Ask Liz Weston

Get smart with your money

Social Security

Three ways to retire poor

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Will Work for FoodI hear from a lot of people who think they’re doing the right things with their money—little realizing that they’re impoverishing their future selves. Three behaviors you’re most likely to regret later:

Putting off saving for retirement. Some people spend every dime they make, while others delay saving while they pursue other goals that seem more worthy, like saving for a home or paying off debt. The reality is that retirement savings opportunities are “use it or lose it”—you can’t get back the company matches, tax breaks or (most important) the power of compounding if you don’t get those contributions into your account. Compounding is so powerful, in fact, that it gets harder and harder to catch up the older you get…until it gets impossible. The smarter solution: Start saving for retirement from your first job, and don’t stop.

Cashing out your retirement when you leave a job. The next most widespread and destructive behavior is tapping into what you do manage to save. About 42% of those who lost their jobs in 2010 cashed out their retirement plans, which is about the same percentage as before the recession, according to an Aon report. More than half of those in their 20s cashed out. Not only do you incur taxes and penalties that eat up 25% or more of your withdrawal, but you lose all the future tax-deferred compounding on that money—which means those in their 20s are hurt even more by cash-outs than those who do it later. (Figure every $1,000 you withdraw in your 20s will cost you $20,000 or more in lost future retirement income.) The smarter solution: Leave your retirement money for retirement. If you can’t or don’t want to leave your balance when you leave your job, roll it into your new employer’s plan or into an IRA.

Grabbing your Social Security benefit early. Social Security will be a big part of most people’s retirements, but too few people understand how much they’re hurting themselves—or their loved ones—when they apply early and lock in a permanently reduced check. It’s not just that you’re likely to live past the “breakeven point” when, mathematically, waiting until full retirement age pays off in terms of total benefits. More importantly, you may be cutting yourself off from strategies that would maximize your lifetime benefits and leaving your surviving spouse with a bigger check. Take a minute to read AARP’s excellent primer on the subject, “How to Maximize Your Social Security Benefits,” and use the free calculator at T. Rowe Price to help you understand the impact of different strategies. (If you want more freedom to customize a tool, www.maximizemysocialsecurity.com gives you that for $40.) The smarter solution: View Social Security as a kind of longevity insurance that helps protect you against the possibility of outliving your savings.

 

Divorced? You may qualify for half of ex’s Social Security

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Dear Liz: Many years ago I read about spousal benefits based on an ex-spouse’s Social Security earnings record. Is there a minimum length of time of the marriage to qualify? How do I apply for this benefit? I am within nine months of retirement.

Answer: You can qualify for Social Security spousal benefits based on an ex’s work record as long as:

•The marriage lasted 10 years or more.

•You are 62 or older and unmarried.

•Your ex-spouse is eligible to begin receiving his or her own Social Security benefit (even if he or she hasn’t applied yet).

•Your own benefit is less than the spousal benefit you would get based on his or her work record.

Any benefits you receive based on his or her record won’t affect what your ex receives, or what his or her current or other former spouses receive.

As with regular spousal benefits, the amount you get will be permanently discounted if you apply before you’ve reached your own full retirement age (which is currently 66 and will climb to 67 in a few years).

Gay marriage: more taxes, more benefits

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Champagne glassesThe Supreme Court’s decision to invalidate the Defense of Marriage Act means that gay married couples will have access to the federal benefits now enjoyed by other marrieds.

These benefits include tax breaks, Social Security benefits and estate planning advantages that until now were denied gay couples, even if their marriages were recognized under state law.

Among other things, gay marrieds will now be able to:

  • claim Social Security benefits based on a spouse’s working record and qualify for survivor benefits.
  • fund an IRA or Roth IRA for a nonworking spouse.
  • split a retirement fund or other assets without triggering tax bills if they divorce.
  • exempt health care benefits for a spouse from their federal income.
  • bequeath their estate to a spouse without triggering potential federal estate taxes.

These gains may come with a cost: as NerdWallet puts it, “federal income tax brackets are in fact easier on high-income individuals than they are on most high-income married couples.” NerdWallet figured that same-sex couples earning more than $146,000 may see their tax bill go up by over $1,000.

One of my gay friends, a financial planner, just posted to her Facebook page that her taxes are likely to go up by several thousand dollars. But she was happy, as she put it, to “take one for the team.”

 

How to claim SS now, and claim more later

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Dear Liz: You recently wrote that people who start Social Security benefits before their full retirement age are locked in and can’t switch to a higher benefit later. You are indeed locked in to that reduced benefit, but by switching to a spousal benefit at age 66, for example, it is possible to receive a higher benefit. Getting correct information about this is tough. I’m a certified financial planner and I received three different answers from Social Security personnel. Search the FAQ on the ssa.gov site for “receiving full and reduced benefits.”

Answer: Thanks for that important clarification. The original letter referenced a technique that some married couples can use to significantly boost their overall benefit. The technique allows people to start spousal benefits — Social Security payments based on the work record of a husband or wife — while letting their own benefit grow, to be claimed later. But the option of switching from the spousal benefit to your own benefit is available only if you start spousal benefits at your own full retirement age (which is currently 66). People who start spousal benefits before full retirement age can’t later switch to their own benefit.

As you note, however, people who start with their own benefit may be able to switch to a spousal benefit later. Both their own benefit and their spousal benefit would be reduced because of the early start. Here’s how Social Security explains it:

“When you apply for reduced retirement benefits, we will check to see if you are eligible for both your own retirement benefits and for benefits as a spouse. If you are eligible for both, we always pay your own benefits first. If you are due additional benefits, you will get a combination of benefits equaling the higher spouse’s benefit. If you are not eligible for both because your spouse is not yet entitled, but you are due a higher amount when he or she starts receiving Social Security benefits, then the higher spouse’s benefit is payable to you when your spouse applies for retirement benefits. Remember, you cannot receive spouse’s benefits until your spouse files for retirement.”

Social Security claiming strategies can be complicated. The AARP has an excellent guide at http://bit.ly/153Quvh.

Early Social Security start precludes switching later

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Dear Liz: In a recent column, you noted that someone who chooses to obtain Social Security at age 62 on her own account is unable to switch to her spouse’s account at age 66. Is this true for a spouse who is older than the husband? My husband is one year younger than me. If I chose to start Social Security at age 62 on my own benefits, would I be able to switch to his when he retires at age 66 (and I would be age 67 at the time)?

Answer: You’ve actually got it a bit backward. Someone who waits until her full retirement age to apply for Social Security has the choice of starting with a spousal benefit (typically half of what the spouse gets) and then switching to her own benefit later, usually at age 70 when it’s reached its maximum level.

This is often a recommended strategy with two high earners, since the one receiving spousal benefits can “graduate” to her own, higher benefit later. If the spouse receiving spousal benefits was a lower earner, her benefit might not be as big as her spousal benefit at age 70, so there would be no reason to switch.

If you start spousal benefits before your own full retirement age, however, you’re locked in. You can’t let your own benefit grow and switch to it later.

For a program meant to benefit ordinary Americans, Social Security can be mind-numbingly complex. Fortunately, you can find good calculators at the AARP and T. Rowe Price websites to help you sort through your options.

How couples can maximize Social Security

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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.