Is Your Health the Best Reason to Wait to Apply for Social Security?

Is Your Health the Best Reason to Wait to Apply for Social Security?

Should Your Health Affect Your Social Security Decisions James Lange

For the past several months, I have been discussing the looming legislation I call the Death of the Stretch IRA.  This series of posts turns slightly away from that, discussing the likelihood of a reduction and then increase in federal income tax rates which not only affects inherited IRAs but also your Roth IRA and Social Security planning.   For those of you who are currently retired or will be shortly, the elections you make concerning your Social Security benefits, as well as the execution of optimally timed Roth IRA conversions can make the difference between your being financially secure or going broke.  This post discusses how your health could affect your Social Security elections.

Social Security at 66 vs 70 – which is better?

In most cases, I tell my clients that it is better if the spouse who has the strongest earnings record holds off applying for Social Security until age 70 in order to get the maximum amount of delayed retirement credits.  This is key to your tax and retirement planning as it can increase your benefit by up to 8 percent each year, plus cost of living adjustments!  I go into more details in my book, which you can get a free copy of by clicking here.  But if you’ve read my book already, then you know the specific reason for waiting until age 70 to apply is so that the primary earner’s benefit amount is increased to the maximum possible.

Reasons to Wait until Age 70 to Apply for Social Security

Read that last sentence one more time.  Did you notice that I did NOT say that the reason for waiting until age 70 is so that the primary earner will receive more money?  I said the reason for waiting until age 70 to apply is so that the primary earner’s benefit amount is increased to the maximum possible.  It’s an important distinction, and I want to tell you what I mean by that.

Recently I met with a couple who were not yet retired.  The husband, who was older and the higher earner of the family, had recently been diagnosed with a terminal illness and given a life expectancy of no more than five years.  The wife was 55 – ten years younger than her husband.  Both of them thought that the husband should apply for Social Security immediately, so that he could at least get some money during the years he still had left.

I asked him, “But what about her?”   He looked at me and said, “She’ll get my full benefit after I die, won’t she?”

What happens to Social Security after your spouse dies

Let’s do a quick review of what happens to your income from Social Security after one spouse dies.  Suppose the husband is entitled to a monthly benefit of $2,000 at age 66.   His wife is entitled to a spousal benefit of 50 percent but, in this case I’m going to say that she has worked all of her life and her benefit based on her own record is higher – $1,200.  Their monthly household income from Social Security, therefore, is $3,200.

So what happens when your spouse dies?  How much does the survivor get?  The answer is the higher of the two benefits.  In the above example above, the wife’s benefit would increase to $2000 after her husband’s death.  Sound good?  It isn’t!  The problem is that the monthly household income from Social Security will go down – from $3,200 to $2,000!  Think of how critical that is!  That’s the reason that, in most cases, the higher earner should wait until age 70 before applying for Social Security.

In the case of the clients I was talking about earlier, it was especially important that the husband wait to apply for benefits.  She was ten years younger than he was – 55 years old – and the picture of health.  That meant her life expectancy of age 84, or almost 30 years.  Her husband may never see a dime of his Social Security money – if he does, he’ll get a higher benefit for the time he does have left.   But if his wife survives him, which she probably will, she’ll have more than just an inherited IRA and his savings accounts, she’ll have his higher benefit for the rest of her life too.  Remember that, as we discussed before, the timing of your application to Social Security can drastically benefit your retirement planning. especially after the Death of the Stretch IRA.   There is a critical lesson to be learned from this example.  Poor health is not a good reason for the primary earner to apply for Social Security early, unless the spouse is also in poor health.  If both spouses are in poor health and are not likely to enjoy a long retirement, then it could make sense to apply early.  The goal is to make it possible for both of you to enjoy as much income as possible, while you are both alive!

Stop back soon for more Social Security talk!

-Jim

For more information on this topic, please visit our Death of the Stretch IRA resource.

 

P.S. Did you miss a video blog post? Here are the past video blog posts in this video series.

Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA?

Are There Any Exceptions to the Death of the Stretch IRA Legislation?

How will your Required Minimum Distributions Work After the Death of the Stretch IRA Legislation?

Can a Charitable Remainder Unitrust (CRUT) Protect your Heirs from the Death of the Stretch IRA?

What Should You Be Doing Now to Protect your Heirs from the Death of the Stretch IRA?

How Does The New DOL Fiduciary Rule Affect You?

Why is the Death of the Stretch IRA legislation likely to pass?

The Exclusions for the Death of the Stretch IRA

Using Gifting and Life Insurance as a Solution to the Death of the Stretch IRA

Using Roth Conversions as a Possible Solution for Death of the Stretch IRA

How Lange’s Cascading Beneficiary Plan can help protect your family against the Death of the Stretch IRA

How Flexible Estate Planning Can be a Solution for Death of the Stretch IRA

President Trump’s Tax Reform Proposal and How it Might Affect You

Getting Social Security Benefits Right with the Death of the Stretch IRA

The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA

Part II: The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA

Social Security Options After Divorce: Don’t Overlook the Possibilities Just Because You Hate Your Ex

Social Security Options After Divorce: Don’t Overlook the Possibilities Just Because You Hate Your Ex

How Divorce Affects Your Social Security Benefits

Social Security Options After Divorce: Don’t Overlook the Possibilities Just Because You Hate Your Ex

This series of posts discusses the likelihood of a reduction and then increase in federal income tax rates.  For those of you who are currently retired or will be shortly, the elections you make concerning your Social Security benefits, as well as the execution of optimally timed Roth IRA conversions can make the difference between your being financially secure or going broke.  This post will cover some options that divorced individuals may want to consider when filing for Social Security benefits.

Social Security Benefits after Divorce – Your Former Spouse is Still Alive

Let’s say that you were married for ten years but are now divorced.  Did you know that you can get Social Security spousal benefits based on your former spouse’s earnings record?   Suppose that your ex began collecting Social Security at his Full Retirement Age of 66, and that he gets $30,000 every year.  Then suppose that your own benefit is $800/month.  If you’ve never asked Social Security about receiving benefits based on your divorced spouse’s record, you should.  If you meet the requirements, you’re entitled to half of your ex’s benefit amount, which in this example is a lot higher than what you’d receive based on your own earnings record.

What are the requirements for Social Security spousal benefits if you’re divorced?  First, your ex must still be alive (for an important reason I’ll cover shortly) and must be entitled to receive Social Security retirement or disability benefits.  Your marriage to your former spouse had to have lasted ten years or longer.   The final requirement is that you must be at least age 62, and unmarried.  If you remarried, you are still entitled to spousal benefits, but they will generally be awarded based on the earnings record of your new spouse – not the individual who you are divorced from.

Not all divorces are amicable, unfortunately, so I want to give some peace of mind to those of you who believe you probably qualify for benefits from a former spouse but are reluctant to ask about them.  First, your filing for spousal Social Security benefits will have absolutely no impact on your ex’s monthly check.  In fact, if your former spouse remarried and divorced five times, and each of his spouses meets all of the requirements listed above, every single one of them can collect Social Security spousal benefits based on his record.  And every former spouse is entitled to receive the same amount of money as the current spouse – with no reduction in anyone’s benefit!

Suppose that you meet all of the requirements, but you are not on the best of terms with your former spouse?  Well, it will probably take longer if you don’t have your former spouse’s Social Security number, but you can still apply for spousal benefits.  You’ll just need to give the Social Security Administration your former spouse’s name and place of birth, and both of his parent’s names.

Social Security Spousal Benefits From Former Spouse Who Is Still Working

What if your divorced spouse is not currently collecting Social Security?  If your ex is eligible for retirement benefits but has chosen not to file for them yet, you can still collect a spousal benefit based on his record as long as you were married for at least ten years, and have been divorced for at least two years.

Social Security Survivor Benefits after Divorce – Your Former Spouse is Dead

I said earlier that it was important that your former spouse be alive, in order for you to be able to collect spousal benefits on his record.   But what happens to your spousal Social Security benefits when your former spouse dies?  Well, if your marriage ended on very bad terms, you’ll probably be happy to hear that your ex could be worth more to you dead than alive.  If you are collecting spousal benefits based on a divorced spouse’s record, and that spouse dies, you are eligible to receive the same survivor benefits as his current spouse – which is his full monthly benefit amount.  Again, the requirement is that your marriage had to have lasted at least ten years, in order to collect survivor’s benefits based on a former spouse’s earnings record.

Divorce and Social Security Benefits

The bottom line is that if you were married for at least ten years and have not remarried, you should make sure that you investigate what benefits you might be entitled to after your divorce –benefits that are based on your former spouse’s earnings record.  This is true whether your former spouse is alive, has remarried or even if he or she has passed on.  Getting the most you can out of your Social Security benefits is even more important now, with the likely Death of the Stretch IRA.

Stop back soon for more Social Security talk!

-Jim

For more information on this topic, please visit our Death of the Stretch IRA resource.

 

P.S. Did you miss a video blog post? Here are the past video blog posts in this video series.

Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA?

Are There Any Exceptions to the Death of the Stretch IRA Legislation?

How will your Required Minimum Distributions Work After the Death of the Stretch IRA Legislation?

Can a Charitable Remainder Unitrust (CRUT) Protect your Heirs from the Death of the Stretch IRA?

What Should You Be Doing Now to Protect your Heirs from the Death of the Stretch IRA?

How Does The New DOL Fiduciary Rule Affect You?

Why is the Death of the Stretch IRA legislation likely to pass?

The Exclusions for the Death of the Stretch IRA

Using Gifting and Life Insurance as a Solution to the Death of the Stretch IRA

Using Roth Conversions as a Possible Solution for Death of the Stretch IRA

How Lange’s Cascading Beneficiary Plan can help protect your family against the Death of the Stretch IRA

How Flexible Estate Planning Can be a Solution for Death of the Stretch IRA

President Trump’s Tax Reform Proposal and How it Might Affect You

Getting Social Security Benefits Right with the Death of the Stretch IRA

The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA

Part II: The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA

Part II: The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA

In this blog post find out more about the best age to apply for Social Security benefits after the Death of the Stretch IRA.

Part II The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA James Lange

Last week, I talked briefly about the best age to apply for Social Security benefits.  It’s a more important question than many people realize, unfortunately.  The prestigious Center for Retirement Research at Boston College estimates that 90% of all Social Security recipients apply at the wrong age.  Social Security is one area where you could very well be better off if you do not go along with the majority, and I want to explain why.

What is Full Retirement Age?

First, let’s start with Social Security’s official definition of the term Full Retirement Age.  I am admittedly sloppy on that point; I generally define it as being “Age 66” but it is really not that simple.  Social Security defines Full Retirement Age as the age at which a person may first become entitled to full or unreduced retirement benefits.  That’s the key – if you wait until your Full Retirement Age, your benefits will not be reduced.

But what age is Full Retirement Age?  Years ago, the answer was simple – age 65.  But as an influx of baby boomers entered the work force, the government looked at the Social Security system and projected what they called “a funding gap”.  I think it was their polite way of saying “we’d better do something now, or else we won’t have enough money to pay all these people.”  Raising taxes is never a popular option, especially with a presidential election right around the corner.  So in 1983 Congress just decided to make it harder for workers to collect when they applied for benefits decades into the future, and hope that nobody noticed.  And nobody noticed – until now – that the age of which you will be paid full benefits is going up.

Individuals who are retiring within the next decade are subject to a changing Full Retirement Age that, depending on your year of birth, is somewhere between age 66 and age 67.   The video that is attached shows exactly how it is calculated.  But it seems likely to me that, as our population ages and more people apply for benefits, they could raise the Full Retirement Age again.  Is it possible that your children and grandchildren won’t be able to collect full benefits until age 68 or 69?

Applying for Social Security at Age 62

If you were born after 1937, Social Security currently allows you to apply for benefits as early as age 62 – but should you do so?  Last week, I talked about the Social Security breakeven point, and whether or not it makes sense to apply for Social Security at age 62.  Most of you know that, if you do so, your benefits will be reduced. What you may not know is that, if you do so, the reduction in your benefit amount will be greater than it is for people who were born before 1938!

Let’s look at just how much your Social Security benefit will be reduced if you sign up at age 62.  If your Full Retirement Age is 67, your benefit will be reduced by about 30 percent.  So if your full benefit amount is $2000/month and you apply at 62, your check will be reduced by 30 percent to about $1400.  If you apply at 63, the reduction is only 25 percent.  So there is a benefit to waiting until age 66 or 67 to apply for benefits.

Benefit of Waiting to Apply for Social Security

There’s an even greater benefit to waiting beyond your Full Retirement Age to apply for Social Security.  You get an eight percent raise for every year you hold off!  If your Full Retirement Age is 66 and you wait until 70 to apply, you’ll get 132% (plus Cost of Living Adjustments) every year.  So let’s go back to the previous example, where your benefit at Full Retirement Age is estimated at $2000.  If you wait until you are 70 to apply, your monthly benefit will go up to $2640 – and that doesn’t even include Cost of Living Adjustments.

The government offers a great resource where you can see the options that are available to you specifically.  You can access it by clicking here: www.ssa.gov/estimateyourbenefit

Remember, the timing of your Social Security application and any Roth conversions that you might want to do are synergistic.  Ultimately, both could benefit your long-term retirement planning, especially after the Death of the Stretch IRA.

Stop back soon for more Social Security talk!

-Jim

For more information on this topic, please visit our Death of the Stretch IRA resource.

 

P.S. Did you miss a video blog post? Here are the past video blog posts in this video series.

Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA?

Are There Any Exceptions to the Death of the Stretch IRA Legislation?

How will your Required Minimum Distributions Work After the Death of the Stretch IRA Legislation?

Can a Charitable Remainder Unitrust (CRUT) Protect your Heirs from the Death of the Stretch IRA?

What Should You Be Doing Now to Protect your Heirs from the Death of the Stretch IRA?

How Does The New DOL Fiduciary Rule Affect You?

Why is the Death of the Stretch IRA legislation likely to pass?

The Exclusions for the Death of the Stretch IRA

Using Gifting and Life Insurance as a Solution to the Death of the Stretch IRA

Using Roth Conversions as a Possible Solution for Death of the Stretch IRA

How Lange’s Cascading Beneficiary Plan can help protect your family against the Death of the Stretch IRA

How Flexible Estate Planning Can be a Solution for Death of the Stretch IRA

President Trump’s Tax Reform Proposal and How it Might Affect You

Getting Social Security Benefits Right with the Death of the Stretch IRA

The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA

The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA

What is the best age to apply for Social Security benefits after the Death of the Stretch IRA? Find out in this video blog post.

The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA

This is the second in a series of posts about planning for Social Security benefits in retirement.  It will give you some ideas on how you can get the maximum Social Security benefit possible.  It will also cover some mistakes that you need to avoid when filing for Social Security benefits for the first time.

Getting The Best Social Security Advice You Can

Tell me the truth – deep down, you’re sick of working.  You really want to quit your job and retire, no matter what the cost.  And part of your plan relies on the income that you’ll receive from Social Security.   I need to give you fair warning – you might not like what I’m going to say about your plan.  But before you disregard the advice that follows, you should know that I authored a best-selling book on Social Security.  I’ve been quoted on CNBC, and many of the top financial experts in the nation agree with me.  And I think my advice will be an eye-opener for many people who will be applying for Social Security benefits in the next few years.

The Best Age to Take Social Security

“What is the best age to take Social Security?”  “Taking Social Security at 62 vs 66 – which is best?”  I’ve heard those questions more times than I can count.  And while every situation is different, I’ll tell you that, for most people, the best age to apply for Social Security benefits is definitely not “as soon as you’re eligible”.  I know, I know – all of your friends are telling you that the Social Security program is going broke and you need to get your money back out of it while you can.  Well, are your friends going to be there with handouts for you, if it turns out that you made a huge mistake and end up going broke yourself?

The Social Security Breakeven Point

Figuring out the best age to take Social Security depends on several variables, but yes, there is a breakeven point where, if you live long enough, in hindsight you’ll know whether or not you made the right decision.  The short video snippet that is included with this post shows how that breakeven is calculated.  In the video, the assumptions that I have used results in a breakeven point that occurs at about age 82.

However, I’m going to pass along a piece of advice that I got from noted economist Larry Kotlikoff that made me change my attitude about the breakeven question.  As he pointed out, if you take your Social Security benefits as soon as you’re eligible and then die before your breakeven point, yes, you’ll have more money than if you had delayed applying.  But what good does it do you?  You’re dead, and dead people don’t have financial problems!  What he told me is that the last thing I should worry about is how much money I’ll have if I die early.  Instead, he told me, I should be worrying about living a long time and running out of money.  So if you understand Larry’s way of thinking, the breakeven point should not be a major factor if you’re trying to figure out the best age to apply for Social Security.  Suppose your primary concern is coming out on the right side of the breakeven point.  You delay applying for Social Security and then die before receiving any benefits.  In hindsight, yes, you would have gotten more money from the Social Security system if you applied earlier.  But why on earth would that be your primary concern?  If you apply as soon as you are eligible, your benefits are significantly reduced.  And what happens if you do live beyond your breakeven point, and have to spend your golden years just getting by on your meager Social Security check?  Social Security can provide you with a guaranteed monthly income, and the decisions you make can make a significant difference in your standard of living during retirement.   And truthfully, that was the best Social Security advice I have ever heard.  Thanks, Larry!

Last but not least, the decisions you make about claiming Social Security will become even more important when you consider the legislation that may spell the Death of the Stretch IRA.  I’ll cover more about that in a later post.

Stop back soon for more Social Security talk!

-Jim

For more information on this topic, please visit our Death of the Stretch IRA resource.

 

P.S. Did you miss a video blog post? Here are the past video blog posts in this video series.

Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA?

Are There Any Exceptions to the Death of the Stretch IRA Legislation?

How will your Required Minimum Distributions Work After the Death of the Stretch IRA Legislation?

Can a Charitable Remainder Unitrust (CRUT) Protect your Heirs from the Death of the Stretch IRA?

What Should You Be Doing Now to Protect your Heirs from the Death of the Stretch IRA?

How Does The New DOL Fiduciary Rule Affect You?

Why is the Death of the Stretch IRA legislation likely to pass?

The Exclusions for the Death of the Stretch IRA

Using Gifting and Life Insurance as a Solution to the Death of the Stretch IRA

Using Roth Conversions as a Possible Solution for Death of the Stretch IRA

How Lange’s Cascading Beneficiary Plan can help protect your family against the Death of the Stretch IRA

How Flexible Estate Planning Can be a Solution for Death of the Stretch IRA

President Trump’s Tax Reform Proposal and How it Might Affect You

Getting Social Security Benefits Right with the Death of the Stretch IRA

Getting Social Security Benefits Right with the Death of the Stretch IRA

Social Security Planning, Roth IRAs & Death of the Stretch IRA

Social Security Planning Roth IRA Conversions and the Death of the Stretch IRA James Lange

First, I wanted to thank you for your comments and questions about my previous posts.  It’s gratifying to know that my readers apparently care more about the financial future of their families than the latest wardrobe malfunction in Hollywood!  And if you have any questions or comments, please feel free to send them over because I will do my best to address them.

I’ve had a number of people who wrote in to ask about a comment I made in a workshop, in which I said that, with the Death of the Stretch IRA likely being imminent, it’s more important than ever to “get Social Security right”.  Those of you who have been subscribing to this blog for a while probably know the answer but, for the benefit of new readers, I want to back up and explain what I meant by “getting it right”.

Social Security Options Are Changing

There were major changes made to the Social Security rules last year – changes that could potentially mean hundreds of thousands of dollars of difference in your retirement income.  When I learned that these changes were coming, I did everything I could possibly do to get the word out that if you did not get grandfathered under the old Social Security rules by April 26, 2016, you could lose out on a lot of money.  Well, if you didn’t get grandfathered last year in time to take advantage of one excellent Social Security strategy called “Apply and Suspend”, it’s too late.  It’s no longer an option, and people who apply for Social Security benefits after April 29, 2016 can’t do it.  Another technique involving the filing of a Restricted Application for benefits will be going away in 2020.  And while I’m not trying to rub salt in any wounds, the reason I’m reminding you about it is because the Social Security options for many people continue to disappear as Congress tries to fix the nation’s financial problems.  The point that I want to make is that if you do not have the ability to take advantage of the same Social Security strategies as someone – maybe an older friend or family member – who was able to get grandfathered under the old rules, you will probably not be able to collect as much money from Social Security as they did – even if you have similar earnings records.

Social Security and Roth IRA Conversions Work Together

One idea that might benefit you is to consider a series of Roth IRA conversions.  I’ve had people tell me that Roth IRA conversions won’t benefit them because they checked it out using an online calculator.
Well, online calculators are fine if your only source of income is from your IRA – but for most people, it isn’t.  Most people collect Social Security, too. It’s important to understand that Social Security and Roth IRA conversions are complementary, not competing strategies.

The Death of the Stretch IRA Spells Changes Too

Getting Social Security right and using Roth IRA conversions effectively will be even more important if Congress finally does enact the Death of the Stretch IRA legislation.

Don’t think it’s that big a deal?  This short video shows you just how much of a difference “getting Social Security right” and blowing it can make.  The posts that follow this one will address some things that you can still do to maximize your own benefits even if you are not grandfathered under the old rules.  Then I’ll show you how these ideas can be integrated with a series of Roth IRA conversions.  With the possibility of the Death of the Stretch IRA hanging over our heads, it’s important to do what you can to defend your retirement savings!

Please stop back soon!

-Jim

For more information on this topic, please visit our Death of the Stretch IRA resource.

 

P.S. Did you miss a video blog post? Here are the past video blog posts in this video series.

Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA?

Are There Any Exceptions to the Death of the Stretch IRA Legislation?

How will your Required Minimum Distributions Work After the Death of the Stretch IRA Legislation?

Can a Charitable Remainder Unitrust (CRUT) Protect your Heirs from the Death of the Stretch IRA?

What Should You Be Doing Now to Protect your Heirs from the Death of the Stretch IRA?

How Does The New DOL Fiduciary Rule Affect You?

Why is the Death of the Stretch IRA legislation likely to pass?

The Exclusions for the Death of the Stretch IRA

Using Gifting and Life Insurance as a Solution to the Death of the Stretch IRA

Using Roth Conversions as a Possible Solution for Death of the Stretch IRA

How Lange’s Cascading Beneficiary Plan can help protect your family against the Death of the Stretch IRA

How Flexible Estate Planning Can be a Solution for Death of the Stretch IRA

President Trump’s Tax Reform Proposal and How it Might Affect You

What You Should Be Doing Now to Protect your Heirs from the Death of the Stretch IRA?

What to do now to protect your heirs from the Death of the Stretch IRA

What Should You Do Now About the Death of the Stretch IRA James Lange

This post is the fifth in a series about the Death of the Stretch IRA.  The four posts that precede this one spell out the details of the proposed legislation that will cost your family a lot of money.  In this post, I’m going to talk about some possible solutions to the problems that will be caused by the Death of the Stretch IRA that you should consider now.  As I said in my earlier posts, using Lange’s Cascading Beneficiary Plan to take advantage of the existing minimum required distribution rules that allow inherited IRAs to be stretched will, for most of you, produce a much more favorable result than any other option available.  The Death of the Stretch IRA legislation is designed to accelerate income taxes on retirement plans, so the Charitable Remainder Unitrust should be your “Plan B” that you consider only after the law changes.

How can Social Security help with the Death of the Stretch IRA?

If you’re considering retiring, the very first thing you should do is evaluate your Social Security benefits.  Many people feel that the best age to take Social Security benefits is 62 – get back what you paid into the system before it collapses, etc!  I used to agree with that line of thinking until noted economist Larry Kotlikoff brilliantly pointed out the flaw in my logic.  Larry told me that the last thing I should worry about was not getting back what we had paid into the system if my wife and I die young.  If you die, he said, you will have no financial worries – because you’re dead!  Our fear, he told me, should be that we might live a very long time and possibly outlive our money.  Wow!  What an attitude adjustment!  But after thinking about it, I realized Larry was right.  Your Social Security benefits will give you a guaranteed income that will last for the rest of your life, so it makes sense to maximize them and get the most you can.  I wrote an entire book on that subject – you can get it for free by going to the first page of this website – so I’m not going to cover those techniques in this blog.  Or, check out an earlier blog post that talks about my latest Social Security book The Little Black Book of Social Security Secrets, Couples Ages 62-70: Act Now, Retire Secure Later.   But, getting the highest Social Security benefit is something that you should be evaluating now, because it will benefit you before and after the Death of the Stretch IRA.

How much can you afford to spend every year in retirement?

Second, know exactly how much you can afford to spend every year during retirement, without having to worry about running out of money.  Many financial advisors point to a rule of thumb known as the Safe Withdrawal Rate, which is the amount that you should be able to withdraw from your assets over the course of your lifetime without worrying about running out of money.  And while there is certainly validity in knowing how much you can spend during the retirement, the problem with rules of thumb is that they are just that!  I have proven that there is also a benefit to spending your savings strategically – I discuss it at length in my flagship book, Retire Secure! – but the idea, sadly, is usually not included in general discussions about Safe Withdrawal Rates.  The bottom line?  Don’t rely on estimates – talk to someone who is skilled in running the numbers, and then check your numbers regularly.  That way, you won’t have to worry about running out of money, no matter when the Death of the Stretch IRA passes.

Are you paying to much to invest your money?

Third, know how much you are paying to invest your money.  As more and more people become educated about investment fees, the trend (thankfully) has been to move away from high-cost products such as annuities and front-loaded mutual funds, and from stockbrokers who survive by constantly buying and selling in their client’s accounts.  Instead, more people are looking toward low-cost mutual funds that can provide diversification, income and even growth without having to pay huge fees.  The cost that you pay to earn a return on your money is so important that I’ve even been known to suggest that it should be included as part of your Safe Withdrawal Rate calculation.  In years past, there was an odd prestige associated with the idea of having your money managed by a broker who charged high fees.  That is not the case anymore!  Americans are moving in droves to low-fee investments because they now fully understand how much they save over the long term.  And doing the same will benefit you no matter when the Death of the Stretch IRA legislation passes.

Please stop back soon!

Jim

For more information on this topic, please visit our Death of the Stretch IRA resource.

 

P.S. Did you miss a video blog post? Here are the past video blog posts in this video series.

Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA?

Are There Any Exceptions to the Death of the Stretch IRA Legislation?

How will your Required Minimum Distributions Work After the Death of the Stretch IRA Legislation?

Can a Charitable Remainder Unitrust (CRUT) Protect your Heirs from the Death of the Stretch IRA?

What Should You Be Doing Now to Protect your Heirs from the Death of the Stretch IRA?

How Does The New DOL Fiduciary Rule Affect You?

Why is the Death of the Stretch IRA legislation likely to pass?

The Exclusions for the Death of the Stretch IRA

Using Gifting and Life Insurance as a Solution to the Death of the Stretch IRA

Using Roth Conversions as a Possible Solution for Death of the Stretch IRA

How Lange’s Cascading Beneficiary Plan can help protect your family against the Death of the Stretch IRA

How Flexible Estate Planning Can be a Solution for Death of the Stretch IRA

Four Ways Women Can Improve Their Outlook in Retirement

Women and Retirement Lange Financial Group Pittsburgh PA

Recent studies have shown that women, even those who worked outside of the home, are much more likely to slip below the poverty line in retirement than men are.

Recent studies have shown that women, even those who worked outside of the home, are much more likely to slip below the poverty line in retirement than men are. Approximately 8 percent of adults aged 65 and older must rely on food stamps to survive and, of those, two-thirds are women. Why is there such a financial inequity between men and women in their golden years?

In years past, women typically earned much less than men (fortunately, this has started to change). Because they earned less than men, women were not able to save as much for retirement. Federal law establishes the maximum percentages that workers can contribute to retirement plans. Assuming that two workers both contribute the maximum percentage to their retirement plans, a male worker who earns $60,000 will save more dollars than a female worker who earns $40,000. Women must also make what they can save last longer. According to the Social Security Administration, the life expectancy of a man who is 65 today is 84.3. The life expectancy of a female, who is 65 today, is 86.6—a difference of almost two and one-half years.

Many women who are now retired are not as educated about finances as women of subsequent generations. They let their husbands manage the money, and frequently are unintended victims of poor decisions made by their spouses. This is especially true when considering both defined benefit pensions and Social Security elections. Retirees generally have the choice of applying for a higher benefit that lasts for their own lifetime, or a reduced benefit that is paid over the course of both their and their surviving spouse’s lifetimes. Many insist on applying for the higher benefit under the premise that they need a higher income to live on. If they are the first to die, though, their spouses are cut off completely. Many of the primary wage earners also make bad decisions when applying for Social Security benefits, never considering how their actions will affect their spouses. The decisions they make can mean a difference of about $25,000 in Social Security income every year, for their surviving spouses.

The good news is that, even if you are retired now, there are steps that you can take to improve your outlook in retirement. Consider some of these options:

1. If you are saving for retirement, take advantage of qualified retirement plans such as 401(k)s, 403(b)s, and IRAs. These plans offer tax advantages that, in the long run, will provide you with a much larger nest egg in retirement than buying identical investments inside a non-retirement account. Make sure that you manage the money that you do save, well. Many women are afraid to invest their money in anything other than CD’s, and never consider that the low rates of return they offer may cause them to run out of money before they run out of time.

2. If your spouse is entitled to a defined benefit pension when he retires, or if he will receive payments from an annuity, make sure that he chooses the payment option that covers your life as well as his own – especially if you are younger than he is. If he chooses the option that covers only his life, the payments will stop when he dies. If you can’t afford to live on the reduced benefit amount that covers both of your lives, then you can’t afford to stop working.

3. If your spouse earned more money than you did, ask him to think twice about applying for Social Security benefits at age 62. If he does, his benefit will be reduced by 25 percent for the rest of his life. Your spousal benefit, as well as your survivor benefit if he predeceases you, will also be permanently reduced. If it’s possible, encourage your spouse to wait until age 70 to apply for benefits. If he does, his benefit will be increased by 32 percent. If you survive him, the benefit you receive after his death will also be significantly higher.

4. Many women are not educated about financial and tax strategies they can use to make their money last longer. Consider making a series of Roth IRA conversions during the years after you retire, but before you start taking withdrawals or Required Minimum Distributions from your retirement plans. The money you save in a Roth IRA is not taxable, and so lasts longer than money that is in a traditional retirement plan.

It is important to remember that there is no one-size-fits-all answer to this problem. In order to make sure that you are financially secure, it is imperative that you contact a financial professional that you can trust and discuss these points in detail. A good fee-based advisor will be able to guide you through the best possible choices for pensions, Social Security, investment planning, and retirement expenses.

For more information about the financial challenges affecting women in retirement, please listen to our radio show at “Women Don’t Ask: How Married Women Can Advocate for their Own Financial Protection

 

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Changes to Social Security Rules: File & Suspend vs Restricted Applications and Social Security Benefit Strategies for Married Couples

The Little Black Book of Social Security Secrets, James Lange

The Little Black Book of Social Security Secrets evaluates options for collecting Social Security benefits and recommends the most advantageous strategies for them.

Changes to Social Security Rules: File & Suspend vs Restricted Applications and Social Security Benefit Strategies for Married Couples

Social Security Options after the 4/29 Apply and Suspend deadline

A couple of people who have written in want to know why I’m taking such a passionate interest in the changes to the Social Security rules. “What’s in it for you?” they ask. When I wrote The Little Black Book of Social Security Secrets, my plan was to make it available as a resource to my own clients. It received such an overwhelming response, though, that I quickly realized that I should make it available to as many people as possible – even though it’s unlikely that I’ll ever derive a benefit from doing so.

I am a CPA and an attorney, and my area of expertise lies in retirement and estate planning. As part of our services, we have always evaluated our client’s options for claiming Social Security benefits. Social Security is an integral part of retirement planning. If your income from all sources is high enough, your Social Security benefits will be taxed. Required minimum distributions from traditional retirement plans, which begin at age 70 ½, will compound that tax problem. It seems obvious to me that, if I want to give clients good advice about the money they will have available to spend during their retirement years, I must evaluate their options for collecting Social Security benefits and recommend what I believe are the most advantageous strategies for them. From the feedback I’m getting, though, it seems that many of the professionals in my field are quite happy to refer their clients to their local Social Security office for advice. Frankly, this is one topic on which I’m more than happy to hold the minority opinion!

But let’s go back and look at some real-life questions presented by people who have read my book, and who want to know what they should do with their own Social Security benefits. Ralph is 67, and hasn’t applied for Social Security yet because he wants his monthly benefit to grow by Delayed Retirement Credits (DRCs) of eight percent every year, and Cost of Living Adjustments (COLAs). His Primary Insurance Amount (PIA) is $2,400. His wife, Alice, just turned 65. She worked for most of her life, and her PIA is $1,800. What is the best Social Security strategy for this couple?

Social Security Options

Ralph has several options. If he files for his own benefit now, he would be eligible to collect about $2,600 (his PIA, plus the years’ worth of DRCs that he has already earned, plus COLAs) every month. He can also delay filing for benefits until age 70. Not filing will allow his benefit to grow by additional DRCs and COLAs, but he will need to file when he turns 70 because he cannot earn additional DRCs after that. Ralph can even change his mind. If he started to collect his benefit at age 67 and later regrets his decision, he can suspend his benefit and earn DRCs every month that his benefit is suspended, until he turns 70.

What about Alice? She is eligible to collect a benefit based on her own record, but, if she wants to collect it now, her benefit will be permanently reduced because she has not reached her Full Retirement Age (FRA) of 66. If she waits until she is 70 to collect her own benefit, the outlook is much better. Like Ralph, she is eligible to earn DRCs and COLAs on her own benefit. Her PIA is $1,800 and, if she waits until 70 to collect it, her monthly benefit amount will be about $2,400. If she is already collecting her own benefit, she can also suspend it when she reaches FRA and earn DRCs until she turns 70.

Spousal Benefits Give More Options to Married Couples

Ralph and Alice have been married for at least a year, so both have another option – Social Security spousal benefits. Even if Alice had never worked outside of the home, she would be eligible to collect spousal benefits based on Ralph’s record. The general rule is that spousal benefits can be paid as early as age 62, but they will be reduced. In order for Alice to receive the maximum possible spousal benefit – which is 50 percent of Ralph’s PIA – she must wait until 66 to apply. (Note, Social Security has something called a deemed filing rule, discussed below, that could affect whether she will receive her spousal benefit or her own benefit.) There is no benefit to Alice waiting beyond age 66 to apply for spousal benefits.

Ralph can also apply for spousal benefits based on Alice’s earnings record. Why would he want to, when his own benefit would be higher? There are some situations where it might actually make sense for the person whose own benefit is higher than his spousal benefit, to apply for the lower spousal benefit. We’ll cover more about that in a minute.

Suppose Ralph and Alice were divorced, and that only Ralph has remarried. As long as their marriage lasted at least ten years, Alice would still be eligible to file for spousal benefits based on his record. Does that mean that his current wife can’t get spousal benefits? As long as they’ve been married at least one year, his current wife can, when she is eligible, also file for spousal benefits based on Ralph’s record. Ralph could have been married four or five times and, as long the marriages lasted at least ten years, all of his ex-wives would be able to collect spousal benefits based on his record. The interesting part is that none of his ex-wives’ spousal benefits will be reduced because others are claiming on the same record!

How are Spousal Benefits Calculated?

The spousal benefit calculation can be complicated, so let’s look at an example. Let’s assume that Alice didn’t work much outside of the home, and that her PIA is only $400. Her full spousal benefit would be half of Ralph’s PIA, or $1,200. The difference of $800 is what is often referred to as the “spousal excess” – and the distinction between that and her PIA is very important if Alice wants to apply when she turns 62. If she does, and if Ralph is already claiming, she will receive 75 percent of her PIA ($300), plus 70 percent of the spousal excess ($560), for a total of $860. Of course, if Alice waits until FRA to apply, she’d get the equivalent of 50 percent of Ralph’s PIA ($1,200).

In our original scenario, though, Alice worked for most of her life and her own PIA is $1,800 – higher than the maximum spousal benefit to which she’d be entitled. Why would she apply for a spousal benefit if her own benefit is higher? We’ll cover the reasons why in the next section but, before we do we need to take a look at how much she’d be eligible to receive as a spousal benefit. If she applies at FRA, she’s eligible for the maximum – or 50 percent of Ralph’s PIA. Alice can certainly apply for benefits now, but her age (65) presents a complication. Social Security’s deemed filing rule says that, since she is not yet FRA (for our purposes here, 66), she will be “deemed” to be applying for both her own benefit and her spousal benefit. In other words, if she applies at 65, she has no choice – Social Security will figure out how much she would receive as a spouse, and how much she would receive based on her own record, and pay her the higher of the two. In this case, her own benefit, even reduced because she applied early, is higher than her spousal benefit. She’ll get $1,679 ($1,800 x 93.3%).

Maximize your Social Security benefits by Combining the Apply and Suspend Strategy with Restricted Applications

So how can Ralph and Alice use the options they have available to maximize the amount they receive from Social Security? Let’s look at some ideas.

Suppose Ralph is currently collecting his own benefit or that he applied for and suspended his benefit by the April 29, 2016 deadline. What happens if Alice waits one year, and applies for benefits when she is FRA (66)? If she waits until FRA, Alice’s application will no longer be subject to the deemed filing rule. She can submit her paperwork and specify that she only wants to apply for whatever spousal benefit to which she might be entitled. This is also known as filing a Restricted Application. Since she’s now FRA, she’d be eligible to receive 50 percent of Ralph’s PIA, or $1,200. She can collect her spousal benefit until she turns 70 and, in the meantime, the benefit based on her own earnings record will continue to grow by DRCs and COLAs. When she turns 70, she can switch to her own benefit, which will have increased by at least 32 percent – or, to almost $2,400 every month. Note, in order to be able to file a Restricted Application for spousal benefits, you had to have been at least 62 years old as of December 31, 2015. If you weren’t, you’ll be in the same boat as I am. We’ll be subject to the deemed filing rule regardless of when we apply for benefits.

Best Social Security Strategy for Married Couples

What does this mean in terms of money? If Alice applies for her own benefit at 65, she’ll receive about $1,679 every month, for the rest of her life. If she waits until age 66 to apply for just her spousal benefit – filing that Restricted Application – she’ll give up all the money she could have received from age 65 to 66 – a little over $20,000 ($1,679 x 12 months). Her spousal benefit of $1,200 every month will give her some income from the time she is 66 to 70, but not as much as if she’d applied for her own benefit at age 65. The difference between taking a spousal benefit and her own benefit during that four year period is significant – she’ll miss out on about $23,000 ($479 x 48 months). If you’re keeping track, she’s already missed out on about $43,000! But once she turns 70 and starts to receive her own benefit that has been increased by DRCs, the outlook is different. From that point on, Alice will get about $700 more ($2,400 – $1,679) every month than if she had applied at 65 – and she will get it for the rest of her life.

Confusing? You bet! But I hope you understood the general idea that, even though Alice collected no money when she was 65, and collected less money than she could have from the time she was 66 to 70, the handsome payoff that she received after she turned 70 made up for her sacrifice – and the payoff happened in a little over 5 years ($43,000 / $700 = about 61 months).

There is one catch. In order for Alice to be able to collect that 50 percent spousal benefit from the time she is 66 to 70, Ralph either has to be collecting his own benefit, or had to have applied and suspended by the deadline of April 29, 2016. Suppose Ralph is 70 years old but has not applied for benefits yet. He should go ahead and do so, because he won’t earn any more DRCs beyond this point. And once he files, Alice will be able to file a Restricted Application for spousal benefits.

Suppose Ralph just turned 66, and was not eligible to file for and suspend his benefit. Well, he can certainly apply for and collect his own benefit and Alice can file a restricted application for her spousal benefit, but then Ralph won’t earn those DRCs that can increase his check by 32 percent. Unless there were very unusual circumstances involved, it probably wouldn’t make sense for Ralph to collect when he is 66, just so Alice can get a spousal benefit for four years.

Suppose Ralph is 65, and Alice is 64 – so neither has reached FRA yet. Both are allowed to apply now, but, if they do, we know that each will receive the benefit based on his or her own record, and that their benefits will be permanently reduced. But what happens if they wait until next year, when Ralph turns 66 and Alice turns 65? Ralph can apply for his own benefit and receive his PIA of $2,400. Alice, though, has to be FRA in order to submit a Restricted Application for spousal benefits. If she waits until she’s 66, she’ll get the maximum spousal benefit of 50 percent. But because she restricted the scope of her application to her spousal benefit, she can collect about $1,200 every month until she turns 70. Once she turns 70, she can switch from her spousal benefit and collect her own benefit, which by now has grown to $2,400 every month.

In reality, these calculations are oversimplified. Before we make specific recommendations to our clients about Social Security, we take in to consideration such factors as life expectancies, income taxes, other sources of income, and COLAs. But the one thing I wanted to make sure you understood by these examples is that the ability to file a Restricted Application and collect spousal benefits might be able to provide one of you with a source of retirement income while your own benefit still continues to grow. And, as long as you were at least 62 years old by 12/31/2015, it is an option that you can take advantage of when you finally do apply for Social Security benefits.

My next post will give some additional examples of how Restricted Applications can be useful. If you have questions or comments, please feel free to write them below. Stop back soon!

Go to www.paytaxeslater.com/ss to get your free digital copy of The Little Black Book of Social Security Secrets, and then talk to a professional about your options before it’s too late.

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New Social Security Rules Causing Confusion Among Retirees

New Social Security Rules Causing Confusion Among Retirees

What’s the deadline for filing and suspending? Should I do it online or in person? What’s the difference between Apply and Suspend versus Restricted Applications? Should I take Social Security now or wait?

Confusion among retirees with the new Social Security rules

We’ve been getting a lot of phone calls about the impending changes in the Social Security rules. Before I tell you about some of those calls, and explain how real people like you are dealing with potentially confusing Social Security decisions, I wanted to give you a quick update on some important dates.

Deadline for File and Suspend (or Apply and Suspend) for Social Security

If you plan to file for your own benefits and then suspend them, April 29, 2016 is an important date. If you file and suspend by that deadline, your spouse, when eligible, can then file for and collect spousal benefits from Social Security while your own continue to grow by Delayed Retirement Credits (DRCs).

Applying for Social Security Online or In Person

Many of the people we’ve talked to are concerned because they can’t even get an appointment with their local Social Security office until well after the deadline One way to apply is to call your local Social Security office before April 29, 2016 and schedule an appointment for after the deadline. The act of scheduling the appointment creates what is called a protective filing date, a concept which is covered in detail in my blog post of April 13, 2016. As I said in that post, I’m a little nervous about relying on a protective filing date. I am encouraging my own clients who are eligible, to just file online by April 29, 2016. I’ve had several clients report back to me that they applied online, and thought that the process was fairly simple. If you want to apply online, please note that there is no specific form that you need to fill out, that is titled “Apply and Suspend”. When you get to the very bottom of your application, there is a comment box. You need to write a comment in the box and say something like “It is my intention to file for and then suspend my benefits. I do not want to receive any checks until I turn 70.” That’s all that is required, but you do need to spell out your intentions very clearly. Please be sure that you print a copy of your application for your own records.

Apply and Suspend Vs Restricted Applications

Are you confused about whether Applying and Suspending is the best option for you? It’s not the right answer for everyone. My blog post of April 8, 2016 covers some situations where it might do more harm than good. One of those includes scenarios where it is more beneficial for one of the spouses to file a Restricted Application. Some examples of how Restricted Applications can be beneficial are covered in my blog post of April 22, 2016.

Is it Better to Take Social Security Now or To Wait?

Are you concerned about suspending your benefits because you were planning on using the money to live on? If you have been accumulating money in IRAs and retirement plans, it might actually make more sense for you to spend that money first, and allow your Social Security benefits to grow. This idea is covered in my blog post of April 12, 2016. This particular strategy isn’t for everyone, and there are so many variables to consider that we have to go through a lot of calculations before we can make specific recommendations about it. Do you think there’s a possibility that it might make sense for you to spend your retirement money first? If so, you should apply for and suspend your Social Security benefits now assuming that it is the right technique for you. Although we can’t possibly do it by April 29, 2016, we’d be happy to have our team do the math for you to see how spending your retirement money first might benefit you. If we find that you’re better off to spend your Social Security money and leave your retirement plans untouched, then you can always unsuspend your benefit.

We’ve had many calls from people who have questions about Social Security. Please check back tomorrow, when I’ll discuss some more of the real-life situations readers are wrestling with.

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Are you confused about how the Apply and Suspend strategies can benefit you? Please do not ask your local Social Security office for advice, because they can only present your options about government benefits! The decisions that you make about this affect far more than just your Social Security benefits, and could have unintended complications and/or repercussions if they are not made considering the big picture.

Getting your Social Security decision right is important, but it is even more important that you have the right strategies for all of your planning. To find out if your entire financial house is in order, fill out this pre-qualification form by clicking here to see if you qualify for a free consultation. Western PA residents only please.

Don’t delay. Go to www.paytaxeslater.com/ss to get your free digital copy of The Little Black Book of Social Security Secrets, and then talk to a professional about your options before it’s too late.

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Restricted Applications vs File and Suspend – Which is Best?

Restricted Applications vs File and Suspend – Which is Best?

Tony, 72, and Maria, 67 are both still working full time. Tony already applied for Social Security, Maria has not. Should Maria wait to apply?

Thanks again to all of you for your interest in my new book, The Little Black Book of Social Security Secrets. I’ve received a lot of questions about the best Social Security strategies for married couples, and my most recent blogs have given some examples where the File and Suspend strategy might be beneficial. Now I want to cover some examples for those of you who have two-income households, and who might benefit from filing a restricted application for benefits.

Tony, 72, and Maria, 67, read my book and wondered if they should reconsider their Social Security strategies. Both are still working, and full time. Tony applied for his benefits as soon as he was eligible, at age 62. Maria has not applied yet. Should Maria apply for benefits, or should she wait? This question, unfortunately, is not as straightforward as you might hope. Let’s look at all of the facts.


Filing a Restricted Application for Spousal Benefits

Tony is already receiving his Social Security checks, so he doesn’t have a lot of options. But what options does Maria have? Because she was Full Retirement Age (FRA) on December 31, 2015, she can file a restricted application for benefits and specify that she only wants to receive a spousal benefit. Her spousal benefit is a percentage of the benefit based on Tony’s earnings record. In order to be able to file a restricted application for spousal benefits you must be at least FRA, so in this case Maria will receive the maximum spousal benefit of 50 percent. Filing a restricted application for spousal benefits allows Maria to collect some income from Social Security while the benefit payable based on her own earnings record grows by Delayed Retirement Credits (DRCs). When she turns 70, she can switch to her own benefit if is higher than her spousal benefit.

Suppose Tony was only 60, and had not yet filed for his own benefit? Maria wouldn’t be able to file a restricted application for spousal benefits unless Tony has filed for his own benefit. She could apply for benefits based on her own earnings record, but then she’d miss out on those DRCs.

Suppose Tony is 67, and regrets that he started taking his benefits at 62. Can he suspend them without affecting Maria’s spousal benefits? The answer is yes, but only because we’ve changed Tony’s age and are now assuming that he’s 67. You have to be at least FRA, but not yet 70, in order to suspend your benefits after you’ve started collecting them. Why even bother then? Think about it for a minute. If Tony was able to suspend his benefit, the couple could still receive some income from Social Security (Maria’s spousal benefit), while at the same time allowing Tony’s to grow by DRCs. When he unsuspends them, Tony could receive a higher benefit amount, and for the rest of his life. (Don’t forget – if Tony wants to suspend his benefit, he needs to do so by April 29, 2016!)


Restricted Application Deadline

Many people have asked what the deadline is for them to file a restricted application, and unfortunately the answer is not as straightforward as for those who want to file and suspend. The rule is that, if you were at least 62 on December 31, 2015, you can file a restricted application when you reach your FRA. What if Maria is 63? In that case, she couldn’t file a restricted application for benefits right now, but she could do so when she reaches her FRA (for our purposes here, 66). What if Maria is 60? If she is, she will never be able to take advantage of this technique because she was not at least 62 on December 31, 2015.

In real life, my advice would not stop at telling Maria that she should probably file a restricted application. In the original scenario, Maria is 67 and is not collecting Social Security benefits of any kind right now. She could have filed a restricted application for spousal benefits as soon as she turned 66, and she wouldn’t have affected Tony’s benefit or the benefit based on her own earnings record at all. Maria’s missed out on a lot of money! The first thing I would tell her is that, when she files her restricted application, she should ask for retroactive spousal benefits. Retirement claims can be paid for up to six months retroactively.


Changes When Filing a Restricted Application

I’d also want to take a closer look at Tony and Maria’s tax picture, and point out some possible changes that they may not have considered. They have income from their jobs, income from Tony’s Social Security, minimum required distributions from his IRAs, and now they’ll have even more income from Maria’s spousal benefits. Just how bad will the news be for them on April 15th?

Interestingly enough, Tony and Maria have some options available to them that non-working couples do not. Assuming that they don’t need Maria’s Social Security income to live on, I would ask them to consider putting that money right back in to their retirement plans at work. Most of you who read this column regularly know that, once you turn 70 ½, you are generally required to start taking minimum distributions (RMDs) from your IRAs. Some of you may not be familiar with the exception to the rule, though, that applies to individuals who are still working at that age. If you are still working, you are not required to withdraw money from your work retirement plan when you turn 70 1/2. You’re not required to withdraw anything from your work plan at all, until you stop working. There is an exception to this exception, and it applies if you own more than 5 percent of the company. If this is the case, you must take RMDs from your retirement plan at work when you turn 70 ½, even if you are still working.

Here’s another idea for those of you who are still working, and who have IRAs in addition to a work retirement plan. Assuming that the rules of your own plan allow it, you can roll any IRAs that you have in to your work retirement plan. You would not be required to take minimum withdrawals from the plan, or any of the IRAs that you rolled in to it, until you stop working.

Suppose Tony and Maria both work for a large employer, such as the local university? If they are still working, they can still contribute to their work retirement plans regardless of their ages. If they are not already contributing the maximum possible to their work retirement plans, they can use Maria’s new income from her spousal benefits to increase their contributions. If their employer offers them a choice of pre-tax and Roth accounts in their plan, they can allocate their contributions strategically once they have evaluated their short-term and long-term goals. Increasing their contributions to the pre-tax account might help their current tax situation, but increasing contributions to the Roth might be more beneficial in their later years. This is because, as of this writing, you are not required to take minimum distributions from a Roth account. And, if you do take distributions from a Roth account, they will most likely be tax-free.

Suppose Tony and Maria are self-employed, and have a SEP or a SIMPLE retirement plan for their business? In that case, they would fall under the 5% ownership rule, and must take minimum distributions from that plan when they turn 70 ½. But they still might be able to manage Maria’s new income from Social Security more effectively than by just allowing it to accumulate in the bank. If you have earned income, the IRS permits you to contribute to an IRA. In 2016, the annual contribution limit is $6,500. Assuming that Tony and Maria both earned more than $6,500 they could each contribute the maximum to an IRA. But wait! Isn’t it against the rules to contribute to an IRA after you turn 70 ½? Well, you can’t contribute to a traditional IRA after you turn 70 ½, but you are allowed to contribute to a Roth IRA regardless of your age as long as you meet certain income guidelines. So Tony could contribute to a Roth IRA, and Maria could contribute to either.

What if Tony became ill, and was no longer able to work? If Maria is still working, and assuming that she earns enough money, she can still contribute to her own IRA. She can also contribute to a spousal Roth IRA for Tony. The amount that Maria can contribute to both IRAs is limited to the amount of taxable compensation that they report on their tax return. But if she made more than $13,000 in 2016, it would be possible for her to put $6,500 in her own IRA, and $6,500 in Tony’s Roth IRA.

So what’s the bottom line? Even if you are worried about how collecting Social Security will affect your tax picture, you can minimize the impact – especially if you continue to work.

Please check back soon for my next post, which will answer some really complicated scenarios that readers have posed. Thanks for the questions!

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Are you confused about how the File and Suspend or Restricted Application strategies can benefit you? Please do not ask your local Social Security office for advice, because they can only present your options about government benefits! The decisions that you make about this affect far more than just your Social Security benefits, and could have unintended complications and/or repercussions if they are not made considering the big picture.

Getting your Social Security decision right is important, but it is even more important that you have the right strategies for all of your planning. To find out if your entire financial house is in order, fill out this pre-qualification form by clicking here to see if you qualify for a free consultation. Western PA residents only please.

Don’t delay. Go to www.paytaxeslater.com/ss to get your free digital copy of The Little Black Book of Social Security Secrets, and then talk to a professional about your options before it’s too late.

 

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