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Is a Reverse Mortgage Right for You?

350px-halo_over_tree3As individuals near retirement there may be a need for additional income in order to support their living expenses in retirement. On this blog we have discussed creating income streams in retirement with annuities, Social Security optimization, and withdrawal strategies in qualified accounts.

For some individuals these streams of income may not be enough. Another potential vehicle to assist with providing income in retirement is a reverse mortgage. Reverse mortgages are where an individual or couple uses the equity in their home to received monthly income payments. Generally, once the owners pass away or sell the home, the loan is paid off with the remaining equity in the home. There’s also a limit on the amount a homeowner can borrow.

The most popular form of a reverse mortgage is the home equity conversion mortgage (HECM) offered by the Department of Housing and Urban Development (HUD). To qualify, individuals must be 62 years of age or older, live in the home that qualifies for the loan and receive counseling from a HECM approved counselor. The counselor will educate the individual on the advantages and disadvantages of the reverse mortgage and whether or not it makes sense.

Should individuals decide that the HECM is right for them the still maintain ownership of the home. HECM loans are also non-recourse. In other words, an individual will never owe more than the value of the home when it’s sold – regardless if the home’s value declines.

From a retirement perspective, a reverse mortgage can increase the probability of not outliving your income at retirement. The income from the reverse mortgage can be used in conjunction with other income such as Social Security, pensions and qualified plan distributions. This is something we have helped clients with do determine if such a strategy is right for them.

For more information on reverse mortgages, the links below provide excellent information.

Social Security Earnings Test

testWhen you’re receiving Social Security benefits before your Full Retirement Age (FRA, which is age 66 ranging up to age 67 for folks born in 1960 or later), there is an earnings test which can reduce or eliminate the benefit you are planning to receive.

If your earned income* is greater than $15,720 (2015 figure), for every $2 over this limit, $1 will be withheld from your Social Security benefit. So, for example, if you earn $20,000 in 2015, a total of $2,140 in benefits will be withheld – 50% of the over-earned amount of $4,280.

If you are receiving a Social Security benefit of $1,070 per month, this means that 2 months’ worth of benefits will be withheld. This can come as a surprise if you’ve been receiving the full benefit and the earnings test is applied at the beginning of the following year, when you don’t receive a check for two months.

After you reach FRA, you’ll get an adjustment to your benefit for the withheld checks. From our example, if you had two months’ worth of benefits withheld during the 3 years before the year you’ll reach FRA, you will receive credit for the months of withheld benefits. At FRA your benefit will be adjusted as if you had filed 6 months (3 years times 2 months) later than you actually filed. So if you originally filed at age 62, your benefit will be adjusted as if you filed at 62 years and 6 months, an increase of 2.5%.

In the year that you reach FRA (but before you actually turn 66) the earnings test is much more liberal: the limit is $41,880. Plus the rule is that for every $3 over the limit, $1 is withheld from your benefits. The rule is actually applied on a monthly basis, at the rate of $3,490 per month for partial years ($1,310 for the years before you reach FRA).

*So what earnings are counted? Only earnings from employment or self-employment are counted toward the earnings tests. There is a rather long list of income types that do not count toward the earnings test – here’s a brief rundown of non-counted earnings (only for Social Security earnings test, not for income taxation):

  • deferred income (based on services performed before becoming entitled to Social Security benefits)
  • court awards, including back-pay from an employer
  • disability insurance payments
  • pensions
  • retirement pay
  • real estate rental income (if not considered self-employment, i.e., the individual did not materially participate in the production of the income)
  • interest and dividends
  • capital gains
  • worker’s compensation or unemployment benefits
  • jury duty pay
  • reimbursed travel or moving expenses as an employee
  • royalties – only exempted in the year you will reach FRA, otherwise royalties are counted toward the earnings test

Mandatory Retirement Plans

6870886851_76c9703cca_m1A few weeks ago I finished a paper arguing for mandatory retirement contributions from both employers and employees. Though arguably the paper will not come close to changing public policy on retirement plans, it did raise some arguments in favor of the United States adopting a mandatory savings plan.

In the paper I explained that research has shown that individuals risk not having enough saved for retirement. This could be due to employees not having a retirement plan through work or because employees face an abundance of mutual fund options in the plan that they don’t know where to begin. Some of these employees choose the default option or simply go with what a colleague recommends.

Another problem the paper addresses is the declination of defined benefit pensions. Such pensions are employer sponsored and funded, thus removing funding an investment risk from the employee. At retirement the employee receives a guaranteed income for the rest of his life. The concerns of these plans are they can be costly for the employer to maintain and in the case of Illinois, can be drastically unfunded.

The majority of employees that have retirement plans have access to defined contribution plans. In these plans the employee is responsible for funding, investing and distributing the money at retirement. The employer only sponsors the plan and may provide a matching sum. Those without any employer plan are left with saving in IRAs, myRAs, or other non-qualified accounts.

Proponents of mandatory savings plans include Froman (2009), David (2007), Statman (2013), and Ghilarducci (2007, 2009). Most notably, Teresa Ghilarducci recommends a 2.5% contribution from both employer and employee to an account maintained for the benefit of the employee. The accounts would have investment options similar to the Thrift Savings Plan for government employees as well as a guaranteed interest account.

At retirement the entire account must be annuitized to provide guaranteed income for the retiree’s life. I agree with this method. This provides at least some guarantee that a retiree will have income for life. This is what annuities are designed to do – provide longevity insurance.

Following in Ghilarducci’s footsteps, I recommended a higher savings rate similar to what Ibbotson, Xiong, Kreitler, Kreitler, Chen, P., (2007) and Pfau (2011). At the very least, I suggest a minimum default savings rate of 10% with gradual 2% increases annually to 20%. This is similar to what Bateman & Piggott (1998) found in Australia’s mandatory plan.

A mandatory plan will remove the need for employers and financial planners to “nudge” employees and clients to save for retirement. Under a mandatory plan, the decision is made for them. In this case, some income for retirement is guaranteed.



Bateman, H., & Piggott, J., (1998). Mandatory Retirement Saving in Australia. Retrieved March 20, 2015, from

David, D., (2007). Mandatory Retirement Plans? Not Quite, but Close. Journal of Pension Benefits. 56-58.

Forman, J. (2009). Should We Replace the Current Pension System With A Universal Pension System? Retrieved March 24, 2015 from

Ghilarducci, T., (2007). Guaranteed Retirement Accounts: Toward Retirement Income Security. Retrieved April 10, 2015 from

Ghilarducci, T., & Arias, D. (2009). The High Cost of Nudge Economics and the Efficiency of Mandatory Retirement Accounts. Retrieved April 17, 2015 from

Ibbotson, R., Xiong, J., Kreitler, R., Kreitler, C., & Chen, P., (2007). National Savings Rate Guidelines for Individuals. Retrieved April 9, 2015 from

Pfau, W. (2011). Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle. Journal of Financial Planning, 24(5).

Statman, M., (2013). Mandatory Retirement Savings. Financial Analysts Journal, 69(3), 14-18.

Social Security Survivor Benefit Coordination

coordinatingIf you’re a widow or widower and you are eligible for Social Security Survivor’s Benefits based on your late spouse’s record, you may have some timing decisions to make that could significantly affect your overall benefits. This is especially true if you are also eligible for Social Security benefits based on your own earnings record.

Timing the receipt of benefits is, as with most all Social Security benefits, the primary factor that you can control.  If you have worked over your lifetime and you have a  becomes even more important. The decision process is dependent upon the relative size of your own Social Security benefit as compared to the Survivor Benefit based on your late spouse’s record.

Own SS Benefit Greater than Survivor Benefit  If your own benefit will be greater than the Survivor Benefit, it could be beneficial to you in the long run to take the Survivor Benefit as early as possible (as early as age 60) even though it will be reduced.  You could then continue receiving this reduced benefit for several years to your FRA (or even to age 70) and then switch over to your own benefit, which will be higher and unreduced at that point.

Survivor Benefit Greater than Own Benefit  If the Survivor Benefit is the larger of the two, you could take your own benefit early (reduced, of course) and then switch over to the Survivor Benefit later, at FRA. It doesn’t pay to delay the Survivor Benefit to a date later than your Full Retirement Age – the Survivor Benefit will not increase after that age.

By using one of these methods you are able to receive *some* benefit earlier-on in your life, and then switch over to the higher benefit later.  Just keep in mind that earnings limits and other reductions will apply.  Also, these same options are available for ex-spouse widows and widowers as well, as long as you haven’t remarried prior to age 60.

Complications with Social Security Filing for Divorcees

divorceSocial Security filing decisions are tough enough – and so is being divorced. Add the two together and you have all sorts of complications. In this article we’ll review one type of complication with Social Security filing for divorcees that can work in your favor and one that can work against you.

Let’s start with the provision that may work against you – Deemed Filing.

Deemed Filing

When you file for benefits prior to Full Retirement Age (FRA, which is 66 for folks born between 1943 and 1954, ranging up to age 67 if born in 1960), a provision called “deemed filing” takes effect. Deemed filing means that you are “deemed” to have filed for all available benefits – generally meaning your own benefit and any spousal benefit that you are eligible for as of the date of filing.

The reason that deemed filing might work against you if you’re divorced is because of the nature of eligibility for spousal benefits for a divorcee: You are automatically eligible for spousal benefits based on your ex-spouse’s record when either the ex has reached age 62 and the divorce has been final for two years, or when the ex files for his or her own Social Security benefits, whichever occurs first.

For a currently-married individual, spousal benefits are not available until the spouse has applied for his or her own benefit. Because of this, the married individual has a bit more control over his or her filing for spousal benefits, since the couple can discuss and time the two filings in order to separate retirement benefits from spousal benefits. As a divorcee you have much less control over this decision.

For example, Lou divorced her husband Ed five years ago after a 10+ year marriage. Lou is going to reach age 62 this year, and she would like to file for her own benefit now, and then delay filing for the spousal benefit based on Ed’s record until she reaches FRA, age 66. The key here is Ed’s age. If Ed is already age 62 or older, Lou does not have the option of separating her retirement benefit from the spousal benefit.

On the other hand, if Ed reaches age 62 at least in the month after Lou reaches age 62, Lou could file for her own retirement benefit any time after she reaches age 62 but before Ed reaches age 62, effectively separating her own retirement benefit from the spousal benefit based on Ed’s record.

Another way that this separation could occur is if the divorce had not occurred more than 2 years before Lou’s reaching age 62, and Ed has not filed for his own benefit prior to Lou’s filing.

So in our example, if the divorce was only finalized earlier this year and Ed has not filed for his own benefit, Lou could file for her own retirement benefit separately from the spousal benefit any time before the two-year period after the divorce has elapsed – as long as Ed doesn’t file for his own benefit before that period has elapsed.

This is also dependant upon the fact that Lou remains unmarried. So another way to separate these benefits would be for Lou to re-marry, and then file for her own benefit at any time. The remarriage nullifies Lou’s eligibility for spousal benefits based on Ed’s record. The eligibility for spousal benefits based on Ed’s record is restored if Lou’s current marriage ends (either by a subsequent divorce or death of the current spouse) – but since she wasn’t eligible when she filed for her own benefit, deemed filing did not apply and she can control when she files for the spousal benefit.

Restricted Application

On the other hand, as a divorcee you may have special treatment available to you in filing a restricted application for spousal benefits.

The restricted application is an option where an individual can, at Full Retirement Age or later, file strictly for spousal benefits only while delaying filing on his or her own retirement benefit until later when delayed retirement credits have accrued. He or she must not have filed for any Social Security retirement benefits previously.

In order for an individual to be eligible to file a restricted application, of course that person must be eligible for a spousal benefit. As a divorcee, the same rules that restricted you in the deemed filing section above have a tendency to liberate you at this stage. Since eligibility for spousal benefits is based only on the age of your ex-spouse and the time elapsed since the divorce was finalized, a unique situation is available. Both spouses could be eligible to file a restricted application.

On the other hand, for a married couple only one spouse can be eligible for a restricted application – because eligibility for spousal benefits for married persons depends on the other spouse filing for his or her own benefit. In doing so, of course this person could not file a restricted application.

Back to our example couple, Lou & Ed: Lou chose not to file for her own benefit at 62, and Ed delayed as well. When Lou reaches FRA (as long as she’s unmarried), she can file a restricted application for spousal benefits based on Ed’s record. This is because she is at or older than FRA and she is eligible for spousal benefits due to the fact that her divorce has been finalized for more than 2 years and Ed is at least age 62. Ed’s filing status doesn’t matter to her eligibility.

Should You Self-Insure?

230147757_0d1d0f2ff5_mAt some point in our lives the question arises as to whether or not it makes sense to keep some of the insurance we have. Please understand that this post is not about encouraging the reader to drop any insurance coverage, but perhaps give some perspective on whether or not it makes sense to do so.

Consider the case of life insurance. Generally, the younger we are the more life insurance makes sense. When we’re young we have many years until retirement and have high human capital; the ability to earn great amount over our working lifetime. Our financial capital is very small; we haven’t accumulated any assets such as retirement savings. As we age, our human capital decreases. Our financial capital increases and is high when we retire. Thus the need for life insurance diminishes.

It’s at this point that an individual can consider letting their term insurance policy expire after the term is up such as 30 years. The individual can consider if there’s really a need to replace the human capital they were protecting throughout their working life. At this point, many individuals choose to self-insure. That is, they elect to pay for expenses at death such as funeral, burial, etc., with the financial capital they’ve accumulated.

A similar consideration can be applied to long term care. With premiums increasing and underwriting getting more stringent an individual or couple may decide that it’s more cost effective to pay for their long term care, if needed, out of their financial capital.

There are plenty of points to think about in favor of keeping the insurance. For example, if an individual has a desire to leave a gift or substantial sum of money to charity or heirs, they may choose to keep their life insurance. They may also purchase life insurance at a later age to leverage the gift.

With long term care insurance, they may choose to purchase a policy in order to protect the assets they’ve accumulated. Additionally, they may purchase the long term care insurance in order to alleviate the burden their care may be on family if they didn’t have the insurance.

These are just some idea to consider. As always, don’t hesitate to ask a professional and get specific advice for your situation.

Maximum WEP Impact


Photo courtesy of Matthew Kosloski via

Rounding out our series of articles about the Windfall Elimination Provision, or WEP, I thought we should talk a bit about the maximum impact that WEP can have on you.

In other articles we’ve discussed this in part, but it hasn’t necessarily been fleshed out completely.  As you may know, the maximum WEP reduction is equal to the lesser of 50% of the first “bend point” for each year or 50% of the amount of the pension from income that was not subject to Social Security taxation. In 2015 this is $413 per month at most.

What’s important to know is that this reduction is against your Primary Insurance Amount (PIA), not necessarily against your benefit amount. Depending upon when you file relative to your Full Retirement Age, the WEP impact to your benefit could be more or less than that amount.

Wait – what?

As you may recall, the Primary Insurance Amount (PIA) is only equal to your benefit if you file at exactly your Full Retirement Age (FRA). If you file at some age (even a month) before or after your FRA, the PIA is only a foundation used to calculate your benefit. If you file before FRA, your benefit will be something less than the PIA; after, your benefit will be something more than your PIA.

So, as a result, if your PIA is reduced by the maximum WEP impact ($413 for 2015), the actual benefit reduction will be more or less than that amount unless you file at exactly your FRA.

For example, Sue has an unreduced, pre-WEP PIA (Primary Insurance Amount) of $1,500 and she is subject to the maximum WEP impact of $413. Sue is deciding when to file for her Social Security benefit – she will be 62 in 3 months, so she could file early, or she could wait until age 70 to file. Her FRA is 66 years of age.

If Sue decides to file at age 62, her benefit would be calculated as 75% of her PIA. Since her PIA is $1,500 and the maximum WEP impact is $413, her WEP impacted PIA will be $1,087 ($1,500 minus $413). Her benefit at age 62 will be $815.30 – for a dollar-reduction (maximum WEP impact) of $309.70 because if WEP had not impacted her PIA her benefit would have been $1,125.

On the other hand, if Sue decides to file age her own age 70, her benefit is calculated as 132% of her PIA – reflecting the maximum Delayed Retirement Credits. Since her maximum WEP impact-reduced PIA is $1,087 (as calculated above), her benefit at age 70 will be $1,434.80. In this case, her maximum WEP impact is $545.20. This is because if the Sue’s PIA had not been subject to the maximum WEP impact, it would have been $1,980 at her age 70.

So, the real maximum WEP impact to your benefit can be anywhere from $309.70 to $545.20 for 2015.

File & Suspend vs. Restricted Application

file & suspendThese provisions in Social Security filing are, without a doubt, the two that cause the most confusion. Being very complicated provisions and also provisions that can be very helpful to folks wishing to maximize benefits, file & suspend and restricted application are often mis-used or completely misunderstood. So at the suggestion of a reader, seeing a comment response I’d given to another reader, I will provide some additional background on just what is the difference between these two, as well as when one is used versus the other.

First of all – although it is technically possible for one person to both file & suspend and file a restricted application, typically this results in either no benefit at all or very little benefit. You should not consider both of these to be done by one person unless there are some extenuating circumstances that require it (I can’t for the life of me think of any at the moment but there’s bound to be at least one).

Here’s why:

When you file & suspend, you have established a filing date. If you have established a filing date, the only spousal benefit that you are eligible to receive is the excess – which is the spousal benefit minus your own benefit. If this turns out to be negative, you would receive no spousal benefit at all. If your intent is to delay your own benefit as long as possible you would be unnecessarily reducing the spousal benefit (or eliminating it altogether) by doing a file & suspend.

On the other hand, you can only file a restricted application if you have not established a filing date, and you can only file this at or after your FRA. By filing a restricted application, you are eligible for the full amount of the spousal benefit (50% of your spouse’s FRA-age benefit) with no reduction. Your spouse must have established a filing date for her retirement benefit to enable you to file the restricted application.

The restricted application is called so because you are applying NOT for all available benefits, but you are restricting your application to spousal benefits only. If your application is not restricted, SSA considers it an application for all available benefits as of your filing date. You would file a restricted application if you wanted to delay your retirement benefit but also receive a spousal benefit in the meantime (until you file for your own retirement benefit).

To help with understanding, have a look at this prior article File & Suspend and Restricted Application are NOT Equal. There are a few examples toward the end of the article which will likely help illustrate the differences between the two provisions.

Hope this helps to clear things up about file & suspend and restricted application – if not, let me know in the comments below!

The Power of Dollar Cost Averaging

financial fitnessIf you’re like most investors systematically saving for retirement through their employer or with an IRA chances are you’re taking advantage of dollar cost averaging. Dollar cost averaging is a method of investing a specific dollar amount, generally monthly, no matter how the market is reacting. It’s also a way for an investor to fully fund a retirement account without requiring the maximum amount allowed in one shot.

For example, let’s assume that an investor under the age of 50 wants to save to an IRA. The maximum contribution to the IRA for 2015 is $5,500. Should the investor want to save monthly and still invest the maximum allowed for the year, he would simply divide by 12 and invest a sum of $458.33 monthly.

The beauty of this strategy is that the investor takes advantage of market swings, whether high or low. If the market is considerably high (as it is as of this writing) the investor is buying fewer shares for the $458.33 invested. If the market falls, the investor (assuming he keeps investing – which he should) buys more shares for the same $458.33. Over time, dollar cost averaging allows the investor to purchase shares for an overall lower cost per share. This strategy not only works for IRAs but also for an employer-sponsored plan such as a 401(k). In fact, many individuals are already doing this via payroll deductions.

The investor is accomplishing a few things by dollar cost averaging. First, he is saving for retirement. Second, he is controlling emotions by investing consistently no matter what the market is doing. Lastly, he is not trying to time the market. By dollar cost averaging he’s actually passively timing the market by buying less when the market is high and more when it’s low, all for the same monthly amount.

Let me explain why it’s important to keep investing in a down market. I’m going to give an analogy that I think fits well. Imagine you want to purchase a flat screen TV. You’ve gone to the local store and find out that the TV you’re looking for is $1,000. After waiting a week you go back to the store to see that same TV has been marked down to $250, same TV, brand spanking new. Another week goes by and you see the TV is now priced at $1,250.

The question is: at which point do you buy?

Obviously the answer is when the TV is priced at $250. You may consider buying four TVs since you planned on spending $1,000 anyway. Paying $1,250 is absurd, isn’t it?

Interestingly enough, many investors do the exact opposite when markets are rising or falling. Many individuals feel safety and security when the market is high and invest more. Yet, those same individuals will not buy and may even sell when the market is low or on sale, which is a recipe for disaster. This is a rare example where individuals feel better about paying more – for the same thing. It doesn’t make sense.

Dollar cost averaging helps control this behavior. It systematically forces us to buy less when markets are high and possibly overpriced and more when they’re on sale. Benjamin Graham, arguably the most famous investor and Warren Buffett’s teacher advocates dollar cost averaging in his seminal book, The Intelligent Investor. It helps take the emotion out of investing by passively forcing an investor to keep investing regardless of market volatility.

When Does WEP NOT Impact My Social Security?


Photo courtesy of Ståle Grut via

Recently we covered the Windfall Elimination Provision a bit more completely, including how to eliminate WEP and how WEP can impact your dependents. This prompted quite a few folks to write to me about their own situations, wondering if WEP would impact them.  So today we’ll cover those cases where you might be wondering about this, when WEP does NOT impact your Social Security.

First of all, if you have worked all your life in a job where Social Security tax was withheld, WEP does not impact your Social Security at all. This is true even if you worked in a government job – as long as your wages (earnings) were subject to Social Security tax withholding, WEP will not impact you.

As well, if you have worked and received substantial earnings from Social Security covered jobs for 30 or more years during your career, and you also have a pension coming from a non-SS-covered job, then WEP will not impact your Social Security benefit.

In addition, if you worked in a job where the earnings were not subject to Social Security tax withholding, but you didn’t work there long enough to generate a pension from those earnings, then WEP will also not impact your Social Security. This is to say, if you do not have a pension (of any type, lump sum, annuity, or other) coming from the non-Social Security-covered job, WEP does not impact your Social Security.

Also, if you are receiving a pension based on someone else’s work – your spouse for instance – that was not subject to Social Security taxation, this pension will not cause WEP impact to your own Social Security, or to a spouse benefit from Social Security. WEP is based upon a pension being received for YOUR work, and it would impact YOUR retirement Social Security benefit. In this case, the pension is not based on your work, it is based on your spouse’s work.

Another way that you could be receiving a pension from a non-Social Security-covered job where WEP would not impact you is if the pension is from a foreign (non-US) government that has a totalization agreement with the United States Social Security system. It’s highly unlikely that this situation would come about because the totalization agreement typically means that your credit in one government’s system is applied to the other government’s system and you only receive one of the pensions. I only mention this situation to complete the picture of possibilities.

Lastly, if you have received a lump sum payment of a pension from a job where Social Security taxes were not withheld, and you have lived past the actuarially-defined timespan that the pension was determined to last, then WEP will no longer impact your Social Security benefit.

I can’t say for sure that this is an exhaustive list – this is just the list that comes to mind at the moment. If you have other situations where WEP is not impacting you, please let me know in the comments section below.

How We Can Serve You

2649626409_7a07d66781_m1I wanted to write a short post this week letting our readers know that even though the majority of them may not be located in the state of Illinois, we are generally still able to help and work with you should you want to use or services. Here are a few ways that we can make your experience working with us as “local” and as professional as possible.

  1. We use email – a lot. This is arguably the main way we communicate with clients. It’s not that we’re above using the phone, but with our schedules we are frequently out of the office. Email lets us stay in contact with you regardless of where we’re at.
  1. We use video conferencing. Whether we’re in the office or traveling for business we can easily have a face to face conversation with you if you’d like to put a face with the name. This allows a more intimate conversation without the need of either of us being physically present.
  1. You see what we see. For clients that use our investment management services, they are set up with an online account where they are able to see exactly what we see on a daily basis when it comes to their assets. Transparency is so important in our role as fiduciaries.
  1. We serve you. One of the most important reasons why we value the fee-only compensation model is that we work for our clients. No other entity, product or individual compensates us for the work we do except directly from our clients. In other words, our clients are our employers.
  1. Regardless of location, we still have your best interests in mind. Let me be more specific, we must have your best interests in mind. We couldn’t agree with this business model and fiduciary standard more. It makes serving our clients much more enjoyable for us, and we think our clients enjoy it also.

How Does WEP Affect My Dependents?

Photo courtesy of Samuel Zeller via

Photo courtesy of Samuel Zeller via

We’ve reviewed how WEP impacts your own benefits in prior articles. Briefly, when you’re receiving a pension based on work that was not covered by Social Security, your own Primary Insurance Amount will be reduced by as much as $413 per month (2015 figures) or 50% of the pension, whichever is less.

But can this reduction to benefits affect my dependents’ benefits as well?

Since the nature of the WEP calculation is to reduce your Primary Insurance Amount (PIA), that means any benefit that is based on your PIA will also be reduced.

So, if your spouse is planning to receive spousal benefits based on your earnings record and your PIA is reduced due to WEP, the spousal benefit available to your spouse will also be reduced.

For example, Jennifer, age 66 was a teacher for 25 years, and her employment was not covered by Social Security taxes. In addition to her teaching job, she also worked part-time and during the summer breaks in a job that was covered by Social Security. She earned 20 years of coverage as substantial earnings, not enough to reduce WEP, but enough to generate a Social Security retirement benefit.

Jennifer’s PIA (before WEP) is $1,400 per month, and since her pension from the teaching job is $1,500, the total WEP reduction factor for her PIA is $413. Her WEP-reduced PIA is $987.

Jennifer’s husband Scott is also 66. When Jennifer files for her own retirement benefit, Scott intends to file a restricted application for Spousal Benefits. Since Scott has not filed for benefits previously, he will be eligible for a Spousal Benefit equal to 50% of Jennifer’s PIA – $493.50 (50% of $987).

See How to Eliminate WEP for details on what happens to Scott’s benefit if Jennifer dies while he’s collecting Spousal Benefits (spoiler alert: it’s an increase).

How to Eliminate WEP

Photo courtesy of ahmadreza sajadi via

Photo courtesy of ahmadreza sajadi via

If you are receiving a pension from a non-Social Security covered job and you’re also entitled to receive Social Security benefits, the Windfall Elimination Provision (WEP) may reduce your Social Security benefit. There are ways that this WEP reduction can be eliminated.

How to Eliminate WEP

As discussed in other articles, it is possible to reduce the impact of WEP by working in a Social Security-covered job and earning “substantial earnings” ($22,050 in 2015) for 21 or more years. For the first 20 years, there is no reduction to the WEP impact. For each year of substantial earnings greater than 20, the impact of WEP is reduced by 10%. When a total of 30 years of substantial earnings have been recorded on your earnings record, WEP is eliminated completely.

Another way to eliminate WEP is when the primary numberholder (the individual subject to WEP) dies. This is because WEP only impacts your PIA when you are receiving a pension based on non-covered employment. If the primary numberholder dies, she is no longer receiving the pension – therefore, WEP no longer applies. If the surviving spouse chooses to continue (or begin) receiving a Spousal Benefit, the PIA against which the spousal benefit is calculated is restored to non-WEP impact.

In addition – when a pension from a non-covered job is received in a lump sum, SSA calculates a number of years over which the lump sum would have been spread had it been received as an annuity. The recipient can eliminate WEP impact if he or she out-lives that time span determined for the deemed annuitization of the lump sum. After that time has elapsed, your PIA will be restored to the pre-WEP level.

What to Do if You’re a Victim of Tax Fraud

5856708903_294549a95a_mHopefully this will never happen to you but in the unfortunate event you become of victim of tax fraud there are some steps that you can take to help alleviate the concern that someone has stolen your identity to file a fraudulent tax return in order to receive the refund.

Generally, the first sign of fraud appears when you try to file our return electronically. Most e-file providers receive acknowledgements from the IRS that the return was successfully e-filed. If a return is rejected, a code will return with the rejection indicating what the issue is. For example, a sign of fraud will indicate that the Social Security numbers used to file your return were previously used in the same tax year for another return. If you know you didn’t previously file, then fraud is likely.

If you feel you’re the victim of fraud, here’s what you can do:

  1. Contact the IRS immediately and let them know you feel you’re the victim of fraud.
  2. Generally, you won’t be able to e-file so instead you’ll paper file your return. You or your tax preparer can provide a statement as to why you’re paper filing and that you feel you’ve been a victim of fraud.
  3. Review all of you outside accounts and information to see if you can detect where the culprit got your information. Consider changing passwords and or limiting access to what information you provide.

Lastly, this is directly from the IRS:

The IRS has security measures in place to verify the accuracy of tax returns and the validity of Social Security numbers submitted.

  • If you receive a notice from the IRS that leads you to believe someone may have used your Social Security number fraudulently, please notify the IRS immediately by responding to the name and number printed on the notice or letter.
  • If you are an actual or potential victim of identity theft and would like the IRS to mark your account to identify any questionable activity, please complete Form 14039(.pdf), Identify Theft Affidavit. Mail or fax the form to the address or fax number listed on the notice with your tax return if your electronic filing was rejected or to the address/fax located in the instructions.
  • You may also contact the IRS’s Identity Protection Specialized Unit (IPSU) at 800-908-4490. IPSU employees are available to answer questions about identity theft and resolve any tax account issues that resulted from identity theft.
  • Review Publication 4535(.pdf), Identity Theft Prevention and Victim Assistance, for more information. It is available in both English and Spanish.
  • If you suspect someone else is using your Social Security number, or to secure information on how to prevent identity theft, you can contact the Federal Trade Commission (FTC) Identity Theft Hotline toll-free at 877-438-4338.


Hopefully this never happens to you, but if it does, there’s a way to fix it.

When is Your Social Security Birthday?

birthday cake
Image by freakgirl via Flickr

As you’re nearing the point when you intend to receive your Social Security benefits, it may occur to you to question just when do these milestones take effect?  Just when are you considered first eligible for benefits, when are you at Full Retirement Age, and when have you reached the maximum age? When is your Social Security birthday? (it’s not when you think)

For Social Security age purposes, the month of your birthdate is important – but that’s not the date at which you reach the milestone.  It’s actually the month after your birthday, the month when you are that particular age for the entire month.

For example, if your birthdate is January 15, 1954, you will actually reach age 62 on January 15, 2016 – but you’ll be eligible for benefits beginning with February of 2016.  Likewise, since your Full Retirement Age is 66, you will reach Full Retirement Age by Social Security’s records as of February, 2020.

The Twists

The maximum benefit age of 70 (for Social Security’s purposes) is the month that you actually have your 70th birthday. For our example, this would be January, 2024.

The other time that this doesn’t follow is when your birthdate is the first day of the month.  For Social Security purposes, when you have the first of the month as your birthdate, you are considered as having the month prior as your birth month.  See When Your Birthday Isn’t Your Birthday for more information.

To illustrate, if your birthdate is February 1, 1954, you will reach age 62 on February 1, 2016 and for Social Security benefits, you’ll be eligible for benefits on that date as well. Same goes for age 66 – you’ll reach that age on February 1, 2020 and you’re at Full Retirement Age on that date as well. You’ll reach age 70 on February 1, 2024, but for Social Security purposes you reach age 70 on January 1, 2024.

File an Extension if You Don’t Have All Your Information

extension above the clouds

Photo courtesy of Joshua Earle via

If you find yourself without all of the information to file your tax return on time, or if you just haven’t got the time to fill out the forms, you can always file for an extension of time to file.  This is an automatic extension of six months – to October 15 in most cases.

This is only an extension of the time to file your return, not an extension of the time to pay any tax due.  You should send the tax due (your estimate of course) by April 15.

In an earlier article, we covered the fact that you should file your tax return on time, even if you can’t pay. This applies here as well, but in general you should pay if you’ve calculated that you owe.

Here are seven important things you need to know about filing an extension:

  1. File on time even if you can’t pay. If you completed your return but you are unable to pay the full amount of tax due, do not request an extension. File your return on time and pay as much as you can. To pay the balance, apply online for a payment plan using the Online Payment Agreement application at or send Form 9465, Installment Agreement Request, with your return. If you are unable to make payments, call the IRS at 800-829-1040 to discuss your options.
  2. Extra time to file.  An extension will give you extra time to get your paperwork to the IRS, but it does not extend the time you have to pay any tax due.  You will owe interest on any amount not paid by the April 15 deadline, plus you may owe penalties.
  3. Form to file. Request an extension to file by submitting Form 4868, Application for Automatic Extension of Time to File US Individual Tax Return to the IRS. It must be postmarked by April 15. You also can make extension-related credit card payments, see Form 4868.
  4. E-file extension.  You can e-file the extension request using tax preparation software with your own computer or by going to a tax preparer who has the software.  You must e-file the request by midnight on April 15.  The IRS will acknowledge receipt of the extension request if you e-file your extension.
  5. Traditional Free File and Free File Fillable Forms. You can use both Free File options to file an extension.  Access the Free File page at
  6. Electronic funds withdrawal. If you ask for an extension via one of the electronic methods, you can also pay any expected balance due by authorizing an electronic funds withdrawal from a checking or savings account.  You will need the appropriate bank routing and account numbers. For information about these and other methods of payment, visit the IRS website at or call 800-TAX-1040 (800-829-1040).
  7. How to get forms. Form 4868 is available for download from the IRS website or you can pick up the form at your local IRS office.

Life Cycle Finance Theory

This is an excellent video on one approach to thinking about retirement. Dr. Wade Pfau and Professor David Littell of The American College of Financial Services lead the discussion.

File your tax return on time, even if you can’t pay

wreckSo you’re up against the deadline for filing your taxes, and when you run the final numbers you discover that you’re going to have to pay a boatload of tax. Panic-stricken, you look at your bank account and see single digits, and there’s nowhere near enough left over on payday to make the tax payment. What should you do? Go ahead and file your tax return on time, even if you can’t pay.

If you have all of the information to file a correct tax return on time, you will avoid penalties for not filing. You’ll still have penalties for not paying on time, but at least you’re not compounding the problem by adding failure to file penalties as well. (In another article we’ll cover what to do if you don’t have all the information you need to file a correct tax return by April 15.)

Recently the IRS issued a Tax Tip (2015-53) which details some information about this situation. The actual text of this Tip follows:

File on Time Even if You Can’t Pay

Do you owe more tax than you can afford to pay when you file? If so, don’t fail to take action. Make sure to file on time. That way you won’t have a penalty for filing late. Here is what to do if you can’t pay all your taxes by the due date.

  • File on time and pay as much as you can.  You should file on time to avoid a late filing penalty. Pay as much as you can with your tax return. The more you can pay on time, the less interest and late payment penalty charges you will owe.
  • Pay online with IRS Direct Pay.  IRS Direct Pay is the latest electronic payment option available from the IRS. It allows you to schedule payments online from your checking or savings account with no additional fee and with an immediate payment confirmation. It’s, secure, easy, and much quicker than mailing in a check or money order. To make a payment or to find out about your other options to pay, visit
  • Pay the rest of your tax as soon as you can.  If it is possible, get a loan or use a credit card to pay the balance. The interest and fees charged by a bank or credit card company may be less than the interest and penalties charged for late payment of tax. For debit or credit card options, visit
  • Use the Online Payment Agreement tool.  You don’t need to wait for IRS to send you a bill to ask for an installment agreement. The best way is to use the Online Payment Agreement tool on You can even set up a direct debit installment agreement. When you pay with a direct debit plan, you won’t have to write a check and mail it on time each month. And you won’t miss any payments that could mean more penalties. If you can’t use the tool, you can file Form 9465, Installment Agreement Request instead. You can view, download and print the form on anytime.
  • Don’t ignore a tax bill.  If you get a bill, don’t ignore it. The IRS may take collection action if you ignore the bill. Contact the IRS right away to talk about your options. If you face a financial hardship, the IRS will work with you.

In short, remember to file on time. Pay as much as you can by the tax deadline. Pay the rest as soon as you can. Find out more about the IRS collection process on Also check out

Spousal Benefit Filing: Real World Examples


Photo courtesy of Maja Petric via

This business of filing for Spousal Benefits is complicated, as we’ve discussed in the past. The options available are difficult to understand, and the timing of the choices can make real dollar differences in benefits.

Recently I received a couple of messages from readers that illustrate very good examples of Spousal Benefit decisions in real life. I’ve changed a few of the facts to protect each reader’s identity, but otherwise these are real world examples.

I’m using these real cases because I often hear from readers (as in these cases) that their situations are just so unique that the examples provided can’t be applied. Hopefully these real-life situations will help you as well.

Restricted Application or just file for my own benefit?

This first email illustrates the great benefit of utilizing the Restricted Application instead of filing for (in this case the wife’s) own benefit. It might seem like you’re not getting much for the extra effort, but as illustrated, there’s a significant benefit to using the Restricted application:

I just finished reading your latest Social Security book, and have read your online articles about Social Security, in particular on the Restricted Application process.  I think I understand, but my husband and I don’t fall neatly into one of your examples. Most of the scenarios are for people who have not yet made a choice, or are younger.

My husband is now 73, and began taking Social Security benefits at 65, about 8 months before his FRA. We don’t know his FRA benefit amount, and haven’t found it on the SSA website. At the time he retired we were unaware of the various SS maneuvers, so he just began receiving benefits.  He currently receives $2,400/month. I will turn 65 in September, and would like to retire soon after that, and can probably wait until 66 to file a Restricted Application, but am not sure that would be the right thing for our situation. My FRA benefit amount will be $1,100, and the amount at 70 is projected to be $1,600. Since we don’t know his FRA benefit amount, it’s difficult to calculate whether or not it would be a good idea to use the Restricted App, or just start collecting.

Thanks, P

Here is my response:

Hello P –

Even though you don’t know for sure what your husband’s FRA benefit amount would be, you know that it’s at least $2,400 since that’s his reduced amount. So if you file a restricted application your spousal benefit would be $1,200 (and probably a bit more, but we’ll remain conservative).

This by itself should help you to make the decision: if your own benefit at age 66 is projected at $1,100, of course at that time if you filed you would also file for the spousal excess benefit, taking your total benefit up to our calculation of at least $1,200. So – why would you *not* file a restricted application, and take the exact same $1,200 for 4 years, and then when you reach age 70 give yourself a bonus of $400 per month?

I used your projected age 70 benefit of $1,600 minus the $1,200 to come up with $400. Your actual age 70 benefit might be a bit less since you’re retiring at age 65 and not earning any more on your Social Security record after that point. Remember that the projection at age 70 from SSA assumes you’ve worked up to that age.

I think this is a pretty clear example of how knowing what to do can really pay off – in this case to the tune of $4,800 per year once you reach age 70.

Which of us should file for Spousal Benefits?

The second email is another example of the confusion that reigns with regard to the concept of Spousal Benefits. As you’ll see, you may need to do some calculations to understand if it makes sense for one spouse or the other to file for Spousal Benefits, and the timing of those filings.

My wife is 4 years older and I am.  She reached FRA (66) in June 2014 and had enough work credits so she filed for SS and began received benefits ($800/month).  I reach FRA in June 2018 and at FRA my SS retirement benefit is projected to be $2600.  I planned to delay receiving benefits until I turn 70.  When I reach FRA the spousal benefit for my wife ($2,600 x 50%=$1,300) would be greater than the $800 she receives now based on her earned benefits.  Can she switch from her benefits to spousal benefits when I reach FRA?  If I defer my benefits until I turn 70 can I file for spousal benefits until I turn 70 and then switch to my own SS benefits?

Thanks for your help – L

And here is my response:

Dear L –

Yes, your wife can file for spousal benefits based on your SS record when you file for your own benefit. If you are at or older than FRA when you file you can suspend at that time as well, allowing your benefit to increase by the delay credits up to your age 70.  That covers your first question.

With regard to your second question, if you file for your own benefit to enable your wife to receive the spousal benefit increase described above, you will not be eligible for a spousal benefit based upon her record. On the other hand, if you do not file for your own benefit, thereby delaying your wife’s receipt of the spousal benefit increase until you reach age 70, you could be eligible for a spousal benefit based on her record when you reach FRA.

In your case, it appears to make the most sense for you to file and suspend, allowing your wife to receive a total benefit of $1,300 (50% of your FRA benefit amount of $2,600).

If you went the other route, she would continue to receive $800, and you’d receive $400, which totals to $1,200. After you reach age 70 and file for your own benefit your wife would be eligible for the increased Spousal Benefit for a total benefit of $1,300.

The first option (for you to file and suspend) will result in $100 per month more in benefits over the 4 years between your age 66 and 70 versus the second option, a total of $4,800 that you’d leave on the table.