Taking Social Security at the wrong time can cost you big bucks. Just when I think I’ve heard every bad reason for taking Social Security early, another one pops up. Understand—there are “good” reasons to take Social Security early. “Bad” reasons aren’t supported by the facts. Here are the top five “bad” reasons. Are you sure you want to bet on dying young? Do the math. [img]https://www.wealthcareconnect.com/PF.Base/file/attachment/2016/12/c588767a37190e455e27df343618119b_view.jpg[/img] Take Social Security at 66 instead of 62, and you’re money ahead by 78. Take it at 70 and you’re ahead by 82-1/2—before average life expectancy. Married? Delaying Social Security can mean more money for the longer-living spouse too. See if filing early pays. Estimate your life expectancy at sites like and , or view averages on a table at . Estimate your Social Security payment at SSA’s website, . My friend died before he got Social Security. After paying for decades, the idea of getting nothing is galling. But think about this painful fact: an early death means you no longer need long-term financial planning. Actuary and author Steve Vernon at suggests your bigger problem is a late death, with the need to fund a long life. Remember that on average you and your spouse get more Social Security by delaying (see Bad Reason #5). Social Security is excellent longevity protection, so don’t settle for a smaller early payment. I can’t stand my job. Understood. Sometimes you just have to leave, even if it costs. But it doesn’t follow that you should take Social Security now unless you really need the money. Plan your landing before you bail out. Think about alternatives to taking your Social Security early. A fun part-time job will pay better. Drawing down your savings might make more sense. Talk to a fee-based financial planner from sites like . The Social Security is there if you need it, but it’s not the only alternative to your yucky job. I don’t want to spend down my savings. Yes, it’s really hard to start spending your nest egg. But in some cases it makes good sense. Compute the dollar amount of your first few years of Social Security, and consider setting aside that amount of savings to replace those early payments. You could come out ahead in the long run. Consider taxes too: if you’re blessed with a large traditional IRA, IRS will force withdrawals at 70-1/2--see . The larger your IRA, the bigger the withdrawals and the tax bite. By contrast, if you partially draw down your IRA early and delay Social Security until 70, your forced withdrawals will be lower, and your relatively higher Social Security is tax-advantaged. Look at your savings versus your Social Security payment and consider creating a replacement fund. Talk to a financial planner or tax professional about early vs. late IRA withdrawals. You’re thinking Social Security will be bankrupt any day now, and you want to get yours before the money’s gone. Two problems with this. First, Social Security isn’t broke. The latest accounting shows it’s 100% solvent until 2034. Not exactly an imminent train wreck. And after 2034 it could continue to pay 79% of benefits, not a bankrupt zero. That assumes no fix before then. Second, every proposed fix gives older people a break, by focusing tax increases or benefit cuts on younger generations. If you’re already Social Security age, there’s no big rush. Learn about Social Security’s solvency at . And consider: would Congress let the most popular program in history die? Naturally there are good reasons to take Social Security early: short life expectancy, needing the money to make ends meet, exercising a “zombie” strategy, as in and more. Just don’t take it for a bad reason. And as always,
The new budget act could affect your Social Security plans. [/b] The Bipartisan Budget Act of 2015 (BBA 2015)(https://www.congress.gov/bill/114th-congress/house-bill/1314/text) became law November 2, 2015. Several key provisions of Social Security were changed, including two filing strategies, some Medicare premiums, and future disability payments. Payment suspension, available from age 66-70, has been a powerful tool for maximizing Social Security payouts. Under the old rules (http://www.marketwatch.com/story/even-more-ways-to-profit-by-suspending-social-security-2014-09-15) it offered three rewards: 1. Each month you suspended payments, your future payments increased. 2. Your spouse and children could receive Social Security on your suspended record, as could your ex-spouse. 3. You could “unsuspend” retroactively, collecting some or all of your suspended payments in a lump sum. BBA 2015 does not eliminate file and suspend. But some of the rewards will be denied to some people. Reward #1 remains available to everyone. Rewards #2 and #3 are unavailable, starting with new requests to suspend in May 2016 or later. (BBA 2015 specifies “at least” 180 days from November 2, 2015, which is April 30, 2016.) If your payments are currently suspended, or if you request suspension before May 2016, you are under the old rules and reap all three rewards. If eligible (i.e. age 66-70 in April 2016), you should consider suspending your payments before the deadline. If you request suspension in May 2016 or later: • Your payments will stop, and will increase while suspended • All family payments will stop (spouse, child, and possibly your ex-spouse) • Your payments re-start at age 70, or anytime you request them, but with no retroactivity. There are still powerful uses for suspending payments under the new rules; see Examples 4 and 5 below. Remember: file and suspend is not ended by BBA 2015, but valuable rewards are eliminated. If you qualify, consider suspending before May 2016 so the old rules and rewards apply. Also known as “spousal-only claim” or my own term, “dualie detour,” (http://www.marketwatch.com/story/rules-of-the-road-for-social-security-dualies-2014-12-04) this strategy allowed you to file only for spousal payments at 66, then switch to your own payments at 70 for a raise. It is no longer available to anyone born January 2, 1954, or later. It continues to be available for anyone born January 1, 1954, or earlier. Remember: eligibility for RA is based simply on your birth date. It’s available if you qualify and if you first file at 66 or more. (all assume it’s 2015) • Husband is 64. His age-66 payment is $2,000. • Wife is 62. Her age-66 payment is $1800. • Husband can file and suspend at 66 to grow his payments (like anyone at Full Retirement Age). However, the new rules apply, so no family benefits are payable while he suspends. • Wife files an RA at 66 because her birthdate qualifies. However, while Husband is suspended, no spousal payment is possible. He has to unsuspend his payments to allow the spousal payment. • If he unsuspends, she gets $1,000 spousal payment from 66-70 while he draws his own Social Security. At 70 she gets $2376 (her own $1800 x 132%). • Same as #1, but Husband is 66 this year. • He files and suspends before May 2016 and waits until age 70 for his own Social Security. The old rules apply because he suspends before the deadline. At 70 he will get $2640 ($2,000 x 132%). • Wife files an RA at 66 (her birthdate qualifies). She gets $1,000 spousal payment from 66-70 (50% of his $2,000). At 70 she gets $2376 (her $1800 x 132%). • Same as #1, but Wife is now 60. • Husband can file and suspend at 66, but under the new rules no family benefits are payable. He decides to delay filing. • Wife is ineligible to file a RA due to her birthdate. If Wife files anytime while Husband is getting payments, she is deemed to have filed for both her own and spousal, and she will be paid only her own, since it is larger. • Since the new rules apply to both, each can take their own Social Security when ready. There will be no spousal payments. • Same as #1, but Husband is 64 and retired. • Wife is 60 and children are 16 and 17. • Husband claims Social Security at 64 and gets $1720 (86%, reduced because he is under 66). • The two children get Social Security payments of up to $1,000 each (50% of $2000) until they graduate from high school. • In two years Husband is 66 and both children’s payments have stopped due to graduation. Husband suspends his payments from 66 to 70. At 70 he gets $2270 (his original $1720 x 132%). • Betty retires and starts her Social Security at 65. Her age-66 payment is $2,000. Her payment is $1860 (93%) because she filed one year early. • At 67 she starts a great job and suspends her Social Security because it’s unneeded. • At 69 she again retires and reinstates her Social Security. Her new payments are $2157 (116% of $1860) because of her 2-year suspension. will not go up 50%, as many feared. If you are paying $104.90 for Medicare Part B through Social Security deductions in 2015, your 2016 premium stays the same. You’ll see an increase if you: • Don’t pay through Social Security deductions • Have an income-related premium increase • Newly enroll in 2016 If so, your base premium will be $121.80. are preserved. Threatened 2016 reductions were averted by BBA 2015. You can still strategize (http://www.marketwatch.com/story/social-security-changes-will-hit-couples-divorced-women-hard-2015-11-06?link=MW_TD_popular) to get the most from Social Security. So as always,
Avoid retirement surprises by understanding the Social Security computation. Let’s go back to school to study the math behind your Social Security. A little understanding of the numbers goes a long way to avoiding retirement surprises and shortfalls. Like other pension systems, your Social Security is based on three factors: eligibility, earnings, and age. SSA puts its own twist on each factor. Math 101: Compute your eligibility To be eligible for Social Security retirement payments, you need 40 Work Credits (WCs). You can earn up to 4 WCs per year, so they’re sometimes called quarters. In 2015 you earn one WC for each $1220 you earn anytime in the year. So if you earn 4 x $1220, or $4880 in 2015, you get all 4 WCs for the year. (Only work where you pay Social Security taxes counts. The cost per WC generally increases annually with inflation.) 40 WCs ÷ 4 WCs per year = 10 years of part-time work needed for a retirement payment. Math 102: Compute your average earnings The second factor is your lifetime average earnings. Many pensions are computed on your best 5 years of work. Not Social Security. It’s based on your best 35 years of work. Here’s how: • SSA records each year’s earnings subject to Social Security taxes. • When you hit 62, every year is multiplied by an inflation factor to make it more comparable to today’s pay level. • The top 35 years of inflated earnings are selected and averaged together. The years need not be contiguous (in a row or block). That 35-year average determines your Social Security payment—a higher average means higher Social Security. 35 years are used, even if you don’t have 35 years of work. Missing years post as zeros, reducing your 35-year average. A little math hocus-pocus (see http://www.socialsecurity.gov/OACT/COLA/piaformula.html) converts your 35-year average into your Social Security payment. Avoid two mistakes here. • First, high late-career earnings don’t always mean high Social Security, if you had low earnings earlier. It’s a lifetime average. • Second, retiring a few years early after lifelong work won’t drastically reduce your Social Security. A few zeros have little impact on your 35-year average. Math 103: Compute your age The third factor is your age when you start payments. That’s based on your Full Retirement Age (FRA). Your FRA is between 65 and 67, determined by your birth year. (See http://www.socialsecurity.gov/OACT/ProgData/nra.html) Whatever your FRA, you can start payments any month from 62 to 70. Start payments at your FRA and you get a 100% payment. Start payments earlier and you get a small reduction for each reduction month. For example, if your FRA is 66, and payments start at 62, your 48 reduction months yield a 75% payment. Start payments after your FRA and you get a raise for each month’s Delayed Retirement Credit (DRC). For example, if your FRA is 66 and payments start at 70, the 48 DRCs yield a 132% payment. Age factors top out at 70; don’t delay filing after that. An SSA calculator at http://www.socialsecurity.gov/OACT/quickcalc/early_late.html#calculator figures the percentage for any month from 62-70. More schooling • Get SSA’s estimate of your future payments at www.ssa.gov/myaccount. • Math nerds: See a sample computation dissected by SSA at http://www.socialsecurity.gov/OACT/ProgData/retirebenefit1.html or in my book, available at http://andylandis.biz/index_files/Page403.htm. • Compute your own estimate at www.ssa.gov/pubs/index.html. Type “your retirement” in the lower search box (under the “Publications” headline), and select your birth year in the “PDF” button. It all adds up. So as always, keep on planning.
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