Tag: full retirement age

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Annuities Fixed Index Annuities Retirement Income Planning

Looking for a Pension with a Flexible Start Date?

Focus on and take control of your retirement made in 2d software

If you want peace of mind when you retire, you need to have a plan that will generate sustainable income streams that will cover a large portion of your fixed and discretionary expenses. Income tax planning is critical since your income needs to be calculated net of income tax to determine the amount that will be available for spending.

A sustainable income stream is simply a regular series of payments that, once it begins, will continue for the rest of your life. An ideal sustainable income stream is one that’s calculated using life expectancy and has a flexible start date. The longer you wait to turn on your income, the greater the periodic payment.

Social Security is a great example of a sustainable income stream that meets these criteria. Although you can begin collecting as early as age 62, you can also delay your start date to as late as age 70. The longer you wait, the greater your monthly payment. Assuming a full retirement age of 67, your benefit will be 80% greater if you delay your start date from 62 to age 70, excluding cost of living adjustments.

While Social Security is an important cornerstone of most retirement income plans, it generally needs to be supplemented by other sources of sustainable income. Even if you qualify for the maximum monthly benefit of $2,663 assuming you reach full retirement age in 2015, your annual benefits of approximately $32,000 may be reduced to as little as $21,000 after income tax, depending on your other income and income tax bracket.

Fortunately, there’s another source of sustainable income beside Social Security that’s calculated using life expectancy and also features a flexible start date. It’s offered by life insurance companies and is called a fixed index annuity (FIA) with an income rider.

Unlike the start date of Social Security which is limited to a window of eight years (age 62 to 70), a FIA income rider start date is open-ended. Generally speaking, the only requirement is that you must be at least age 50 when you begin receiving income. Assuming you meet this condition, you can start your lifetime income stream at any age you choose.

Similar to Social Security, the longer you defer your start date, the greater your lifetime income payments will be. Other factors that will influence your income payment are the age at which you purchase your FIA, your original investment amount, additional investments if permitted, premium bonus when applicable, and non-income withdrawals. The calculation of your payment amount is defined by the income rider provision of your FIA’s contract.

Since the calculation of your payment amount is contractually defined, you can determine the amount of initial and ongoing investments required to provide you with a target amount of income beginning at one or more specified ages of your choice before you purchase a FIA. Furthermore, if you need different amounts of income beginning at different ages, you may want to consider investing in two or more FIAs with income riders.

In addition to meeting the criteria of an ideal sustainable income stream, i.e., one that’s calculated using life expectancy and has a flexible start date, a FIA with an income rider offers another benefit that can be important where there are potential beneficiaries. Unlike other types of fixed income annuities, i.e., immediate and deferred income annuities, a FIA has an accumulation, or cash, value.

The accumulation value increases by purchases and premium bonuses and decreases by income and non-income withdrawals and income rider and surrender charges. Any accumulation value remaining at the death of the contract owner(s) will be paid as a death benefit to the beneficiaries.

As stated at the beginning of this post, income tax planning is a critical part of the retirement income planning process since your income needs to be calculated net of income tax to determine the amount that will be available for spending. All income payments from FIAs with income riders are taxable as ordinary income. This is true whether they’re held in traditional IRAs and other types of retirement plans or as nonqualified, i.e., nonretirement, investments.

If you’re looking for a pension with a flexible start date to increase the amount of your fixed and discretionary expenses that are covered by sustainable income throughout your retirement, one or more FIAs with an income rider may meet your needs.

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Social Security

How to Reduce Your Spouse and Your Social Security Benefits

As discussed in the two-part series, Approaching 62? – Stop Before You Leap, there are financial and non-financial consequences that will be dictated by your choice of a Social Security retirement benefit starting age. It’s a decision that shouldn’t be taken lightly since it may possibly be the most significant factor in your ability to sustain financial security throughout retirement.

If you’re married, sustainability of financial security continues after the passing of the first spouse to die and often lasts for many years. If you decide to begin receiving your Social Security benefits before your full retirement age (“FRA”), you will also be turning on your spousal benefit. This is due to the deemed filing provision.

Under the deemed filing provision, when you apply for Social Security benefits before your FRA, you are deemed to also apply for your spousal benefit and vice versa. This is automatic. As a result, not only will you receive a reduced benefit compared to what you would receive if you wait until your FRA, your spousal benefit will also be reduced. In addition, your spouse must be 62 in order to receive a spousal benefit. Furthermore, a spousal benefit is only payable if you have been married for at least one year before filing for your benefit.

The spousal benefit is 50% of your benefit if your spouse has reached FRA. If you file an application to receive your benefits before your FRA, both you and your spouse will receive reduced benefits. Your benefit will be reduced by virtue of the fact that you’re applying for benefits before your FRA. At best, your spouse will receive 50% of your reduced benefit. If your spouse hasn’t reached FRA, his/her spousal benefit will be further reduced.

Spousal benefits are reduced from age 62 to FRA, which can vary from age 65 to 67 depending upon when your spouse was born. If your spouse is 62 when you claim your benefit and you claim your benefit before your FRA, he/she will receive 70% of 50% of your benefit, or 35% of your reduced benefit.

As an example, let’s suppose that you were born in 1952 and your FRA is 66. Let’s further assume that your monthly benefit at FRA is $1,000, however, when both you are your wife are 62, you decide to apply for your retirement benefits. Your benefit will be reduced by 25% to $750 and your spousal benefit, which would be $500 at your FRA, will be reduced to $262.50 (70% of 50% of your reduced benefit of $750). As a result of starting your benefits at age 62, you and your spouse will receive monthly benefits totaling $1,012.50 (your benefit of $750 plus a spousal benefit of $262.50), or $487.50, or 32.5%, less than the amount of $1,500 (your benefit of $1,000 plus a spousal benefit of $500) that you would have received had you waited until FRA to start your benefit.

If you haven’t reached your FRA and you’re married, beware of the deemed filing provision. That is, unless you don’t mind receiving reduced Social Security benefits for you and your spouse.

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Social Security

Working? Social Security Benefits Don’t Stop, They’re Suspended

Last week’s post discussed the fact that, with two exceptions, the choice of your Social Security start date is an irrevocable decision. The two exceptions allow you to suspend payment of your monthly retirement benefit in order to take advantage of Social Security’s annual 7% – 8% benefit increase between age 62 and 70 that’s available to individuals who haven’t yet begun receiving benefits.

Both of the benefit payment suspension exceptions require you to file an application with Social Security Administration in order to implement them, and, as such are voluntary. There’s another way to suspend payment of your benefits that’s automatic and doesn’t require you to complete a form.

Social Security has an earnings test that only applies to individuals who are younger than their full retirement age (“FRA”). FRA varies between age 65 and 67 and is determined by your year of birth. Once you reach your FRA, your benefit amount will be unaffected by the amount of your earnings.

There are actually two earnings tests:

  1. Under full retirement age
  2. The year an individual reaches full retirement age

Under Full Retirement Age

If (a) you’re less than your FRA and (b) you’re not in the year that you will reach your FRA, you can earn up to $15,120 a year without any reduction in your Social Security benefits. Once you exceed this amount, your benefits will be reduced by one dollar for every two dollars in earnings above this limit.

The Year an Individual Reaches Full Retirement Age

In the year than you reach your FRA, you can earn up to 1/12 of $40,080, or $3,340 a month, during each month preceding the month that you reach your FRA without any reduction in benefits. Once you exceed this amount, your benefits will be reduced by one dollar for every three dollars in earnings above this limit.

Benefit Suspension

It’s common for individuals who may be affected by Social Security’s earnings test to use it to target the amount of earnings they will receive in order to avoid a reduction in benefits in a particular year. What many people fail to understand is that to the extent their benefits are reduced as a result of the earnings test, they aren’t lost, they’re simply suspended. Furthermore, there will be an increase in benefits to the extent that they were reduced once FRA is reached and the earnings test is no longer an issue.

My recommendation is don’t let the earnings test drive your decision regarding the amount of your earnings in a particular year for two reasons. First of all, you won’t lose Social Security benefits if your earnings exceed the threshold amount. Your benefits will simply be deferred. Second, the employment income that you’re foregoing may require you to tap into other sources of retirement income prematurely, resulting in a potential accelerated depletion of valuable retirement assets that wouldn’t have otherwise been necessary.

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Social Security

The Almost Irrevocable Retirement Income Planning Decision

I don’t know about you, however, I appreciate and enjoy flexibility in my life. When I hear the word “irrevocable,” other than in the phrase “irrevocable life insurance trust,” which I know from many years of experience is a wonderful estate planning tool in the right situation, I get a little squeamish. As Duke Frederick says to Celia in Scene 3 of Act 1 of Shakespeare’s As You Like It, “Firm and irrevocable is my doom.”

As pointed out in the December 17, 2012 post, Approaching 62? – Stop Before You Leap – Part 2 of 2, with two exceptions, the choice of your Social Security start date is an irrevocable decision. This wasn’t always the case. Although it wasn’t well-publicized and wasn’t used very often, the “do-over,” or “pay-to-play” strategy as I liked to refer to it, enabled individuals who claimed Social Security at age 62 to repay 100% of their benefits received to date without interest and receive a higher benefit going forward based on their current age. Ironically, Social Security Administration ended the ability to use this strategy on December 10, 2010, four days after the third of a three-part series on this topic was published by Retirement Income Visions™ (see Pay-to-Play Social Security – Part 3 of 3).

Once you start receiving your Social Security retirement benefits, why would you want to stop receiving them? As pointed out in last week’s post, benefit amounts will increase by 7% – 8% each year that the start date is deferred between age 62 and 70, excluding cost-of-living adjustments (“COLA’s”). You may have started your benefits at age 62 or some other age before your full retirement age (“FRA”) since you thought this made sense at the time and later realized this wasn’t the right choice in your situation. Another possibility is that you learned about a strategy to suspend and restart your benefits at a later date in order to receive a larger monthly payment.

Stopping Social Security Before Your Full Retirement Age

Unlike the now defunct “do-over” strategy where you could repay 100% of your benefits received to date without interest at any time after you began receiving them, there’s a limited exception that enables you to employ a scaled-down version of this strategy. If you claimed benefits before your FRA and you’re within 12 months of when your benefits started, you can withdraw your application and stop your benefits by repaying 100% of what you received so far.

Stopping Social Security After Your Full Retirement Age

Between FRA and age 70, Social Security Administration allows you to suspend retirement benefit payments. This can be done either when you’re approaching your FRA and haven’t started receiving benefits yet or after you have reached FRA and are already receiving benefits. There are different reasons why you would want to do this that’s beyond the scope of this post.

While there are two exceptions when it comes to the irrevocability of the Social Security start date that may or may not be beneficial in a particular situation, these are limited exceptions. As emphasized in the last post, the age at which you begin receiving Social Security retirement benefits may possibly be the most significant factor in your ability to sustain financial security throughout retirement. As Billy Joel says in his song, Get it Right the First Time, “Get it right the first time, that’s the main thing. I can’t afford to let it pass. Get it right the next time, that’s not the same thing.”

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Deferred Income Annuities Social Security

Social Security – The Ultimate Deferred Income Annuity

Last week’s post made the point that Social Security isn’t simply an entitlement program and is instead a deferred income annuity (“DIA”) payable for life. As discussed, the primary difference between Social Security and a commercial DIA is the organization from which the investment is purchased and payments are guaranteed. In the case of Social Security, it’s the federal government while DIA’s are purchased from, and payments guaranteed by, individual life insurance companies.

It turns out that in today’s low-interest rate environment, Social Security is inarguably the ultimate DIA. To illustrate this, I will use my current Social Security benefits statement that includes the following information about my projected monthly retirement benefit beginning at various ages:

Age 62                                                        $1,870
Age 66 and 2 months (full retirement)    $2,559
Age 70                                                        $3,385

In addition to projected monthly retirement benefits, my statement also shows that through 2011, I have paid Social Security taxes totaling approximately $149,000 and my employers (including myself and my two corporations for the last 23 years) have paid approximately $94,000, for a total of approximately $243,000.These taxes have been paid over the last 40 years beginning with part-time employment when I was in high school, with the vast majority paid over the last 25 years.

In addition to my Social Security retirement benefit, my wife is entitled to receive a monthly benefit equal to one-half of my full retirement benefit, or $1,280 (50% x $2,559) if she starts receiving benefits at her full retirement age. This is referred to as a spousal benefit and is independent of any benefit to which she may be entitled based on her earnings record. Assuming my wife has no significant earnings and further assuming that I predecease her, she will receive her spousal benefit for the rest of my life at which time she will receive my higher monthly benefit for the remainder of her life.

Ignoring my wife’s spousal benefit in order to minimize complications, let’s demonstrate the value of my Social Security retirement benefit by calculating the single premium required today at my age 57 to purchase a DIA that will pay my projected monthly retirement benefit beginning at various ages with a 2% annual increase for the remainder of my wife and my lives. Per the November 12, 2012 The Smooth COLA post, Social Security cost-of-living adjustments (“COLA’s”) have averaged 2.6% over the last ten years; therefore, an assumed 2% annual increase is probably conservative.

The following is the range of DIA single premiums required to pay various joint lifetime income amounts assuming an annual 2% increase beginning at various ages using illustrations from three highly-rated life insurance carriers:

While it’s obvious that the above single premium amounts are significantly greater than the total Social Security taxes of $243,000 paid through 2011 by my employers and myself, it’s important to keep in mind the following facts when doing a cost/benefit analysis of Social Security compared to commercial DIA’s:

  • In order to receive the projected Social Security monthly income beginning at various ages, it’s assumed that my current earnings will continue until my full retirement age.
  • In order to receive the projected Social Security monthly income beginning at various ages, Social Security taxes paid by my employers and myself are projected to total $314,000 – $381,000 or greater depending upon my annual earnings, actual taxable Social Security wage bases, and when I retire.
  • Although my Social Security tax payments haven’t been segregated and invested in an account in my name and they have been used to fund Social Security benefits for other individuals, my employers and I have been paying into the Social Security Trust Fund for 40 years.
  • My projected Social Security monthly income beginning at various ages doesn’t include COLA’s between now and my Social Security starting age.
  • The DIA assumed annual increase of 2% may be greater or less than the actual Social Security COLA’s for the remainder of my wife and my lifetime.
  • Although it isn’t likely, it’s possible that my projected Social Security benefit amounts may change if Social Security law changes.
  • As previously stated, my projected Social Security benefits and the single premium DIA calculation both exclude my wife’s Social Security spousal benefits.
  • While it’s possible that less than 50% of my Social Security benefits will be taxable, under current law, it’s likely that 50% – 85% of my benefits will be taxable, depending upon the amount of my other income.
  • Depending upon when I would start receiving payments from a DIA, approximately 40% – 60% of my payments would be taxable as a result of favorable tax treatment associated with nonqualified annuity payments.
  • The required DIA single premium amounts are on the high side since they were calculated assuming that I’m a California resident when I receive my payments and, as such, take into consideration California’s nonqualified annuity premium tax of 2.35% which isn’t applicable in most states.

As you can see, a number of factors must be considered when comparing Social Security as a DIA to purchasing a commercial DIA. Despite these various factors, in today’s low-interest rate environment, it’s clear that Social Security is the ultimate DIA.

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Annuities Fixed Index Annuities

Fixed Index Annuity Income Rider Similarities to Social Security – Part 3 of 4

Retirement Income Center - Currency

I hope that you’re enjoying this series about fixed index annuity income rider similarities to Social Security. I personally find it easier to understand a new concept when there’s something familiar I can compare it to.

Parts 1 and 2 discussed the first five of eight characteristics shared by fixed index annuity (“FIA”) income riders and Social Security. This post addresses characteristics six and seven as follows:

6. Income ceiling
7. Portfolio risk reduction

Income Ceiling

Characteristic #4, increased annual lifetime income, which was discussed in Part 2, is a very important benefit shared by FIA income riders and Social Security alike. By deferring the income start date, Social Security recipients and FIA income rider holders will receive larger annual lifetime income amounts than if they elect to receive income sooner.

Deferring the start date of Social Security retirement benefits from 66, assuming 66 is full retirement age, to 70 translates to a 32% increase in monthly benefits. Waiting to receive lifetime retirement payments (“LRP’s”) from FIA income riders can also result in a significant increase in payments.

There’s a limit in the ability to realize additional income by deferring the start date of both Social Security benefits and LRP’s from FIA income riders. In the case of Social Security, other than potential annual cost of living adjustment (“COLA”) increases, payments max out at age 70. Once you achieve this milestone, there’s no benefit to delaying the start date further.

Although it’s not a set age and it varies by product and situation, there’s also an income ceiling when it comes to FIA income riders. Unlike Social Security where benefits max out at age 70, this may not occur until age 90+ with various FIA income riders. The FIA income rider ceiling for each situation is different and is dependent on three factors: (1) age at which a particular FIA is purchased (2) number of years in the accumulation, or roll-up, period, and (3) age at which withdrawal percentage no longer increases.

Although the vast majority of individuals elect to begin receiving Social Security by their full retirement age, with longer life expectancies and the associated possibility of living to 90 and beyond, it makes sense in many situations to wait until age 70 to begin receiving benefits.

On the other hand, given the fact that FIA income rider LRP’s may not max out until age 90+, while it’s prudent to defer the income start date for several years, it generally doesn’t make sense to wait until the year in which the income ceiling is reached. Unlike Social Security, however, where income is the only benefit, if income hasn’t been started at the time of death, a FIA owner’s beneficiaries will receive the contract’s accumulation value which may be substantial.

Portfolio Risk Reduction

Since they both provide predictable lifetime income, Social Security and FIA income riders, in addition to all of their other benefits, reduce portfolio risk. In both cases, the present value of the future income stream comprises an important, if not dominating, piece of the fixed income component of one’s investment allocation model.

When viewed this way, Social Security reduces overall portfolio risk, and, in turn, reduces the dollar amount of traditional fixed income assets, e.g., CD’s, bonds, etc. that would otherwise need to be included in a portfolio if Social Security wasn’t available. To the extent that significant income will also be received from a FIA income rider, this further reduces a portfolio’s dependence on traditional fixed income instruments.

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Annuities Fixed Index Annuities

Fixed Index Annuity Income Rider Similarities to Social Security – Part 2 of 4

Retirement Income Center - Currency

Part 1 of this post began a discussion of eight characteristics shared by fixed index annuity (“FIA”) income riders and Social Security. It discussed the first two characteristics, lifetime income and entry fee. This post continues the series, addressing characteristics three through five as follows:

  1. Flexible income start date
  2. Increased annual lifetime income
  3. Inflation and longevity risk protection

Flexible Income Start Date

Unlike some fixed income annuity investments that have a specified income start date, there’s no such requirement for either Social Security retirement benefits or fixed index annuity income rider withdrawals. In the case of Social Security, recipients may begin taking reduced benefits at age 62, with a full benefit available between age 65 and 67, depending upon when you were born, and a maximum benefit for those deferring their start date to age 70.

With a FIA income rider, there’s even greater flexibility regarding commencement of income withdrawals. As discussed in the May 7, 2012 post, When Should You Begin Your Lifetime Retirement Payout? Part 1 of 2, the earliest start date, which is defined in the income rider section of every FIA contract, is either during the initial contract year or after the first contract year once you’ve attained a specified age, typically 50.

Increased Annual Lifetime Income

As a general rule, it behooves Social Security recipients and FIA income rider holders to defer their income start date. By doing so, they will receive larger annual lifetime income amounts than if they elect to receive income sooner. If married, this benefit extends to the individual’s spouse in the case of Social Security in the event of death if the surviving spouse’s benefit is less than that of the deceased. Increased lifetime income will also be available for both spouses of FIA contracts with income riders assuming a joint lifetime payout is offered and is elected at the time of application.

With Social Security, the increased benefit for each year of deferral is significant. As an example, someone who is eligible to receive a monthly benefit of $1,000 at full retirement age of 66, would receive 25% less, or $750 at age 62. Likewise, if the individual waited until age 70 to begin receiving benefits, the amount would be $1,320, or 32% greater than at age 66, or 76% greater than at age 62.

For FIA income riders, the lifetime retirement payment (“LRP”) amount will increase during each year of the income rider accumulation phase. This period varies by product from a specified number of years, e.g., 10, until income is taken, or until a specified age, e.g., 85 or 90. In addition, once you complete the accumulation phase, your LRP will increase as a result of the application of increased withdrawal percentages associated with older ages, however, the frequency of increases is generally limited to five-year intervals with most FIA contracts.

Inflation and Longevity Risk Protection

To the extent that Social Security recipients and FIA income rider holders defer their income start date and receive a larger annual lifetime income payment, this will provide them with increased protection from two major retirement income planning risks: inflation and longevity. The value of this protection shouldn’t be underestimated when choosing a start date for Social Security benefits or FIA income rider payments.

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Annuities Celebration Income Tax Planning IRA Retirement Income Planning Roth IRA Social Security

Retirement Income Visions™ Celebrates 2-Year Anniversary!

Retirement Income Center

Thanks to all of my subscribers and other readers, Retirement Income Visions™ is celebrating its two-year anniversary. Since its debut on August 16, 2009, Retirement Income Visions™ has published a weekly post each Monday morning, the theme of which is Innovative Strategies for Creating and Optimizing Retirement Income™.

As stated in the initial post two years ago, Retirement Income Visions™ Makes Its Debut, the importance of retirement income planning as a separate and distinct discipline from traditional retirement planning was magnified during the October, 2007 – March, 2009 stock market decline. Although the stock market experienced three positive and encouraging days this past week, the market volatility the last three weeks has only served to emphasize the need for a comprehensive retirement income plan.

Add to the mix the increasing instability of the Social Security and Medicare programs and the rapid decline of traditional pensions as a source of retirement income. Not to mention increasing life expectancies, soaring health care costs, and an economic situation ripe for inflation. Retirement income planning is no longer an option – it has quickly become a downright necessity.

Since inception, Retirement Income Visions™ has used a themed approach, with several weeks of posts focusing on a relevant retirement income planning strategy. This past year was no exception. The weekly posts, together with the customized Glossary of Terms, which currently includes definitions of 99 terms to assist in the understanding of technical subject matter, has contributed to a growing body of knowledge in the relatively new retirement income planning profession.

Going back a year, the six August 16 through September 20, 2010 posts completed a 36-part series on Roth IRA conversions. This was a very timely topic with the January 1, 2010 availability of this strategy to all taxpayers regardless of income level, combined with the ability to defer 50% of the reporting of income from a 2010 Roth IRA conversion to 2011 and the other 50% to 2012.

The September 27, 2010 post, Plan for the Frays in Your Social Security Blanket, began a 25-part educational series about Social Security. The first two parts discussed some of the historical events in connection with changes to the Social Security system affecting benefit amounts and delay in the commencement of receipt of benefits. The October 11, 2010 post, Do Your Homework Before Flipping the Social Security Switch, began a five-part series regarding various considerations in connection with electing to begin receiving Social Security benefits before full retirement age (“FRA”).

The November 15, 2010 post, Wait Until 70 to Collect Social Security? examined the opposite end of the spectrum, i.e., delaying the start date of receipt of Social Security benefits. The follow-up three-part series, Pay-to-Play Social Security, presented the “do-over” strategy, a little-publicized strategy for increasing monthly benefits in exchange for repayment of cumulative retirement benefits received.

The “file and suspend” and “double dipping” strategies for potential maximization of Social Security benefits were addressed in the next two two-part posts from December 13, 2010 through January 3, 2011, Breadwinner Approaching Social Security Retirement Age? – File and Suspend and Working? Remember Your Social Security Spousal Benefit When Your Spouse Retires.

Income taxation and associated planning strategies was the subject of the subsequent respective two- and four-part January 10 through February 14, 2011 series, Say Goodbye to Up to 30% of Your Social Security Benefits and Increase Your After-Tax Social Security Benefits. The February 21, 2011 post, Remember Your Future Widow(er) in Your Social Security Plan made the point that the decision regarding the start date of Social Security Benefits, in addition to fixing the amount of your retirement benefit, may also establish the amount of your spouse’s monthly benefit.

Retirement Income Visions™ Social Security series culminated with the three-part February 28 through March 24, 2011 series, Your Social Security Retirement Asset. These three posts discussed the importance of Social Security as an asset, perhaps one’s most important asset, in addition to its inherent role as a monthly retirement income stream.

With the media’s emphasis in 2010 on the two-year deferral of inclusion of income from a 2010 Roth IRA conversion as the motivating factor for pursuing this planning technique, I felt that there wasn’t enough attention given to the potential long-term economic benefits available through use of this investment strategy. Roth IRA Conversions – Don’t Let the Tax Tail Wag the Dog began a six-part series on this important topic on March 21, 2011 that ran through April 25, 2011. The May 2 and May 9, 2011 Roth IRA Conversion Insights two-part series followed up the Roth IRA conversion economic benefit discussion.

The importance of nonretirement assets in connection with retirement income planning was discussed in the May 9, 2011 Roth IRA Conversions Insights post as well as the May 23 and May 30, 2011 respective posts, Nonretirement Investments – The Key to a Successful Retirement Income Plan and Nonretirement vs. Retirement Plan Investments – What is the Right Mix? This was followed up with two posts on June 6 and 13, 2011 regarding traditional retirement funding strategies, Sizeable Capital Loss Carryover? Rethink Your Retirement Plan Contributions and To IRA or Not to IRA?

The June 20 and June 27, 2011 posts, Do You Have a Retirement Income Portfolio? and Is Your Retirement Income Portfolio Tax-Efficient? addressed the need for every retirement income plan to include a plan for transitioning a portion, or in some cases, all, of one’s traditional investment portfolio into a tax-efficient retirement income portfolio. This was followed by the July 5, 2011 timely Yet Another “Don’t Try to Time the Market” Lesson post.

The July 11, 2011 Shelter a Portion of Your Portfolio From the Next Stock Market Freefall began a new timely and relevant ongoing series about indexed annuities. This post was published just ten days before the July 21st Dow Jones Industrial Average peak of 12,724.41 that was followed by the beginning of a steady stock market decline coinciding with the final days of U.S. debt limit negotiations and Standard & Poor’s unprecedented U.S. credit rating downgrade, culminating with a closing low of 10,719.94 this past Wednesday. As implied in the titles of the July 18 and July 25, 2011 posts, Looking for Upside Potential With Downside Protection – Take a Look at Indexed Annuities and Limit Your Losses to Zero, this relatively new investment strategy has the potential to be a key defensive component of a successful retirement income plan.

As I did a year ago, I would like to conclude this post by thanking all of my readers for taking the time to read Retirement Income Visions™. Once again, a special thanks to my clients and non-clients, alike, who continue to give me tremendous and much-appreciated feedback regarding various blog posts. Last, but not least, thank you to my incredible wife, Nira. In addition to continuing to support my weekly blog-writing activities, she also endured my year-long family tree project that I recently completed. Well, sort of. Is a family tree ever completed?

Categories
Retirement Asset Planning Retirement Income Planning Social Security

Your Social Security Retirement Asset – Part 1 of 3

Retirement Income Center

This is Part 1 of 3 of the final post in Retirement Income Visions™ series about Social Security. Since its inception on September 27, 2010, the series has focused on Social Security retirement income planning strategies. What most people don’t realize is that Social Security is more than an income stream. It’s an asset – perhaps your most important retirement asset.

Specifically, Social Security is an annuity. Per Retirement Income Visions™ Glossary of Terms, an annuity is:

A contract between an insurance company and an individual, or insured, whereby the insurance company, in exchange for a receipt of a lump sum payment, or premium, or series of payments, or premiums, that is invested by the insurance company in one or more tax-deferred investment vehicles, agrees to pay the insured a lump sum, distributions of the contract balance, or the option to elect an irrevocable structured payout with a specified payment beginning at a specified date, paid at specified intervals over a stated period of months or years or for the duration of the insured’s and potentially his/her spouse’s and/or other individuals’ lifetime(s) depending upon the payout option selected.

While it isn’t in strict compliance with the definition, Social Security comes pretty close. Let’s dissect the definition of an annuity as it pertains to Social Security retirement benefits. Social Security:

  • Is a contract between an insurance company, i.e., the United States government and an individual, or insured, i.e., the Social Security benefit recipient.
  • In exchange for a receipt of a series of payments, or premiums, i.e., Social Security withholding in the case of an employee and the Social Security portion of self-employment tax in the case of a self-employed individual.
  • That is invested by the insurance company in one or more tax-deferred investment vehicles. Although it isn’t fully funded like an insurance company is required to do and although it’s currently projected to be depleted in about 2037, there’s a Social Security Trust Fund that provides a means by which the federal government accounts for excess paid-in contributions from workers and employers in the Social Security system that aren’t required to fund current benefit payments to retirees.
  • Agrees to provide the insured with the option to elect an irrevocable structured payout. Although it’s ostensibly an irrevocable structured payout, there currently exists the ability to repay cumulative benefits received in exchange for a higher payout using a “do-over” strategy (See the November 22, November 29, and December 6, 2010 three-part Pay-to-Play Social Security series).
  • With a specified payment beginning at a specified date. While it isn’t an option since it’s the only payout mode available, Social Security payments begin at a specified date chosen by the recipient, whether it be at Full Retirement Age (“FRA”), beginning from age 62 until FRA, or beginning after FRA until age 70.
  • Paid at specified intervals over a stated period of months or years or for the duration of the insured’s lifetime. Social Security is paid monthly for the duration of the recipient’s lifetime.
  • And potentially his/her spouse’s lifetime. If an individual is married, Social Security retirement benefits don’t cease upon the individual’s death. Instead, the identical benefit continues to be paid to the surviving spouse unless the survivor’s benefit is greater than the deceased spouse’s benefit, in which case the surviving spouse will continue to receive his/her benefit based on his/her employment record.

So, besides the fact that Social Security is an annuity, what else is important about the fact that Social Security is an asset? This will be addressed in Part 2 next week.

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Social Security

Remember Your Future Widow(er) In Your Social Security Plan

Retirement Income Center

Since I began writing this Social Security retirement income planning series on September 27, 2010, several of my posts have discussed strategies for maximizing one’s benefits. In the case of married individuals, the various strategies have taken into consideration maximization of benefits during the couple’s lifetime.

What many people don’t realize is that when they make a decision regarding the start date of their Social Security benefits, which can be anywhere from age 62 to age 70, in addition to fixing the amount of their benefit, they are also potentially establishing the amount of their spouse’s monthly payment in the event that they die before their spouse.

Contrary to the general rule whereby you can qualify for a retirement benefit equal to the greater of your benefit or 50% of your spouse’s benefit as early as age 62, as a surviving spouse you can receive a widows or widowers benefit equal to 100% of your spouse’s benefit as early as age 60 assuming that you were married for at least 10 years. As a surviving spouse, beginning at age 62, you would be entitled to collect the greater of (a) your widows or widowers benefit or (b) your benefit based on your earnings record.

Similar to non-survivors, if you start collecting at an earlier age, your benefit will be reduced. The amount of a survivor’s benefit reduction will be a fraction of a percent for each month before the survivor’s full retirement age (“FRA”). The exact amount of the reduction is determined by the survivor’s year of birth; however, it’s approximately 30% across the board if benefits begin at age 60 and 20% assuming an age 62 start date. You may refer to Social Security Administration’s survivors chart to determine the amount of your benefit reduction.

If you’re married, you’re not dependent upon your Social Security benefit to meet your expenses, and you aren’t sure whether to collect your Social Security benefits beginning at your FRA or delay your start date to a later age up to age 70, the amount of your spouse’s benefit in the event of your death should be an important consideration. Per the November 15, 2010 Wait Until 70 to Collect Social Security? post, if you were born in 1943 or later, you will receive an 8% increase for each year that you delay your start date after your FRA, up to approximately 32% if you wait until age 70.

As an example, per the November 15th post, my annual projected benefit would be $39,384 at age 70, or $9,684 greater than my projected FRA benefit of $29,700. Assuming that my wife’s benefit based on her earnings record is projected to be less than my benefit, and assuming that we’re not dependent upon my Social Security benefit to meet our expenses, it would make sense for me to delay the start date of my benefit beyond my FRA in order to increase my spouse’s widows benefit in the event that I die before her. Maximization of my wife’s widows benefit would be in addition to potentially maximizing my cumulative Social Security benefits during my lifetime depending upon how long I live.

If you’re married, always remember when choosing a Social Security start date that, in addition to determining the amount of your benefit, you may also be determining your spouse’s Social Security benefit amount fate in the event that you predecease your spouse, you were married for at least ten years, and the amount of your spouse’s benefit based on his/her earnings record is less than your benefit.

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Social Security

Working? Remember Your Social Security Spousal Benefit When Your Spouse Retires – Part 2 of 2

Retirement Income Center

Last week’s post introduced the “double dipping” strategy. It’s designed for married couples who are both eligible to receive retirement benefits, with one spouse retired and the other spouse still working. At Full Retirement Age (“FRA”)*, the retired spouse collects his/her benefit and the working spouse collects a “spousal benefit” equal to 50/% of the retired spouse’s benefit.

Although eligible to receive a retirement benefit based on his/her work record which could be significantly greater than his/her spousal benefit, the working spouse’s benefit will continue to grow by choosing instead to receive a spousal benefit. The growth could be as much as 32% if he/she works until age 70 compared to the benefit he/she would have received had he/she chosen instead to retire at FRA.

As stated at the conclusion of last week’s post, while a couple who receives a spousal benefit for the working spouse in addition to the retired spouse’s benefit is better off than a couple who is unaware of this strategy and simply receives the retired spouse’s benefit, the “double dipping” strategy isn’t without risk. Let’s take a look at an example to illustrate this.

Let’s assume a same-age married couple where both spouses are eligible to receive a monthly benefit of $2,475 beginning at age 66 and 2 months (FRA) based on each spouse’s respective work record. Per Exhibit 1, let’s further assume that Spouse A retires at FRA and Spouse B continues to work, collecting a spousal benefit equal to 50% of Spouse A’s benefit beginning at FRA. At age 70, Spouse B retires, discontinues his/her spousal benefit, and begins collecting a retirement benefit based on his/her work record. Finally, let’s assume that benefits increase by an annual inflation rate of 2%.

Per Exhibit 1, Spouse’s A’s annual benefit is $24,750 at age 66 and 2 months and Spouse B’s annual benefit is 50% of this amount, or $12,375. With assumed annual benefit increases of 2%, Spouse A’s annual benefit is $31,518 at age 69 and Spouse B’s annual benefit is 50% of this amount, or $15,759. At age 70 when Spouse B retires, discontinues his/her spousal benefit, and instead begins collecting a retirement benefit based on his/her work record, Spouse B’s annual benefit jumps to $43,737.

Had Spouse B not employed the “double dipping” strategy, and instead began collecting his/her benefit beginning at age 66 and 2 months, Spouse B’s benefit at age 70 would have been identical to Spouse A’s benefit – $32,148. This amount is $11,589 less than Spouse B’s benefit of $43,737 received. The increased benefit is attributable to postponing collecting his/her benefit based on his/her retirement record from age 66 and 2 months to age 70 due to annual delayed retirement credits of 8%, or a total of 32% (8% x 4 years). Furthermore, per Exhibit 1, Spouse B collected spousal benefits totaling $58,731 from age 66 and 2 months until age 70.

Although Spouse B receives a much greater benefit beginning at age 70 by employing the “double dipping” strategy, Spouse B has also forfeited the opportunity to collect double the benefit he/she would have received from age 66 and 2 months until age 70 had Spouse B simply applied for a benefit based on his/her work record instead of receiving a spousal benefit. This is illustrated in Exhibit 2.

Let’s jump to Exhibit 3 which shows a comparison of cumulative benefits assuming both spouses begin collecting a benefit based on each spouse’s respective work record (left three orange columns) vs. Spouse B initially collecting a spousal benefit which he/she discontinues at age 70 at which time he/she begins collecting a benefit based on his/her work record (right three yellow columns). Per Exhibit 3, it isn’t until age 74 that the “double dipping” strategy starts paying off. Prior to age 74, the couple’s cumulative projected benefits were greater when both spouses collected their retirement benefits based on their respective work records. Had Spouse B died before age 74, the couple would have been better off without the “double dipping” strategy. Assuming survival of Spouse B beyond age 73, the couple’s cumulative projected benefits using the “double dipping” strategy begin to exceed their benefits without use of this strategy.

What’s best for you? As with all Social Security strategies, you need to prepare an analysis using facts about your projected Social Security benefits and other assumptions that make sense to you. Furthermore, as will be discussed next week, taxation of Social Security benefits must also be considered before deciding upon a particular strategy.

 

* Full Retirement Age (“FRA”), otherwise known as normal retirement age, is the age at which one is entitled to receive 100% of his/her Social Security retirement benefit. It varies from age 65 to age 67 and is dependent upon the year of birth. The FRA for individuals born in 1937 or earlier is 65 while the FRA for those born in 1960 and later is 67.

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Social Security

Working? Remember Your Social Security Spousal Benefit When Your Spouse Retires – Part 1 of 2

Retirement Income Center

This post discusses yet another relatively unknown strategy for maximizing Social Security benefits. It’s often referred to as the “double dipping” Social Security strategy. Like the “file and suspend” strategy that was the subject of the previous two posts, this strategy is designed for married couples with both individuals eligible to receive retirement benefits, preferably both at their respective Full Retirement Age (“FRA”), i.e., age 65 to 67 depending upon year of birth.

Unlike the “file and suspend” strategy where both spouses are retired and the older spouse is the breadwinner, with the “double dipping” strategy, one spouse is retired and the other spouse continues working. In addition, even though the working spouse is eligible to receive Social Security retirement income based on his/her work record, he/she doesn’t do this. As a result, the working spouse’s benefit will continue to grow by as much as 32% if he/she works until age 70 compared to the benefit he/she would have received if he/she had chosen instead to retire at FRA.

Just because the working spouse has made a decision not to collect Social Security benefits based on his/her work record doesn’t mean that he/she isn’t entitled to receive any benefits. As a result of one spouse retiring, the working spouse, in addition to his/her employment income, is now eligible to receive another source of income. This additional income is known as a “spousal benefit.”

As a spouse, you qualify to receive a monthly payment equal to 50% of your spouse’s Social Security benefit – whether or not you’re retired. When the working spouse completes his/her application for Social Security benefits, he/she must clearly state on his/her application that it’s for a spousal benefit, otherwise Social Security Administration will begin paying the applicant’s benefit if it’s greater than his/her spousal benefit.

While a couple who receives a spousal benefit for the working spouse in addition to the retired spouse’s benefit is better off than a couple who is unaware of this strategy and simply receives the retired spouse’s benefit, the “double dipping” strategy isn’t without risk. Part 2 of Leverage Your Spousal Social Security Benefit will address this topic next week.

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Social Security

Breadwinner Approaching Social Security Retirement Age? – File and Suspend – Part 2 of 2

Retirement Income Center

Last week’s blog post introduced the “file and suspend” Social Security strategy. By implementing this strategy, a couple with a breadwinner can start a spousal benefit and suspend the breadwinner’s retirement benefits, increasing the latter’s benefits by as much as 32%, depending upon when it’s restarted. “File and suspend” is typically done when the breadwinner has reached full retirement age (“FRA”) and the younger spouse is at least age 62.

As pointed out at the end of last week’s post, the “file and suspend” strategy is a viable solution for maximizing a married couple’s Social Security benefits, however, it’s not without risk. Specifically, a potential downside of using this strategy is (1) premature death of the breadwinner or (2) the couple’s premature death between age 70 and “breakeven.”

Breadwinner’s Premature Death

If the breadwinner dies between FRA, assuming this is when the strategy is implemented, and age 70, the couple will have forfeited receipt of the breadwinner’s Social Security benefits that he/she could have been receiving beginning at FRA through date of death. By doing this, the couple would have to use other resources, e.g., salary, IRA accounts, etc., to meet their financial needs.

Let’s take a look at an example. Per Exhibit 1, assuming a monthly benefit of $2,475 for the breadwinner beginning at age 66 and 2 months and annual 2% increases, there would be a cumulative loss of benefits of $117,462 for the breadwinner assuming death at age 70. This loss of benefits, however, could be offset by an increase in the surviving spouse’s benefit assuming that the breadwinner filed and suspended at age 66 and 2 months. This is due to the fact that a surviving spouse is entitled to receive the larger of his/her benefit or his/her deceased spouse’s benefit.

Per Exhibit 1, at age 70, the breadwinner’s projected annual benefit is $32,148 and the spouse’s benefit is $16,074. Assuming death of the breadwinner at age 70, the surviving spouse would be entitled to receive the larger benefit, or $32,148. Let’s further assume that the breadwinner filed and suspended at age 66 and 2 months with the goal of resuming his/her benefit beginning at age 70, however, he/she dies on his/her 70th birthday. Per Exhibit 2, the breadwinner’s annual benefit is projected to be $42,631 at age 70, or $10,483 greater than what his/her benefit would have been had the breadwinner not filed and suspended. The surviving spouse in this case would be entitled to receive $42,631 instead of $32,148. With an increased benefit of $10,483 plus annual 2% increases, it would take approximately 11 years for the surviving spouse to overcome the cumulative loss of benefits of $117,462 that the breadwinner could have received between age 66 and 2 months and age 70 had he/she not chosen to “file and suspend.”

Couple’s Premature Death Between Age 70 and “Breakeven.”

Let’s assume that our breadwinner and spouse are both healthy and the breadwinner doesn’t die before age 70. Is the use of the “file and suspend” strategy without risk? Absolutely not. Let’s also combine our couple’s cumulative projected Social Security benefits from Exhibit 1 and 2 into one spreadsheet – Exhibit 3. The three columns in orange on the left-hand side represent the cumulative results per Exhibit 1, i.e., breadwinner beginning receipt of benefits at age 66 and 2 months. The three columns in yellow on the right-hand side represent the cumulative results per Exhibit 2, i.e., the breadwinner filing and suspending at age 66 and 2 months with recommencement of benefits beginning at age 70.

Per Exhibit 3, the couple’s cumulative Social Security benefits are projected to be greater from the breadwinner’s age 66 and 2 months through age 79 assuming survival of both individuals. It isn’t until sometime during the breadwinner’s age 80 that “breakeven” occurs when the cumulative benefits using the “file and suspend” strategy are projected to exceed those without use of this strategy. Assuming survival of the breadwinner and spouse, the difference in benefits is projected to become more significant each year thereafter. What starts out as a projected difference of $10,094 ($773,091 – $762,997) at age 80 grows to $77,920 ($1,152,943 – $1,075,023) at age 85 and $152,806 ($1,572,331 – $1,419,525) at age 90.

In summary, while the “file and suspend” strategy can potentially maximize a married couple’s Social Security benefits, its success is dependent upon longevity of the breadwinner and spouse. To the extent that the breadwinner or the couple die prematurely, commencement of receipt of retirement benefits beginning at the breadwinner’s full retirement age (“FRA”) would generally be more beneficial, depending upon assumptions used.

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Social Security

Breadwinner Approaching Social Security Retirement Age? – File and Suspend – Part 1 of 2

Retirement Income Center

If you’ve been reading the Social Security retirement income strategy series that began on September 27th, you know that there are several options regarding commencement of receipt of Social Security benefits. You can begin receiving a reduced benefit as early as age 62, a standard benefit at full retirement age (“FRA”) which can vary from 65 to 67 depending upon your year of birth, or wait until 70 at which time your benefit will be 32% greater than the amount you would receive at FRA.

As a spouse, you can either claim a benefit based on your earnings record, or, alternatively, you can collect a spousal benefit equal to 50% of your spouse’s Social Security benefit. Although you can start receiving Social Security survivors benefits at age 60, you must be age 62 to qualify to receive a spousal benefit.

There’s another unpublicized Social Security strategy for potential maximization of Social Security Benefits called “file and suspend.” Candidates for implementing this strategy are typically in the following situation:

  • Married.
  • Older spouse is the breadwinner.
  • Spousal benefit will be greater than what would be received under the spouse’s work record.
  • Older spouse is in good health.
  • Couple has other sources of income, e.g., older spouse is still working, IRA account(s) is (are) available, etc.
  • There is no immediate need for additional income.
  • Older spouse is at least 62, preferably FRA.
  • Younger spouse is at least 62.

By employing this strategy, a couple can start the spousal benefit while enabling the breadwinner to increase his/her FRA benefit by 32%. Here’s how it works. Beginning as early as age 62, and preferably at FRA, i.e., age 65 to 67 depending upon year of birth, the breadwinner files for his/her benefits and his/her spouse files for spousal benefits. The breadwinner immediately requests a suspension of his/her benefits and his/her spouse continues collecting a spousal benefit.

Assuming that the breadwinner is at FRA, his/her benefit will increase 5.5% – 8% each year, depending upon year of birth, until age 70. If the breadwinner dies, his/her spouse will collect a larger benefit equal to what the breadwinner would have collected based on his/her age at his/her time of death.

To the extent that a couple is employing the “file and suspend” strategy and is also taking distributions from an IRA account that wouldn’t otherwise be taken until age 70-1/2, the distributions will reduce the required minimum distributions (“RMD’s”) that would otherwise need to be taken beginning at age 70-1/2. Even though his/her Social Security benefits will be greater when he/she finally begins receiving them at age 70, this strategy can potentially reduce the amount of the breadwinner’s taxable Social Security benefits.

The “file and suspend” strategy is a viable solution for maximizing a married couple’s Social Security benefits, however, it’s not without risk. Stay tuned for Part 2 next week to learn about why this strategy may fall short of accomplishing its goal of maximizing a married couple’s Social Security benefits.

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Social Security

Pay-to-Play Social Security – Part 1 of 3

Retirement Income Center

Did you read last week’s blog post, Wait Until 70 to Collect Social Security?, learn that you can increase your Social Security retirement benefits by 4.5% to 8% per year for each year between your full retirement age (“FRA”) and age 70 depending upon when you were born if you delay the start date from your FRA until age 70 and say to yourself, “That sounds great, however, I’m 69, I’ve been receiving Social Security since I was 62, so that doesn’t apply to me.”? Well, not true, at least for the time being.

Using a little-publicized strategy that may be discontinued by Social Security Administration (SSA) in the near future, you can delay your Social Security start date to age 70 to obtain a higher monthly payment even though you’re already collecting benefits. Although the popular name for this strategy is a “do-over,” I like to refer to it as “pay-to-play” Social Security.

Here’s how it works. Let’s say you’re 69 and you’ve been collecting Social Security since turning 62. In order to receive a larger benefit beginning at age 70, you’re required to pay back 100% of the Social Security benefits that you’ve received from the date you began collecting your benefits. The payback is without any interest or penalties. Furthermore, to the extent that you’ve paid income tax on your Social Security benefits, you’re entitled to claim a tax credit or tax deduction for the amount of tax liability attributable to your benefits, whichever results in the most tax savings.

In order to take advantage of this strategy, you must file SSA Form 521 – Request for Withdrawal of Application at your local Social Security office. Once you do this, your retirement benefits will stop almost immediately. If your spouse is receiving a spousal benefit (See Do Your Homework Before Flipping the Social Security Switch – Part 4 of 5), his or her benefits will also stop. You will then receive a letter from SSA with the amount of your required benefit repayment, including any spousal benefits. Once you repay your benefits, you can then reapply for a higher monthly payment for you, as well as your spouse if he/she was receiving a spousal benefit, based on your current age. There will be a delay of up to several months between the date your benefits stop and they resume during which time you will be responsible for paying Medicare Part B premiums yourself.

Depending upon your tax situation in the payback year, part of the funds that you will be able to use for your payback can come from the tax savings attributable to your payback. Let’s assume this is your situation. Why would you withdraw a sizeable lump sum from existing investments in excess of the tax savings when (a) the withdrawal, assuming it isn’t from a bank account or money market fund, will be taxable, either 100% as ordinary income assuming it is coming from a taxable retirement plan, e.g., an IRA, or at capital gains rates if from a nonretirement account, (b) you will lose future income and/or appreciation on the amount of your withdrawal, and (c) you could die soon after paying back your cumulative Social Security benefits, thereby potentially negating the benefit of an increased Social Security payment?

The answer to part (a) of this question is that if you don’t have funds readily available in a bank account, money market fund, or other liquid assets, and you must instead incur a sizeable tax liability that will significantly deplete your investment portfolio, you’re probably not a good candidate for the “pay-to-play” Social Security strategy. Assuming instead that you have liquid funds readily available, then the answer to parts (b) and (c) comes down to investment alternatives. Should you use your hard-earned money to invest in a larger future Social Security benefit or are you better off investing in an alternative income-paying investment? Parts 2 and 3 will help answer this question, with the latter providing you with an illustration.