Social Security Workshop for Baby Boomers
November 8, 2010 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
I am conducting a free personal finance workshop on social security planning strategies at the Keller Public Library on Tuesday, November 16 at 6:30 pm. Personal finance workshops are held the third Tuesday of each month at the library, and this will be the last time the social security topic will be addressed in 2010.
The session will cover what baby boomers need to know to maximize their retirement income. Attendees will learn:
- 5 factors to consider when deciding when to apply for benefits
- Why you should always check your earnings record for accuracy
- How to coordinate benefits with your spouse
- How to minimize taxes on Social Security benefits
- How to coordinate Social Security with your other sources of retirement income
You are welcome to attend and bring your questions! The last time this workshop was held in August, we had quite a few excellent questions from the audience that helped everyone learn more about unique social security filing strategies and the rules that apply to them. Seating is limited, so please RSVP to library@cityofkeller.com to ensure your space.
August 2010 Personal Finance Newsletter
August 13, 2010 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
The August 2010 personal finance newsletter is now available. It includes information on how college scholarships are taxed, how the new healthcare law affects Medicare drug plans, and, as always, an investment market update. Enjoy! Click here to view the newsletter.
Social Security File-And-Suspend Strategy
August 13, 2010 by Jean Keener, CFP, CRPC, CFDS · 1 Comment
If you’re married and looking for opportunities to increase retirement income, you may want to look closely at your Social Security benefits. One opportunity for maximizing Social Security income, called “file-and-suspend,” may enable a married couple to boost both their retirement and survivor’s benefits.
What is file-and-suspend?
Generally, a husband or wife is entitled to receive a Social Security retirement benefit based either on his or her own earnings record (a worker’s benefit), or on his or her spouse’s earnings record (a spousal benefit), whichever is higher. But under Social Security rules, a husband or wife who is eligible to file for retirement benefits based on his or her spouse’s record cannot do so until his or her spouse begins receiving benefits. However, there is one exception–someone who has reached full retirement age may choose to file for retirement benefits, then immediately request to have those benefits suspended, so that his or her eligible spouse can file for spousal benefits.
File-and-suspend is a strategy that may be used in a variety of situations, but is commonly used when one spouse has much lower lifetime earnings, and thus will receive a higher retirement benefit based on his or her spouse’s earnings record. (A husband or wife’s spousal benefit may be as much as 50% of what his or her spouse is entitled to receive at full retirement age.) Using this strategy not only allows the eligible spouse with lower earnings to immediately claim a higher (spousal) retirement benefit, but can also increase the amount of available survivor protection. The spouse with higher earnings who has suspended his or her benefits can accrue delayed retirement credits at a rate of 8% per year (the rate for anyone born in 1943 or later) up until age 70. Because a surviving spouse will generally receive a benefit equal to 100% of the retirement benefit the other spouse was receiving (or was entitled to receive) at the time of his or her death, suspending a benefit to accrue delayed retirement credits may substantially increase the survivor’s benefit.
Example
Let’s look at one hypothetical example of how filing for, then suspending, Social Security benefits might help a married couple increase their retirement income and survivor’s benefits.
Henry and Julia are a married couple living in Keller, TX. Henry is about to reach his full retirement age of 66, but he wants to postpone filing for Social Security benefits. At full retirement age his monthly benefit will be $2,000, but if he waits until age 70 to file, his benefit will be $2,640 (32% more) due to delayed retirement credits. However, his wife Julia, who has had substantially lower lifetime earnings than Henry, wants to retire in a few months at her full retirement age (also 66). Based on her own earnings record, Julia will be eligible for a monthly benefit of $700, but based on Henry’s earnings record she will be eligible for a monthly spousal benefit of $1,000 (50% of Henry’s entitlement).
So that Julia can receive the higher spousal benefit as soon as she retires, Henry files an application for benefits, but immediately suspends it. That way, he can also continue to earn delayed retirement credits, which will result in a higher monthly retirement benefit for him later.
Using the file-and-suspend strategy not only increases Julia and Henry’s retirement income, but it also offers increased survivor protection. Upon Henry’s death, Julia will be entitled to receive 100% of what Henry was receiving (or was entitled to receive) at the time of his death. So by suspending his own retirement benefit in order to increase it through delayed retirement credits, Henry has ensured that Julia will receive a survivor’s benefit that is up to 32% higher for the rest of her life should he die first. (Note, though, that this hypothetical example is for illustrative purposes only and does not account for cost-of-living adjustments or taxes.)
Points to consider
- Deciding when to begin receiving Social Security benefits is a complicated decision. You’ll need to consider a number of scenarios, and take into account factors such as both spouses’ ages, estimated benefit entitlements, and life expectancies.
- Ask a financial professional to help you weigh the tax consequences of delaying Social Security income.
- Using the file-and-suspend strategy may not be advantageous when one spouse is in poor health or when Social Security income is needed as soon as possible.
- The spousal benefit will be reduced if the spouse claiming it is under full retirement age.
Social Security Workshop at Keller Public Library
August 11, 2010 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
I am conducting a free workshop on social security planning strategies at the Keller Public Library on Tuesday, August 17 at 6:30 pm. The session will cover what baby boomers need to know to maximize their retirement income. Attendees will learn:
- 5 factors to consider when deciding when to apply for benefits
- Why you should always check your earnings record for accuracy
- How to coordinate benefits with your spouse
- How to minimize taxes on Social Security benefits
- How to coordinate Social Security with your other sources of retirement income
Seating is limited, so please RSVP to library@cityofkeller.com to ensure your space.
Paying the Bills: Potential Sources of Retirement Income
August 18, 2009 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
Planning your retirement income is like putting together a puzzle with many different pieces. One of the first steps in the process is to identify all potential income sources and estimate how much you can expect each one to provide.
Social Security
According to the Social Security Administration (SSA), more than 9 of 10 people aged 65 or older receive Social Security benefits. However, most retirees also rely on other sources of income.
The SSA sends you an estimate of your benefits each year. The closer you are to full retirement age, the more accurate that estimate will be. For a rough estimate, you can use the calculator on the Social Security website (http://ssa.gov).
Your Social Security retirement benefit is calculated using a formula that takes into account your 35 highest earnings years. How much you receive ultimately depends on a number of factors, including when you start taking benefits. You can begin doing so as early as age 62. However, your benefit may be 20% to 30% less than if you waited until full retirement age (65 to 67, depending on the year you were born).
As you’re planning, remember that the question of how Social Security will meet its long-term obligations to both baby boomers and later generations has become a hot topic of discussion. Concerns about the system’s solvency indicate that there’s likely to be a change in how those benefits are funded, administered, and/or taxed over the next 20 or 30 years. That may introduce additional uncertainty about Social Security’s role as part of your overall long-term retirement income picture, and put additional emphasis on other potential income sources.
Pensions
If you are entitled to receive a traditional pension, you’re lucky; fewer Americans are covered by them every year. Be aware that even if you expect pension payments, many companies are changing their plan provisions. Ask your employer if your pension will increase with inflation, and if so, how that increase is calculated.
Your pension will most likely be offered as either a single or a joint and survivor annuity. A single annuity provides benefits until the worker’s death; a joint and survivor annuity provides reduced benefits that last until the survivor’s death. The law requires married couples to take a joint and survivor annuity unless the spouse signs away those rights. Consider rejecting it only if the surviving spouse will have income that equals at least 75% of the current joint income. Be sure to fully plan your retirement budget before you make this decision.
Work or other income-producing activities
Many retirees plan to work for at least a while in their retirement years at part-time work, a fulfilling second career, or consulting or freelance assignments. Obviously, while you’re continuing to earn, you’ll rely less on your savings, leaving more to accumulate for the future. Work also may provide access to affordable health care.
Be aware that if you’re receiving Social Security benefits before you reach your full retirement age, earned income may affect the amount of your benefit payments until you do reach full retirement age.
If you’re covered by a pension plan, you may be able to retire, then seek work elsewhere. This way, you might be able to receive both your new salary and your pension benefit from your previous employer at the same time. Also, some employers have begun to offer phased retirement programs, which allow you to receive all or part of your pension benefit once you’ve reached retirement age, while you continue to work part-time for the same employer.
Other possible resources include rental property income and royalties from existing assets, such as intellectual property.
Retirement savings/investments
Until now, you may have been saving through retirement accounts such as IRAs, 401(k)s, or other tax-advantaged plans, as well as in taxable accounts. Your challenge now is to convert your savings into ongoing income. There are many ways to do that, including periodic withdrawals, choosing an annuity if available, increasing your allocation to income-generating investments, or using some combination. Make sure you understand the tax consequences before you act.
Some of the factors you’ll need to consider when planning how to tap your retirement savings include:
- How much you can afford to withdraw each year without exhausting your nest egg. You’ll need to take into account not only your projected expenses and other income sources, but also your asset allocation, your life expectancy, and whether you expect to use both principal and income, or income alone.
- The order in which you will tap various accounts. Tax considerations can affect which account you should use first, and which you should defer using.
- How you’ll deal with required minimum distributions (RMDs) from certain tax-advantaged accounts. After age 70½, if you withdraw less than your RMD, you’ll pay a penalty tax equal to 50% of the amount you failed to withdraw.
Some investments, such as certain types of annuities, are designed to provide a guaranteed monthly income (subject to the claims-paying ability of the issuer). Others may pay an amount that varies periodically, depending on how your investments perform. You also can choose to balance your investment choices to provide some of both types of income.
Inheritance
One widely cited study by economists John Havens and Paul Schervish forecasts that by 2052, at least $41 trillion will have been transferred from World War II’s Greatest Generation to their descendants. (Source: Why the $41 Trillion Wealth Transfer Is Still Valid) An inheritance, whether anticipated or in hand, brings special challenges. If a potential inheritance has an impact on your anticipated retirement income, you might be able to help your parents investigate estate planning tools that can minimize the impact of taxes on their estate. Your retirement income also may be affected by whether you hope to leave an inheritance for your loved ones. If you do, you may benefit from specialized financial planning advice that can integrate your income needs with a future bequest.
Equity in your home or business
If you have built up substantial home equity, you may be able to tap it as a source of retirement income. Selling your home, then downsizing or buying in a lower-cost region, and investing that freed-up cash to produce income or to be used as needed is one possibility. Another is a reverse mortgage, which allows you to continue to live in your home while borrowing against its value. That loan and any accumulated interest is eventually repaid by the last surviving borrower when he or she eventually sells the home, permanently vacates the property, or dies. (However, you need to carefully consider the risks and costs before borrowing. A useful publication titled “Reverse Mortgages: Avoiding a Reversal of Fortune” is available online from the Financial Industry Regulatory Authority.)
If you’re hoping to convert an existing business into retirement income, you may benefit from careful financial planning to minimize the tax impact of a sale. Also, if you have partners, you’ll likely need to make sure you have a buy-sell agreement that specifies what will happen to the business when you retire and how you’ll be compensated for your interest.
With an expert to help you identify and analyze all your potential sources of retirement income, you may discover you have more options than you realize.
August 2009 newsletter
August 5, 2009 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
The August newsletter is now available. It includes information on 2010 social security and medicare numbers for planning purposes, whether creditors can go after your 401(k) and more. To view it, click here.
June 2009 Newsletter
June 2, 2009 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
The June 2009 newsletter is now available. It includes articles on the new credit card law provisions, energy-efficient tax credits, estate planning for second marriages, and social security planning. Click here to read it.
Retiring Later Boosts Social Security Benefit
May 28, 2009 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
The following chart illustrates how the age you begin receiving benefits can greatly affect the amount of income you receive from Social Security every month. The chart assumes a full retirement age of 66, and a base benefit at full retirement age of $2,000 (which is nearly the maximum Social Security benefit an individual can receive).
In this hypothetical example (your individual situation will be different), the Social Security benefit available at age 62 is $1,500, which is 25% less than the $2,000 monthly benefit available at full retirement age. But at age 70, the benefit available is $2,640, which is 32% more than the monthly benefit available at full retirement age, due to delayed retirement credits. Keep in mind, too, that other factors, including post-retirement earnings and cost-of-living increases, can also affect your monthly benefit check.
You can explore various retirement benefit scenarios using the calculators available at the Social Security Administration’s website.
Social Security Myth Debunked
May 26, 2009 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
Question: Help! I’m 62 and my income is declining. Should I take social security now to lock in my benefits?
Quick answer: this is not a good reason to take social security early.
Social security uses your highest 35 years in calculating your benefit. They index the years before age 60 for inflation, and then average them. So while lower earnings in the last few years before you take social security don’t help increase your “high 35″ average, it doesn’t reduce it either. Bottom line: lower earnings now is not a reason to start taking social security earlier.
One thing to be aware of: it may appear on your social security statement that your future projected benefit at full retirement age is declining if your earnings are going down. That’s because each year when your statement is generated, social security projects that your income will stay the same as last year’s income all the way through retirement. If that doesn’t happen, they need to adjust the projections.
You should really base the decision on when to take social security on whether you need the money now or not, and how life expectancies run in your family. If people tend to live a long time in your family, waiting is likely a very good idea if you can afford to live without the income now.
Of course, social security is under-funded, and there are no guarantees for any of us. But those in the 60+ age group can have more certainty in planning on full or close to full benefits than people under 50.
If you want to read more about this, you can walk through your calculation at http://www.socialsecurity.gov/pubs/10070.html#estimate.
Working During Retirement
February 5, 2009 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
Planning on working during retirement? If so, you’re not alone. An increasing number of employees nearing retirement plan to work at least some period of time during their retirement years.
Why work during retirement?
Clearly, if you work during retirement, you’ll be earning money and relying less on your retirement savings–leaving more to potentially grow for the future and making your savings last longer, as shown in the chart below:
| Assumptions: Retirement savings $1,000,000 Earnings rate 6% Preretirement income $150,000 Social Security $2,000/month Desired income replacement 80% ($120,000/year, $10,000/month) |
|||
| Without working, you’ll need to use $8,000 ($10,000 desired income minus $2,000 Social Security) of retirement savings per month, and your savings will last 16 years. | |||
| But if you earn this amount monthly… |
for 3 years, your savings will last… |
for 5 years, your savings will last… |
for 10 years, your savings will last… |
| $1,000 | 17 years | 18 years | 19 years |
| $2,000 | 18 years | 19 years | 22 years |
| $3,000 | 19 years | 21 years | 26 years |
| $4,000 | 20 years | 23 years | 32 years |
| $5,000 | 22 years | 26 years | 39 years |
| This is a hypothetical example and is not intended to reflect the actual performance of any specific investment, and does not take into account the effect of taxes and inflation. | |||
If you continue to work, you may also have access to affordable health care, as more and more employers are offering this important benefit to part-time employees.
But there are also non-economic reasons for working during retirement. Many retirees work for personal fulfillment–to stay mentally and physically active, to enjoy the social benefits of working, and to try their hand at something new–the reasons are as varied as the number of retirees.
How will working affect Social Security?
If you work after you start receiving Social Security retirement benefits, your earnings may affect the amount of your benefit check. Your monthly benefit is based on your lifetime earnings. When you become entitled to retirement benefits at age 62, the Social Security Administration calculates your primary insurance amount (PIA), upon which your retirement benefit will be based. Your PIA is recalculated annually if you have any new earnings that might increase your benefit. So if you continue to work after you start receiving retirement benefits, these earnings may increase your PIA and thus your future Social Security retirement benefit.
But working may also cause a reduction in your current benefit. If you’ve reached full retirement age (65 to 67, depending on when you were born), you don’t need to worry about this– you can earn as much as you want without affecting your Social Security retirement benefit.
If 
you haven’t yet reached full retirement age, $1 in benefits will be withheld for every $2 you earn over the annual earnings limit ($14,160 in 2009). A special rule applies in your first year of Social Security retirement–you’ll get your full benefit for any month you earn less than one-twelfth of the annual earnings limit, regardless of how much you earn during the entire year. A higher earnings limit applies in the year you reach full retirement age. If you earn more than this higher limit ($37,680 in 2009), $1 in benefits will be withheld for every $3 you earn over that amount, until the month you reach full retirement age–then you’ll get your full benefit no matter how much you earn. (If your current benefit is reduced because of excess earnings, you may be entitled to an upward adjustment in your benefit once you reach full retirement age.)
Not all income reduces your Social Security benefit. In general, Social Security only takes into account wages you’ve earned as an employee, net earnings from self-employment and other types of work-related income, such as bonuses, commissions, and fees. Pensions, annuities, IRA distributions, and investment income won’t reduce your benefit.
Also, keep in mind that working may enable you to put off receiving your Social Security benefit until a later date. In general, the later you begin receiving benefit payments, the greater your benefit will be. Whether delaying the start of Social Security benefits is the right decision for you, however, depends on your personal circumstances.
One last important point to consider: in general, your Social Security benefit won’t be subject to federal income tax if that’s the only income you receive during the year. But if you work during retirement (or receive any other taxable income or tax-exempt interest), a portion of your benefit may become taxable. IRS Publication 915 has a worksheet that can help you determine whether any part of your Social Security benefit is subject to federal income tax.
How will working affect my pension?
If you work for someone other than your original employer, your pension benefit won’t be impacted at all–you can work, receive a salary from your new employer, and also receive your pension benefit from your original employer. 
But if you continue to work past your normal retirement date for the same employer, or if you retire and then return to work for that employer, you need to understand how your pension will be impacted.
Some plans will allow you to start receiving your pension benefit once you reach the plan’s normal retirement age, even if you continue to work. Other plans will suspend your pension benefit if you work beyond your normal retirement date, but will actuarially increase your payment when benefits resume to account for the period of time benefits were suspended. Still other plans will suspend your benefit for any month you work more than 40 hours, and will not provide any actuarial increase–in effect, you’ll forfeit your benefit for any month you work more than 40 hours.
Some plans provide yet another option–”phased retirement.” These programs allow you to continue to work on a part-time basis while accessing all or part of your pension benefit. Federal law encourages these phased retirement programs by allowing pension plans to start paying benefits once you reach age 62, even if you’re still working and haven’t yet reached the plan’s normal retirement age.
If your pension plan calculates benefits using final average pay, be sure to discuss with your plan administrator how your particular benefit might be affected by the decision to work part-time. In some cases, reducing your hours at the end of your career could reduce your final average pay, resulting in a smaller benefit than you might otherwise have received.
How will working affect my health benefits?
Many individuals work during retirement to keep their medical coverage. If working during retirement for you means moving from full-time to part-time, it’s important that you fully understand how that decision will impact your medical benefits.
Some employers, especially those with phased retirement programs, offer medical coverage to part-time employees. 
But other employers don’t, or require that you work a minimum number of hours to be benefits eligible. If your employer doesn’t offer medical benefits to part-time employees, you’ll need to look for coverage elsewhere. If you’re married, the obvious option is coverage under your spouse’s health plan, if your spouse works and has coverage available. If not, you may be eligible for COBRA coverage.
COBRA is a federal law that allows you to continue receiving medical benefits under your employer’s plan for some period of time, usually for 18 months, after a qualifying event (including loss of coverage due to a reduction in hours). But it’s expensive–you typically have to pay the full premium yourself, plus a 2% administrative fee. (COBRA doesn’t apply to employers who have fewer than 20 employees.) Another option is private health insurance, but that will also be very expensive.
Of course, once you turn 65, you’ll be eligible for Medicare. You’ll want to contact the Social Security Administration approximately three months before your 65th birthday to discuss your options. If you have private or employer-sponsored health insurance, talk to your benefits administrator or insurance representative before enrolling in Medicare to find out how your current health insurance fits in with Medicare.