Social Security 5: File and Suspend for Soon-to-Be Widowed Homemakers (2009-03-30)

Social Security 5: File and Suspend for Soon-to-Be Widowed Homemakers

(2009-03-30) by avid John Marotta and Matthew Illian

Our own death or the death of a loved one can be difficult to face. But mortality is one of the most critical factors to consider when making decisions about your Social Security. If you have little earnings of your own and your spouse is in failing health, there is a unique way to maximize benefits.

Don't dismiss this scenario out of hand. It is much more common than you might think. For example, David's grandfather died at age 72 and his grandmother lived until she was six months shy of 100. Men on average are slightly older than their spouses with significantly higher incomes. And we know they tend to die at a much younger age than their wives. When that happens, the difference between the best and worst Social Security choices can be worth over $90,000.

Healthy spouses with little earnings of their own should always encourage their partners to delay filing for Social Security. What changes in this special case is what they should do concerning their own filing.

Take the case of James and Betty Butterworth. James is four years older than his wife. Betty worked to help put James through law school, and then he started his own estate planning firm. She raised their five children and served on the boards of three local charities. Despite her lifetime of achievements, Betty is not eligible for Social Security benefits because to qualify requires earnings in at least 40 quarters.

James has just turned 66 and Betty is 62. Their plan was to file for Social Security when James turned 70, which would increase their annual income by more than 46% compared to filing when James is 66 (full retirement age). When James is 70, Betty will start receiving half of her husband's benefits until her husband dies, and then she will inherit his full payment as the survivor. Normally this is the best option, but then the Butterworths' circumstances take an unfortunate turn.

Betty is healthy, but James has just been diagnosed with cancer and probably will only live another five years. Assuming her husband dies in five years at age 71, Betty will begin receiving his full survivor benefit earlier than is typical for a spouse. In this situation, Betty only expects to receive one year of spousal benefits before jumping up to the survivor benefit. This would mean she would receive just a year of half spousal benefits (when she is age 66 and James is 70) before getting full benefits.

But there is a way for Betty to start receiving spousal benefits at age 62 and still inherit all of the increased benefits from her husband's delayed filing.

The Senior Citizens' Freedom to Work Act of 2000 provides an option that can boost total benefits payments for the Butterworths by as much as 10% over the second best choice. This new option is called "File and Suspend." It works this way: When James reaches his full retirement age of 66, he files for Social Security but suspends receiving any benefits.

Now that James has filed, Betty is entitled to apply for spousal benefits when she is 62. She will collect an extra four years of spousal benefits by using this strategy.

By suspending, James continues to earn delayed retirement credits of 8% a year. These delayed retirement credits allow his benefits to grow from 100% of full benefits when he is 66 to 132% of full benefits when he turns 70. And Betty will inherit this amount after he dies.

Betty is not able to step up to a higher benefit when her spouse files at age 70 because she is already receiving spousal benefits. But she will soon inherit a large survivor benefit, and those early years of spousal benefits really add up. James would have to live to at least 75 before Betty would have benefited from delaying her own filing.

Sadly, James loses his battle with cancer a year earlier than expected. He dies at age 70 and Betty inherits his stepped-up survivor benefit. But because they used the file and suspend option, Betty receives an additional $37,582. If she had waited until James turned 70 to file, she would not have received any spousal benefit.

In summary, the primary earner should often delay taking Social Security when the spouse's income has been significantly smaller in order to increase the survivor's benefits. And if the primary earner's health is questionable, consider file and suspend to allow the spouse to collect additional years of spousal benefits.

from http://www.emarotta.com/article.php?ID=330

Social Security 4: File, Repay and Refile to Get an Interest-Free Loan (2009-03-23)

Social Security 4: File, Repay and Refile to Get an Interest-Free Loan

(2009-03-23) by David John Marotta and Matthew Illian

About half of retirees file for Social Security benefits early at age 62. By doing so, they receive only 75% of their full retirement benefits. And unless they die prematurely, they could lose out on more than $250,000 they might have received otherwise. So for many people, filing early is the worst possible decision.

Retirees who delay filing for Social Security until age 70 receive annual payments equal to 132% of full retirement benefits. If you don't mind some added risk, you can combine these file-early and file-late strategies by filing, repaying and then refiling.

To refile, you must repay everything you have received in benefits after you submit the Request for Withdrawal of Application, which also allows for a refund of the taxes you have paid. You can use this opportunity to file, repay and then refile in at least three ways.

First, if you have made the mistake of filing early, you can repay what you have received and then refile at your full or delayed retirement age. This ability to undo your selection will raise your monthly payment by 33% at full retirement age and by 76% at age 70. Some people who were expecting to retire at age 62 may want to repay their benefits because they are still working full time and being penalized on their work benefits.

Here's the second way this method is worth considering. You simply use it to gain a tax-free loan from the government. The only difference between filing late and filing early, repaying and then refiling is an eight-year interest-free income stream of payments from the government.

Refiling at age 70 can offer the best of both worlds. If you die before age 70, you have enjoyed benefits you would not have received otherwise. If you live to age 70, you will have succeeded in getting an interest-free loan from the government.

Consider the case of Leland Rockefeller again. If he files early, he will receive a monthly benefit of $1,742. Between age 62 and age 70, he could receive interest income. Even at just a 4% return, Leland could earn an additional $28,402 of interest before repaying and refiling at age 70. After refiling he will start receiving increased benefits in the amount of $3,066. The survivor benefit for his wife Candy will nearly double. The break-even point will come the year Leland turns 79. The benefits will continue beyond his death for as long as Candy draws a survivor's check.

But filing, repaying and then refiling does have a downside. Significant risks must be considered.

For example, Leland might die at age 69 before being able to repay and refile, having received only seven years of early payments. If Leland was single, his filing early at least would have resulted in getting some money. But because he is married, his young widow Candy could get stuck receiving his reduced benefits simply because he didn't live long enough to repay and refile.

This is not a trivial concern. Any threat to repaying means you might be saddled with one of the worst filing methods and miss one of the best. Before filing early with the intention of repaying and refiling, you must consider the worst case scenario: what will happen if you never get the chance to repay and refile. If Leland and Candy's Social Security benefits were both equally high, Candy would not be hurt too much by Leland filing early and then dying before he had a chance to refile.

Another danger of the refiling scenario is that when it comes time, you may not have the money. If you've invested poorly or spent the money, you may be shackled with reduced benefits for the rest of your life. Given the tendency of most retirees to file early because they can't wait to start spending their Social Security checks, the danger of not having the money when it comes time to repay is too risky for many households.

The potential benefit of filing and repaying is greatly reduced if you continue working beyond age 62. When you take Social Security, any income over $14,600 reduces your benefits by $0.50 for every $1 above that limit you receive as wages. It also doesn't work if you are trying to use the time between age 62 and 70 as low-income years to convert some traditional IRAs into Roth IRAs and thus minimize taxes during retirement.

Finally, a third reason to consider this file, repay and refile strategy is to gain an inflation-adjusted income stream starting at age 70. Repaying Social Security is a better return on your money than any commercial annuity you could buy. In the case of Leland, repaying his Social Security will provide him the benefits of a joint and survivor annuity at nearly half the price of commercial annuities offered through an insurance company.

The Withdrawal of Application asks you to explain why you are withdrawing your initial benefit application. You can simply respond that it's better for you financially or you are now working. About 100,000 people file a Withdrawal of Application each year.

Although filing early and then repaying can be risky, it is the least dangerous for a husband and wife whose benefits are roughly equal. In this case, either partner dying before refiling won't jeopardize the other's benefits. Additionally, both should have stopped receiving any income when the first one reaches age 62. This most commonly happens when spouses are the same age. Also, they should be fairly well off with no temptation to spend what they receive, and they should invest in stable vehicles, such as CDs that mature the year they turn 70.

Although this option of refiling is both riskier and more complicated than the more traditional choices, it can boost your benefit by an additional 3%. For the faint of heart, however, simply filing late provides 97% of the benefit with little of the risk. It also opens up the possibilities of working until age 70 or using those years to take advantage of Roth conversions.

from http://www.emarotta.com/article.php?ID=329

Social Security 3: Delay Filing for Younger Wives and Homemakers (2009-03-16)

Social Security 3: Delay Filing for Younger Wives and Homemakers

(2009-03-16) by David John Marotta and Matthew Illian

Most retirees believe their only choices for Social Security are to file early or to file when they reach full retirement age. Furthermore, married couples make the mistake of only calculating benefits on each person's personal life expectancy. If you are married, look at joint mortality. With a little planning, you can boost your benefits significantly.

Social Security options are complex for married couples. Each spouse qualifies for three different types of benefits. Option 1: They can file for their personal benefit based on their own record of earnings. Option 2: They may file for spousal benefits based on half of their spouse's earnings. With each of these options, they have three choices: file early, file at full retirement age or delay filing and receive up to 132% of full retirement benefits.

Option 3 is for retirees who meet requirements for a survivor's benefits after their spouse predeceases them, based on their spouse's earnings record. Don't overlook this survivor's benefit when you are deciding when to file. Computing how long you must live to take advantage of late filing requires including the projection for survivor's benefits and considering the likelihood that each spouse might be the first to die.

For any couple in a situation where one should take the other's spousal benefits, joint longevity as well as the difference between their ages affects the filing options significantly. There may be many more years to collect survivor's benefits than personal benefits. Because women typically live longer and are more likely to have earned lower personal benefits, many men delay their benefits until age 70. Their wives thus inherit a larger benefit to use through possibly long years as a widow, a wonderful way to protect a loved one from running out of money.

For example, consider Leland and Candy Rockefeller. Candy met Leland in her tai chi class at the country club. Leland's wife had passed away two years earlier, and Candy was just beginning to think about marriage. They fell in love over a couple of bento boxes after class. She'd always wanted to see Tokyo, and he owned a penthouse suite on Shibuya Street. They honeymooned in the Far East.

Despite their age difference, they have been happily married for seven years. Leland is now 62 and considering filing for Social Security; Candy is 25 years younger. Second marriage has kept Leland in good shape, but the men in his family did not live to old age. He may not need the money either way, but he is tempted to take early benefits and get as much as possible while the system is still viable.

Candy, in contrast, has youth on her side. She enjoys excellent health and exercises regularly. And the women in her family have had impressively long lives.

When Leland dies, Candy can begin receiving a survivor's benefit as earlier as age 60. If he files early, she will receive a monthly benefit equal to $1,661 in today's dollars, but if Leland waits until age 70, she will receive a monthly benefit of $2,192. Her many years of receiving benefits far outweigh the possibility that Leland will die too young to enjoy his increased benefits. Clearly he should wait until age 70 before he files for Social Security.

Even if Leland dies at age 70 and does not receive a dime of benefits, so long as Candy lives past 76, it will have been worth it. Candy finds it enormously reassuring to know that even if she lives to be 100 she will have received $1,052,160, or 11% more benefits, because of Leland's wisdom in waiting to file. And if Leland lives to an average life expectancy of 81 and Candy lives to age 84, which is typical for women in retirement, they will collect $182,664 more because of Leland's delayed filing.

Healthy spouses with little earnings of their own should always consider encouraging their partners to delay filing for Social Security. Having little, if any, benefit accrued on their own work record, they will need to rely on their spousal and survivor's income benefits. This is a situation that homemakers and younger wives share. Only in a situation where both the spouses have a shortened life expectancy does it benefit a couple to file early. Delaying your filing for Social Security also allows you to earn additional income and save money without penalizing your benefits.

Another reason to delay filing is to gain a measure of longevity insurance. Dying young never jeopardizes a retirement plan financially. It's only when you live a long time that you risk running out of money. Filing late increases the money you will receive. And if you live a long life, the benefit of a later filing increases the longer you live.

Anyone who delays filing for Social Security should also consider another choice: filing, repaying and then refiling. This option is both riskier and more complicated, but it can boost your benefit by an additional 3%. We discuss this scenario in next week's column.

Too many impatient retirees take Social Security as soon as possible and miss out on thousands of dollars. Run the numbers and consider all your options before you make the decision when to file.

from http://www.emarotta.com/article.php?ID=328

Social Security 2: File Early If You Plan to Die Young (2009-03-09)

Social Security 2: File Early If You Plan to Die Young

(2009-03-09) by David John Marotta and Matthew Illian

Social Security may be a Ponzi scheme, but it differs in one important way. Those who get paid early won't have to give the money back. Perhaps this explains why many people choose to start taking payments as soon as possible.

About half of all Americans file early for Social Security at age 62. In addition to their concern that promised payments may dry up in the future, many other factors motivate them. Some are behavioral finance mistakes, but others are legitimate.

Filing early exacts a steep price. Your Social Security benefits are permanently cut to 25% less than the amount calculated at full retirement. In 2009, full retirement benefits require waiting until age 66. So filing at age 62 translates to several years of early payments followed by getting 25% less for the rest of your life. Waiting beyond age 66 means getting extra benefits above the full retirement amount. Waiting until age 70 results in receiving 132% of full retirement benefits. People who file early receive about 44% less Social Security income over their lifetime than those who wait until age 70 when the maximum benefit is available.

Consider the case of aging rock star Capitan Danger. After decades of free love and rocking on, he finally began working steadily after he reached 50. By recording soundtracks for video games, he now has more than 10 years (40 quarters) of on-the-books income that has qualified him for Social Security benefits at age 62. At this point Danger has to decide if he wants to take retirement benefits early or wait until as late as age 70 to receive the highest benefit.

Studies show that if we refrain from smoking, exercise regularly, only drink alcohol moderately, and eat five servings of fruit and vegetables a day, we will enjoy an average of 14 additional years of life compared with people who adopt none of these behaviors.

Capitan Danger adopted none of those behaviors.

Although the average 62-year-old might live another 19 years, Capitan Danger will be lucky to survive more than 5 years. His body is beat up from his heroin addiction in the 1970s, and alcohol abuse has damaged his liver. And of course he doesn't ever pay much attention to the future consequences of anything.

Capitan Danger should file early for Social Security benefits. He can make his decision independently. Although he has known the love of many women, he never married any of them. One of the characteristics he seeks in a partner is her ability to support his lifestyle. Accordingly, his current girlfriend is years from retiring and earns more than he does anyway. She certainly won't need or be eligible to claim his Social Security benefits when he dies.

During retirement the Capitan has a disincentive to work. He must not earn more than $14,160 in 2009. Any overage will be taxed at 50%. That's fine with Danger because working too hard cramps his musical style.

He would have received a monthly benefit of $1,562 if he had waited until age 70. Beginning at 62, however, Danger will only get $887. By starting his Social Security payments early, he will realize $95,823 in today's dollars by age 70. It takes a while for the larger benefit that comes from delaying filing to overcome the immediate windfall of starting early.

Danger's break-even point is at age 80. He will receive the greatest benefit from filing early if he dies exactly at age 70. After that, no benefit will accrue in delaying his retirement income. He will no longer receive the delayed retirement credits that increase his benefit 8% in addition to the cost-of-living adjustment for each year he waits. If the Capitan lives to 82, he will have lost $20,016 by taking benefits early. At age 90, he will be $84,750 behind, and by age 95 his present hedonism will have cost him $125,209.

Sadly, Danger's hard living catches up with him and he dies at age 69, having used his extra retirement money as deposits on costumes and venues for a failed reunion tour of The Thankful Corpse, his former band.

People with shorter life expectancies and singles who will not be passing their benefit along to a surviving spouse are the best candidates for filing early for Social Security. Others are better off looking at other options. Women obviously tend to live longer than men. But Social Security does not discriminate by gender, so single men have an actuarial incentive to file before single women. Both minorities and poor people typically live shorter lives, which is also an incentive to file early.

You can see how critical it is to plan carefully before you file for Social Security. Because of all these moving variables, maximizing benefits changes every year as the age to file and receive full benefits keeps advancing upward. And it changes with every retiree's specific situation. But in each case, analysis begins with an estimate of projected benefits for both you and your spouse.

If you do not have a copy of the benefits estimate that Social Security sends out annually, you can request it at www.ssa.gov/estimator and then print the results. Or call the Social Security Administration at 800-772-1213. You can also get a copy of "Retirement Benefits" (Publication No. 05-10035) online.

On March 11 from 7 to 8:30 pm, the nonprofit NAPFA Consumer Education Foundation is giving a seminar, "Everything You Need to Consider Before Filing for Social Security," at the Northside Library Meeting Room in the Albemarle Square Shopping Center. Financial advisors Matt Illian and Frank McCraw will be presenting. For more information, visit http://www.napfafoundation.org/NAPFAfoundation_Charlottesville.htm or e-mail .

from http://www.emarotta.com/article.php?ID=327

Social Security 1: Planning Is Crucial (2009-03-02)

Social Security 1: Planning Is Crucial

(2009-03-02) by David John Marotta and Matthew Illian

Social Security benefits can represent a big stack of cash. A typical monthly benefit of $2,200 has a present value well over $500,000. Consider all your Social Security options carefully to avoid making a costly mistake.

Like all government law, Social Security is not a simple piece of legislation. Since the Social Security Act became law in 1935, hundreds of amendments have added to the complexity. To make the best decision, you must consider health, income before retirement, income during retirement and taxes.

Retirees cannot rely on commonly held beliefs. Don't assume that simplistic rules such as "Always file for early benefits" or "You need to stop working to receive benefits" are correct. There are specific cases that break every rule of thumb. And these one-size-fits-all answers leave many retirees failing to maximize the benefits they have earned.

At least four methods are used when electing how to take Social Security. And if you are married, the two of you can mix and match these in more than 16 different ways. Each one results in a different cash flow. By using the cash flows and the time value of money, you can determine which method will result in the highest net present value and offer you the best maximum value.

These methods differ significantly. They depend on your historical earnings, marital or divorce status, continued work in retirement, longevity and rates of return. The choice may be worth $250,000 of income or more. Filing options include "early filing," "standard filing," "delayed filing," "file and suspend," and many combinations of these options for married couples. It is certainly worth careful study and analysis of each one. Yet a majority of Americans make their choice impulsively and emotionally.

The decision is even more critical for women. For 42% of single women older than 62, Social Security is their sole source of income. Women on average outlive men. Thus planning for retirement is much easier for men, who tend to have more assets and die young. Widows are twice as likely to live under the poverty line as men who have lost their wives. And the poverty rate for elderly single women is 23% compared with just 5% for retired couples.

Couples must take their joint longevity into account before either one files for benefits. The person with the longer life expectancy will inherit either a wise or a foolish decision that will last a lifetime. Given that a husband's benefits are often higher and the wife's life expectancy longer, each case needs to be analyzed carefully.

Unfortunately, many people file after considering only one or two options in isolation. The Social Security Administration's new online filing system enables quick decision making. People can easily submit their request without any professional advice or planning.

Before filing, then, you obviously should be informed about all the options. To begin, you need to know your personal Social Security earnings and the projected benefits for both you and your spouse. You can request an estimate at www.ssa.gov/estimator and then print the results. Or call the Social Security Administration at 800-772-1213. You can also get a copy of "Retirement Benefits" (Publication No. 05-10035) online.

Social Security planning is crucial for everyone. People with significant assets should carefully consider both the lifetime benefits and tax consequences of Social Security in light of their overall portfolio strategy. For the less well off, Social Security benefits will dictate their retirement lifestyle. Proper planning could well determine what they can afford to eat.

To help you understand your options before locking in the wrong choice, attend the nonprofit NAPFA Consumer Education Foundation seminar, "Everything You Need to Consider Before Filing for Social Security," on March 11. This free presentation will be held at the Northside Library meeting room in the Albemarle Square Shopping Center from 7 to 8:30 pm. Financial advisors Matt Illian and Frank McCraw are leading the seminar. For more information, visit http://www.napfafoundation.org/NAPFAfoundation_Charlottesville.htm. Or e-mail .

from http://www.emarotta.com/article.php?ID=326