The Lange Report – April 2016

 

Table of Contents

 

Important Updates on Recent Changes to the Social Security Rules

The Bipartisan Budget Act of 2015 contained certain provisions affecting Social Security that will cost retirees a lot of money if they do not act quickly. If you haven’t already done so, please take a moment to download a copy of my new book, The Little Black Book of Social Security Secrets, to read about them. It is a short book, and it is available on my website, free of charge, at www.paytaxeslater.com/ss. In fact, the book has gone viral, with over 1100 downloads in one week! Additionally, many of you receiving this newsletter will receive a free hard copy, with my compliments.

If you’ve already ready my book, you know that the legislation, when written, was confusing. After I wrote the book, the Social Security Administration was forced to release several “Emergency Messages” aimed at clarifying the pending changes to their rules. These Emergency Messages will impact many individuals who are in or are approaching retirement, because they address several critical, previously unanswered questions. A summary of the information contained in those Emergency Messages is shown below. There are also detailed explanations that follow that may clarify how these changes to the rules might affect you.

  • April 29, 2016 is the last day that you or your spouse can voluntarily suspend your own Social Security benefit under the “old” file-and-suspend rules.
  • My book says that you must be full retirement age (currently 66) or older by April 29, 2016 to be grandfathered into the “old” file-and-suspend rules. The latest information we have from Social Security implies that there may be a four-month grace period, and, at the time we went to press with this newsletter, we were waiting for yet another “Emergency Message” from them to clarify this. The reason the question remains is because it is possible to file an application for benefits up to four months before you want your benefits to start. This seems to imply that you can file (and suspend) by April 29, 2016, even though you won’t be 66 (full retirement age) until August of this year. So if you read my book and thought that you were ineligible to apply for and suspend your benefits because you wouldn’t turn 66 until shortly after April 29, 2016, well, there still might be hope for you yet. As soon as the information is available, I will publish the answer on my blog — you can access my blog at www.paytaxeslater.com/blog. And, of course, I’ll address it in the next issue of this newsletter, as well as in a clarifying email once we have the information.
  • You will no longer be eligible to receive lump-sum retroactive benefits if you submit a suspension request after April 29, 2016.
  • If you submit a suspension request after April 29, 2016, the ability for others to claim benefits based on your record will, for most individuals, stop. One exception to this is that benefits for a former spouse who is collecting on your record will continue to be paid.
  • If you submit a valid suspension request by April 29, 2016 and it is effective for no later than that date, you will be grandfathered into the “old” file-and-suspend rules, even if the Social Security Administration does not process your request until a later date.
  • If you were age 62 or older by January 1, 2016, you will grandfathered under the “old” restricted application rules, even though you cannot actually submit such an application until you are 66.
  • If you are claiming spousal benefits because you are caring for a child under age 16, or if you are claiming disability benefits, you will be exempt from the new rule.

These changes can significantly affect you and your loved ones in retirement. Let’s look at the details.

Apply and Suspend
April 29, 2016 is the last day on which you may voluntarily suspend your application while still allowing another eligible person (including your current spouse) to collect benefits based on your earnings record. You can still submit a suspension request after this date. If you do, the benefits paid to anyone who is collecting on your record will stop. This includes your current spouse!Once you unsuspend your own benefits, the auxiliary benefits that are tied to your earnings record will resume.

There is one important exception to this rule. If you are collecting divorced-spouse benefits — not spousal benefits — based on your ex’s record, and your ex decides to suspend his or her own benefits, your divorced-spouse benefit will not stop even if your ex fills out the paperwork after April 29, 2016. Yes, you read that right. Under the new rules, current spouses will not be treated as well as former spouses.
Here’s another, lesser-known idea that will be eliminated after April 29, 2016. Under the “old” rules, you were allowed to suspend your benefit and then “change your mind” later by requesting a retroactive reinstatement of your benefits. Those who chose to do so could receive a lump-sum payment of all of the money they would have received from their filing date. Unfortunately, as clarified in one of the Emergency Messages, the lump-sum retroactive benefit option will definitely be eliminated for suspension requests submitted after April 29, 2016.

There is one small piece of good news for those of you who may want to take advantage of the Apply and Suspend strategy. As long as you submit your own suspension request by April 29, 2016, and it is effective for that date or sooner, you will still be grandfathered under the “old” rules no matter how long it takes them to process your paperwork. Can’t get an appointment at your local Social Security office by April 29, 2016? Don’t worry — you can still do it online at www.ssa.gov. I am encouraging all clients who are eligible to file and suspend while they can. You may be protecting important options for your spouse by simply filing, even though you are not receiving benefits yourself.

Restricted Applications
If you were born after January 2, 1954, you can skip this section completely because, like me, you’re not old enough to take advantage of this strategy anyway. Were you born before January 2, 1954 but you’re not sure if it makes sense for you to file a restricted application for benefits? Please read Chapter 5 of my book before you read the following clarification that was issued on February 5, 2016.

The restricted application strategy allows you to apply only for certain benefits to which you’re entitled, when you do finally reach full retirement age (currently age 66). In the meantime, your own benefit continues to grow by Delayed Retirement Credits and Cost of Living Adjustments. Here’s the part you need to be clear on. Currently, if you’re filing for Social Security benefits prior to your full retirement age, you are “deemed” to be applying for your own benefit, as well as your spousal or divorced benefit — and the amount that you do eventually receive will be the higher of the two.

The Bipartisan Budget Act of 2015 automatically grandfathered anyone age 62 or older as of January 1, 2016 into the “old” rules — meaning that if you meet that requirement you will still be able to file a restricted application when you are eligible. You may have to wait several years, though, because the earliest you can file a restricted application for benefits is age 66.

Under the new rules, you will be “deemed” to be applying for the highest benefit to which you’re entitled. Social Security will compare the benefit that you’re entitled to based on your own record with the spousal benefit that you’re entitled to, and will pay you an amount that is equal to the higher of the two.

With the issuance of these Emergency Messages, most of the questions about the changes to Social Security as a result of the Bipartisan Budget Act of 2015 have been answered.

Retirement Account Beneficiary Designations – The Devil is in the Details
by: Matt Schwartz

It is hard for me to believe that I have been practicing law, specializing in the areas of retirement and estate planning and estate administration, for nearly 20 years now (the last 14 years with Lange Legal Group, LLC).  During that time, I have run into situations in dealing with clients that would make you laugh, make you cry, and many that make you think.  One such topic, that I hope makes everyone reading this stop and think, is a consistent misunderstanding by clients of how their assets get distributed at death.  Most clients assume that all assets are controlled by your Will.  However, that is not the case.

The distribution of retirement accounts is not controlled by your will, rather, by a document known as the beneficiary designation.  It is a document that commonly gets little attention but in many cases the beneficiary designation distributes 50 to 75 percent or more of the client’s net worth.  Many clients have Wills that include terms that allow a deceased beneficiary’s children to inherit a deceased beneficiary’s share (also known as a “per stirpes” distribution) and trusts for young beneficiaries even before they see us.  However, these important provisions are commonly not included in beneficiary designations of their retirement accounts.  What this often boils down to is an accidental disinheritance of a grandchild or leaving money to grandchildren before they are old enough to handle a large inheritance.

When I explain to new clients that their prior beneficiary designations inadvertently disinherit their grandchildren, they are often horrified.  Even those who have per stirpes provisions in their original retirement account beneficiary designations commonly do not have language making sure that a young beneficiary’s share is left in trust.   Leaving a young beneficiary’s share in trust is essential, as giving a young beneficiary a large inheritance with no guidance or oversight is one of the greatest fears of most of our clients.  For those who do reference trusts for younger beneficiaries under their Wills or Trusts, many of these trusts are not appropriate to allow the trust to qualify as a stretch IRA beneficiary. This means that the retirement account may have to be distributed over five years or over the remaining life expectancy of the deceased retirement account owner which is almost always going to be much shorter than the beneficiary’s life expectancy.  The cost of this massive income tax acceleration error can potentially be hundreds of thousands of dollars in extra taxes paid over the beneficiary’s lifetime.

Unfortunately, even if the attorney prepares the appropriate beneficiary designation, sometimes when an account is transferred the former appropriate designation is overlooked and a new beneficiary designation is inserted that doesn’t have the important provisions to protect your family.

Our expertise in these areas allow us to prepare your beneficiary designations to be consistent with the distribution pattern of your assets under your Wills and Trusts while updating your Wills or Trusts to contain proper language to preserve the stretch IRA for trust beneficiaries.  If an account needs to be transferred, we will make sure that the new account has the appropriate beneficiary designation.  If you are looking for a team with a holistic approach that focuses on developing an estate plan for all of your assets including your retirement assets, the Lange Legal Group, LLC could be a great fit for you.

The 4 Percent Rule – Can You Still Count on 4 Percent as a Safe Withdrawal Rate?

Traditionally, the 4 Percent Rule says that you can safely withdraw 4 percent of your retirement savings per year, adjusted for inflation, to support you through 30 years of retirement. If your life expectancy is shorter than 30 years, you can withdraw more than 4 percent.

The 4 Percent Rule was derived in 1994 by the well-known safe withdrawal expert, Bill Bengen, and he still sticks to 4 percent, even in today’s economy. Jack Bogle, founder and former CEO of Vanguard, concurred that 4 percent was still a good rule of thumb. (I interviewed both Bill and Jack on my radio show, and if you are interested, you can access links to the audio or transcripts of the shows at www.paytaxeslater.com/radioshow).

What factors do you have to consider when deciding on a withdrawal rate that is appropriate for your situation? The first issue is the health of the stock market after you retire. If the market tanks after you retire and you have to weather several consecutive years of bad returns, then withdrawing 4 percent of your principal on the day of your retirement may be too aggressive.  The second issue is the current low rate for fixed income instruments. The combination of low yields on fixed income and low returns from stocks in the early years of retirement can hamper growth, which may make an initial withdrawal rate of 3 percent or 3.5 percent more prudent.

As odd as it may sound, you should also be aware that you can end up with too much money. More than 2/3 of retirees who have followed the 4 Percent Rule have ended up with more than double their starting principal after 30 years. Adhering strictly to the 4 percent withdrawal rate may mean that you miss out on a lot of fun during those golden years when you are most able to enjoy yourself.

Unfortunately, you won’t know which outcome to expect, because you can’t predict the future. So what should you do to make sure your nest egg will support you during retirement without living more frugally than you need to?

Start with a withdrawal rate that makes sense for your situation and for the market conditions when you retire. Let’s use 4 percent for discussion’s sake.

For example, assume you have a $1,000,000 portfolio. The first year, you withdraw $40,000. Then, assume the market takes a 10 percent hit and at the beginning of the second year of retirement, your portfolio is down to $864,000 ($1,000,000 minus $40,000 withdrawal minus $96,000 which is the 10 percent loss on the one million). What do you do? Bill Bengen says you then withdraw $43,000, (4 percent of the original $1,000,000, plus 3 percent for inflation). The classic rule says you don’t have to change your spending or lifestyle as the market fluctuates.
If, however, you are willing to adjust your lifestyle and spending based on market conditions, then you could probably spend more than 4 percent initially.
In the end, the 4 Percent Rule isn’t perfect, but it remains a good rule of thumb you can use as a jumping-off point for your own retirement planning, and is a strategy that you should re-visit with your financial advisor on an annual basis.

Sweet Potato and Kale Patties

Ingredients (makes 8-10 patties)

  • 2 ½ cup cooked and mashed sweet potatoes (2-3 potatoes)
  • 2-3 cups chopped kale
  • ¼ cup ground flax seed
  • ½ cup water
  • 1 diced onion
  • 2 garlic cloves, minced
  • ½ teaspoon sea salt
  • ¼ teaspoon black pepper
  • 1 teaspoon coriander
  • Cayenne pepper to taste
  • Olive oil for frying
  • Chickpea (besan) flour for coating patties

Directions

  • In a small dish, add ground flax seeds and water and let sit while you do step 2.
  • In a small frying pan, heat oil and cook onions and garlic until fragrant and soft (approximately 3 minutes).
  • In a medium-sized bowl, add sweet potatoes, kale, cooked onions, garlic, soaked flax seeds, salt, pepper, coriander, and cayenne. Stir to fully combine.
  • Heat pan again with oil to a medium heat.
  • Add approximately ½ cup chickpea flour to a plate.
  • Take approximately ½ cup of the sweet potato mixture and make a patty. Roll or pat into chickpea flour and coat both sides.
  • Add patties to pan and fry for 5 minutes on each side or until they’re a light brown.
  • Serve.