Financial Literacy Day

Financial Education Day at Pace University

The Financial Planning Association of the Greater Hudson Valley is co-sponsoring a Financial Literacy Day at Pace University on November 17. This is a free event with 15 workshops on important personal finance topics and a keynote appearance by Willie Geist of MSNBC's Morning Joe and Kiran Chetry of CNN. I will be speaking on Social Security strategies and participating in a panel discussion on planning a comfortable retirement.http://appsrv.pace.edu/pclc/fed/workshops---seminars.html#sessionone

Easy and Simple?

The “Simple” Social Security Formula

I was excited to read that Prof. Laurence Kotlikoff had put together a simple formula for deciding when to claim Social Security retirement benefits. Prof. Kotlikoff is one of the country’s top experts on consumer finance and I thought he had found the Holy Grail for one of the most difficult problems in retirement planning. It was disappointing to finally see his “simple formula.” After making some simplifying assumptions, he boils his formula down to 9 variables.

               B(a) = PIA(a) x (1 – e(n)) x (1 + d(n)) x Z(a) + max((.5 x PIA*(a) – PIA(a) x (1+d(n))) x E(a), 0) x (1- u(a,q,n,m)) x D(a)

Here’s the link to the complete article in a recent edition of Forbes Magazine:

http://www.forbes.com/sites/kotlikoff/2012/07/17/when-should-i-take-social-security-a-simple-formula/

http://www.forbes.com/sites/kotlikoff/2012/07/17/when-should-i-take-social-security-a-simple-formula/ 

Frequently I run across people who think that personal finance is easy and simple and that reading a few magazines or newsletters and catching an occasional cable television show on the markets will give them all the information they need. I don’t claim to have all the answers but if you’d like to tackle that formula together, give me a call.

Maximizing Your Benefits

Social Security Seminar

I am speaking at the Ossining Library on Jan. 5, 2012. Social Security benefits are the bedrock of retirement for most Americans and I find that there are many misconceptions about Social Security. Understanding the basics of Social Security retirement benefits can make a big difference in the later years of retirement.

Saving Social Security

Social Security is for Real

Lately Social Security has been pilloried in the news. For years people have said it’s bankrupt and won’t be there when the Baby Boomers retire. I believe that nothing could be further from the truth. Each year Social Security pays out hundreds of billions of dollars in retirement benefits. According to the Social Security Administration, even without changes, it will be able to pay out 75 percent of retirement benefits for generations.  Inevitably there will be changes but changes are phased in gradually. The last major revamping of the program began under the Greenspan commission in 1983 and their changes will be fully implemented by 2017 --- some 44 years later. As people live longer, the full retirement age will likely be pushed up a few years although there will still be early retirement options. The wages subject to Social Security taxes likely will rise and the way inflation is calculated may change. These changes amount to small cuts in benefits but are intended to preserve the program much as we know it now. Social Security is completely integrated into the fabric of American life and will probably outlive us all. Anyone planning their retirement would be foolish not to incorporate Social Security into their thinking.

Social Security Earnings

Never Too Old

 

Many people continue to work and get paid past their normal retirement age. No matter how young or old people are, Social Security adds those earnings to their lifetime earnings record. In turn, this 35-year earnings record is used in determining their retirement benefits. If one has worked for less than 35 years, zeros are added into the formula for years not worked. If one has worked more than 35 years, the lower earning years (adjusted for inflation) are dropped from the formula. A surprisingly large number of people are affected by this and should review their benefits. We know of child singers and teenage actors who have substantial earnings. We also have met many people in their 70s or 80s who continue to work and are well paid. Some women initially retired with a spousal benefit but continued to work. At some point, the woman’s own benefit could eclipse the spousal benefit, which is at most half as large as the primary wage earners’. In the case of a divorcee, it may be a little difficult to check, but it may be worth doing. With the help of the Social Security administration, a review of your benefits is always available.

Rule Change

 No More Social Security "Do Over' Rule

The Social Security Administration has ended the “do-over” provision. 

The rule enabled people whose circumstances had changed -- they found a new job or inherited money -- to stop receiving their Social Security retirement benefits.  In return, they would receive higher monthly checks when they did retire.

The do-over required repaying benefits in a lump sum with no penalty or interest. In extreme cases, delaying benefits from the early retirement age of 62 to 70, the retiree’s monthly check would be twice as large counting inflation adjustments. Over a lifetime the difference could total hundreds of thousands of dollars if the retiree and spouse live into their 80s.

Only a tiny fraction of the 50 million Social Security recipients used the do-over clause. But there were   rising concerns of potential abuse of the rule. The financial press had emphasized the possibility of an “interest-free loan.” 

The rule change highlights the importance of carefully analyzing Social Security options before signing up for benefits. For nearly two-thirds of Americans, Social Security is their largest or second largest asset in retirement. Getting it right can make the difference in the financial security they enjoy in retirement.

Social Security Rule Change

Do-Over is Done

The Social Security Administration last week ended the “do-over” provision. The do-over rule enabled people whose circumstances had changed -- maybe they found a new job, inherited some money unexpectedly or had a change of heart --  to pay back the benefits they had received and to delay receiving additional Social Security retirement benefits.  By doing so, they would receive much higher monthly checks when they did choose to retire.

The do-over involved repayment of the benefits received in a lump sum with no penalty or interest. In return, the recipient would receive the higher monthly benefits in the future. In extreme cases, by delaying receiving benefits from the early retirement age of 62 to age 70, the retiree could get a check twice as large counting cost of living adjustments. The total difference over a lifetime could amount to hundreds of thousands of dollars if the retiree and spouse live well into their 80s or 90s.

Only a fraction of the 50 million Social Security recipients were taking advantage of the do-over clause. The change in the rule was made after concerns were raised that it could be abused. The provision started receiving publicity in the financial press as an “interest-free loan.” The intention of the provision was not to provide people with interest-free loans, and therefore the SSA acted.

Only about 500 people a year were taking advantage of the rule and most were using it to adapt to their new circumstances. There was potential for abuse by people speculating with the money but that had yet to occur. Often overlooked by the press and commentators was that after taking taxes and  the administrative hassles into account, the interest-free loan generally wouldn’t have appealed to speculators.

The rule change, while it did not affect many people, highlights the importance of carefully analyzing one’s Social Security options before signing up for benefits. For nearly two-thirds of Americans, Social Security is the largest or second biggest asset in retirement and getting it right can make the difference in whether they’ll have a comfortable retirement.

Unlike some of the proposals to make big changes in Social Security retirement benefits, this rule change doesn’t require Congressional action. It is a rule that has been published in the Federal Register and as such it is effective immediately. But there is a sixty day comment period and the Social Security Administration could amend the rule afterwards.

Generally, changes to Social Security retirement benefits have taken place over a long time. From its inception in 1935, the full retirement age was 65. It has been increased to 66 now and is climbing gradually to 67 by 2027. This adjustment has been phased in gradually since the last big reform of Social Security in 1983.

A recent proposal to increase the full retirement age to 69 would not take effect until 2075 – in other words for today’s four year olds. Early retirement today starts at age 62 but with lower benefits than one would receive at full retirement age.

A common concern is that Social Security is facing insolvency. However, the trustees of the Social Security Administration report that they will be able to meet all obligations for several decades without any changes to the current benefit structure or funding and they expect Social Security to be secure long into the future.

http://blogs.forbes.com/janetnovack/2010/12/08/social-security-administration-kills-do-over-to-boost-benefits/

New Social Security Proposal

 Reform of Social Security Considered

The President's commission reported preliminary recommendations for reform of Social Security. They call for ensuring the solvency of Social Security for the next 75 years and could be the basis for action over the next few years. By the end of that period, the age for full retirement would be 69 and there would be other changes including adding benefits for the lowest paid workers. There would also be adjustments to the calculations for cost of living adjustments.http://www.nytimes.com/2010/11/11/us/politics/11fiscal.html?_r=1&hp

Maximizing Benefits

Taking Social Security Seriously
 

For almost two-thirds of Americans, Social Security is more than half of their income in retirement. For most of the rest, it is an important part of their retirement spending. Despite the concerns we've seen reported in the press, Social Security is on a sound financial footing. With changes that we expect to happen over the next decade, the program should be around for a long time. Each year Social Security sends out $700 billion in monthly checks.

Given its importance, Social Security should be an integral part of everyone's retirement planning. Knowing the options for receiving Social Security payments and when to sign up is often complicated, especially taking into account the different ages of spouses, marital histories and other factors. We look at 13 variables in planning strategies for Social Security payments.

Getting the strategy right can make a difference of hundreds of thousands of dollars in lifetime benefits; sometimes between a comfortable retirement and concern in later years. Benefits are calculated based on a complex formula that involves a 35-year work history. Examining that record and taking corrective action years before retirement, can be important for many people.

Taking Social Security Seriously

A Key Decision for Retirement Planning

Most people who are younger than age 62 do not take Social Security seriously. For decades, the media has hammered into people that Social Security is going bankrupt and they cannot depend on it for retirement. Changes in the program will be necessary to keep it solvent but that has happened in the past and will likely happen again. The most recent major reforms occurred in 1983 and changes are needed again as life expectancies increase and major changes occur in Americans’ work habits.

Still, each year the Social Security Administration sends out more than $600 billion in benefits and nearly all Americans depend on the payments as one of their top four assets in retirement. Understanding the program is vitally important for most people.

One of the most important decisions people make about retirement is when to begin receiving Social Security benefits. And yet many people either do little analysis or only simple calculations. Delaying benefits can sometimes result in doubling monthly payments so it’s worth spending time on the decision. Many current retirees will collect more than $1 million in benefits from Social Security.

Ideally, Social Security should be part of your total retirement planning and should begin 10 to 15 years before full retirement age, now 66. Benefits are based on reported income during your top 35 working years. The formula is skewed toward average wage earners so people in their 50s can still influence benefits. In some cases people might want to take part-time jobs or even decline to use deductions and pay more taxes to maximize future benefits.

To the extent people analyze the decision, most use a simple break-even analysis that calculates when the higher payments received at a later age would surpass the smaller payments received for more years. This analysis ignores many factors and it’s potentially misleading. Frequently, people using this analysis underestimate their life expectancy. One quarter of the people who start Social Security at full retirement age will live into their 90s. A mistaken analysis will cost them dearly for decades.

The critical ages for influencing Social Security benefits are the decades of the 50s and 60s. By age 70, everything will be cast in stone. The Social Security formula is skewed toward modest earners, so people in their 50s can still greatly affect their Social Security benefits. Self employed professionals and spouses who left the workforce to raise children are among those who could benefit most from an analysis.

The analysis is complicated for one person but it is much more complicated for a couple, particularly when the ages and earnings histories diverge. Other factors to take into account are that benefits are cut between ages 62 and 66 if the person continues to work; one spouse can receive half the benefits of the other upon reaching full retirement age; and a survivor receives the highest benefits of either spouse. Social Security benefits are also taxed once the retiree reports income above a certain threshold. Those taxes now begin on couples with incomes about $32,000 and as much as 85 percent of the benefits are subject to taxation if their combined income is more than $44,000.

Each person or couple’s situation is unique but a proper analysis of when to apply for Social Security benefits should weigh at least 13 factors: age of each spouse, health, family history, joint life expectancy, previous marriages, current and future spending, retirement plans, tax bracket, reduction in benefits if they work before full retirement age, current assets, future sources of income such as pensions or inheritances, and life insurance. The Social Security website, www.socialsecurity.gov, provides a wealth of information and calculators where one can access his own earning history, but no one source of analysis takes everything into account. An accountant or financial advisor should be able to calculate different scenarios and advise on the risks and advantages of each. It is a complicated topic; long academic papers are being written on the subject.

In all cases it pays to begin taking your own benefits by 70 or spousal benefits at full retirement age. If you receive retirement benefits early, between 62 and 66 now, the benefits are permanently reduced by as much as 35 percent depending on year of birth. Between 66 and 70, your own benefits increase by 8 percent a year. Spousal benefits, which are a maximum of 50 percent of the higher earning spouse’s, cannot increase past full retirement age. However, survivor benefits do increase. Once the higher earning spouse dies, the survivor receives benefits equal to those of the higher earning spouse so it’s important to take joint life expectancies into account.

It’s not uncommon for people today to underestimate their life expectancy and outlive their assets. This is particularly important for women, who on average outlive their spouses and will end up relying on one Social Security check in their later years. Getting the best possible answers on Social Security could make a big difference in the comfort of one’s retirement.