloween headaches and how insurance can help. Also in the news: Your battle plan for buying a home with a VA loan, what college and student debt changes are likely after the election, and the best credit card for food delivery apps.

7 Halloween Headaches and How Insurance Can Help
What to do when you get tricked.

Your Battle Plan for Buying a Home With a VA Loan
Choose experienced professionals to guide you through the VA loan process, and bring some cash to the table, even if you don’t plan to make a down payment.

Trump vs. Biden: What College and Student Debt Changes Are Likely
What to expect from both candidates.

The Best Credit Cards for Food Delivery Apps
Finding tasty discounts.

Wednesday’s need-to-know money news

Today’s top story: What to do if you can’t pay for insurance due to Coronavirus. Also in the news: 3 effective ways to get airlines and hotels to bend their rules, a new episode of the SmartMoney podcast on spring cleaning your finances, and what the CARES Act means for public service student loan forgiveness.

What to Do if You Can’t Pay for Insurance Due to Coronavirus
Get in touch with your carrier immediately.

3 Effective Ways to Get Airlines and Hotels to Bend Their Rules
Twitter vs. phone vs. email.

SmartMoney Podcast: ‘How Should I Spring-Clean My Finances?’
Three steps to tidy things up.

What the CARES Act Means for Public Service Student Loan Forgiveness
Document everything.

Q&A: Rising insurance premiums

Dear Liz: I’m an insurance agent specializing in long-term-care policies and just read your advice to the woman who was upset about how much her premiums had risen. Her premiums were $2,400 annually starting when she was 55 but are $4,470 now that she’s 77. First, thank you for noting that these premium increases are because insurance companies didn’t expect people to live so long and nursing home rates to increase so much. Please also tell your reader that, at her age, her premium for the coverage she has now would be well over $12,000! She bought early and she’s definitely getting a ridiculously low premium for the coverage she has. I’m sorry that she’s on a fixed income, but ask her how she’ll pay for a $60,000-per-year stay in a nursing home. If she can’t afford her premium, she should reduce her amount of time covered, not the amount of dollars covered.

Answer: Let’s be clear about who’s at fault here. It’s not the people who bought long-term-care insurance policies and expected them to remain affordable.

Insurers are supposed to be experts at predicting risk, but they made incorrect assumptions about how many people would drop their policies (known as the lapse rate), how many would file claims and how long those claims would last. Insurers also overestimated the returns they could get on their bond investments, which also help determine premiums.

All these stumbles have led to repeated premium increases that have threatened to make coverage unaffordable right when people need their coverage the most.

This woman is well aware of the high costs of long-term care; that’s why she bought the policy in the first place and kept paying it all these years. Her premium might seem “ridiculously low” to you, but anyone with an ounce of empathy could understand that $4,470 is a huge chunk of change for most seniors.

Keeping her coverage means giving up some of the benefits she was promised and had been counting on. Reducing the number of years the policy protects her, for example, could make her premium more affordable but leave her exposed to devastating costs if she needs many years of care.

This is a crappy situation for people who were trying to do the right thing. They don’t deserve to be sneered at for being upset about it.

Tuesday’s need-to-know money news

Today’s top story: What to do if Hurricane Dorian hits your home and mortgage. Also in the news: How to fall in love with your car again without breaking the bank, drink up savings at Starbucks, and why you should add cash to your car’s emergency kit.

What to Do If Hurricane Dorian Hits Your Home, Mortgage
What to do first.

Fall in Love With Your Car Again Without Breaking the Bank
Rekindle an old flame.

Drink Up Savings at Starbucks
Just in time for Pumpkin Spice Latte season.

Add Cash to Your Car’s Emergency Kit
But don’t leave it on the dashboard.

Thursday’s need-to-know money news

Today’s top story: Plug into your car’s computer to save money and drive safer. Also in the news: How to reset retirement plans to weather a downturn, the easiest way to earn 6,000 Rapid Rewards point, and why you should pay off all of your debt before investing in stocks.

Plug Into Your Car’s Computer toonboardney, Drive Safer
Your on-board computer can tell you a lot about your driving habits.

How to Reset Retirement Plans to Weather a Downturn
Making the adjustments.

Quite Possibly the Easiest Way to Earn 6,000 Rapid Rewards Points
All it takes is a newsletter.

Pay off all your debt before investing in stocks
Credit card debt is the worst.