Jane Young, CFP, EA
Social Security seems straight forward but it can be quite complex, there are many opportunities and pitfalls to watch out for. Before filing for Social Security, research your options to maximize your benefit, minimize taxes and avoid errors in your benefit calculation. It’s important to meet with a Social Security Representative prior to filing but don’t solely rely on this information. Due to the complexity of various options, they may overlook something that could impact your situation
You can file for Social Security benefits as early as 62 but you will receive a reduced benefit. Most healthy individuals should hold off on taking Social Security as long as possible. If possible, delay taking Social Security until age 70. Your benefit will increase 8% a year from your full retirement age to age 70. The full retirement age for individuals born before 1954 is 66 gradually increasing to age 67 for anyone born in 1960 or later.
Upon reaching full retirement you may be eligible to take 50% of your spouse’s benefit or 100% of your own benefit if you are currently married, were born before 1954 and your spouse has started taking benefits. While taking spousal benefits, your benefit can continue growing until you reach age 70 at which time you can switch to 100% of your own benefit if it’s higher. There is no advantage to delaying benefits beyond age 70.
If you have been divorced for two years or more, were married for at least 10 years and are currently unmarried, you are eligible to receive 50% of your ex-spouses benefit or 100% of your own benefit. If you were born before 1954, at full retirement you have the option to start taking 50% of your ex-spouses benefit and switch to your own retirement benefit at a later date. If you are a widow and you were married for at least 10 years you are eligible to take the highest of 100% of your deceased spouses benefit or your own.
If you take benefits before your full retirement age you are limited on how much you can earn before your benefit is reduced. In 2016, your benefits would be reduced by $1 for every $2 earned over $15,720. Benefits lost due to work will result in a higher benefit later. There is no income limit if you wait to take benefits at full retirement. If you take Social Security while working a larger portion of your benefit will be taxable, so you may want to consider delaying Social Security until you stop working or reach age 70.
If you held jobs where you paid into Social Security and you receive a pension from working in a job where you did not pay Social Security, your Social Security benefit may be reduced. Be sure to notify the Social Security Administration of your pension.
More information on your Social Security benefits is available at www.ssa.gov.
Jane Young, CFP, EA
When it comes to retirement there are many preconceived notions and myths on how you should handle your finances. Avoid falling into the trap of what retirees are “supposed to do”. Instead, logically evaluate your situation and make decisions accordingly. Below are some common financial mistakes to avoid with regard to your retirement.
- Don’t underestimate your life expectancy and how many years you will spend in retirement. It is reasonable to spend 20 to 30 years in retirement. Most retiree’s should plan to cover expenses well into their 90’s.
- Avoid overestimating your ability and opportunity to work during retirement. Be cautious about including too much income for work during retirement in your cash flow projections. You may lose your job or have trouble finding a good paying position. Additionally, your ability and desire to work during retirement may be hindered by health issues or the need to care for a spouse.
- Many retirees invest too conservatively and fail to consider the impact of inflation on their nest egg. Maintain a diversified portfolio that supports the time frame in which you will need money. Money needed in the short term should be in safer, fixed income investments. Alternatively, long term money can be invested in stock mutual funds where you have a better chance to earning returns that will outpace inflation.
- Resist the temptation to take Social Security early. Most people should wait and take Social Security at their full retirement age or later, full retirement is between 66 and 67 for most individuals. Taking Social Security early results in a reduced benefit. If you can delay taking Social Security you can earn a higher benefit that increases 8% per year up to age 70. This can provide nice longevity insurance if you live beyond the normal life expectancy. You also want to avoid taking Social Security early if you are still working. In 2016 you will lose $1 for every $2 earned over $15,720, prior to reaching your full Social Security retirement age.
- Avoid spending too much on your adult children. The desire to help your children is natural but many retirees need this money to cover their own expenses. You may be on a fixed income and no longer able to earn a living, your children should have the ability to continue working for many years.
One of the biggest retirement mistakes is the failure to do any retirement planning. Crunch some numbers to determine how much you need to put away, when you can retire, and what kind of budget you will need to follow. Without proper planning many retirees pull too much from their investments early on leaving them strapped later in life. It’s advisable to have your own customized retirement plan done to determine how much you can annually pull from your investments. As a general rule, annual distributions should not exceed 3-4% of your retirement portfolio.
Jane Young, CFP, EA
The best time to take Social Security is a personal decision based on your financial situation, health, lifestyle, family longevity and when you stop working. Social Security will provide you with the same total amount, if you live to the average life expectancy, regardless of when you take it. The full retirement age for most people is between 66 and 67. You can begin taking reduced benefits as early as 62 or you can wait and take an increased benefit as late as age 70. If you begin at 62 your benefit is reduced by about 30%, if you take Social Security after your full retirement date your benefit will increase 8% per year until age 70.
You will probably benefit from taking Social Security at full retirement or later. Unless you have a serious medical condition, there is a good chance you will live longer than the Social Security average life expectancy. Social Security life expectancy tables are based on 2010 data and lag what can be reasonably expected. They indicate a 65 year old male will live to around 84.3 and a 65 year old female will live to around 86.6. Taking Social Security later is like buying longevity insurance. It can provide you with more money later in life which can help put your mind at ease, if you are worried about out living your money.
If you are still working it can be especially detrimental to take Social Security before your full retirement age. In 2015 you will lose $1 for every $2 earned over $15,720. Once you reach full retirement age there is no limit to how much you can earn. However, taxation of your Social Security benefit is based on your overall earnings. If you take Social Security after you stop working a smaller portion of your benefit is likely to be taxable. Additionally, if you continue to work and delay Social Security you may be able to increase your total Social Security benefit. The Social Security Administration annually recalculates benefits for recipients who are still working.
The decision on when to take Social Security is significantly impacted by your marital status and your spouses expected benefit. If you have been married for at least ten years you have the option to take the greater of 50% of your spouse’s benefit or your full benefit. If you wait until your full retirement age you can start taking 50% of your spouse’s benefit, let your benefit grow, and switch back to your full benefit at age 70. If you take the spousal benefit prior to your full retirement age you cannot switch back to your own benefit at a later date. If you have been married for at least 10 years, and your spouse dies, you are eligible for the greater of your benefit or 100% of your spouse’s benefit.
More information about your Social Security benefit is available at www.ssa.gov.
Jane Young, CFP, EA
As the average life expectancy increases retirement is starting to look very different. We may be less likely to completely stop working on a fixed, predetermined date. As the traditional retirement age of 65 approaches many are considering a more gradual transition into retirement.
One advantage of easing into retirement includes the ability to supplement your cash flow and reduce the amount needed to be withdrawn from your retirement savings. If you continue working after 65 you may be able to earn enough to delay taking Social Security until 70. This will provide additional financial security because your Social Security benefit increases 8% per year from your normal retirement age to age 70. The normal Social Security retirement age is between 66 and 67.
Abruptly going into retirement can be very traumatic because careers provide us with a sense of purpose, a feeling of accomplishment and self-esteem. Your social structure can also be closely tied to work. By working part time before completely retiring, you can gradually transition into the new phase of your life. As you approach retirement age the grind of working 40 to 50 hours per week can become very trying. Working part time allows you to stay engaged with your career while taking some time to relax and pursue other interests.
According to a 2012 study by the Bureau of Labor Statistics, more people are working beyond age 65. In 2012 about 18.5% of Americans over 65 were still working vs. only 10.8% in 1985. A study reported by the Journal of Occupational Health and Psychology stated there are health benefits from working part time during retirement. This may be attributed to less stress and a more balanced life while experiencing the mental stimulation gained from continued engagement at work.
Gradually transitioning into retirement may be more practical for someone who is self-employed. However, the concept of phased retirement is a hot topic among human relations firms and departments. Phased retirement programs usually involve working about 20 hours a week with some element of mentoring less experienced workers. Formal phased retirement programs are still rare but they are gaining popularity. A 2010 study by AARP and the Society for Human Resources Management found that about 20% of the organizations polled had a phased retirement program or were planning to start a one. In fact, the federal government just launched a phased retirement program.
Before signing up for a phased retirement plan, take steps to fully understand the impact it may have on your benefits. If you are under 65 there may be restrictions on your health insurance. Additionally, some pension calculations are based on your final years of salary, working fewer hours at this time could negatively impact your benefit. Also avoid situations where you are only paid for 20 hours a week but still work 30 or 40 hours to get your job done.