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Posted in: delayed retirement credit, file and suspend, Social Security, Social Security spousal benefit, Spousal Benefit.
Tagged: delayed retirement credit · Social Security · spousal benefit

A Good Reason to File and Suspend: Back Benefits

Aug 5th, 2013

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Man wearaing suspenders (Photo credit: Wikipedia)

Note: with the passage of the Bipartisan Budget Act of 2015 into law, File & Suspend and Restricted Application have been effectively eliminated for anyone born in 1954 or later. If born before 1954 there are some options still available, but these are limited as well. Please see the article The Death of File & Suspend and Restricted Application for more details. In particular, the provision discussed below is no longer available to anyone.

We’ve discussed the file and suspend option in the past as it relates to enabling your spouse or dependents to begin receiving benefits based on your record while you delay filing to accrue the delay credits. But there’s another reason that you might want to file and suspend at Full Retirement Age (FRA) – and this one has little to do with a spouse, even single folks can take advantage of this.

When you file and suspend, what you have done is to establish a filing date notation on your record. By establishing a filing date notation, as mentioned before, your spouse and dependents can file for benefits based upon your record. In addition, since there is a filing date on your record, you are eligible to change your mind about delaying your filing to a later date and receive your benefits retroactively from that point to the point when you “unsuspend” your filing. Then from that point forward you will receive your benefits monthly as if you had filed (and not suspended) on the original date.

An important point is that you cannot file and suspend until you have reached Full Retirement Age. This option is not allowed prior to FRA.

Why would you want to do this?

There may be more reasons, but the one that immediately comes to mind is if you have a reason to believe that your lifespan will be much shorter than the crossover age, typically around age 80. After the crossover point, your lifetime benefits from delaying your retirement become more than if you had filed earlier.

Commonly when the decision is made to delay benefits past FRA, you are assuming that it will be beneficial for you in the long run – in other words, you anticipate that you’ll live beyond the crossover age.

For example, you could file and suspend at age 66 (FRA) and then later, at age 68 you are diagnosed with a significant health problem that will likely shorten your life. Instead of waiting until age 70 to file for your benefits, or unsuspending your benefits at your current age, you could ask to unsuspend your benefits as of the date that you originally filed at FRA (age 66). You would then be eligible to receive back-benefits from the point of the original filing in a lump sum, and then you’d receive benefits each month going forward at the rate you would have received at age 66 (plus COLAs).

If you’re single and delaying your benefits past Full Retirement Age, I can’t think of any reason why you wouldn’t want to do this. There’s always the possibility that you will have a change in your outlook (heaven forbid). If that were the case, the back-benefits could come in really handy, not to mention that you could receive ongoing benefits from that point on.

On the other hand, if you’re married you need to consider if there’s a possibility that it might be beneficial to receive spousal benefits based on your spouse’s record. If so, then you wouldn’t want to file and suspend, because this would substantially reduce or eliminate any spousal benefit that you would be eligible for. Keep in mind as well that if you unsuspend your benefit, your surviving spouse and dependents’ benefits will be based on the lower benefit level (when you originally filed).

For example, Tom and Joy are age 66 and 62 respectively. Tom’s expected age 66 benefit is $1,800 per month, and Joy’s is $800. Joy intends to begin receiving her own benefits right away at age 62, and as such her benefit will be reduced to $600, or 75%. Tom has a choice now: he could file and suspend, or he could file a restricted application for spousal benefits only.

If Tom files and suspends, Joy will be eligible for reduced spousal benefits of an additional $70 on top of her reduced retirement benefit, for a total of $670 per month. However, if Tom were to file a restricted application for spousal benefits only, he would be eligible for $400 per month. So this way, Tom and Joy are receiving a total of $1,000 per month. In this case Tom would not want to file and suspend his benefits at FRA – unless he’s concerned about the possibility of a shortened lifespan.

Posted on Aug 5th, 2013

by author: jblankenship.

Posted in: #noTOP, delayed retirement credit, Social Security, Social Security spousal benefit, Spousal Benefit.
Tagged: delayed retirement credit · Social Security · social security spousal benefits

The Airplane Analogy

Aug 2nd, 2013

by sraskie.

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Safety Instructions… (Photo credit: Ranieri Ribeiro)

Many parents face the decision during their working years to try to fund both retirement and college education. Some can adequately do both while others are forced to do the best they can with what money they can save.

Sometimes parents can get caught up in wanting to save as much as they can for their children’s college education and forgo the need to save for or save more for retirement.

When this situation presents itself, I have given my clients my airplane analogy. It goes something like this:

Have you ever flown on an airplane before? If you have you know that once you’re scrunched in and belted and the plane makes its way from the gate the flight attendants break radio silence and start with their routine flight instructions. After you’re taught where the exit rows are and how to use your seat as a floatation device they inevitably change the conversation to cabin pressure.

Should the aircraft experience a decrease in cabin pressure oxygen masks will fall from the overhead compartments. Grab the mask and fully extend the cord to allow the release of oxygen.

The next words are crucial to your survival.

Place the mask over your face and tighten the straps on the side. Once your mask is secured then attend to your child or help the person next to you.

Why would they say that? Because if you pass out at 35,000 feet you’re of no use to anyone.

A similar comparison can be made for those parents saving for both retirement and college. If the focus is solely or mostly on college savings, there may be little if any money accumulated for retirement. In addition, there are plenty of financial aid opportunities available for college. The options for financial aid in retirement are slim.

I’m not saying don’t save for your child’s education. It is very important and a priority for many parents. What I am saying is make sure your retirement savings are being added to as well. Otherwise the reward for all of that money saved for college may be a degree – and two future roommates for the graduate!

Posted on Aug 2nd, 2013

by author: sraskie.

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Posted in: 529, coverdell esa, retirement, retirement plan, retirement plans, retirement savings, retirement savings plans.
Tagged: 401 k · investment · qualified retirement plan · retirement accounts · retirement plan · retirement savings

3 Reasons to use the new safe harbor home office deduction and two reasons not to

Jul 31st, 2013

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home office (Photo credit: Sean MacEntee)

Home office workers! In case you hadn’t heard about it, the IRS made some changes to the way the home office deduction works for 2013. Essentially, you are now allowed to deduct a flat $5 per square foot of dedicated office space, with a maximum of 300 square feet. But this new “safe harbor” option isn’t for everyone. Listed below are three reasons this may be good for you, and a couple of reasons that you might want to use the old method.

3 Reasons It’s a Good Thing

Depreciation recapture not needed any longer – if you are just starting out taking the home office deduction, you can forget about this concept of “depreciation recapture”. This is a required add-back (actually basis reduction) when you sell your home. If you took the old-style home office deduction, including depreciation of your home office space, you’ll still need to keep records of the depreciation that you claimed in earlier years and recapture that depreciation when you sell your home. (Note: you’ll also need to maintain these records even if you start taking the safe harbor amount, since you might switch back to the old method, as well. More on that later.)

Less record keeping – In the past when calculating the home office deduction, you needed to gather together your utility bills, mortgage interest, real estate taxes, repair bills, etc., in order to determine the amount that is attributable to the home office. Under the safe harbor rule, this isn’t necessary.

No loss of mortgage exp deduction – In addition to the above, under the old method, any amount for real estate taxes and mortgage interest that are claimed under the home office deduction had to be subtracted from those expenses for use on your Schedule A – this is no longer required if using the safe harbor $5 rule.

2 Reasons You May Want to Stick With the Old Rule

Office or dedicated space is larger than 300 square feet – You’re limited to 300 square feet under this new provision. For many home office deducters, this will be plenty, but there are likely many exceptions. If your office includes a dedicated waiting area, for example, this could easily go beyond the 300 square foot maximum.

Carry overs from prior years are lost/no carryover allowed – if your home office expenses are greater than your gross income less business expenses and you’re using the new safe harbor method, there is no carryover of the excess to future years. Using the old method, the excess could be carried over. In addition, if you switch to the safe harbor method, any prior year carryover is lost.

(Here’s a bonus, but it’s not for the faint of heart!) If you later switch to the old method you have to account for the prior depreciation (only as basis for depreciation). This over-complicates the depreciation calculation, as you must skip the years when depreciation isn’t charged to determine basis for the current year, but account for those years when determining which year’s depreciation to deduct.

General

Choice can be changed each year – Using the safe harbor rule in one year doesn’t lock you into that choice for the future. You can switch back & forth every year if you wish… but keep in mind that this is going to complicate your depreciation calculations quite a bit. Also, once you’ve filed a return with one choice or the other, you cannot go back and amend the return to change the method of home office deduction – it’s an irrevocable choice.

If you have more than one home and you intend to take the home office deduction for offices in each home, you are limited to using the safe harbor for only one of the offices in any particular year. You can still use the old method on your other home offices in that year. You’re not required to use the safe harbor rule for any of the offices.

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Posted on Jul 31st, 2013

by author: jblankenship.

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Posted in: 2013 tax year, income tax, irs, itemized deduction.
Tagged: home office deduction · income tax · income tax deduction · irs

Book Review: A Random Walk Down Wall Street

Jul 26th, 2013

by sraskie.

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A Random Walk Down Wall Street (Photo credit: Wikipedia)

Right from the start this book will be an excellent read for both financial advisors as well as their clients. Dr. Malkiel provides academic insight on the reasons why passive management works and some great commentary on the use of index funds as part of someone’s overall portfolio.

This was the second time I read this book and certainly not the last. It’s great reinforcement on why we invest our clients’ money the way we do and provides solid academic evidence that doing anything to the contrary is counterproductive, more expensive and simply playing a loser’s game.

Some of the bigger takeaways from the book are Dr. Malkiel’s thoughts and research on the different part of the Efficient Market Hypothesis or EMH. The EMH consists of three parts – the strong form, the semi-strong form and the weak form. The EMH essential admits that markets are efficient – meaning that current prices of stocks reflect all available information and prices adjust instantly to any changes in that information.

The weak form of the EMH rejects technical analysis as a way for beating the market and getting superior returns. Technical analysis can best be described as using past information to exploit future stock picks. Examples of exploiting such information are through charting, which is analyzing a stock based on its pattern of movement on a chart. Other examples given are those of anomalies that investors try to exploit such as the January Effect and the Dogs of the Dow.

The semi-strong form of the EMH says that analyzing a company’s financials, managers, and quarterly and annual reports will not help an investor or manager find stocks that will beat the market overall, thus bot technical and fundamental analysis of companies is futile.

The strong form of the EMH goes even further by stating that even inside information (think Martha Stewart and ImClone) won’t lead investors to superior returns over the market. So technical and fundamental analysis along with insider information are useless.

Admittedly, we know that anomalies exist and there are going to be differences here and there. Even Dr. Malkiel admits this – which is why it’s called a hypothesis and not a law. But the point to remember here is that even though markets have anomalies they are generally efficient and to the extent markets are inefficient, we won’t be the ones to beat them.

Think of it this way: if hundreds of Wall Street professionals and analysts can’t get it right, what makes us think we can?

So don’t try to beat the market; buy the market.

And that’s the meat and potatoes of this book.

Posted on Jul 26th, 2013

by author: sraskie.

Posted in: Book review, index funds, investing, investment, IRA, ira funds, ira money, iras, life insurance, mutual fund expenses, mutual funds, qualified retirement plan.
Tagged: 401 k · 401k · efficient market hypothesis · EMH · fiduciary · investment · IRA · mutual fund expenses · passive fund · qualified retirement plan

Be Careful When Using Your Social Security Statement for Planning

Jul 24th, 2013

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The Statement (Photo credit: Wikipedia)

Recently I received an interesting email from a reader (thanks, JRT!) that illustrates one of the problems with interpreting your statement from Social Security on a regular basis. Part of the email follows:

I am just reaching 66 and have been self employed for many years. I have worked continuously for 30+ years reaching $100,000 or so per year but have been slipping into retirement and last years income dropped to $70000. SS has already reduced my monthly payment estimate. It appears that if I postpone beginning taking my SS retirement I will lose in the long term because each year I have reduced income before retiring my SS distribution will be less. For instance if I defer to 70 and have 4 years with zero income won’t I be hurting myself???

In the situation described above, what the reader is describing is the amounts he is seeing on statements from Social Security. When he was (for example) 64 years old, he saw a projected benefit at age 70 approaching the maximum benefit. Then when he got his new projection a year later, after he had reduced his income for the most recently-reported year, the amount was less. It appears that he’s losing benefits by delaying – right?

Not really.

The problem is with the way that the SS calculates your projected benefit. They always assume two things that will tend to cause problems:

Your most recently-reported wages will continue at that same rate until you retire.
You will continue working until you file for SS benefits.

Jeff’s Statement at Age 64

So let’s work this out in an example. FYI, I’ve done all of this work using the Social Security “Any PIA” online calculator. The reader (let’s call him Jeff) was born in 1949, so in 2013 he is 64 years of age. He has earned the Social Security maximum earnings from 1978 to the present. When he receives his estimate for benefits at age 70, the projected amount of his benefit is $3,452. (Note: When I plugged in the numbers for 2013 and 2014-beyond, I used the current max amount of earnings, $113,700, to reflect what SS does for the statement.)

If I go back and change the retirement age to 66, the benefit calculates to $2,579. It’s safe to assume that if the situation was exactly as I described, Jeff would have received a statement showing him that information when he was 64 years of age.

Jeff’s Statement at Age 65

To estimate what would happen to Jeff’s estimated benefits the next year when he gets his statement, I changed his birthdate to 1948, and – since he indicated he is now earning less, I showed that instead of the maximum amount for 2012, 2013, and 2014-beyond, he actually projects to earn $70,000. Now, his projected benefit at age 70 is $3,394 – since the future projected income is less than was projected a year earlier. The projected age 66 benefit is now $2,571, also less than before, but by a smaller margin since fewer years are impacted.

Jeff hasn’t “lost” benefits – because the projected amount was only that, a projection. Since the reality is that he received less in earnings than was originally projected, his accurately-projected benefit is now less. In other words, the only way Jeff could have achieved the projected benefit is if he continued to work at the same income level ($113,700) as was projected for him.

Jeff’s Statement at Age 66

Taking Jeff’s last statement into account now – what happens if he stops working at age 66 and has four zero years? To display this, I again dropped his birthdate back by a year, so that it indicates he is age 66 this year. The past three years (including 2013) he has received earnings of $70,000 – but for future years, he will receive zero income. Now the calculator shows a projected age 70 benefit of $3,306, which is likely to be very accurate – the only difference would be the annual COLAs that are applied (if any) between now and when Jeff reaches age 70.

Conclusion

So – as you can see, it can be dangerous to assume that the projected benefits on your Social Security statement are completely accurate for your situation, unless you actually will earn the same income between now and the date you begin receiving benefits. In the case of Jeff, since his income is reducing and potentially going to zero for his last four years before age 70, the projected benefit from a couple of years prior was overstated. The overstatement in this case was roughly $150 per month.

Posted on Jul 24th, 2013

by author: jblankenship.

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Posted in: Earnings Limits, Social Security, social security benefits, social security retirement.
Tagged: maximum benefit · Social Security · social security statement

Tips When Renting Out Your Vacation Home

Jul 22nd, 2013

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English: Rental cabins near the Great Smoky Mountains National Park in Sevier County, Tennessee. (Photo credit: Wikipedia)

If you have a vacation home that you only use during for brief vacations throughout the year, you might have entertained the thought of renting out the home to defray some of your expenses. Using a property for mixed purposes – that is, partly as personal and partly as a rental (business use) – can lead to some complications with regard to your income taxes.

This is due to the fact that the income earned from renting out the property is likely to be taxable income, which you will need to report on your income tax return. Of course, you’re allowed to deduct the expenses that are related to the production of income, and then you’re only taxed on the net income after the deductions.

The IRS recently published their Summertime Tax Tip 2013-08, which provides some of the guidelines to keep in mind if you’re going to rent out your vacation home. The complete text of the Tip follows:

Renting Your Vacation Home

A vacation home can be a house, apartment, condominium, mobile home, or boat. If you own a vacation home that you rent to others, you generally must report the rental income on your federal income tax return. But you may not have to report that income if the rental period is short.

In most cases, you can deduct expenses of renting your property. Your deduction may be limited if you also use the home as a residence.

Here are some tips from the IRS about this type of rental property.

You usually report rental income and deductible rental expenses on Schedule E, Supplemental Income and Loss.You may also be subject to paying Net Investment Income Tax on your rental income.
If you personally use your property and sometimes rent it to others, special rules apply. You must divide your expenses between the rental use and personal use. The number of days for each purpose determines how you divide your costs.Report deductible expenses for personal use on Schedule A, Itemized Deductions. These may include costs such as mortgage interest, property taxes, and casualty losses.
If the property is “used as a home”, your rental expense deduction is limited. This means your deduction for rental expenses can’t be more than the rent you received. For more about this rule, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes).
If the property is “used as a home” and you rent it out fewer than 15 days per year, you do not have to report the rental income.

Get Publication 527 for more details on this topic. It is available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Posted on Jul 22nd, 2013

by author: jblankenship.

Posted in: irs, itemized deduction.
Tagged: irs · itemized deduction · rental property

What a Mutual Fund Manager Won’t Tell You

Jul 19th, 2013

by sraskie.

4 comments

Most people reading this article will have some experience with mutual funds. Whether part of your IRA, 401(k), or other savings vehicle mutual funds play a key role in helping people achieve their savings goals with access to a wide variety of companies and diversification along with professional management.

By professional management we mean an individual or team of managers that run the day-to-day activities of the fund such as buying and selling of stocks and bonds as well as running financial analyses of the different companies whose stock they are looking at adding to or selling from the fund.

Mutual funds and their managers vary and from the macro level you essentially have two types of managers – active and passive. Active management means that the managers of the fund actively trade securities in hopes of achieving higher than market returns or outperforming their respective benchmark, such as the S&P 500. Passive manager have more of a buy and hold mentality and will rarely trade unless it is absolutely necessary or if they are index fund manager and a specific company had been added to or removed from an index such as the S&P 500.

What they won’t tell you is that many fund managers will often play monkey see monkey do. Fund managers will mimic what their counterparts are doing and buy and sell the same funds. Rarely will you see a manager go out on a limb – there’s too much to lose such as a well-paying job, and a sizeable bonus.

Studies have shown that managers will “hug” their respective benchmarks for job security – meaning that rather than try to beat their benchmark by a wide margin, they will stay within a few percentage points, plus or minus in order to still meet their goals. A manager the consistently beats the market by a wide margin will be expected to do the same year after year – a feat impossible to do over the long run and in the short run, mostly due to luck.

Admittedly, there will be some managers that will beat the market. You’ll see them announce their victories in the different financial press showing stellar returns and how their fund beat the market. Read the fine print. In most cases they will be announcing their returns before expenses, called gross returns. Look at net returns, after expenses, and the same managers have now underperformed the market or their benchmark. And if they’ve been lucky enough to really beat the market by a wide margin, in most cases the next year the fund is scraping the bottom of the barrel.

In the long run your best bet is to simply buy and hold the market through passive management and index funds. Your expenses are less and you’re not paying someone to do something they can’t.

Posted on Jul 19th, 2013

by author: sraskie.

Posted in: expense ratio, index funds, investing, investment, mutual fund expenses, mutual funds, passive investing.
Tagged: expense ratios · index funds · investment · mutual fund expenses · mutual fund fees · mutual funds · passive investing · passive management

Financial Record Storage and Safekeeping

Jul 17th, 2013

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A tornado near Seymour, Texas (Photo credit: Wikipedia)

We’ve all got reams of papers, paystubs, receipts, sticky notes and possibly even old matchbook covers with important financial information stored on them. It’s important to keep some of these documents safe, in order to provide proof of purchase, documentation for deductions, and the like. You never know when a significant event could occur in your home that could put these documents at risk. Fire, flooding, tornadoes, blizzards, and three-year-olds can emerge out of nowhere and could possibly destroy your important documents. We’ve discussed how long to keep these documents in the past. Recently the IRS published their Summertime Tax Tip 2013-04, which details some recommendations for safe storage of your documents. The text of the Tip follows.

Keep Tax and Financial Records Safe in Case of a Natural Disaster

Hurricanes, tornadoes, floods and other natural disasters are more common in the summer. The IRS encourages you to take a few simple steps to protect your tax and financial records in case a disaster strikes.

Here are five tips from the IRS to help you protect your important records:

Backup Records Electronically. Keep an extra set of electronic records in a safe place away from where you store the originals. You can use an external hard drive, CD or DVD to store the most important records. You can take these with you to keep your copies safe. You may want to store items such as bank statements, tax returns and insurance policies.
Document Valuables. Take pictures or videotape the contents of your home or place of business. These may help you prove the value of your lost items for insurance claims and casualty loss deductions. Publication 584, Casualty, Disaster and Theft Loss Workbook, can help you determine your loss if a disaster strikes.
Update Emergency Plans. Review your emergency plans every year. You may need to update them if your personal or business situation changes.
Get Copies of Tax Returns or Transcripts. Visit IRS.gov to get Form 4506, Request for Copy of Tax Return, to replace lost or destroyed tax returns. If you just need information from your return, you can order a transcript online.
Count on the IRS. The IRS has a Disaster Hotline to help people with tax issues after a disaster. Call the IRS at 1-866-562-5227 to speak with a specialist trained to handle disaster-related tax issues.

In the event of a disaster, the IRS stands ready to help. Visit IRS.gov to get more information about IRS disaster assistance. Click on the “Disaster Relief” link in the lower left corner of the home page. You can also get forms and publications anytime at IRS.gov or order them by calling 800-TAX-FORM (800-829-3676).

Posted on Jul 17th, 2013

by author: jblankenship.

Posted in: financial planning, irs, itemized deduction.
Tagged: documentation · irs · records

A Few Things for a Single Person to Consider When Planning Social Security Filing

Jul 15th, 2013

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Single man (Photo credit: @Doug88888)

The decision of when to begin receiving Social Security benefits can be a bit daunting, because there are many things to take into account when making this decision.

The basic concept of the lifetime value of benefits taken at various ages is the most common thing to consider, when this is really not as important as you might think. This is especially true for single person – since the benefit reduction and increase factors are designed to achieve a similar lifetime result for the average lifespan.

In other words, if you are an average person with an average lifespan, it won’t make much difference at what age you file for benefits, as you’ll receive approximately the same amount by the end of your average life, whenever you begin receiving the benefits.

However.

Another factor that you need to keep in mind is how Social Security benefits are treated, tax-wise. At a maximum, your Social Security benefit will be taxed as 85% – for every dollar in Social Security benefits you receive, you’ll only owe income tax on 85 cents at most. At the other end of the spectrum, you may not be taxed at all on your Social Security benefits, depending on your total overall income.

For example, Jane, age 62, is retiring. She has a modest pension of $10,000 with a cost-of-living adjustment annually, and her annual expenses are $40,000 per year. Jane has an IRA worth approximately $300,000, and she has a Social Security PIA (benefit at age 66, her Full Retirement Age) of $2,000 per month.

Jane could take her Social Security benefit now, at age 62, at a reduced amount of $1,500 or $18,000 per year. If she did this and she’s receiving the $10,000 pension, she’d also need to withdraw approximately $15,000 from her IRA to make up the difference. When she has the income as described, she will incur income tax of approximately $2,478. This is the approximate amount of tax she’d have on her income for her life.

Another way to arrange Jane’s income would be for her to hold off on taking the Social Security benefits until later, and take more from her IRA each year to make up the difference. This would require withdrawals of approximately $35,000 per year from the IRA. Along with the pension income, this would result in annual taxes for Jane of roughly $4,800.

The good part is that, when Jane reaches FRA, age 66, she could start receiving Social Security benefits at the rate of $2,000 or $24,000 per year. At that point she could reduce her IRA withdrawal to approximately $6,000 per year – and because of the way Social Security is taxed, at this stage she would only have tax of $600 per year. None of her Social Security would be taxed, and this would remain the same for the rest of her life.

Had she delayed even further, to age 70 to begin receiving Social Security benefits, her total benefit would now be $31,680 due to the delay credits. At this point she would not need IRA withdrawals any longer, and she would have no income tax at all for the rest of her life.

Let’s shake up the details a bit more, with Joe’s situation: at age 62, he has annual expenses of $60,000, and a PIA of $30,000 per year – meaning he could receive $30,000 per year ($2,500 per month) if he files at age 66. Joe has an IRA worth $1 million, and no pension.

If Joe starts Social Security benefits at age 62, his benefit will be reduced to 75%, or $22,500. In order to achieve his $60,000 income requirement, he’d need to withdraw roughly $47,000 from his IRA, and his total income tax would be approximately $9,960 – and he’d have a similar tax for the rest of his life.

If Joe instead delays to age 66, his FRA, to begin receiving Social Security benefits, he’d need to take roughly $70,000 from his IRA for those four years, and his tax is approximately $10,928 for those years. At age 66 he’ll have $30,000 in Social Security benefits, which he would need to augment with IRA withdrawals of approximately $37,000. Tax on this income would be down to $7,253, which would be about the same for the rest of his life.

Delaying to age 70 would have an even more profound impact: At this stage Joe would be eligible for $39,600 in Social Security benefits, so he’d only need to withdraw roughly $24,000 per year from his IRA, and the total tax on this income would be down to $3,353 for the rest of his life. The dramatic decrease in tax is due to the fact that, at this income level, less than 50% of Joe’s Social Security benefits are taxed.

Other sources

It should be noted here that in the all of the examples for both Jane and Joe, there is always a possibility that their IRAs might run out of money in their lifetimes with these long-term IRA withdrawal rates. This is far less likely in the cases where they depend on a larger amount of Social Security benefits for income by delaying benefits to later ages.

The examples below don’t make assumptions about rate of return on the IRA assets, as we have also not made any assumptions about Cost-of-Living Adjustments or inflation – all to keep the figures simple to follow.

For the first example with Jane starting SS benefits at age 62 and withdrawing $15,000 per year, assuming that she lives to age 81 she’d need $285,000 in the IRA to start with. If she delays to age 66 to start benefits, her IRA would need to have approximately $230,000 to support her need of $35,000 for four years and then $6,000 for the remaining 15 years to age 81. Delaying to age 70, she’d need a total of $280,000 from her IRA to withdraw $35,000 for 8 years.

If she lives beyond age 81, in the first case she’s only got $15,000 left, and she needs to withdraw $15,000 each year to cover her expenses, or only one year. In the second case she has $70,000 left in her IRA, from which she needs to withdraw $6,000 each year, so it will last a little less than 12 years. In the last case, Jane has $20,000 left in the IRA, but she doesn’t need to withdraw anything at all – so in other words, her income is arranged to last for the rest of her life, with no limitation, plus no income tax!

For Joe – in the first case he’d need $893,000 from his IRA to get him to age 81. The second, he needs $835,000 – four years at $70,000 and 15 years at $37,000. In the last situation, Joe needs $560,000 for the first 8 years, and then $264,000 for the eleven years to age 81, for a total withdrawal of $824,000.

If he lives past age 81, he’s got $107,000 in the first case, from which he needs to withdraw $15,000 per year, leaving him with just over 7 years of withdrawals. In the second case, with $165,000 remaining in the IRA and an annual withdrawal of $37,000, leaving him with just over four years of withdrawals. In the last case, he has $176,000 and needs to withdraw $24,000 annually, or just over 7 years.

So in Joe’s case, he either needs to reduce his expenses or count on the fact that he’ll only live to age 88 (or 85). At any rate, his best outcome would occur by delaying to age 70 – because a larger amount of his required income is guaranteed since it’s Social Security benefits, rather than the finite IRA account which could run out during his lifetime.

Posted on Jul 15th, 2013

by author: jblankenship.

5 comments already - add to the conversation!

Posted in: delayed benefit, delayed retirement credit, security retirement benefits, Social Security, social security tax.
Tagged: delayed retirement credit · Social Security · social security benefits

Holy Priceless Collection of Etruscan Snoods

Jul 12th, 2013

by sraskie.

4 comments

Snood dog (Photo credit: Wikipedia)

Pretty weird title right? It actually comes from the classic Batman TV series starring Adam West and Burt Ward. Burt Ward’s character, Robin was notorious for his exclamations categorizing different objects or dilemmas as righteous.

How does this relate to financial planning? We all have our snoods that we collect or have value to us. When we purchase renters or homeowners insurance, we often assume that our personal property is covered under the specified limits on the policy. Normally this is 50% of the home’s insured value.

But it pays to read the fine print. Most policies will only allow for coverage for certain items and only for specific limits. For example, a typical home insurance policy will cover jewelry only up to $1,000 total – for all of the jewelry you own. In order to have coverage for a specific item of jewelry such as a wedding ring, engagement ring, or necklace an endorsement is required.

Think of an endorsement as a “mini insurance policy” specifically for the item covered. For a wedding ring, it would be a policy within your existing homeowners or renters policy that covers only the ring, subject to its own deductible and often much more broad types of coverage. This means that in a normal home policy without an endorsement one could lose their ring, have the stone fall out, etc. This is known as mysterious disappearance and is generally not covered under the basic home policy.

With an endorsement, the ring could be lost, or a stone could fall out and the endorsement will likely cover that loss – subject to the endorsements deductible which is typically less that the home policy deductible.

The same is true for other items such as art, coins, trading cards, silverware, furs, antiques, firearms, and yes, priceless collections of Etruscan snoods. I have even had friends need a specific endorsement for the grand piano in their living room.

Most insurance carriers will require an independent appraisal to endorse high-ticket items like jewelry, antiques, coins, etc.

Check your policy and make sure your snoods are covered. If not, contact your insurance carrier and see what needs to be done to get them added. Your premiums will undoubtedly increase, but you’ll have peace of mind knowing your snoods are covered.

Posted on Jul 12th, 2013

by author: sraskie.

Posted in: home insurance, Insurance, renters insurance.
Tagged: home insurance · home owners insurance · inland marine · insurance endorsements · insurance riders · jewelry endorsement

What is WEP?

Jul 10th, 2013

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Social secruity (Photo credit: SalFalko)

WEP, in Social Security parlance, is the Windfall Elimination Provision. So, if that’s all you wanted to know, you’re good to go.

You wanted more though, right? Okay, here we go:

WEP is the provision of the Social Security rules that provides for reduction of your Social Security benefit when you are receiving a pension from a job that was not covered by Social Security. Usually these jobs are government-related, including state and federal government employees, teachers, and the like. In addition, pensions from work done in other countries would also fit into this category, as long as the work was not covered by US Social Security.

How it Works

When your Social Security benefit is calculated, if you’ll recall from this earlier article on benefit calculation, your Average Indexed Monthly Earnings (AIME) factor is divided into three portions, bounded by bend points. The first bend point is multiplied by 90% – but if WEP applies, the 90% multiplier is reduced by as much as 50%. The reduction amount can be reduced or eliminated by two additional factors – the amount of your pension from non-covered work, and the number of years of substantial earnings you’ve accrued in your career in jobs covered by Social Security.

If your benefit is fully impacted by WEP, this means that for 2013 your Primary Insurance Amount (PIA) will be reduced by 50% of the first bend point, which is $791 – so the maximum reduction via WEP in 2013 is $395.50.

The reductions apply to your own PIA which then applies to your own retirement benefit, as well as to any beneficiary or spousal benefits that are calculated on your PIA. If you’re receiving a Spousal or Survivor Benefit based on someone else’s record, WEP does not apply. Additionally, if the pension you’re receiving is from someone else’s work – as in, if you’re receiving a survivor’s pension based upon your spouse’s government-related job – WEP does not apply to your Social Security benefits.

Now let’s review the ways that the WEP reduction can be reduced or eliminated from the maximum 50%.

Substantial Earnings

When you have worked in a Social Security-covered job for more than 20 years and the earnings are considered “substantial” by Social Security definition, these earnings can begin to reduce the WEP reduction factor from the maximum. For each year greater than 20 that you’ve had substantial earnings, the 50% factor is reduced by 5%. So if you have had substantial earnings for 30 or more years, the WEP reduction factor is completely eliminated.

Amount of Your non-SS Pension

The other way that WEP impact can be reduced from the maximum is based on the amount of your pension from the non-Social Security-covered job. The total dollar amount of WEP reduction is limited to 50% of the total dollars being received from the non-SS-covered job. So if your pension from this non-SS-covered job is less than $791 (in 2013), then the reduction for WEP will not be at the maximum.

Let’s say your pension from non-SS-covered work is $400 per month. As a result of the maximum cap, your Primary Insurance Amount will only be reduced by $200 (50% of your pension amount).

Posted on Jul 10th, 2013

by author: jblankenship.

Posted in: Social Security, wep, windfall elimination provision.
Tagged: Social Security · WEP · Windfall Elimination Provision

Stretching an IRA When There Are Non-Individual Beneficiaries

Jul 8th, 2013

5 comments

Ira and Charlie (Photo credit: Wikipedia)

As we’ve discussed here previously, one of the requirements to enable an inherited IRA to be “stretched” over the lives of the beneficiaries is that all of the beneficiaries must be individuals. That is to say, none of the beneficiaries can be something other than a person, such as a trust (specifically a trust that is not a see-through trust), a charity, or an estate. If even one beneficiary is not a person, then all of the beneficiaries must take distribution within five years.

But there’s a way around this, and it has to do with the timing of distributions.

When an IRA owner dies, there is a key date to know: September 30 of the year following the year of death of the owner. On that date, the beneficiaries are “set” for the IRA, and if available, the Designated Beneficiary is named. It is on this date that the applicable distribution period is defined for the beneficiaries of the IRA. If all of the beneficiaries are persons (not some other entity as described above) and the IRA is not split into separate inherited IRAs for each beneficiary, the oldest beneficiary becomes the Designated Beneficiary. It is the lifetime of the Designated Beneficiary which will determine the applicable distribution period for all beneficiaries. However, if the IRA is split up into separate inherited IRAs for each beneficiary, then all beneficiaries are Designated Beneficiaries, and each separate inherited IRA’s beneficiary will be eligible to use the distribution period referencing his or her own age.

However – as mentioned above, if one or more beneficiary(ies) on September 30 of the year following the year of death of the original owner is a non-person entity, then all beneficiaries must take distribution of their portion of the IRA within 5 years. The date is the key: if distribution of the non-person entity’s portion is completed prior to September 30 of the year following the hear of the death of the original owner, then as of that date there would be only “person” beneficiaries. This would allow for the remaining individuals to split up the IRA into separate inherited IRAs and take distribution over their individual lifetimes, per the IRS’ tables.

For example…

John died at the age of 68 in June of 2012, leaving his IRA and other assets primarily to his two children, Chuck and Sally. However, he also wanted to make sure that his alma mater, Enormous State University, received 1/3 of his IRA, worth $1 million at his death.

If John’s executor does nothing with the IRA assets prior to September 30, 2013, Chuck, Sally, and ESU will have to take distribution of $333,333 each before the end of 2018. This could amount to a considerable tax burden for Chuck and Sally (ESU wouldn’t have to pay taxes as an educational institution), since each would have to withdraw as much as $66,667 each of the five years. It should be noted that the distribution doesn’t have to be evenly split over the five years as long as the account is fully distributed by the end of five years.

On the other hand, if John’s executor were to distribute the 1/3 share to ESU before September 30, 2013, then ESU is no longer a beneficiary of the IRA on the Beneficiary Designation Date. With that fact in place, the IRA has only “individual” beneficiaries, and so the account can be split evenly between inherited IRAs for Chuck and Sally, and then Chuck and Sally can stretch the IRA distributions over their own lifetimes. per the IRS tables.

Posted on Jul 8th, 2013

by author: jblankenship.

5 comments already - add to the conversation!

Posted in: inherited IRA, IRA, retirement accounts.
Tagged: inherited IRA · IRA · required minimum distribution

Fees

Jul 5th, 2013

by sraskie.

1 comment

Expenses (Photo credit: Phillie Casablanca)

What you see is what you get – or what you don’t see is what you get. As you start or continue to invest and save for college, retirement, weddings, vacations, and other goals it’s important to know the underlying fees and charges of the products and funds that you’re in. Very often these fees are buried in the minutia of a thick prospectus or in the fine print of your account statement.

Fees are necessary, but excessive fees aren’t. You should be getting what you pay for – but that can be hard if you don’t know what you’re paying.

Let’s take mutual funds for example. On one end you have fees and expenses going to the fund and the manager to try to do the best with your money – which is to earn a decent return (positive or negative) and hopefully beat their benchmark. This is typically a more expensive approach when the manager is trying beat their benchmark as there is more buying and selling of the stock and bonds in his or her fund.

On the other end of the spectrum, you have a passively managed fund or an index fund. These are typically less expensive as the manager doesn’t have to do a ton of work – after all, their fund is essentially mirroring the index – like the S&P 500 or the Barclays Capital Aggregate Bond Index.

So what determines a fair fee? For active and passively managed funds, anything less than one percent is going to be a good start. Think of it this way: if you have $100,000 invested in a fund charging one percent in expenses, that’s $1,000 annually going to the fund company. Half a percent is going to be $500 annually and a quarter percent is $250 and so on. This is on top of how the fund performed. So if the fund lost seven percent, you effectively lost eight percent. If you’ve gained nine percent, your net is eight percent.

Added to the fund expenses are the fees and charges your broker or adviser may charge. Front-end load or commissions are charged by commissioned advisers. These can range from around five percent to one percent depending on the fund for new dollars that come in. There are also 12b-1 fees (often referred to as trails) that are tacked on commissioned funds and these are usually around a quarter percent annually.

Fee-only advisers will charge from a quarter percent to up to two percent in addition to the fund expenses. They may also offer a range of services provided that include the management fees you’re paying such as tax returns, financial planning, and budgeting.

Read your statements, asks lots of questions and make sure you know exactly how much you’re paying.

Posted on Jul 5th, 2013

by author: sraskie.

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Posted in: fee-only, fiduciary.

Important Ages for Social Security

Jul 3rd, 2013

4 comments

That Certain Age (Photo credit: Wikipedia)

There are many specific important ages to know as you’re planning your Social Security filing strategy. The ages can become quite confusing and jumbled together as you plan. It’s important to know at what age you can take specific actions, as well as what the consequences can be if you take a particular action earlier than it is appropriate.

These ages are pervasive throughout this blog and my book, but I hadn’t compiled all of the important ages into a single place, so listed below are what I have determined to be the most important ages with regard to Social Security, as well as what is important about that age. Enjoy!

Age	Description
22-62	This is the forty years during which your monthly earnings are compiled to develop your initial Average Indexed Monthly Earnings (AIME). This figure is then used to determine your Primary Insurance Amount (PIA) which is used to calculate your retirement benefit, your spouse’s and dependents’ benefits, survivor benefits for your beneficiaries, and the family maximum benefit amount.
50	The first age at which you can file for survivor’s benefits (also known as widow(er)’s benefits). In order to file for survivor’s benefits at this age, you must be permanently disabled. Benefits at this age will be reduced – to the same amount as if the survivor was age 60 and not disabled.
60	The first age at which you can file for survivor’s benefits if you are not disabled. (see 50 above if disabled) Survivor benefits at this age will be reduced to the minimum amount.
62	The earliest age at which you can begin receiving your own retirement benefit and spousal benefit if you are eligible. Both benefits would be reduced if taken at this age.
62-FRA	Between these ages (starting at age 62 and before reaching FRA), if you file for your own benefit and you are eligible for the spousal benefit (meaning your spouse has filed), you are deemed to have filed for both benefits. Likewise, during this period if you file for the spousal benefit you are deemed to have filed for both benefits.Within the 3 years immediately before FRA, your benefit is reduced by 5/9% each month, or 6.667% per year. If you file more than 3 years before FRA, reduction is 5/12% per month for each month greater than 3 years before FRA, or 5% per year.
66	Full Retirement Age (FRA) for folks who were born during the years 1943 to 1954. This is the first age when you can file for the full, unreduced retirement benefit. You can also file a restricted application for spousal benefits only at this age – if your spouse has filed for his or her own benefit.At FRA, spousal benefits are maximized – there is no increase by delaying receipt of spousal benefits after this age. This is also the FRA for survivor’s benefits if born between the years of 1945 and 1956. This means you’d have no reduction to survivor benefits if you delay filing for them until this age.
66 & 2 months	FRA for retirement benefits if born in 1955 (see 66 for description). FRA for survivor benefits if born in 1957.
66 & 4 months	FRA for retirement benefits if born in 1956, and FRA for survivor benefits if born in 1958.
66 & 6 months	FRA for retirement benefits if born in 1957; FRA for survivor benefits if born in 1959.
66 & 8 months	FRA for retirement benefits if born in 1958; FRA for survivor benefits if born in 1960.
66 & 10 months	FRA for retirement benefits if born in 1959; FRA for survivor benefits if born in 1961.
67	FRA for retirement benefits if born in 1960 or later; FRA for survivor benefits if born in 1962 or later.
FRA-70	Between these ages, if you have not filed for your own benefit (or have suspended), your retirement benefit will increase by 2/3% per month, or 8% per year (12 months).
70	At this age, your delayed benefit is at its maximum level. There are no increases by delaying receipt of benefits past this age.

If I’ve left out any important ages, let me know so that I can add them to the list. Just leave a comment below!

Posted on Jul 3rd, 2013

by author: jblankenship.

Posted in: restricted application, Social Security, social security benefits, Social Security spousal benefit, social security survivor benefits, spousal benefits, survivor benefits.
Tagged: restricted application · Social Security · spousal benefit · survivor benefit

When is a RMD a RMD?

Jul 1st, 2013

2 comments

Minima Cackling Goose (Photo credit: K Schneider)

I receive quite a few questions from folks looking for clarification on the rules around Required Minimum Distributions upon reaching age 70½, so I thought I’d jot down a couple of facts about them that you may find interesting.

When can I take the distribution?

Looking through some notes from readers I found one where it was asked (this is paraphrased for clarity):

My birthdate is April 10, 1943, so I will reach age 70½ on October 10, 2013. Do I need to wait until October 10 or after to take a distribution so that it is counted as my RMD?

I responded to this question by saying that, to be safe, I suggest the reader wait until after October 10 to take the distribution.

However. (there’s always a however in life, isn’t there?)

I subsequently received a message from a reader (thanks, TAM!) with the following updated information:

It is, in practice, fully believed that the IRS looks at the YEAR you turn 70 1/2 and NOT the birthdate. When reviewing IRS.gov they are very concerned about making sure one gets the RMD by the last date possible and do not really address how soon a person can take it. Such is government! But in practice, if your birthday makes the date you turn 70 1/2 turn out to be 12/31 or 12/30 we generally advise the client to take the RMD during that year to avoid having to take two RMD’s the next year.

I thought TAM’s information might be helpful to folks who are facing this decision. It still won’t hurt to wait, but according to TAM, you could take the distribution any time during that year when you reach age 70½.

How does IRS know I’ve taken the distribution?

This question comes up pretty often as well:

Do I need to send in a form or something to let the IRS know that I’ve taken my required minimum distribution?

When you’re subject to RMD during a particular year (including the year you reach age 70½), the first money that you withdraw from your IRA(s) is considered to be your RMD. As long as you take at least enough distribution from the account to satisfy the RMD requirement, you’re golden.

Your IRA custodian sends a copy of your 1099-R form to the IRS, as well as filing a Form 5498 (to indicate contributions) – so the IRS is well aware that you’ve taken the distribution. They’re also well aware if you do not take distributions, and will be in contact with you to rectify the situation – in the form of a bill for the penalties and taxes. Don’t rely on this as your notification!

Posted on Jul 1st, 2013

by author: jblankenship.

2 comments already - add to the conversation!

Posted in: IRA, irs, required minimum distribution, rmd.
Tagged: IRA · required minimum distribution · rmd

Medicare Part B

Jun 28th, 2013

by sraskie.

4 comments

English: image edited to hide card’s owner name. author: Arturo Portilla (Photo credit: Wikipedia)

The next letter in our Medicare alphabet soup is Part B. Part B is essentially medical insurance that covers doctor’s services, outpatient care, home health services, and durable medical equipment. It will also cover some other services as well as well as many preventative services.

As far as what doctors will and will not cover Part B depends on whether or not they have agreed to assignment. Assignment is simply your doctor or another health care provider agreeing to be paid directly by Medicare and be willing to accept the payment amount that Medicare decides is the value of the service. Agreement also means the doctor or health care provider cannot charge you any more than what the deductible and coinsurance amounts are.

The basic cost for Medicare Part B for 2013 is $104.90 monthly. Individuals with higher AGI may end up paying more. The table below, courtesy of Medicare.gov shows the increased amount based on AGI.

If your yearly income in 2011 was		You pay (in 2013)
File individual tax return	File joint tax return	You pay (in 2013)
$85,000 or less	$170,000 or less	$104.90
above $85,000 up to $107,000	above $170,000 up to $214,000	$146.90
above $107,000 up to $160,000	above $214,000 up to $320,000	$209.80
above $160,000 up to $214,000	above $320,000 up to $428,000	$272.70
above $214,000	above $428,000	$335.70

The standard deductible for Medicare Part B is $147 for 2103. Once the deductible is met, then any covered individual will pay 20% of any covered service. Medicare will pick up the other 80%. This is all that someone will pay out of pocket for services under a doctor or provider who has an agreement with Medicare. A person may end up paying more if their doctor is not in agreement.

Part B does not cover long term care nor does it cover custodial care. Other excluded services include routine dental and eye care, acupuncture, hearing aids and exams, and elective cosmetic surgery.

To enroll in Part B, you can ether choose to enroll or you may have been automatically enrolled. If you’re already receiving Social Security benefits then you’re automatically enrolled in Part A and B unless you decide to opt out of Part B. Possible reasons you may want to delay Part B coverage would be in the case of if you already have benefits through current employment or a union agreement.

Generally, should you choose to enroll in Part B, you’re allowed to do during the open enrollment periods. Usually you have 8 months to sign up for Part B coverage. Failure to sign up within the 8 month window may lead to you paying a penalty to sign up outside of the enrollment period.

Signing up for Part B also allows you and qualifies you to become eligible for a one-time 6 month open enrollment period for getting a Medigap policy. What does this mean? This means that you now have a guaranteed right to purchase a Medigap policy in your state regardless of your health status. We’ll talk about Medigap in a future article.

Posted on Jun 28th, 2013

by author: sraskie.

Posted in: 2013 tax year, baby boomers, health insurance, Insurance, medicare, Medicare, medicare costs, medicare part b, medicare part b premiums.
Tagged: medicare · medicare part b · part b

Book Review: Control Your Retirement Destiny

Jun 24th, 2013

8 comments

This new book is the first book from my colleague Dana Anspach. Dana has been writing and blogging for quite some time now, primarily as the voice behind Money Over 55 for About.com (www.moneyover55.about.com). Dana also is a practicing financial advisor and respected speaker.

If you’re looking for a nuts-and-bolts, do-it-yourself primer on all things related to retirement, this is your book. Ms. Anspach has put together a very complete overview of all of the areas that you need to consider in order to “Control Your Retirement Destiny”. By following the advice in this book, you can figure out how much money you need to have to retire, where to put it (meaning, what types of accounts to use), how to invest it, and all of the other important topics that you need to know about.

Along the way, you’ll learn what’s important to know about Social Security, taxes, investment placement, annuities, and mortgages, among other things. Dana intersperses her experiences in helping others through these topics, and provides excellent examples to illustrate the topics.

In addition to providing advice, within the book Ms. Anspach provides some excellent worksheets that you can use to map out your own retirement – factoring in the money you’ll need at various points on your journey, pinpointing when you’ll need specific amounts. As you build your worksheets you’ll refine the scenarios, helping you to determine how to generate your retirement income stream in the most efficient and effective manner.

The spreadsheets are pre-filled throughout with an example couple, in order to illustrate how the process has worked for them. You’ll follow this example throughout all of the decision-points, including when to file for Social Security, how to maintain tax efficiency, and planning retirement income and insurance as you plan your retirement.

In addition to all of the advice given throughout, additional resources are provided to aid your efforts, including recommendations for working with an advisor to help you with the process.

I will recommend this book to anyone who is just starting on the process of mapping out retirement. This is particularly so for the person who really wants to have a hands-on approach as they plan retirement – but I think the book will also be helpful for the person or couple who just wants to have a better understanding of the important decisions surrounding retirement.

Posted on Jun 24th, 2013

by author: jblankenship.

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Posted in: Book review, retirement plan, retirement savings plans, Social Security.
Tagged: book review · retirement plan · Social Security

The Real Breakeven Point for Delaying Your Own Social Security Benefit and Taking the Spousal Benefit

Jun 21st, 2013

3 comments

Balanza de la Justicia (Photo credit: Wikipedia)

Recently there was an article that I was involved with where we were reviewing the strategies of taking a restricted spousal benefit and therefore delaying your own benefit versus taking your own benefit. An astute reader (Thanks BL!) pointed out that there was a bit of a flaw in the logic on the costs of delaying, and therefore a significant difference in the breakeven period.

Briefly, the example went as follows:

Say the wife, Michelle, has a PIA of $1,300 and Mike has a PIA of $2,500. They’re both age 66, and Michelle files the restricted app and is eligible to receive $1,250 (half of Mike’s), which is only $50 less than she would receive if she filed for her own benefit. After four years of delay, she has given up $2,400 ($50 times 48 months) but now her benefit is $1,716 – $416 more than she would have received at age 66. At that rate, she makes up the foregone $2,400 in less than six months.

Here’s the problem:

The example assumes that there is a one-time choice to be made between taking the spousal benefit and taking Michelle’s own benefit. In reality, this choice is made every single month after that first month. Michelle is choosing to continue receiving the spousal benefit versus her own benefit. Her potential foregone benefit increases with each passing month! So in other words, the $2,400 that I estimated above was actually very much understated.

After the first month has passed, if Michelle makes the choice to stay with the spousal benefit, the amount of increased benefit that has been foregone is now increased to $58.70 for the current month. This is because the Delayed Retirement Credit (DRC) is 2/3% per month of delay past her Full Retirement Age. So, since Michelle is making the choice every month to continue receiving the spousal benefit, the amount of her own foregone benefit increases every month between FRA and age 70.

For the example at hand, if you consider the increase every month, Michelle is actually foregoing a total of $12,176. This is, as noted, a significant difference from the figure of $2,400 that I used in the original article. The recommendation is the same though, as it still makes sense for Michelle to delay her own benefit until age 70 and receive the spousal benefit during that four years.

The amount of Michelle’s own benefit that she has foregone during this four year period, $12,176, will be made up by her increased retirement benefit that she can receive upon reaching age 70. At this stage (not including Cost of Living Adjustments) she will be eligible to receive $1,716, which is an increase of $466 per month. With this additional benefit amount, Michelle’s breakeven point against the foregone $12,176 is a little less than 30 months, or 2½ years.

Understand that this outcome is specific to the example that I outlined above. The amount of your own benefit and the amount of the spousal benefit will change the outcome and breakeven point for your own circumstances. The other point that is not worked out with this example is the overall couple’s benefit – which is important to work out as well. If Michelle chose to use her own benefit at FRA, Mike could file a restricted application at that point. This would result in a less-optimal outcome, but these projections should be done as well in working out your plan for Social Security benefits.

I hope the original article didn’t cause too much confusion – this should set the record straight.

Posted on Jun 21st, 2013

by author: jblankenship.

3 comments already - add to the conversation!

Posted in: Delayed Retirement Credit, Social Security, social security benefits, Social Security spousal benefit.
Tagged: delayed retirement credit · DRC · Social Security · spousal benefit

Don’t Just Walk by That Dime on the Ground!

Jun 19th, 2013

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The Government Dime (Photo credit: scismgenie)

Have you ever been walking along the street and saw a dime on the ground? Did you just walk right by, or did you stop to pick it up? Heck, it’s only a dime, it’s not hardly worth the effort to bend over, right? But what if it was a dollar? Or a hundred dollars? You wouldn’t just walk by that, would you? What about $1,200?

Unfortunately, many folks do this very thing with their 401(k) plan employer matching funds. Most employers that sponsor 401(k) plans provide a matching contribution when you defer money into the plan. Often this is expressed as a certain percentage of your own contribution, such as 50% of your first 6% of contributions to the plan.

So if you make $40,000 a year and you contribute 6% to the 401(k) plan, that means you’ll be contributing $2,400 to the plan from your own funds, pre-tax. Since your employer contributes 50% of your first 6%, you’ll have an additional $1,200 added to the account for the year.

If you can only afford to contribute 2% (or $800) to the plan, you’re still getting an additional 50% of your contribution added by your employer for a total of $1,200 for the year. It still makes sense to participate even if you can’t maximize the employer contributions.

However, if you choose not to participate at all, you are giving up the extra money from your employer – forever. You can’t go back and get this money later when you think you can afford to. You’re essentially walking by that $1,200 that’s just sitting there on the ground waiting for you to pick it up.

Arguments against

After having this conversation with several folks, I’ve heard many different excuses to not take advantage of a 401(k) plan. The excuses usually fall into a few limited camps, which I have listed a below.

It’s my money! You’re darn right it is! And if you don’t participate in your 401(k) plan you’re throwing some of *your* money away. Many times people believe that when they put money into a 401(k) plan, it’s gone for good. Nothing could be more untrue! The 401(k) plan is your property. All of your contributions and (as long as you’re vested in the plan) the employer contributions are yours to keep. Granted, it’s locked up behind some significant fees and penalties until you reach retirement age (59½ in most cases) – but it’s still yours.

I don’t trust my company – they’ll go bankrupt and lose my money! As noted above, the 401(k) account is yours, not the company’s. Even if the company goes bankrupt completely, as long as you haven’t invested your entire 401(k) plan in company stock (a la Enron), you still have your 401(k) plan intact. They can’t lose your money, in other words! It’s not theirs to lose.

I can’t afford to put money in the plan! These days, money can be pretty tight (but when isn’t it?). Unfortunately, regardless of how much money you make, it’s always possible to spend up to and more than what you bring home each payday. The reverse of this is also true. Within limits, it’s usually possible to make do with less. If your paycheck was a dollar less every payday you’d figure out how to get by, right? How about $78 less?

Using our example from above, for a single person with an annual income of $40,000 per year, before you participate in the 401(k) plan, your total income tax would be approximately $4,054. If you chose to put 6% or $2,400 in your company 401(k) plan, your income tax would work out to $3,694 – $360 less. So your take home pay would only reduce by about $78 per paycheck (if you’re paid every other week). In return for this annual reduction of $2,040 in take-home pay, you’d now have a 401(k) account with $3,600 in it when counting the employer contributions.

Pretty sweet deal, if you asked me (but you didn’t, I just threw this in your face!). For a total “cost” of $78 per paycheck, you get lower taxes PLUS a retirement savings account worth 75% more than what you had to give up. Not too shabby.

One great benefit of participating in a 401(k) plan is that once you’ve made the decision to participate, you are deferring this income before it makes it into your hands. You don’t have to (or get to) make a decision about saving, it’s done automatically. This helps you to get past one of the real difficulties that many folks face with saving: the money always seems to find another place. This way it automatically goes into savings, before it can find another place.

The bottom line

The best and most important way to assure success in retirement savings is to put away more money over time. Of course your investment returns will help, but if you don’t save the money, it can’t produce returns, right? So do yourself a favor and don’t walk past that $1,200 that’s just lying on the ground!

Posted on Jun 19th, 2013

by author: jblankenship.