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When is the Right Time to Take Social Security?

Man in cafeA critical decision in your retirement planning, is when to begin taking your Social Security payments. A wrong move can result in long-term consequences.

Kiplinger notes, in its June article, “What to Consider Before Filing for Social Security Early,” that some Americans are beginning see the financial benefits of waiting for their full retirement age (between 66 and 67 based on your birth year). But others don’t wait, because you can take them as early as 62 with reduced benefits.

Some folks want to take their benefits as soon as possible. They’ve been paying into the fund for years and want to get their money back ASAP.  It is also possible that Social Security might go away, and they want to be paid before that happens. Others expected to work until they were 65 or 66, but then they’re “downsized” in their early 60s, making it hard to find another job. They may decide they need the steady income that Social Security offers.

You should understand the options before you file: this includes smaller payments for life, earnings limitations on future job possibilities in your retirement, and a potential income hit on your spouse. Remember that monthly payments will be about 30% percent higher at your full retirement age than if you file at 62, plus 8% per year after full retirement age (FRA) if you delay until age 70.

A fellow who is laid off at 62, may prematurely take his benefits when he can’t find work. If he does get a job, he’ll have an earnings threshold of $16,920 in 2017, if filing prior to his FRA. This limits how much he can make. If he makes more, Social Security will withhold $1 in benefits for every $2 he makes over that limit! In addition, if the husband’s been the higher earner in the family for years, and he takes his benefits at 62, he’s greatly reducing the amount his wife will receive if she outlives him.

Understanding all of your Social Security options, and most importantly, how Social Security fits into your overall retirement income and distribution plan, is crucial in deciding when to take your benefits. There are income needs like basic expenses and lifestyle. Some use the first few years of retirement to travel, start hobbies and visit the grandkids. This means more spending in the early retirement years than later. Next review your income streams, like a pension, taxable retirement accounts, non-taxable Roth IRAs and Social Security.

Understand when the distributions start from those various sources to fulfill your needs. You should also consider the scenario of a surviving-spouse. Take away all income associated with the other spouse and see how that changes the income for the surviving spouse. Before you decide to rush down and file for your Social Security, look at all your options and consider the short and long term picture.

Reference: Kiplinger (June 2017) “What to Consider Before Filing for Social Security Early”

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What is fair for a Family with a Child with Special Needs

Teacher with preschoolerAs parents, it’s hard to treat all children fairly, despite their different personalities and capabilities. Most try to ensure that one child never feels less loved than another. Some will carry that over into their estate planning. However, there are times when inequity may be a better choice. A recent Tickertape article is appropriately titled “Estate Planning for Special Needs Children: Trying to Be Even-Steven?” The article says that one instance when fair is not always equal, is when you’re planning the future for a special needs child after you die.

Children with special needs are typically eligible for state and federal benefits to provide them with assistance for their long-term support. Among the most common are Supplemental Security Income (SSI) and Medicaid. In many states, SSI may qualify children for Medicaid, or Medicaid comes automatically with SSI. These are need-based benefits that are means-tested. SSI recipients have a strict assets threshold of $2,000 for an individual. If a special needs child gets an inheritance, it might push him or her, above that ceiling.  This could result in ineligibility for the program benefits that might be used to cover medical, therapeutic, or housing needs.

When money is paid directly to the child as beneficiary, it can cut SSI benefits. The same is true, if the special-needs heir disclaims the inheritance.

Government benefits may be retained, if an inheritance is set up in a Special Needs Trust (SNT), which is designed to help a beneficiary with special needs and preserve government aid while protecting assets. The trust allocates inheritance assets to the child with special needs, but it’s via a third-party.

However, there might be tax implications. While the inheritance itself isn’t taxed, the income that it generates in a special trust is typically taxable at trust tax levels. Creating an SNT can be complicated, and the rules can vary from state to state. Speak to a qualified trust attorney to be sure that all income is reported properly and there are no deductions left on the table.

Treating children equally when one has special needs, may result in creating an inequality. Because of the government program eligibility requirements, you must consider the net tax implications when dividing your estate. Be straightforward with your children as to your intentions, especially if one child will be needing long-term care. Knowing the plans will help everyone prepare for the future.

Reference: Tickertape (June 14, 2017) “Estate Planning for Special Needs Children: Trying to Be Even-Steven?”

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How to Tap into Your Ex’s Social Security Benefits

Bigstock-Couple-Relationships-Cr-5604405You may be eligible for Social Security based on your own employment record, but tapping into benefits based on your ex’s work history may provide you with greater income.

An Aitken (SC) Standard’s recent article asks, “What can you expect from your ex's Social Security?”

The article reminds us that benefits for a divorced person and the qualifications for those benefits aren’t mentioned on your online Social Security statement. As a result, many of these benefits go unclaimed. Therefore, to obtain benefits based on your ex’s work record, your ex must qualify for Social Security benefits. There are these additional requirements:

  • The marriage lasted at least 10 years;
  • You’re 62 or older;
  • You’re currently unmarried; and
  • The benefit you’re entitled to receive based on your own work is less than your ex-spouse's.

If you remarry, you typically can’t collect benefits on your former spouse's record, unless your later marriage ends.

The benefits you can get as a divorced spouse are half the benefits he/she would receive at full retirement age. You can start collecting your ex's Social Security at 62. If you start at that age, you’ll permanently lower your benefits. That’s because you're not waiting to claim until your full retirement age, which for most current retirees is age 66. If your ex-spouse hasn’t applied for retirement benefits but can qualify—you can receive benefits on their record, if you’ve been divorced for at least two years.

Let’s say that you were born in 1955, and you opt to file at 62 for your ex-spouse's benefit. Your benefit will be 70% of the amount you’d otherwise be eligible for at your age 66. If you were born before January 2, 1954 and have already reached full retirement age, you have the option to receive only the divorced spouse benefit and you can delay receiving your retirement benefits until as late as age 70. But if you were born after January 2, 1954, that option’s no longer available. Thus, if you file for one benefit, you’ll be effectively filing for the greater of yours or that amount based on your ex’s record.

If you’ve yet to reach your full retirement age and continue to work while receiving benefits, your divorced spouse benefit will be reduced by $1 for every $2 you earn above the annual limit. The 2017 limit is $16,920.

If you will also receive a pension based on work not covered by Social Security, like a government position, your Social Security benefit on your ex-spouse's record will most likely be reduced.

Reference: Aitken (SC) Standard (May 20, 2017) “What can you expect from your ex's Social Security?”

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Who’s Living Longer?

People standing on globeThe average woman in Japan is now living to 87. But Trust Advisor’s article, “The Rich Are Living Longer And Taking More From Taxpayers, notes that many Americans are dying younger.

The Society of Actuaries has decreased its life expectancy estimates for 65-year-olds in the U.S. by six months, and the health of middle-aged non-Hispanic white Americans is deteriorating fastest.

These trends show a widening gap between wealthier and poorer Americans. The richest people in the U.S. are getting several years of extra life and are also reaping a financial reward for their longevity. These trends will be important with any changes to Social Security, Medicare and other programs. A mere tweak to one of these programs—like retirement age or benefit formulas—may impact the rich and poor quite differently. The researchers wanted to see how long Americans can expect to live based on their income, focusing on earnings in midcareer, from 41 to 51 and using Social Security data.

In 1980, a 50-year-old man in the wealthiest 20% of the income distribution could expect to live five years longer than a 50-year-old man in the lowest-income group. In 2010, the gap between them increased to 12.7 years. The poorest 20% of 50-year-old American men can now expect to live just past 76, six months more than the previous generation. The richest 50-year-olds should make it almost to 89—seven years longer than their parents’ generation.

An important result of this 13-year life expectancy gap is the fact that Social Security and Medicare are becoming a much better deal for well-off Americans. Thirty years ago, the richest and poorest retirees could anticipate roughly the same amount of benefits out of government programs. The richest received larger Social Security payouts by qualifying for higher checks and by living longer. The poorest got more out of government programs. Medicare benefits were about the same for each group.

Now as wealthier people live longer, they can expect to collect a lot more from Social Security over their lifetimes than the poor. In 1980, a wealthier 50-year-old could anticipate collecting $103,000 more than a poor American. Fast forward 30 years and the gap was $173,000. This shows that Social Security is becoming significantly less progressive over time, due to the widening gap in life expectancy.

Some theories about this notion cite rising levels of substance abuse, obesity, and suicide. Others look at how economic inequality drives health inequality. The cost of good health care has skyrocketed—even for those technically covered by insurance.

Your expected life span is a critical factor in your retirement planning and saving for retirement. The longer you live, the more valuable Social Security is to supplement your savings. Life expectancy trends also affect the long-term finances of entitlement programs like Social Security.

Reference: Trust Advisor (April 24, 2017) “The Rich Are Living Longer And Taking More From Taxpayers

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Work A Bit More and See the Benefits!

Happy-old-couple“Working into the second half of your sixties (or even longer) can mean a happier, more financially secure retirement when you finally leave your job.”

Kiplinger’s recent article, “6 Reasons to Work Past Retirement Age,” provides us with some good reasons for working a few more years.

Employee Benefits. The added fringe benefits you receive with your paycheck can be worth hundreds or even thousands of dollars. These are things like your employer-paid life insurance and employer contributions to your 401(k). Don’t forget about health insurance, which can be cheaper than Medicare and provide better coverage. This coverage is valuable, if your spouse is younger than 65 and covered by your plan.

A Larger Pension. If you're fortunate enough to have a pension, you may get a greater payout by working a few more years. Pensions are based on your salary and years of service. Some calculate the benefit on your average earnings over the last three or five years of employment.  Others base it on your average earnings over all the years in which you've participated in the plan. If your income is still increasing, your pension benefit could be better for every year you work.

You Enjoy Working. Many folks enjoy working, especially for the relationships, recognition and  sense of fulfillment. It provides people with purpose and structure. If you’re not sure how you'll spend your retirement, maybe you should keep working until you do.

A Nicer Nest Egg. You need to have enough in retirement savings to last 25 years. If you think you won’t have enough savings and income, working longer is a wise solution. When you keep working, you'll have fewer years before you’ll need to dip into savings, and you can keep saving in your retirement accounts. Even if you don't invest further, it’s still tax-deferred growth.

More Social Security Benefits. The full retirement age for Social Security is now 66 for people born in 1943 to 1954 and goes up to 67 for people who were born in 1960 or later. However, for each year you delay taking the benefit past full retirement age, you get an increase of 8% in your benefit, until age 70. If you're healthy, it makes sense to delay taking the benefit until 70 to collect the bigger check, especially if you have a spouse who will benefit from an increased survivor benefit. A paycheck keeps the money coming in until you reach age 70.

Teaming with Your Spouse. Most couples would like to retire within a year or two of each other to enjoy life together. If your spouse is much younger or not ready to retire, you can work several more years instead of being home alone.

Reference: Kiplinger (January 2017) “6 Reasons to Work Past Retirement Age”

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