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IRAs: Roth or Traditional?

Jul 22nd, 2015
by jblankenship.
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Photo credit: jb

The question comes up pretty often: when contributing to an IRA, should you choose the Roth or Traditional? I often approach this question in general with my recommended “Order of Contributions”:

  1. Contribute enough to your employer-provided retirement plan to get the company matching funds. So if your employer matches, for example, 50% of your first 5% of contributions to the plan, you should at least contribute 5% of your income to the plan in order to receive the matching funds.
  2. Maximize your contribution to a Roth IRA. For 2015 that is $5,500, or $6,500 if you are age 50 or older.
  3. Continue increasing your contribution to your employer-provided plan up to the annual maximum. So if you have more capacity to save after you’ve put 5% into your employer plan to get the matching dollars, and you’ve also contributed $5,500 (or $6,500) to your Roth IRA, you should increase the amount going into your employer plan. Increase this amount up to the annual limit if possible. For 2015 the annual limit for employee contributions to an employer plan like a 401(k) is $18,000 (plus a catch-up amount of $6,000 if you’re age 50 or older).

Beyond those three items if you have more capacity to save, you may want to consider college savings accounts or tax-efficient mutual funds in a taxable account among other choices.

But the question I was referring to is this: Which is better – a Roth or Traditional IRA?

The answer, as you might expect, is a fully-qualified “It depends”. The are several important factors to take into consideration.

If you were to compare the two types of accounts side-by-side, at first glance you’d think that it doesn’t make any difference which one you contribute to – especially if you assume that the tax rate will be the same in retirement (or distribution phase) as it was before retirement (or accumulation phase). This is because you’d be paying the same tax on the distribution of the Traditional IRA after the investment period, simply delayed, that you would pay on the Roth contribution, only this part is paid up-front.

Clear as mud, right? Let’s look at the following table to illustrate. I have purposely not included any increases in value, as we’ll get to that a bit later. In the example, we’re using a 20% ordinary income tax rate.


Each year we had $1,250 available to contribute to either a Traditional or a Roth. We had to pay tax on the Roth contribution each year, but we were able to make the whole contribution of $1,250, tax-deducted on our Traditional account.

What happens when we factor in growth in the account? The following table reflects the next step in our analysis, with each account growing at 10% per year, and the values are as of the end of the year:


If you subtract the tax from the Traditional balance, you come up with the same number as the Roth account, since there is no tax on the Roth account at distribution. So, although you pay more in taxes, you had more contributions to your account, so it all comes out in the wash.

So far, I’ve not come up with a convincing argument for a Roth or Traditional IRA. Let’s make another change to our table, by assuming that the tax rate in distribution increased to 25%, and that we remain at a 20% rate during accumulation. The following results come from that change:


As you can see, this results in a nearly $1,100 increase in taxes at distribution, making the Roth IRA the preferred option. Conversely, if the ordinary income tax rate is lower in distribution, the Traditional IRA is a better option.

There are some other factors that we could consider and run calculations on, but for the most part we’ve covered the important bases. Depending upon your own situation, one might be better than the other, and the reverse could be true in slightly different circumstances.

However, strictly going by the numbers the Roth IRA is preferred when the income tax rate is higher in retirement, and it’s at least as good as the Traditional IRA if the rates remain the same. If the numbers were the only differences between the two accounts, this is not a strong argument for the Roth, because you’re just making a gamble as to what will happen with tax rates in the future.

Thankfully, there are more factors to bear on the decision. In my book An IRA Owner’s Manual I point out three very good reasons to choose the Roth IRA over the Traditional IRA (excerpt below). With those factors in mind, and given that most folks have a generally pessimistic view of tax rate futures in the US, it seems that the Roth IRA is the better choice in nearly all situations.

Three Very Good Reasons to Choose
The Roth IRA Over the Trad IRA

  1. Roth IRA proceeds (when you are eligible to withdraw them, at or after age 59½) are tax free. That’s right, there is no tax on the contributions you put into the account and no tax on the earnings of the account. You paid tax on the contributions when you earned them, so in actuality there is no additional tax on these monies.
  2. There is no Required Minimum Distribution (RMD) rule for the Roth IRA during your lifetime. With the Trad IRA, at age 72 you must begin withdrawing funds from the account, whether you need them or not. For some folks, this could be the biggest benefit of all with the Roth IRA.
  3. Funds contributed to your Roth IRA may be withdrawn at any time, for any reason, with no tax or penalty. Note that this only applies to annual contributions, not converted funds, and not the earnings on the funds. But the point is, you have access to your contributions as a sort of “emergency fund of last resort”. While this benefit could work against your long-term goals, it may come in handy at some point in the future.
  4. (a bonus!) A Roth IRA provides a method to maximize the money you pass along to your heirs: Since there’s never a tax on withdrawals, even by your heirs, the amount of money you have in your Roth IRA is passed on in full to your beneficiaries, without income taxation to reduce the amount they will eventually receive – estate tax could still apply though.

As illustrated, if you believe ordinary income tax rates will remain the same or increase in the future, the calculations work in favor of the Roth IRA.

Posted on Jul 22nd, 2015
by author: jblankenship.

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Posted in: IRA, retirement savings, Roth IRA, traditional deductible ira.
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529 Plan vs. Student Loan

Jul 20th, 2015
by jblankenship.
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college 529 years agoWhen planning for the cost of college for your children, often parents and grandparents think of the 529 plan due to the tax benefits. Almost ten years ago the 2006 Pension Protection Act made the tax treatment of 529 plan college savings instruments permanent.  This will be familiar ground for most, but perhaps parents of future college students need to a refresher.

It will always be cheaper to save for college than to pay for loans. If you’re in the position of most folks – with enough assets that you figure your child won’t be considered for financial aid – then it pays in spades to save now. If you saved $150 a month into a 529 plan for 10 years at 4% rate of return, you’d have just over $22,000 saved up. If, on the other hand, you didn’t save that money and had to borrow $22,000, paying it back over the same 10 year period at 6% interest would require monthly payments of $245 – $95 dollars a month more. If you got lucky and the rate on the loan was the same 4%, the payments would still be $224 a month, almost 50% more than the amount you could have been saving.

The best time to start is yesterday, so the best thing to do is don’t delay. If you started putting money into a 529 plan when your child was first born, accumulating $22,000 by the time the child is 18 only requires $70 per month, assuming 4% rate of return. Wait just five years (until the child is 5), that payment increases to $108 per month. Wait until your child is 13, when you have only five years left in order to accumulate $22,000, you’d need to make 529 plan contributions of more than $333 each month.

Choose the right plan. The differences between your choices for a 529 plan alone are mind-boggling. You can choose a 529 plan that is specific to your state, or one of a myriad of other choices. You can choose a pre-paid tuition plan, or a savings 529 plan (my choice is always the savings type of 529 plan). In addition you need to consider other options for savings as well, such as a Roth IRA. Some options may provide tax benefits, others may not, but this is a critical choice to make as you make your savings plan work for you.

Posted on Jul 20th, 2015
by author: jblankenship.

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Posted in: 529 plan, college savings, education.
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Book Review – Stumbling On Happiness

Jul 17th, 2015
by sraskie.
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Stumbling_on_HappinessDaniel Gilbert does a fine job educating the reader on how to think about happiness. A great example is when he gives some rather positive and happy quotes like the ones you’d read from a satisfied customer’s testimonial. When you turn the page, you find out the quotes come from people you’d least expect. In other words, one of our perceptions of happiness is derived from looking at a person from our perspective, not theirs.

A few examples of this are given throughout the book. One in particular is the example of being a conjoined twin. Most of us would think that particular situation would be a horrible outcome in our lives. But we are looking at it from the perspective of not being a conjoined twin. In fact, conjoined twins would have it no other way. They are happy. We would argue that they’re really not happy because they don’t know what it feels like to not be conjoined.

Mr. Gilbert also talks a bit about diminishing marginal utility which is the economic concept that as we get more of something, we feel happier at a decreasing rate. For example, if you have two people; person A makes $30,000 annually and person B makes $300,000 annually. A raise of $10,000 annually will likely increase person A’s happiness quite a bit while person B will feel only slightly happier. The $10,000 has more of an impact on person A as it’s 33% of his annual income while person B receives a raise of only 3%.

This concept (any many others) from the book can help individuals realize that more money doesn’t mean more happiness. Once a person is receiving enough to be secure, often more money may bring more happiness, but at a decreasing rate.

Stumbling on Happiness is written by an academic (he’s a professor at Harvard) and cites plenty of academic evidence. The beauty of this book is it’s not written academically. Mr. Gilbert’s sense of humor and clever examples will keep the reader interested while knowing the information is backed by research.

Posted on Jul 17th, 2015
by author: sraskie.

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How to Prioritize Your Time and Money

Jul 10th, 2015
by sraskie.
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minimize taxesSometime ago I wrote about needs versus wants. Along those lines I’d like to talk about priorities. It’s pretty common that we heard our friends or family say “I don’t have the time” or “I don’t have the money” (of course, we’ve never said these words). And periodically, I’ll hear these words uttered by my students (no time to study), generally after a not-so-good exam score. But what these folks are really saying is “It’s not a priority right now.”

For many of us, it’s not about having more time or more money. It’s really about prioritizing the time and money we have. When we reprioritize what’s important to us, it’s amazing the things we can accomplish and the money we can save. Here are some tips to prioritize your time and money. In fact, for many folks time is money.

Prioritize your savings. This can be done by paying yourself first through automatic payroll deduction to your 401(k) or other employer sponsored. Do the same thing with automatic deposits into your IRA from your bank account.

Determine needs from wants. This is tough for some folks, but doable. Make a list of everything you spend money on monthly and force yourself to eliminate unnecessary things (wants) from necessary expenditures such as retirement savings, emergency funds or mortgage payment (needs). One you’ve made the list, allocate your money accordingly and stick with it.

Don’t procrastinate. This is easier said than done. But I would argue that eliminating certain wants (such as cable TV or your smartphone) can free up more time to do things that “you never have time for” such as going back to school, reading or writing a great book, or spending time with family.

Another neat trick to get more time I learned in college was to set my alarm 1 minute earlier each day than the day before. By doing do, I was able to free up an extra 30 minutes in my day over a month without shocking my body. Eventually, this led to 60 minutes. Now, I have almost two hours to get work done, exercise, and study before my day starts with my wife and kids.

Set goals. Write down specific goals you’d like to achieve and give them a timeline for accomplishment. For example, you could set baby steps for retirement amounts. This can be done by coming up with an annual savings goal say, $5,500 into an IRA. Give yourself a year (or tax deadline) to accomplish this goal. From there, you can simply divide $5,500 by 12 to get a monthly amount of $458.33. Use the $458.33 as a “mini-goal” and try to free up that money from the needs and wants step mentioned above. Once the money’s freed up, put it on autopilot as recommended in the first step.

Try it, and let me know how it works for you.

 

 

Posted on Jul 10th, 2015
by author: sraskie.

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Posted in: fee-only, fiduciary, financial planning.
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The SEP IRA

Jul 6th, 2015
by jblankenship.
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canoeOne of the more unique types of retirement accounts is the Simplified Employee Pension IRA, or SEP IRA for short.  This plan is designed for self-employed folks, as well as for small businesses of any tax organization, whether a corporation (S corp or C corp), sole proprietorship, LLC, LLP, or partnership.

The primary benefit of this plan is that it’s simplified (as the name implies) and very little expense or paperwork is involved in the setup and administration of the plan.  The SEP becomes less beneficial when more employees are added. There are additional options available in other plans (such as a 401(k)) that may be more desirable to the business owner with more employees.

SEP IRAs have a completely different set of contribution limits from the other kinds of IRAs and retirement plans.  For example, in 2015, you can contribute up to $53,000 to a SEP IRA. That amount is limited to 20% of the net self-employment income, or 25% of wage income if the individual is an employee of the business.

The account for each participant is an IRA, just like any other IRA (other than the contribution limits mentioned above).  You’re allowed to invest in any valid investment security offered by the custodian, rollover the plan (upon termination of employment) and direct the plan to your heirs however you wish, just like any other IRA.

Money contributed to the plan is excluded from the income of the employee/participant upon contribution, and any growth in the account is tax-deferred until distribution.  At the distribution of the funds, the funds will be taxed as ordinary income.  Upon reaching age 59½ you can access the funds without penalty – otherwise, unless you meet one of the early distribution exceptions, there is a 10% penalty imposed in addition to the income tax on the distribution.  At age 70½ you will be required to begin taking minimum distributions from the account, just like any other IRA.

Additionally, a SEP IRA can be established up to the filing date for your business entity – as late as April 15 of the following year if you like.  This is different from a 401(k), for example, which must be established during the tax year.

Posted on Jul 6th, 2015
by author: jblankenship.

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Posted in: IRA, ira contribution limits, SEP IRA.
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Correlation, Risk and Diversification

Jul 3rd, 2015
by sraskie.
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prepping peppersMany investors understand the importance of asset allocation and diversification. They choose among various assets to invest in such as stocks, bonds, real estate and commodities. Without getting too technical, the reason why investors choose different asset allocation is due to their correlation (often signified by the Greek letter rho ρ) to the overall stock market. Assets with a correlation of +1 (perfect positive), move identically to each other. That is, when one asset moves in a particular direction, the other moves in the exact same fashion. Assets with a correlation of -1 (perfect negative), move exactly opposite of each other. That is, when one asset zigs, the other asset zags.

Generally, the benefits of diversification begin anytime correlation is less than +1. For example, a portfolio with two securities with a correlation of .89 will move similar to each other, but not exactly the same. Thus there is a diversification benefit. In other words, both securities may fall in a market downturn, but one may fall further than the other. The other security dropped, but not as bad as its counterpart.

The reason correlation among securities is important is it allows investors to create portfolios with different assets, while lowering risk. This is why diversification works. One of the caveats of diversification is that the more diversified we are, we can eliminate certain risks. We can improve our risk adjusted returns. This is one of the finer points discovered by Dr. Harry Markowitz in his work developing Modern Portfolio Theory.

Investors are subject to two broad categories of risk when investing; systematic risk and unsystematic risk. Systematic risk is undiversifiable. In other words, systematic risk cannot be eliminated no matter how much an investor diversifies. This risk is also called economy-based risk, market risk, reinvestment rate risk, exchange rate risk, and interest rate risk.

Unsystematic risk is risk that can be eliminated through proper diversification. Unsystematic risk includes accounting risk, business risk, country risk, default risk, financial risk and government risk. We don’t have to invest in only one business (Enron), or one country (Greece). This Risk Chart illustrates the more securities we add to a portfolio the lower the risk becomes – up to a certain point. That point is when the curved line nearly touches, but never does, the market risk line. This asymptotic relationship means that we can get very close to the market risk line, but never eliminate market risk. Market risk is always present.

A key point for investors to understand is that diversification reduces but does not eliminate risk. Investors (as well as financial planners) should understand that there will always be risk and that there’s no such thing as a riskless asset.

Another consideration that investors must understand is that if they are properly diversified, they will not perform exactly the same as the market in a bull market. In other words, if the S&P 500 increases 30% in any given year, the investor’s portfolio should not do the same. The same is true in a bear market. A 30% decline in the S&P 500 should not mirror the investor’s portfolio. If all of an investor’s investments go up together and down together, they’re not properly diversified. A well-diversified portfolio will have some assets increase while others decrease.

This can be a tough pill to swallow when the market is seeing record gains and our portfolios seem to be struggling to keep up. Well-diversified investors are (somewhat) comforted when the market drops heavily and don’t see their own portfolios suffer as greatly.

Posted on Jul 3rd, 2015
by author: sraskie.

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Posted in: asset allocation, diversify, fee-only, fiduciary, investing, investment, investment diversification, risk.
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Have You Saved Enough for Retirement?

Jun 29th, 2015
by jblankenship.
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winding roadOne of the reasons that retirement funding is a mystery to most folks is the uncertainty that comes with trying to determine how much is enough – enough savings set aside so that we don’t run out of money during retirement.

The answer to this question begins with an understanding of your day-to-day living expenses, and how those expenses may change in retirement. This is a simple enough process, although it does take some effort.

The difficult part is to determine what the funding requirement is in order to provide the income you’ll need to cover your living expenses – for as much as forty years or more!

There is a rule of thumb (more on this later) that you can use to come up with a rough guess – but without using sophisticated computer modeling and analysis, your level of assuredness is limited.

According to a recent survey by the Employee Benefits Research Institute, 84% of future retirees believe that they will have plenty of savings to cover their needs in retirement. At the same time, less than one-third of those surveyed had gone through the effort to calculate how much they will need.

When looking at the actual savings numbers, only around 20% of the survey respondents had in excess of $100,000 set aside for retirement, and more than 10% indicated that they had nothing at all saved for retirement.

The rule of thumb that I mentioned before indicates that you should plan to withdraw no more than 3% to 5% each year from your retirement savings in order to not run out of money. This is what we refer to as a “sustainable rate of withdrawal”. (There are many opinions about what exactly is the appropriate sustainable withdrawal rate – at one time it was suggested that 4% is the right number, but this has been under considerable scrutiny of late. Working with the range of 3 to 5% will get you in the ballpark, nonetheless.) This equates to a requirement of $1 million in retirement funds in order to be able to withdraw $30,000 to $50,000 each year.

Don’t despair over these estimates, though. The rule of thumb is based upon 100 percent certainty, and if you happen to have that luxury, that’s fantastic. There are ways to increase your sustainable rate of withdrawal, while still maintaining a relatively high degree of certainty.

Improving the Level of Certainty

The first and possibly most important factor is to have a plan, and to monitor your plan closely. You can do this on your own, or in conjunction with a financial pro. Paying close attention to your plan and staying with it will provide you with the information in order to make certain that your plan stays on track.

Your plan should include some sort of projections or modeling to show what your future income could be based upon your sources of income – retirement savings, pensions, Social Security, and the like. This will help you to plan for your expenses in retirement – developing a budget in reverse, if you will.

Making adjustments to your portfolio holdings can have a positive impact on the level of sustainable withdrawal. It may seem to run counter to your intuition, but more risk in your holdings is good for your long-term holdings. It is important to maintain significant positions in the stock market in order to achieve a higher level of withdrawals over time. Without some exposure to risk, your funds will fall behind when compared to inflation of day-to-day expenses, not to mention high-inflation items like healthcare costs.

The third factor that can have an impact on your savings’ sustainability is the pattern of income that you’ll need in retirement. As you probably realize, over the span of the potential forty-plus year retirement, your income needs will likely change. During your first several years, you’re likely to spend considerably more than the overall average, as you travel more, take on new hobbies, and the like. Or, on the other hand you may continue to save during this time of your life.

Later on in your retirement, many folks take on lower expenses as they become more sedentary, not traveling as much and having fewer extraneous expenses. Declining health and lower energy level makes staying closer to home more attractive. In later years, health care costs can cause those expenses to increase. It is also important to maintain a realistic view of your own life span. It’s not at all unreasonable to project your retirement plan out to your late 90’s.

There are more factors that can have a positive impact on your sustainable withdrawal rate, but these are the primary ones. I want to reiterate that the most important factor is to make a plan, monitor it closely, and make the appropriate adjustments throughout your life.

What you’ll find is that, by putting some effort into developing a plan, you’ll have much more confidence in your ability to make your savings last. At the same time, if you find that you haven’t yet done enough, you have time to make adjustments in your efforts that will increase your odds.

Having made a plan, it’s also important to review and update it, on average once a year or so. This kind of review will leave you with the peace of mind that, in fact, you’re on track.

Posted on Jun 29th, 2015
by author: jblankenship.

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Posted in: fiduciary, financial planning, retirement savings.
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How to Invest

Jun 26th, 2015
by sraskie.
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Eggs in a basket

Photo courtesy of sraskie

Occasionally, someone will ask me a question in the following different ways: “Did you see what the market did today?” or “How did the market do today?” To be honest, I’d love to use the line that Charley Ellis has used from the movie Gone with the Wind; “Frankly my dear, I don’t give a damn.”

Professionally, my response is more in line with “I couldn’t tell you.” or “I don’t follow the market really.”

The response is not meant to be rude or abrupt, but more to simply say that for most investors (myself included); they shouldn’t be worried about what the market is doing on a day to day basis. This is especially true for the Dow Jones Industrial Average. A price weighted index of 30 stocks is hardly representative of the market, yet it’s what most people think and refer to as “the market” when they ask the questions above or read the news.

The other reason is when you think of it, do we really have control over the market? In other words, what’s the sense in worrying about something that’s beyond our control? Instead, we can focus on what we can control. One of those is expenses. The other is diversification. The good news is that both are easy to control and easy to implement.

As the title says, this is how most individuals can and should invest. Leave worrying about market fluctuations to individuals who think they can beat the market, but very rarely do consistently.

How to control expenses

Generally, one of the best ways to control expenses is to find passively managed funds such as index funds. Index funds simply buy the market basket of securities and since they represent a market index (such as the S&P 500, the bond market, real estate market, etc.) they generally don’t have a manager actively buying and selling securities in order to beat the market. The more a manager actively trades, the more expenses increase – and lower investors’ returns. To quote Dr. Burton Malkiel, Princeton professor and author of the seminal book on investing A Random Walk Down Wall Street, “You get what you don’t pay for.”

Not all index funds are created equal. This is something I wrote about in the past. Investors should look for index funds that are no-load (do not pay the broker an up-front commission) and with expense ratios of .5% (1/2 of 1%) or less. Two companies that offer very inexpensive index fund options are Vanguard and Fidelity. Once you’ve selected which company you’re going to use it’s now time the next step.

How to diversify

When it comes to diversification, investors should first consider which assets classes they will select to invest and diversify into. Asset allocation and diversification are different. Asset allocation means selection from asset classes such as stocks, bonds, REITs, commodities, etc. Diversification means spreading your investment selection among a particular asset class. Once an investor has picked their asset classes the choice of funds from the above two providers becomes easy.

An investor can have excellent asset allocation and diversification with only a few funds in their portfolio. For example, an investor could choose a total stock market index fund, total bond market index fund, an international index fund and a REIT index fund and arguably never have to look at it again except to re-balance occasionally. The weights of the funds (percent of the portfolio dedicated to each fund) needs to be determine by the investor and may solicit the help of a competent financial planner. Financial planning professionals can assist the client with understanding their appetite for risk, goals, time horizon, and tax implications of their investments.

It’s been said that diversification is the only free lunch in investing. That is, according to Modern Portfolio Theory investors can combine individually risky assets while lowering the overall risk in the portfolio.

I’d love to tell you that investing is rocket surgery, but it really isn’t. The industry can make it complicated and I would argue that the more complicated the less benefit it is to investors. Investors should focus on what they can control; expenses and diversification, and get competent professional advice when necessary.

Posted on Jun 26th, 2015
by author: sraskie.

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Posted in: diversify, expense ratio, fee-only, fiduciary, financial planning, index funds, investing, investment, investment diversification.
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Delayed Retirement Credits for Social Security

Jun 24th, 2015
by jblankenship.
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these two dudes are delayingWhen you delay filing for your Social Security retirement benefit until after your Full Retirement Age (FRA), your future benefit increases due to a factor known as Delayed Retirement Credits, or DRCs. These credits accrue at the rate of 2/3% for each month of delay, which equates to 8% for every full year of delay.

It’s important to know a few facts about DRCs. For one – the delayed retirement credits are accumulative, not compounding. If your Full Retirement Age is 66 (if you were born between 1943 and 1954), you can accrue a full 32% in DRCs. This means that the amount of benefit that you would normally receive at FRA (which is your Primary Insurance Amount, or PIA) would be multiplied by 132% at your age 70. If your FRA is above age 66, your maximum delayed retirement credit is something less than 32% – as little as 24% if your FRA is 67.

Delayed retirement credits stop once you reach age 70, no matter when your Full Retirement Age is.

If you are delaying your benefit to achieve the delayed retirement credits and you die before reaching age 70, your DRCs stop at your death. Your surviving spouse will be eligible for a Survivor Benefit with delayed retirement credits as of the date of your death. Even if your spouse delays receiving the Survivor Benefit after your death, no more delayed retirement credits will accrue to that benefit.

For example, if you died at the age of 68 years and 6 months, your surviving spouse will be eligible for a Survivor Benefit that is 120% of your Primary Insurance Amount (PIA). If your PIA is $1,500 that means your surviving spouse is eligible for a benefit equal to $1,800.

The same is true if you decide at some point before your own age 70 to go ahead and file. I get this question every once in a while, since most examples of File & Suspend illustrate the individual doing a file & suspend at Full Retirement Age and then delaying benefits until age 70. But it’s not a requirement that you delay until age 70 – if you delay until, for example, age 67, you’ll achieve an increase of 8% since you waited a year before filing for your benefit.

You can file at any time after you’ve reached Full Retirement Age to achieve this 2/3% increase for each month. There’s no requirement to File & Suspend before filing for the delay credits either. It might be part of your strategy to File & Suspend if you’re delaying your own benefit but want to provide a Spousal Benefit for your better half. On the other hand, you might not want to File & Suspend if you plan to file a restricted application for Spousal Benefits based upon your spouse’s record.

Lastly, DRCs only affect your own retirement benefit. There are no delayed retirement credits for Spousal or Survivor benefits by delaying past FRA.

Posted on Jun 24th, 2015
by author: jblankenship.

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Posted in: Delayed Retirement Credit, DRC, Social Security, Social Security spousal benefit.
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The Second Most Important Factor to Investing Success

Jun 22nd, 2015
by jblankenship.
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Photo courtesy of Padurariu Alexandru via Unsplash.com.

Photo courtesy of Padurariu Alexandru via Unsplash.com.

On these very pages not too long ago, I pointed out the most important factor to achieving investing success, which is consistent accumulation. The second most important factor? Asset allocation.

Asset allocation is the process of dividing your investment “pile” into various different types of investments in an effort to maximize your exposure to the unique benefits of each type of asset class – while at the same time utilizing the risk as efficiently as possible.

When it comes to asset allocation, there are two primary factors which help to determine how you might allocate your investment assets: risk tolerance and time horizon.

Risk tolerance deals with whether or not you can sleep at night knowing that your investment could fall (or rise!) by 15%, for example. If you’re a person who feels compelled to monitor your investments every day and can’t stand it when you see a loss, you have a low tolerance for risk. If, however you recognize that it is important to take measured risks in order to achieve a better return, you may have a moderate tolerance for risk. On the third hand, if you consider the lottery, Texas Hold ‘Em, and day-trading penny stocks to be reasonable components of a portfolio, you may have an inappropriately large appetite for risk.

Risk is tempered by your time horizon. In other words, even if you’re fairly risk-averse, if your time horizon is long enough, you can (and should) take on a fairly risky allocation model. Conversely, when your time horizon is shorter, you may need to dial down the risk – even if you have a relatively high appetite for risk – the short time horizon reduces your ability to recover from significant losses should they occur.

What’s important to remember is that investing too conservatively early on in your savings career can have a drastic affect on the results. Since you have a significant amount of time for compounding to work in your favor, it makes sense to take additional risk to increase the overall return for your portfolio. With time on your side, you can afford to take a little more risk when the reward is appropriate.

At the same time, when your investing horizon is shorter, say less than five years, you can’t afford to put your funds at much risk. But this doesn’t mean that you should put your money under the mattress – inflation will eat away the buying power of your money in a short time. It’s important to maintain a degree of risk in your portfolio throughout your investing life in order to combat the impact of inflation and provide for a minimal amount of growth.

Once you determine an appropriate allocation model to follow, it makes sense to review and re-balance your portfolio about once a year – in order to make sure your allocation model is still in effect. Rebalancing more often doesn’t produce benefits to match the amount of effort and transaction costs that you would incur.

Posted on Jun 22nd, 2015
by author: jblankenship.

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Posted in: fiduciary, financial planning, investing, investment diversification.
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Perspective

Jun 19th, 2015
by sraskie.
2 comments

berriesA number of years ago while in my garden I was tending to my raspberry patch. It had been a long winter and I feared that many had not survived the cold Wisconsin winter. In the spring, the vigorous plants shot through the soil and in just a few months I had a glorious stand of robust plants.

To my chagrin, the tall, leafy canes were lacking berries. I didn’t even see any flowers blossoming. For two weeks I would go out and check the patch to see if there were any signs of blossoms or berries and each time I went out, I can back in to the house disappointed. Had something happened? I began to question what the winter had done to them or if I had prevented their fruiting in any way. After all, this was a pretty easy variety to grow and ever-bearing nonetheless.

Just as I was ready to give up and call it a failed summer for raspberries, something occurred to me. Every time I check for fruit I was looking down at the plants. I had never bothered to check underneath the plants. Like a mechanic changing oil, I got on my back and shimmied under the plants.

Bingo! I had hit the jackpot. Drooping above me were hundreds of ripe berries. So big and so heavy they nearly fell off as soon as I touched them. How terrible it would have been had I not looked at the patch differently. I simply needed to change my view.

While not necessarily a financial post, I hope this helps some of our readers who may be seeing things a certain way, and by changing their view can give them a new perspective. Life may seem like it’s not bearing fruit right now, but if we look at it from another point of view, we may find we would have missed out on a bumper crop.

Posted on Jun 19th, 2015
by author: sraskie.

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Posted in: fee-only, fiduciary.
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Divorcee Social Security Planning

Jun 15th, 2015
by jblankenship.
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divorcedIf you’re planning to retire and you’re a divorcee, you may be entitled to additional retirement benefits based on your ex’s earnings record.

This can be quite a boon for an individual whose ex-spouse has had a significant earnings record over his or her lifetime. Especially so, if your own benefit is lower because you didn’t work outside the home for a significant number of years.

You may be eligible for this additional benefit if you are at least age 62, your marriage lasted for at least ten years, and your ex-spouse is at least 62 years of age (and therefore eligible for Social Security benefits). If your ex hasn’t filed for his or her own Social Security benefit, the last factor is that your divorce must have been final for at least two years. If your ex has filed for benefits, this time limit is eliminated.

How Can You Plan?

So you’ve determined that as a divorcee you’re eligible for a Spousal Benefit based on your ex’s record. How can you plan? How can you determine what amount of Spousal Benefit you may have available?

Of course, a quick and easy way to know how much your Spousal Benefit might be is to ask your ex-spouse. He or she should know (or should be able to find out readily) the amount of Social Security benefits that he or she will have coming upon retirement.

But it’s often not so easy – naturally a product of divorce is a cut-off of communications, by either or both parties. Even if communicating is possible, it may be far from the desirable choice. The good news is that you don’t *have* to do it that way. You can just go to the Social Security Administration office near you to find out.

But wait a minute – you’d at least hope that the SSA folks wouldn’t just hand out personal information to just anyone who darkens their threshold, right? I mean, you can’t just walk in and ask for Social Security benefit information for another person’s record without proving that you *should* have access to this information.

Of course, there is a certain amount of information that the Social Security Administration staff will not give you – your ex’s Social Security number and address, for example. But if you prove your relationship to the ex – that is, if you can show evidence that you were married for the applicable 10 years or more, and that you are divorced – you can get some information for planning purposes.

This evidence is in the form of a marriage license and a divorce decree. Both items must be official records. In addition, if you don’t have your ex’s Social Security number, you will have to provide enough identifying information to ensure that the records requested are the appropriate ones. This identifying information includes full name, including maiden name if applicable, date of birth, place of birth, known addresses, parents’ names and addresses, and possibly other information to correctly identify your ex.

Once the record has been identified and your relationship the the individual is established, SSA may give you access to your ex’s:

  • Primary Insurance Amount (PIA) – for use in determining what your future Spousal and Survivor Benefits might be;
  • Earnings Record – for use if you believe that the PIA may be incorrect due to incorrect information in the earnings record, to pursue review of earnings record discrepancies.

Generally with the information specified above these inquiries can be made over the telephone, although in certain situations a request must be made in person.

Posted on Jun 15th, 2015
by author: jblankenship.

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Posted in: divorce, Social Security, Social Security spousal benefit.
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There is No Free Lunch (or Dinner)

Jun 12th, 2015
by sraskie.
6 comments

Free LunchA few days ago my mailbox was graced with the postcard you see at the top of this post. In case the print is too small it’s essentially an offering for a free dinner at a local restaurant while the dinner’s hosts plan to offer a seminar on achieving more retirement income.

My initial reaction was to laugh at the card, and then my laughter changed to concern. How many individuals were sent this malarkey? Here are some of the “finer” bullet points from the list of discussion topics:

  • Avoid the long delays and costs of probate
  • Opportunities and solutions to help protect your assets for the futureFree Lunch 2
  • Avoid significant tax losses when passing on your assets

It became apparent that this free dinner seminar was nothing more than a sales pitch for a company to sell life insurance and annuities to unsuspecting individuals. A search on the Internet provided more detail on the company (whose name has been removed from the postcard) and it was apparent they are in the business of selling insurance products. The interesting thing was that I could find not one individual contact name or person for the company. This is scary.

There is no such thing as a free lunch. Be cautious of companies that try to lure individuals in with the goodwill of a free meal only to try to catch you in their trap of high-commissioned, surrender charge-heavy products and promises of retirement security. Almost always, these types of bait and switch tactics are a sham – and you should avoid them.

If you can see the fine print at the bottom you’ll notice two striking phrases:

  • NO AGENTS, BROKERS, OR DEALERS PERMITTED IN THIS SEMINAR!
  • Nothing will be sold at this seminar. Topics covered may require the purchase of insurance products.

Why wouldn’t I be allowed in? And of course, no free lunch would be complete without a helping of the second phrase. In other words, “We’re hoping you’ll feel obligated to us for the free meal by buying insurance products which just makes sense based on our biased and subjective informational seminar.”

This postcard got added to our wall of shame.

Posted on Jun 12th, 2015
by author: sraskie.

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Posted in: fee-only, fiduciary, rant, scams.
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Why Financial Planning?

Jun 9th, 2015
by jblankenship.
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Photo courtesy of Sebastien Gabriel via Unsplash.com.

Photo courtesy of Sebastien Gabriel via Unsplash.com.

I am always advocating creating a plan for your financial life – but why plan? Maybe we can identify some factors which may motivate you to develop plans for your life, incorporating financial factors with the rest of your life.

Following are some of the more important factors that you may want to think about:

  1. It is a way to prepare for the inevitable future. This fits in with one definition of planning, which is “intelligent cooperation with the inevitable.”
  2. Planning identifies problems and points the way to solutions. Taking a systematic, thorough look at the situation and thinking about the future possibilities can bring these things to light.
  3. It helps us to do first things first. In other words, it provides a rationale for assigning priorities. Should we save more for retirement, or for college? Should we pay off our home mortgage?
  4. Planning helps to coordinate your various goals with one another. For example, you need to make sure that adequate funds are being set aside for family vacations, while still putting aside funds for college and retirement.
  5. Planning can educate, involve and inform you and your family about the various goals and situations that you have to account for within your financial world. Planning can be a real eye-opener.

Now, just so that you won’t think that this concept of planning is a new idea, I recently came across the following endorsement of the concept of planning:

Suppose one of you wants to build a tower. Will he not first sit down and estimate the cost to see if he has enough money to complete it? For if he lays the foundation and is not able to finish it, everyone who sees it will ridicule him, saying ‘this fellow began to build and was not able to finish.’

Or suppose a king is about to go to war against another king. Will he not first sit down and consider whether he is able with ten thousand men to oppose the one coming against him with twenty thousand? If he is not able, he will send a delegation while the other is still a long way off and will ask for terms of peace.

In case you don’t recognize the quote, it is from the New Testament of the Bible (NIV), the book of Luke, chapter 14, verses 28-32. Obviously the concept of planning is important – considered by Jesus Christ to be what we call today a “no brainer”. That’s a pretty powerful endorsement, in my opinion.

Hopefully these factors have helped you to understand the importance of planning – and that you are inspired to begin developing your own plan. Because your life will go according to “a” plan, you might as well make it “your” plan!

Posted on Jun 9th, 2015
by author: jblankenship.

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Posted in: fiduciary, financial planning.
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Will Work After Retirement Age Increase My Social Security Benefit?

Jun 1st, 2015
by jblankenship.
5 comments

work after retirement ageThis question comes up every once in a while: Will work after retirement age increase my Social Security benefit due to the additional earnings going on my record?

The answer, as with many of these calculation-type questions, is a fully-qualified “maybe”. The amount of your earnings from work in any year may have a positive impact on your benefit – not just work after retirement age. On the downside, depending upon your benefit amount it may not be much of an increase.

The reason it’s not certain whether work after retirement age will increase your benefit is because of the nature of the calculations involved. If you’ll recall from the article on calculation of your Primary Insurance Amount (PIA) – the foundation of this calculation is a figure called your Average Indexed Monthly Earnings, or AIME. The AIME is an average of the 35 highest indexed earnings years in your working life. This is (first) calculated based upon the years between your age 20 and the year before you reach age 60.

For example, if you reach age 62 in 2015, your AIME is first calculated based on your earnings between the years 1973 and 2013. The index is based on the average of all earnings for the years prior to 2014, as compared to the average of all earnings in the year 2013. For the year 1973 in this example, the indexing figure (multiplier) is 5.9217958 – so if your earnings in 1973 were $10,000 then the indexed earnings for that year would be $59,217. Each year of earnings is multiplied by the unique index factor for your year of eligibility.

Once these figures have been determined, any years of earnings on your record at or after age 60 are added to the list as well – but earnings at or after age 60 are not indexed. These are added to the list of your lifetime earnings at face value.

Once the list of your indexed years of earnings is compiled, the amounts, indexed and face value for those after age 60, are compared and the highest 35 years are selected. This list of 35 years of earnings is then totaled and divided by 420, the number of months in 35 years – and the result is your AIME.

Armed with your AIME, you can now calculate your Primary Insurance Amount (PIA). (PIA is the foundation of all benefit calculations based on your record. PIA is the amount of benefit you would receive if you file at exactly your Full Retirement Age.)

The PIA is based upon your first year of eligibility for benefits, the year in which you reach age 62. From the year you reach age 62, income levels called bend points are defined. For our example of an individual reaching age 62 in 2015, the amount of the AIME up to $826 is multiplied by 90%; for any amount above $826 up to $4,980, the amount is multiplied by 32%; and any amount above $4,980 is multiplied by 15%. (The dollar amounts are adjusted annually, the percentages remain the same.) These three results are added together, resulting in your PIA.

So – back to the question: Will work after retirement age increase my benefit due to the additional earnings?

After the initial computation (described above), in any subsequent year that you have earnings from a Social Security-covered job, SSA takes your additional earnings and puts them into the list of years of earnings (indexed prior to age 60, face-value thereafter) and determines if the additional year’s earnings is one of the highest 35 years in your list. If this additional year replaces a lower earning year in your original list, a new AIME is calculated. Then your same bend points from your age 62 year are applied and a new PIA is developed. This recalculation is automatic, you don’t have to do anything to have the new earnings applied.

Examples

John has been working all of his adult life, from age 20 onward. He will reach age 62 in 2015. His AIME has been calculated as $5,000 this year, which results in a PIA of $2,075.70.

John continues to work past his age 62 since he has risen to the position of manager at his job and he’s just not ready to retire. John’s total earnings are $90,000 in 2015. So at the end of 2015, SSA includes the 2015 earnings in his AIME calculation. His lowest indexed earnings from prior years was $59,217 – and this amount is replaced in his “high 35” with his earnings from 2015. This results in an increase to his AIME to $5,073, and then the PIA is recalculated as $2086.60.

So – indeed, if your additional earnings are greater than one of your AIME calculation years, earning more past age 62 can have a positive impact on your benefit. However, as illustrated in the example, adding a relatively high earnings year after age 62 only increased the PIA by $10.90 per month.

Adjusting the example – if John’s earnings for 2015 are only $40,000 – this amount is less than the lowest indexed amount in his AIME list, so the AIME is not recalculated, and neither is his PIA. This is good news if you think about it. Additional earnings can only increase your benefit and cannot decrease the benefit.

If your benefit is low by comparison to the bend points for your situation as a result of low or zero earnings in one or more years used in your calculation, work after retirement age may have a larger impact.

Looking at another example, Sam (age 62 in 2015) didn’t work outside the home for the first 18 years after he reached age 20, pursuing his recording career and raising his children. From age 38 on, he dropped the recording career dream and took on a job in customer service, earning an average indexed wage over the 23 years (from age 38 to 61) of $24,000 per year. However, since Sam had many years of zero earnings in his list, his AIME is calculated as $1,314 – and his PIA is calculated as $899.40.

If Sam earns his average salary of $24,000 in 2015, his AIME will be recalculated because those earnings replace an earlier “zero” year in his list. As a result his new AIME is $1,371, and the resulting PIA is $917.70. This is an increase of $18.30 per month, almost double the amount that John’s PIA increased for earning nearly four times as much in 2015.

Posted on Jun 1st, 2015
by author: jblankenship.

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Posted in: PIA, primary insurance amount, Social Security, social security benefits.
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Is a Reverse Mortgage Right for You?

May 29th, 2015
by sraskie.
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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.

http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/rmtopten

https://www.consumer.ftc.gov/articles/0192-reverse-mortgages

Posted on May 29th, 2015
by author: sraskie.

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Posted in: fee-only, fiduciary, HECM, mortgage, reverse mortgage.
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Social Security Earnings Test

May 27th, 2015
by jblankenship.
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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
Posted on May 27th, 2015
by author: jblankenship.

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Posted in: Earnings Limits, earnings test, Social Security, social security benefits.
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Mandatory Retirement Plans

May 22nd, 2015
by sraskie.
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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.

 

References

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

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.196.2562&rep=rep1&type=pdf

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

http://jay.law.ou.edu/faculty/jforman/Articles/2009UniversalPensionsJPenBen.pdf

Ghilarducci, T., (2007). Guaranteed Retirement Accounts: Toward Retirement Income Security. Retrieved April 10, 2015 from http://www.gpn.org/bp204/bp204.pdf

Ghilarducci, T., & Arias, D. (2009). The High Cost of Nudge Economics and the Efficiency of Mandatory Retirement Accounts. Retrieved April 17, 2015 from http://www.economicpolicyresearch.org/images/docs/retirement_security_background/The_High_Cost_of_Nudge_Final_FINAL.pdf

Ibbotson, R., Xiong, J., Kreitler, R., Kreitler, C., & Chen, P., (2007). National Savings Rate Guidelines for Individuals. Retrieved April 9, 2015 from https://corporate.morningstar.com/ib/documents/MethodologyDocuments/IBBAssociates/NationalSavingsGuidelines.pdf

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.

Posted on May 22nd, 2015
by author: sraskie.

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Posted in: IRA, retirement, retirement accounts, retirement benefits, retirement plan, retirement plans, retirement savings, retirement savings plans, Social Security.
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Social Security Survivor Benefit Coordination

May 20th, 2015
by jblankenship.
13 comments

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 significant benefit based on your own earnings, it 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.

Posted on May 20th, 2015
by author: jblankenship.

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Posted in: Social Security, social security survivor benefits, survivor benefits.
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