Get smart with your money
Your taxes in retirement may be a lot more complicated than taxes while you’re working.
Social Security checks may or may not be taxed, depending on your income. You’ll pay federal income taxes on most retirement plan withdrawals, but additional state taxes depend on where you live. Tax rates on investments can vary as well.
In my latest for the Associated Press, what to expect when you hit retirement age.
Dear Liz: I’m remarried and don’t plan to claim a spousal benefit on my husband’s Social Security, as my benefit will be four times what his will be. My previous marriage ended in divorce at 10 years, and my ex died two years ago. How do I find out if I’m eligible to collect on my ex’s Social Security record? I am 63 and want to wait until 70 to apply for my own benefit, but I would like to retire at the end of this year.
Answer: You’ve already cleared one hurdle, which is that your previous marriage lasted 10 years. So whether you qualify for divorced survivor benefits depends on how old you were when you remarried.
Divorced people who remarry after they reach age 60, or age 50 if they’re disabled, can qualify for divorced survivor benefits. Those who remarry before that point are out of luck.
Note, please, that the remarriage rule applies only to survivor benefits. Spousal benefits are a different story. While divorced people can qualify for spousal benefits if their marriages lasted at least 10 years, the ability to get a spousal benefit ends when they remarry.
Survivor benefits are also different from spousal benefits in that you will be free to switch from a survivor benefit to your own benefit at 70. When you apply for spousal benefits, you typically have to apply for your own benefit at the same time and will get the larger of the two. You can’t switch to your own benefit later.
Dear Liz: Thanks for your column about Social Security claiming strategies. Here’s a further complication you didn’t address. If the surviving spouse is a teacher in many states, access to survivor’s Social Security benefits is further restricted (if not entirely blocked) by a misogynistic, anti-teacher ruling dubbed the windfall elimination provision, which perhaps was a backlash against the women’s liberation movement of the 1970s and 1980s.
Any clarification on the windfall elimination provision’s inconsistent application and its impact on my widow’s fixed income will be greatly appreciated.
Answer: The explanation is actually a lot more prosaic.
The windfall elimination provision and a related measure, the government pension offset, were not designed to rob public servants of benefits other people get. Instead, the provisions were meant to keep those who get government pensions from getting significantly bigger benefits than people in the private sector.
The provision that would reduce and possibly eliminate your spouse’s survivor benefit is actually the government pension offset. The offset, like the windfall elimination provision, applies to people who get pensions from jobs that didn’t pay into the Social Security system. (Some school systems, as well as other state and local government employers, have opted out of Social Security and provide their own pensions instead.)
If both you and your spouse had only Social Security and no government pensions, one of your two Social Security checks would stop at your death. After that, your spouse would get one check — the larger of the two checks the household received — as a survivor benefit.
If the government pension offset didn’t exist, your widow could receive two checks: a survivor benefit equal to your Social Security benefit, plus her pension. She potentially would be getting a lot more from Social Security than those who paid into Social Security their entire working lives.
The windfall elimination provision, meanwhile, applies to people who have government pensions but also worked in jobs that paid into Social Security.
When people don’t pay into the system for several years because they have jobs with government pensions instead, their annual Social Security earnings for those years are reported as zero. Because Social Security is based on workers’ 35 highest-earning years, those zeros make it look like they have lower lifetime earnings than they actually did.
That’s a problem because the Social Security system is progressive, replacing more income for lower-earning workers than for higher-earning ones. Without adjustments, people with pensions would look like lower earners than they actually were. They would wind up with bigger Social Security checks than someone who had the same income in a private-sector job that paid in a lot more in Social Security taxes.
These provisions are complicated and hard to explain, which is part of the reason some people jump to the conclusion they’re being denied something others are getting. In reality, the provisions were meant to make the system more fair.
Dear Liz: I am married and six months away from my full retirement age, which is 66. I have not filed yet. My wife started collecting Social Security at 62 but does not get very much. We are both in excellent health and have longevity in the genes. We don’t own a home. I have around $960,000 in diversified investments. I take out around $7,000 to $8,000 a month to meet my monthly expenses. Fortunately, the markets have been good, helping my portfolio, but I am not counting on that to continue at the same pace.
Doesn’t it make more sense to be taking less money out each month by starting Social Security now? I know I would receive less money than waiting until 66 or later, but between my check and the spousal benefit my wife could get, I would reduce my annual living expense withdrawals from my account by close to 50%. This would give my portfolio more opportunity to grow, since I will not be taking out so much every month.
I wish I could cut my expenses or could earn more income but cannot at this point. I am shooting for not taking more than 5% a year out of the portfolio going forward.
Answer: You’re right that something needs to change, because your withdrawal rate is way too high.
You’re currently consuming between 8.75% and 10% of your portfolio annually. Financial planners traditionally considered 4% to be a sustainable withdrawal rate. Any higher and you run significant risks of running out of money.
Some financial planning researchers now think the optimum withdrawal rate should be closer to 3%, especially for people like you with longevity in their genes. Chances are good that one or both of you will make it into your 90s, which means your portfolio may need to last three decades or more.
So even if you start Social Security now, you’ll need to reduce your expenses or earn more money to get your withdrawals down to a sustainable level.
Generally, it’s a good idea for the higher earner in a couple to put off filing as long as possible. The surviving spouse will have to get by on one Social Security check, instead of two, and it will be the larger of the two checks the couple received. Maximizing that check is important as longevity insurance, since the longer people live, the more likely they are to run through their other assets. Your check will grow 8% each year you can delay past 66, and that’s a guaranteed return you can’t match anywhere else. In many cases, financial planners will suggest tapping retirement funds if necessary to delay filing.
But every situation is unique. Your smartest move would be to consult a fee-only financial planner who can review your individual situation and give you personalized advice.
Dear Liz: Will my wife, after I’m gone, be able to claim one half of my Social Security benefits because she is the surviving spouse? I am concerned and confused, because her monthly Social Security benefit is much larger than mine. Does that affect this aspect of the available benefit?
Answer: If by “gone” you mean “dead,” then no, that’s not how survivor benefits work.
When one member of a married couple dies, the surviving spouse does not continue to get two benefit checks. The survivor is given the larger of the couple’s two benefits. If she’s already receiving much more than you, then she will continue taking her own benefit and your checks will end.
The “one half” benefit is the spousal benefit, which is paid out while the primary earner is still alive. Typically when married people apply for Social Security, the retirement benefit they earned is compared with their spousal benefit, which is up to one half of what the other spouse has earned. (The amounts are reduced if the person applies for benefits before his or her own full retirement age.) The applicants get the larger of the two checks.
Spousal benefits also are available to divorced spouses, if the marriage lasted at least 10 years.
Today’s top story: How to help your partner’s credit without harming your own. Also in the news: Why Millennials can count on Social Security after all, 3 smart ways to supercharge your travel rewards, and the worst financial mistake a grandparent can make.
Help Your Partner’s Credit — Without Harming Your Own
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Millennials Can Count on Social Security After All
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No matter how well-intentioned.