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At what age does it make the most sense to maximize Social Security to determine the best strategy for filing for Social Security?
Of course the law can change, and our software is updated when that happens. But I would say, it’s a $40 program and you can take the results and make a lifetime plan. I think people should be doing lifetime planning from early on at 25 and 30 years old because you need to save and prepare yourself for a long time. And the earlier you get going, the better you are. Our software is unique in that it has a lifetime spending plan. We figure out what you’re going to be making, what your resources are, and how much you can spend on an ongoing basis. We’re trying to smooth your way so you know what to expect.
Given the high expenses associated with building in the inflation protection rider with an income annuity, can I create a hedge against inflation with investments?
Any income annuity that you buy should be fully inflation indexed. The Federal Reserve has been printing money like crazy for eight years, so inflation could take off. You need something that keeps up point for point with inflation.
Apart from inflation-protected annuities, there are TIPS (Treasury Inflation Protected Securities) which are inflation-indexed bonds which you can buy from the Treasury. You can also take out a bigger mortgage or not pay off your mortgage as rapidly, because if inflation takes off, the real value of what you have to pay back will go down. Suppose you’re paying $10,000 each year in mortgage payments. But suppose the price level factor increased by 5 tomorrow so a hot dog tomorrow costs $10 instead of $2. Then, the real cost of your mortgage will go down by a factor of 5 because you’re going to keep paying that $10,000 every year, but in terms of the purchasing power, that $10,000 won’t be worth that much. So thinking about how fast you should pay off your mortgage is an important inflation hedge and you should think about borrowing against your house and investing in inflation-indexed bonds. Or you can borrow against your house and buy an annuity which is what a reverse mortgage is about and that’s worth looking into as well.
I am 64 years old and a few quarters away from qualifying for Social Security. I was able to opt out of Social Security payroll deductions during my 30 year career. Will it be wise for me to avoid Social Security so I can continue to stay on my former employer’s health plan as my primary plan?
Social Security and Medicare are completely independent. Starting at age 65, you can take Medicare Part D or not. You don’t have to take Social Security at the same time, even though the people at the Social Security office may pressure you to do so. You don’t want to be asking Social Security any questions, you want to be telling them what to do.
There could be enormous payoffs from working those few extra quarters and then qualifying for Social Security. They could also significantly raise their lifetime benefit by more than the taxes they paid. But in their case, they are going to be subject to the windfall elimination provision (WEP) if they do qualify to collect their Social Security benefits. And they’ll be hit with this government pension offset (GPO). The WEP reduced the retirement benefit for somebody with non-covered employment unless they’ve had 30 years of significant covered employment. If you try to collect a benefit of your spouse or ex-spouse’s work record, you get hit with the GPO which reduced that benefit by 2/3 of the non-covered pension you’re collecting.
What are the ramifications of working while collecting Social Security?
The earnings test starts around $15,000 right now. Let’s say you’re 62 and you’ve taken your retirement benefits early, you make more than $15,000 per year which means you lose about $1 for every $2 in benefits you earned, which is essentially a 50% tax. That’s a reason to maybe not work as much or wait to take Social Security benefits in the future. What people don’t realize is that when you reach full retirement age, the benefits that you lose due to the earnings test will be picked back up, will be bumped up on a permanent basis to give you back what you lost through the earnings test. So it’s really a stupid thing. They take money away from you then give it back to you. So your earnings test may not be a true earnings test of any kind in the sense that they give back what they took away from you. But if you flip on to a different benefit, let’s say you were a low earner and you took your retirement benefit early and you lose some or most of it through the earnings test. When you reach full retirement age, you decide to take your widow’s benefit. Your retirement benefit will be bumped up, but it won’t be any benefit to you because your widow’s benefit will be larger anyway. In this scenario, you will have lost money through the earnings test and never recouped it.
The taxation of Social Security benefits under the federal income tax laws is kind of a nasty piece of work because it gets bigger every year because of the threshold beyond Social Security is taxable are not indexed for inflation. So our children are going to see 85% taxation on all their Social Security benefits. We’re facing either 0% or 50% being taxed or 85% depending on the size of our Social Security benefit and our other income. There is one way around having your benefits taxed. That’s by trying to arrange your income so that there isn’t a lot of other taxable income at the time you start taking your Social Security benefit.
How can I maximize my benefits after age 62?
If you’re single and have never been married, the optimal thing to do is wait till you’re 70 to collect a much higher number, if you have a pretty high maximum life expectancy. If you’re for sure going to die at 75, starting earlier would make more sense. Our software lets you change your maximum age of life. If you do find out that you only have a couple years left to live, you can get suspended benefits in a lump sum check. If you’re married, you will want to try and get a free full spousal benefit using File and Suspend which involves having one of the spouses file, generally the older spouse will file for his benefits at 70, and the younger spouse waits till full retirement age and takes the spousal benefit. Then at 70, the younger spouse takes their retirement benefit. That’s generally the optimal scenario for married people. It’s set up so both spouses cannot collect full spousal benefits. Only one can collect full spousal benefits.
Divorcees have an advantage over married people. They can both collect full spousal benefits. There’s even a strategy where people get divorced a couple years before they reach full retirement age and continue living together, each collecting full divorced spousal benefits, then at 70, they remarry and each collect their own retirement benefits.
For widows, the choice is between taking your widow’s benefit early (you can take it as early as 60) and let your own retirement benefit grow, or take your retirement as early as possible and let your widow’s benefit grow. Either way, you want to take your widow’s benefit after you reach full retirement age, otherwise it won’t grow at all. A very important thing we talk about in the book is a special widow’s benefit formula for people whose deceased spouse or ex-spouse made it to at least 62 and took their retirement early. In that case, it may be best to take your widow’s benefit at a point earlier than 66 because with this special formula, your benefit may not actually grow if you wait to collect. The only reason to wait to collect is because it’s going to be bigger. If it’s not going to be bigger, don’t wait to collect it.
My wife is disabled and has not worked for 20 years. Could she qualify for Social Security?
She could potentially qualify. To qualify for disability benefits, she has to have worked for a certain number of years before she became disabled. It sounds like she hasn’t started to collect Social Security benefits, so assuming she hasn’t, she can begin collecting spousal benefits as early as 62. It will be a reduced amount, but if, due to health concerns, her life span is relatively low, that might be the optimal thing to do. The answer is yes. She can collect benefits on her husband’s work record. And if he were to pass away, she could collect a widow’s benefit. That can be taken as early as 60. Or if you’re disabled, it can be taken as early as 50.
Do you believe in supplementing Social Security income with annuities?
If the annuities are in place and protected and if you can find reputable insurance companies that are highly rated in terms of their financial position, because you want to make sure they’re around when you’re around to provide what you bought from them, then I do think that buying inflation-indexed annuities makes sense. A reverse mortgage has an annuity aspect to it because you, in effect, refinance your home, but you don’t have to pay it back until you leave the home. So if you live to 130, you get to live for free in your house. A reverse mortgage is an interesting product as well. There is some risk associated with having to move to your kids or a nursing home earlier on, so it’s not a risk free product, but it does have some real (inflation proof) annuity value to it. I’m basically a big fan of annuities if they’re structured the right way.
How long will the Social Security fund last?
I think for anybody who is close to retirement age or anybody who is age 50 and over, they shouldn’t worry about their Social Security benefits being adjusted down or reduced. There are so many members of the American Association of Retired People, the AARP, essentially a million members, who will have enormous political power as a group in defending the system as it now exists. For younger people, the system is definitely broke financially. We’re going to have to raise taxes to pay for this in some way. But I think it’s going to be affecting people under 50, not people over 50.
I have heard from a veteran Social Security personnel that the first spouse needs to be married for 10 years, but every spouse after that is eligible for his Social Security – as an example – need only be married to him for 9 months so in theory: the 10 year married spouse and several other future spouses married to him > 9 months can all collect on his Social Security benefits…comments?
This is wrong. No spouse who is married for less than 10 years can collect divorcee-spousal or divorcee-widow(er) benefits. A still married person need only be married for one year (not 9 months) to collect spousal benefit on her/his partner’s work record. And oneneedsto be married only 9 months to collect a widow(er)’s benefit if one didn’t get divorced before one’s spouse died.
A 70-year-old collecting Social Security. His wife is 62 considering quitting her job. Can she apply for a spousal benefit at this age? And if so will she get 50% or the reduced rate?
The wife can file for a spousal benefit. But because sheisdoingsobefore full retirement age, she will be deemed to be filing for her early retirement benefit as well. She’ll get her early retirement benefit plus her excess spousal benefit. Her excess spousal benefit will be 70 percent (the reduction factor for early retirement benefits) times the difference between 50 percent of her husband’s full retirement (not age-70) benefit and 100 percent of her own full retirement benefit. This difference can easily be negative in which case the excess spousal benefit will be zero. Consequently, taking her spousal benefit can a) wipe out her spousal benefit and b) leave the wife with a permanently reduced retirement benefit.
In a spousal death, if the living spouse has Filed & Suspended, can she file for a deceased spousal benefit and let her individual benefit continue to accrue? Then switch over at age 70?
Since she has filed, she will get her excess widow benefit, not her full widow benefit during the time of the suspension. The excess widow benefit equals the difference between her widow’s benefit and her own full retirement benefit. This is true even though she won’t, while her retirement is suspended, actually be collecting her full retirement benefit. At 70, she’ll collect her age-70 retirement benefit plus her excess widow benefit, which will be recalculated as her widow benefit less her age-70 benefit (her retirement benefit inclusive of her delayed retirement credits). Depending on the size of her age-70 retirement benefit, her excess widow’s benefit could be negative. In this case, she’ll collect just her age-70 retirement benefit. Or it could be positive, in which case she’ll just collect her widow’s benefit.
One needs to be extremely careful here. If the excess widow’s benefit is positive, continuing to suspend the retirement benefit will entail a major loss in lifetime benefits. If the widow is at full retirement age (now 66) and continues to suspend, she will give up a) getting her widow’s benefit starting at 66 with b) getting her potentially very small excess widow’s benefit for four years and then collecting her widow’s benefit starting at 70. I.e., in this case, the widow gives up four years of substantial benefits for nothing.
Our software at www.maximizemysocialsecurity.com can sort out exactly what it best to do for her.
I have a client who is now 82 years old. She starting taking her social security at the age of 62. Her husband passed away at the age of 75. She was not aware of survivor benefits and never did look into it. Is there anything she can do now? Her husband made a lot more money than she did over the years.
Absolutely! She needs proof of marriage and death.
Is the return of capital taxed via Social Security? For example, if the client’s Master Limited Partnership has a capital loss on line 21 of 1040, is this loss excluded from Social Security income taxability?
There is no direct effect of capital losses on the tax liability arising from the receipt of Social Security benefits, nor does the FICA tax for Social Security depend on such losses.