How should couple with age gap tap Social Security spousal benefits?

Dear Liz: I am 55 and my wife is 65. She only worked a few part-time jobs as she spent most of her working years raising our nine beautiful children. My question is, since she does not have enough credits to collect Social Security on her own work record, can she claim spousal benefits on my work history? If so, at what age and how will it affect my benefits?

Answer: Your wife can receive spousal benefits based on your work record, but those checks can’t start until you’re old enough to qualify for benefits at age 62 (when she’s 72).

If you apply at 62, however, you’re typically locked into a check that would be about 30% smaller than what you’d get if you waited until your “full retirement age” to start. Full retirement age used to be 65, but it’s now 66 and will gradually increase to 67 for people born in 1960 or later.

At your full retirement age, you have the option to “file and suspend,” in which you file for retirement benefits and then immediately suspend your application. Your wife can start receiving spousal benefits, but because you aren’t actually receiving checks, your benefit can continue to grow until it maxes out at age 70.

For many couples, it makes sense for the higher earner to delay starting benefits as long as possible. Given your big age gap, however, you may be better off with a hybrid approach: starting your own benefits (and your wife’s spousal benefit) at age 62 and then suspending your benefit when you reach full retirement age, said economist Laurence Kotlikoff, a Boston University professor who created the site MaximizeMySocialSecurity.com to help people analyze their claiming options. Your benefit would grow 8% a year from the time you suspend to the time you restart at age 70. Your wife would continue to receive her spousal benefit in the interim.

Because your wife will be older than her own full retirement age of 66 when she starts receiving checks, she will be entitled to half of the benefit you’re scheduled to get at your full retirement age. What she gets doesn’t diminish what you get. Spouses who haven’t reached their full retirement age when they apply for spousal benefits have to settle for a discounted check.

Clearly, claiming decisions can be complicated, especially for married people and even more so when there’s a big gap in their ages. AARP has a free calculator that can help most people understand their options. T. Rowe Price also has an easy-to-use calculator, but it doesn’t work for married couples with more than a six-year age gap.

For a more detailed and customizable calculator, you may want to pay $40 to use the software at sites such as MaximizeMySocialSecurity.com or SocialSecurityChoices.com, co-developed by economist (and Social Security recipient) Russell F. Settle.

You may not be as smart as you think you are

Portrait Of Senior Couple In ParkMost people are better off delaying the start of their Social Security benefits as long as possible. That’s the consensus of the AARP, financial planners and researchers who have studied the thousands of different claiming options. In fact, the benefits of putting off Social Security have grown in recent years, thanks to low interest rates, gains in longevity and changes in the law since the 1990s.

Still, every time I pass along the advice that waiting is better, I hear from those who just refuse to believe it. They focus on breakeven points rather than longevity risk; they don’t factor in spousal or survivor benefits; they underestimate how much their benefit can grow with even a few years’ delay.

So when Financial Engines approached me with the results of a recent survey, I just nodded my head in recognition. Their poll found that most people nearing retirement are confident that they can make smart Social Security claiming decisions–but that most do poorly on a test that measures their understanding of basic Social Security claiming concepts. You can read more about it in my column this week for Bankrate, “Are you Social Security smart? Guess again.”

My best advice is that before you claim Social Security, use some of the software tools that are available to help you evaluate your options. The AARP has a good calculator here. If you want to play with the numbers and assumptions a bit more, MaximizeMySocialSecurity.com has software that will really let you get your geek on; a one-year license is $40. You also can talk to a fee-only financial planner who is savvy about claiming strategies.

Here are two things you should know:

1. If you’re married (and that includes you same-sex couples, if you file in a state that legally recognizes your marriage), you have unique opportunities to maximize your lifetime benefits and protect your surviving spouse from poverty. The difference between the best claiming strategies and the worst can be $250,000. No, that’s not a typo.

2. Social Security is not going to disappear. The program is simply too popular and its problems, though real, are not insurmountable. Even if Congress does nothing, the system can still pay out 75% of the benefits promised just from the taxes it will collect. If Congress does do something, the changes almost certainly won’t affect near-retirees but will instead change benefits for younger taxpayers. Signing up for benefits as soon as you’re eligible in order to “lock in” your checks will just lock you in to a much lower payment, for life.

If you’re one of those people who likes to dive into the academic research surrounding claiming strategies, here are a few articles to check out:

“Recent Changes in the Gains from Delaying Social Security.” This article in the Journal of Financial Planning demonstrates how changes in interest rates, longevity and the benefit formula have dramatically improved the benefits from delaying Social Security claims.

How the Social Security Claiming Decision Affects Portfolio Longevity.” Researchers William Meyer and William Reichenstein have done a lot of research on Social Security claiming strategies, and in this Journal of Financial Planning article they use a sophisticated model that factors in taxes to weigh how delaying Social Security can help retirees make their savings last longer.

Should You Buy an Annuity from Social Security?” This brief from Boston College’s Center for Retirement Research explains why it often makes sense to tap retirement savings so that you can delay the start of Social Security benefits.

When Should Married Men Claim Social Security?” This article, also from the Center for Retirement Research, should be required reading for any married couple thinking of starting benefits early. It does a great job of summarizing potential spousal and survivor benefits–and of making the point that starting too early can leave your surviving spouse in a world of hurt.

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Don’t obsess about Social Security “breakeven”

Dear Liz: I read your recent article in which you advised waiting before starting Social Security benefits. Is this good advice for everyone? You probably know that there is a break-even age around 85, so that if you die before 85, starting benefits early is better, but if you die after 85, starting late is better. “Better” means you receive more money. So, right off the bat the advice to delay is wrong for half the people in their 60s, since about half will die before the crossover, and if they had delayed, they lost money.

Answer: The problem with do-it-yourself financial planning is that people often focus their attention too narrowly and ignore the bigger picture. That’s what leads them to do things like pay down relatively low-rate student loan debt while failing to save for retirement. They may focus only on the expected returns of each option, while ignoring the tax implications, company retirement matches and the extraordinary value of future compounding of returns.

Obsessing about the break-even point — the date when the income from larger, delayed retirement benefits outweighs what you’d get from starting early — is often a mistake, financial planners will tell you. There are a number of other considerations, including the value of Social Security benefits as longevity insurance. If you live longer than you expect, a bigger Social Security check can be enormously helpful later in life when your other assets may be spent. Also, if you have a spouse who may be dependent on your benefit as a survivor, delaying retirement benefits to increase your checks will reduce the blow when she has to live on just one check (yours) instead of two (yours and her spousal benefit).

In his book “Social Security for Dummies,” author Jonathan Peterson offers a guide to figuring out your break-even point based just on the dollars you can expect to receive (rather than on assumed inflation or investment returns). In general, the break-even point is about age 78. That means those who live longer would be better off waiting until full retirement age, currently 66, than if they started early at age 62.

Currently, U.S. men at age 65 can expect to live to nearly 83, and the life expectancy for U.S. women at age 65 is over 85.

You can change that break-even by making assumptions about inflation and your future prowess as an investor, but remember that the increase in benefits you get each year by delaying retirement between age 62 and 66 is about 7%. It’s 8% for delaying between age 66 and age 70, when your benefit maxes out. Those are guaranteed returns, and there’s no “safe return” anywhere close to that in today’s environment.

Don’t forget that those benefits will be further compounded by cost-of-living increases. One researcher published in the Journal of Financial Planning found that an investor would have to achieve a rate of return that exceeds inflation by 5% to justify taking benefits at 62 rather than at full retirement age.

“At higher inflation rates and/or higher marginal tax rates, the rate of return may need to be even higher, perhaps in excess of 7% or 8% above inflation to justify taking benefits at age 62,” wrote Doug Lemons, a certified financial planner who retired from the Social Security Administration after 36 years.

You can read Lemons’ paper, as well as other research that planners have done on maximizing Social Security benefits, at http://www.fpanet.org/journal.

What same sex couples–and their advisors–need to know

Last summer’s Supreme Court decisions on same sex marriage created a sea change for gay couples, but the details of that change depend on where they got married, where they live now and the federal agencies involved.

The changes are dramatic and complex enough that financial advisors should contact any clients with same sex partners to discuss the implications, planner Thomas Tillery explained at the AICPA’s financial planning conference in Las Vegas on Monday.

Tillery is a longtime fee-only planner with a string of credentials—CFP, CLU, ChFC, LUTCF, CRPC—as well as a masters of science in financial services and, interestingly, a masters of arts in Christian education from the Southern Baptist Theological Seminary. What Tillery doesn’t have is much patience for advisors who ignore these issues because they disagree with the Supremes’ decisions; they’re “fools,” he said, who need to understand the new realities and serve their clients appropriately.

Here’s a brief summary of what advisors and couples need to know, by agency:

The IRS. Same sex couples are considered legally married for federal income tax purposes if they were wed in a state that recognizes their marriage. It doesn’t matter whether the state where they currently reside recognizes such unions, Tillery said. Couples can apply for refunds for up to three years’ worth of tax returns if they were married during those years and their newly-recognized status would have resulted in lower taxes. Some gay couples had to pay income tax on health insurance benefits for their spouse; the elimination of that requirement could mean money back from the government.

Social Security. Here, residence matters: if the state where couple applies for benefits recognizes same sex marriage, then Social Security spousal and survivor benefits are available to that couple.  One way around this limitation is for the couple to establish residency in a state that recognizes their marriage and then apply for benefits. They could later move to a state that doesn’t recognize their marriage without risking the loss of their Social Security benefits, Tillery said.

Department of Defense. Benefits are available for same sex spouses who can show a valid marriage license from any state or country that recognizes gay marriage. The state where the couple currently lives is irrelevant. Service members can get special leave to travel to a state where same sex marriage is recognized in order to wed.

Department of Labor/ERISA.  Qualified pension plans have guaranteed protections for spouses, including automatic survivor benefits unless the spouse waives them and provisions that allow for division of retirement assets at divorce without triggering tax bills. Whether a same-sex married partner qualifies as a spouse for these provisions depends on whether the state where the employee resides recognizes same sex marriage.

The Supreme Court decisions have implications for other aspects of a couple’s financial life, including estate planning, family leaves, participation in flexible spending accounts and more.

My advice: if you don’t have an advisor who can help you with these issues, find one who can. It could make a huge difference in your financial lives and financial security.

 

 

 

Who should save 10%

Dear Liz: I often hear financial planners say you should save 10% of your income, but they don’t go into exactly what that means. Is that 10% separate from retirement or including retirement? Does that include saving for your emergency fund? Is this just archaic advice now? I’m 46 with only $40,000 saved for retirement so I’m in the panic mode that I will never be able to save enough for retirement.

Answer: Saving 10% for retirement is often considered a minimum for those who start saving in their 20s. The older you are when you begin, the more you’d need to save to match the nest egg you would have accumulated with an earlier start. That means saving 15% to 20% if you start in your 30s, 25% to 30% if you start in your 40s, and 40% of your income, or more, if you don’t start until your 50s.

Clearly, the wind is at your back when you start saving young. It starts blowing pretty hard in your face if you wait.

If you can’t carve out a huge chunk of your income for retirement, though, you shouldn’t despair. Save what you can, as anything you put aside will help supplement your Social Security checks. You may find that your expenses drop substantially in retirement, particularly if you have a mortgage paid off by then, so you won’t need to replace as much income as you think.

Another technique for coping with a late start is to work longer. That gives you longer to save, but it also allows your savings — and your Social Security benefits — more time to grow. You will be able to claim early Social Security benefits at 62, but you’ll be locking in a smaller check for life. It’s usually better to wait until your full retirement age, which will be 67, to begin benefits, since each year you wait adds nearly 7% to your check. If you wait three more years, until age 70, your check would grow by 8% each year. That’s a guaranteed return unavailable anywhere else.

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Your payout from Social Security and Medicare

Old Woman Hand on CaneA reader recently wondered what the average person could expect from Social Security, compared to the taxes we pay into the system.

Urban Institute has done the math, and recently released “Social Security and Medicare Taxes and Benefits Over a Lifetime: 2013 Update.” The institute figured out net present values of money paid in and paid out for various situations: single male and single female, one-earner family, two earner families. Spoiler alert: in most situations, people in the simulations pay more in Social Security taxes than they get back in benefits–but they get back vastly more Medicare benefits than they pay in taxes. Overall, benefits received exceed taxes paid. Here’s one example with a cogent comment from the Wall Street Journal:

Consider: A one-earner couple with a high wage ($71,700 in 2013 dollars) retiring in 2015 can expect lifetime Social Security benefits of $640,000. The same couple can expect to get $427,000 in lifetime Medicare benefits—while paying only $111,000 in Medicare taxes. The latter figures help illustrate how Medicare, in particular, is expected to strain future federal budgets.

The report, which you’ll find here, is interesting reading. Obviously, there are caveats. Nobody can know for sure what his or her Social Security “payout” will be, since a lot depends on longevity. And that brings me to the most important point: it’s really not about money in, money out.

Social Security isn’t an investment scheme. It’s insurance. (The formal name for what we know as Social Security is Old Age, Survivors, and Disability Insurance or OASDI). It’s insurance against poverty, against outliving your assets, against a downturn in the market at the wrong time that could leave you with too little money on which to live. You still should save and invest as much as you can on your own, but Social Security provides a safety net in case things don’t go as planned.

Should daughters be forced to give money to Mom?

Dear Liz: I read with interest your recent column about the filial obligation law possibly coming into effect in California. I hope this is true. I have three grown daughters who make terrific money and who will not offer a pittance to me. I live on Social Security, period. I could really use a few hundred dollars a month to supplement. They had a glorious childhood and this is really sad and inexplicable. I want to contact someone involved with this law, if possible. I am puzzled and hurt. More than money, this situation has a strange malignity to it.

Answer: Currently, California’s filial responsibility law — which makes adult children responsible for supporting their indigent parents — isn’t being enforced. When similar laws in other states have been invoked, it’s typically because the parent is receiving governmental aid or has racked up a bill with a nursing home that wants to get paid.

One of the reasons the laws aren’t enforced is because most people feel an obligation toward their parents. The fact that your daughters apparently don’t indicates that there’s either something missing in their characters or in your characterization of the situation.

Here’s another perspective:

Dear Liz: I am 67 and live in a retirement home. I strongly feel that children should not have to take care of their parents. We all have time to save for our own futures. I left a marriage with very little other than a small child. We did lots of free events together because there was not money to spend. I did immediately start saving for retirement and her college. It all worked out, but had it not, I would not expect her to support me in my old age. I chose to get pregnant and have her…. She did not chose to have me!

Answer: Thanks for sharing your experience. My guess is that if your financial life had not worked out — if you hadn’t been able to save enough or if your savings had been wiped out — your daughter happily would have stepped up to help if she could. People who do their best to take care of themselves often find the support that isn’t offered to those who don’t.

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