Retirement: When you should take Social Security

USA TODAY 12:04 p.m. EST February 22, 2015

 

Social Security is most Americans’ largest retirement asset, but the system is “maddeningly complex, and if you don’t figure it out, you can lose big bucks,” says one of the authors of a new book.

“It’s easy to leave tens of thousands to hundreds of thousands of dollars on the table,” says Laurence Kotlikoff, who wrote Get What’s Yours: The Secrets to Maxing Out Your Social Security with Philip Moeller and Paul Solman. “The benefits are there for the taking. You paid for them. And with a little effort, you can dramatically increase what you get.”

But most people “are doing the wrong thing, which is immediately taking greatly reduced benefits the instant they become available,” he says.

USA TODAY talked to Kotlikoff, a professor of economics at Boston University, about Social Security:

Q: How important is Social Security to most people’s financial strategy in retirement?

A: It’s really critical for almost all of us to get this 100% right. Simply taking benefits at the earliest possible moment without any strategizing can cost almost everybody a lot of money. People don’t understand that there is more than one benefit available to them, and there are different strategies for taking their different benefits.

This is like an investment you have to manage. But we are not told that we have options. I don’t think the Social Security Administration has provided enough education to the public about all the options. In our book we have listed 50 secrets to getting higher lifetime benefits, and 25 “gotchas” that can cost you very big bucks. These include complex strategies for married couples, divorcees, widows, disabled workers and people who are thinking about getting married or divorced.

Q: Why did you write this book?

A: The complexity of the Social Security system is disgraceful. People are losing benefits that they paid for because they are not aware of them, and that’s not fair. The system is a user’s nightmare and, as a consequence, it’s terribly unfair. It’s also in terrible financial shape. Other economists and I show you how we would fix it at www.thepurpleplans.org.

Q: What are the options for taking Social Security?

A: Full retirement age is 66 for those who were born between 1/2/1943 and 1/1/1955. If you start taking Social Security before your full retirement age, the benefits are subject to an early retirement reduction for every month you do so. For example, taking your own retirement benefit at age 62 rather than full retirement age (if your full retirement age is 66) means you have a 25% lower monthly payment.

The Social Security Administration raises your personal retirement benefit for every month you wait to claim your benefits beyond your full retirement age, and the raises continue through age 70. This Delayed Retirement Credit is 8% a year until you turn 70.

So if your Social Security retirement benefit was going to be $1,000 a month at 66, it would be reduced 25% to $750 if you claimed benefits at age 62. If you didn’t take it until 70, it would raise 32% (four times the 8% annual increase) to $1,320.

Q: What is the biggest mistake people make with Social Security?

A People take their benefits too soon, because they are worried about dying before they collect. In so doing they may reduce or lose entirely the auxiliary benefits they can collect. They can also reduce the widow(er) benefits they can provide their current and former spouses. If you die early, you won’t need money.

The real risk is living until 100 on relatively low benefits because you were impatient and took reduced benefits before your full retirement age. Benefits in real dollars (inflation adjusted) are 76% higher if you start them at 70 than if you start them at 62.

Q: So when do you recommend folks start taking it?

A:​ As laid out in the book, the optimal strategy is different for each household. Some workers should wait until 70. Others should file early in order to enable their wives, children or ex-wives to collect based on their work record. But if they do so, they have the option of suspending their benefit at full retirement age and starting it up again at, say, 70 at a higher value. For married couples the optimal strategy is a joint one. The optimal collection decisions one spouse makes depends on what the other decides and vice versa.

Q: Who is eligible for Social Security benefits?

A: ​If you have worked in covered employment for 40 quarters you can receive retirement benefits ​ and also potentially provide spousal benefits to current and ex-spouses as well as your children. You can check out your benefits at ssa.gov/myaccount/, which the agency calls my Social Security.

Q: How does the Social Security Administration determine your benefit amount?

A: Social Security calculates a special average of your past (the highest 35 years) covered earnings, which it calls your Average Indexed Monthly Earnings. It then plugs your AIME into a formula that generates your full retirement benefit or primary insurance amount. The PIA formula is quite favorable to low contributors. But in absolute terms, those with more contributions get the largest benefits.

Q: What are the advantages of applying for Social Security and then suspending your benefit?

A: Formally filing for your benefit, even if you suspend it, c​an let your spouse and children collect spousal and child benefits on your work record. It lets you accumulate Delayed Retirement Credits so that when you restart your benefits they will be higher. This is only permitted between full retirement age and 70.

http://www.usatoday.com/story/money/2015/02/22/social-security-retirement-financial-planning/23518483/

Retirement: What the new Congress has in store

A new Congress is in session, and a big question is this: Exactly what do they have in store for older Americans and retirees?

Are changes to Social Security and Medicare on the table, as some activists wonder? And, are changes in store for the tax advantages of our retirement savings accounts, like IRAs and 401(k)s?

There are a wide range of opinions on whether there would be changes — even slight — to Social Security and Medicare. There is more of a consensus that some tax breaks on retirement accounts, mainly affecting higher-income Americans, may be susceptible to cuts.

“I don’t think it’s a concern for current retirees — those in pre-retirement or already collecting,” says author, CPA and retirement expert Ed Slott, who hosts Ed Slott’s Retirement Roadmap on PBS. “Those people vote. Those entities will not be touched. They will talk about it. They will just trim around the edges. It’s like a third rail — nobody wants to touch that.

“The Millennials, people in their 30s and 40s, they may see something scaled back,” he says. “Social Security was never meant as the sole source of retirement income. You will have to rely on your own savings and your own retirement account. It was always meant as a supplement.”

“For younger people, I would plan on saving without it,” he says. “Benefits are going to have to be curtailed, but not for many years.”

Rich Fiesta, executive director of The Alliance for Retired Americans, a Washington, D.C.-based advocacy group, says he is very concerned about Social Security.

“We’re very concerned on Social Security after the action the House took on the first day,” says Fiesta. “They are arbitrarily changing the rules that handcuffs Social Security in terms of the ability to move funds between the retirement trust fund and the disability trust fund, which has been done 11 times in the history of the program. This last-minute rule change puts the Social Security system as a whole in jeopardy and could subject it to potential benefit cuts over the next two years.”

Kristine Aretha, consultant with M&O Marketing in Southfield, Mich., says she expects Congress to target retirement accounts and life insurance to some degree.

“Congress passed a $1.1 trillion budget,” she says. “We have $18 trillion in debt. We have approximately $18.2 trillion sitting in retirement accounts. When we start connecting the dots, those vehicles are low-hanging fruit — easy for them to come after.”

“They will do slow increments on those kinds of things and slowly peck away,” she says. “In one form or another, since 2013, they’ve tried to attack these vehicles knowing the amount of money sitting there. The saddest part is that the retirement account and insurance are what protect mainstream America — their constituents. It’s the one way they can build and transfer wealth. So, I hate to see Congress take it away.”

And like Slott, she says she thinks Social Security is safe. “They may tweak it a bit, but I don’t think they will take it away,” Aretha says.

Sen. Susan Collins, R-Maine, the new chairwoman of the Senate Special Committee on Aging, says she has three primary goals for this term: retirement security, increasing research for diseases such as Alzheimer’s and diabetes and protecting seniors against fraud and scams.

She says she is worried about the solvency of Social Security in the long term, but the disability fund in the short term has a “terrible prognosis. I don’t pretend to have an answer.

“I would like to see, in an ideal world, an increase in minimum benefits so that if you work your entire life, you don’t retire in poverty. We also need to take a look at the number of people taking early retirement. That’s expensive for the system, but it also makes people less secure in their older years because the benefit is much lower if you take early retirement.”

What financial planners and advocates believe may be on the agenda for Congress:

• Stretch IRAs. A stretch IRA is not a type of Individual Retirement Account, but rather it is a feature used in estate planning. In effect, a parent dies and leaves his or her IRA to a child or grandchild; they would inherit many of the tax features. In other words, they can keep the money in the account and not pay taxes until it is withdrawn.

“The beneficiary can take it and stretch the distributions over his or her lifetime. Congress was never thrilled with that. It was meant for your own retirement, not to benefit your children or grandchildren. I think that will be on the chopping block.”

Anthony LoCascio, financial planner with LoCascio Consulting in Clinton, N.J., agrees the stretch IRA will be a target. He believes Congress will force beneficiaries of inherited IRAs to take distributions — and more importantly pay the taxes — either immediately or within five years.

 • Retirement benefits. “With the number of Baby Boomers — there are 10,000 to 15,000 turning 65 every day for the next 15 years — we will have a strain on Social Security retirement benefits,” says LoCascio. “You will have to do something to adjust for the onslaught of recipients. By 2020 or 2025 there will be more people retired than working. You only have so much money. They will have to make adjustments. And one way would be by increasing the retirement age.”

Collins says Social Security is a key part of income for many retirees. “Nationally, one in four retired Americans has no source of income beyond Social Security,” she says. “In Maine, the number is one in three. While Social Security provides an important safety net, with an average benefit of just $16,000 a year, it is hardly enough to finance a comfortable retirement.”

• Capping retirement accounts. A General Accounting Office report released last year estimated that 9,000 people had IRA balances of $5 million or more, resulting in talk in Congress to limit the amount you can save in a retirement account.

When the report was released last year, Sen. Ron Wyden, D-Ore., then-chairman of the Senate Finance Committee, said the savings incentives in the tax code were not reaching the people who needed them the most. “You want people to be successful, but the IRA was intended for the typical person,” he said at the time. “The typical person is light years away from saving that amount.”

“It (capping retirement accounts) comes up every year, but it is not popular,” says Slott. “Most people don’t have $4 million in their IRA.”

• Programs that target older Americans. “We’re worried about funding for programs that seniors use a lot,” says Fiesta. “America’s getting older. The population is aging. There are a number of programs under the Older Americans Act, like Meals on Wheels, that we already think lack adequate funding.”

“I think Congress will have a long road,” says LoCascio. “These things are on the table. What they will do about it, I don’t know.”

“We are on guard and watching this Congress,” says Fiesta.

Retirement: How women can generate income for life

Many women have a “quiet fear” that they won’t have enough money for retirement, but they can take several steps to make sure that doesn’t happen.

“The key is to continue earning throughout retirement and to find ways to create income for life,” says Donna Phelan, 62, who has worked with thousands of women nationwide during her 18 years with several large Wall Street investment firms. She has an MBA in finance and is the author of a new book, Women, Money & Prosperity: A Sister’s Perspective on How to Retire Well.

Research shows that women often have far less saved for retirement than men, Phelan says. They frequently earn less than men and often take time out of their careers to rear children. They also spend more time with elder care. Some women don’t start thinking about their retirement savings until late in life, and by then it’s hard to save enough, she says.

So it’s important for them to think outside the box and find alternative income strategies so they thrive during their golden years, Phelan says.

She encourages women to come up with what she has nicknamed SISTERS — Stackable Income Streams to Empower Retirement Security. The most important retirement-planning objective is to accumulate and “stack” as many diverse sources of retirement income as they possibly can, Phelan says. For example, if you have five different sources of income in retirement that each paid you $12,000 per year, it would add up to $60,000 annual income, she says.

Possible sources of income include pensions, Social Security, investments and savings, retirement plans such as 401(k) plans and IRAs, part-time jobs, inheritance, annuities, home-based or small business, rental property, life insurance and home equity.

She also encourages women to form SISTERS clubs and get together to talk with other women about financial issues and possibly pool their talents, ideas and resources to create small businesses. “My passion is to start a nationwide conversation about women and retirement.”

Phelan says women should:

• Research their own retirement. Think about how much you’ll need, what kind of lifestyle you want to have, where you want to live, what you want to do and where the money for this is going to come from.

• Delay their retirement start date. Make sure you have enough money to retire before you do. Talk to a financial adviser about the prospects of running out of money in retirement, given today’s longevity predictions. Many women need to understand the necessity of earning an income at age 65 and beyond, she says. “Retirement can be like a camping adventure during an unexpected snowstorm. It can last much longer than you expect, and you must ensure that you have enough supplies.”

• Work part time. “It keeps people vital and lively. It gives them a social network and gives them spending money,” Phelan says. “It eases them into retirement because a lot of people don’t prepare psychologically for retirement.”

• Pool their assets with like-minded women to create business opportunities. “What do a marketer, artist and accountant have in common? They have the makings of an instant start-up if they were to pool their talents,” she says.

• Create a home-based business. “I see so many women doing crafts and making jewelry, and they do it as a hobby or for charity, but they could easily monetize it,” says Phelan, who had her own jewelry-design business with customers such as Tiffany & Co. and Cartier.

• Use non-traditional living tactics, such as renting out rooms of your home. Phelan says she knows one woman began renting empty bedrooms in her own home to local art students, and she used the income to make other financial investments that produced income.

• Get a roommate or downsize your home to a less expensive abode. “A house is often one of the largest expenses in retirement, but it can be a non-producing asset that is more than what women can afford to carry,” she says.

Phelan says she has a roommate, and the arrangement has “allowed both of us to cut our living costs so we can save a little more in our 401(k)s.”

• Become financially literate. Some women are intimidated by going to a financial adviser, but these professionals usually give a complimentary session to prospective clients to see if it’s a good fit, she says. You also can learn about finances from books and websites.

• Look into optimizing your Social Security benefits. Make sure you’ve learned about all the options for taking Social Security, such as spousal benefits (ssa.gov), before you make a decision about your benefits. Unless you are in ill health or in dire need of money, delay taking Social Security for as long as possible. Every year you wait increases your Social Security benefit by 8% up to age 70, she says.

• Pay off unproductive debt, such as credit card debt, as quickly as possible. If possible, pay your credit card bills in full every month. If you cannot, then always pay more than the minimum.

• Rework your budget and spending plan; eliminate non-essential spending.

The sooner women get started doing all of this, the better off they are going to be, Phelan says. “Women need to recognize the role they play in their own retirement-planning process and take responsibility now for their retirement prosperity.”

http://www.usatoday.com/story/money/personalfinance/2014/12/29/retirement-women-fear-going-broke/20537329/