Social Security Refresher

I like to write about Social Security around its anniversary date (President Franklin D. Roosevelt signed The Social Security Act into law on August 14, 1935). I have written a considerable amount about Social Security, some of which I used to compose this annual refresher. Social Security is a pay as you go system, which is funded by payroll taxes (the FICA line item you see on your pay stub). Every employee (and employer) pays a 6.2 percent tax on earnings up to a limit, which changes each year with changes in the national average wage index. This year, the Social Security wage base is $118,500. If you are self-employed, you have to pay as both the employer and the employee, for a total of 12.4 percent.

In 1977, Congress enacted a change in Social Security, whereby a planned 2011 rate hike became effective in 1990. As a result of the change, the government received more money from taxes than was necessary to fund the Social Security obligations, creating a surplus. According to The 2016 Annual Report of the Board of the SS Trustees, over the program's 80-year history, it has collected roughly $19 trillion and paid out $16.1 trillion, leaving asset reserves of more than $2.8 trillion at the end of 2015 for the Old-Age and Survivors and Disability Insurance trust funds.

With thousands of Baby Boomers retiring every day, the combined surpluses are now shrinking and are scheduled to be exhausted in 2034, the same year projected in last year's report. When the Trustees separate the two programs, they project the old-age fund (OASI) will be exhausted by 2035, after which it would be able to pay just 77 percent of benefits, while the disability fund (DI) is likely to be spent down in less than a decade--in 2023, at which point it could only pay out 89 percent of promised benefits.

The Trustees note that there are plenty of options available that would reduce or eliminate the long-term financing shortfalls in Social Security and Medicare. “Lawmakers should address these financial challenges as soon as possible. Taking action sooner rather than later will permit consideration of a broader range of solutions and provide more time to phase in changes so that the public has adequate time to prepare.”

Some of the options include increasing the Social Security wage base or the amount of payroll tax; means-testing benefits (tough to enforce); cutting benefits (highly unpopular); and slowly increasing full retirement age. This would likely phase in for younger Americans and it would occur over a long time horizon.

As politicians grapple with those tough choices, there is something retirees can do to help bolster their future income: wait as long as possible to claim Social Security retirement benefits. Although you can claim benefits as early as age 62, if you do so, your benefit will be permanently lower - for some as much as 25 percent less. This may not only be bad news for you, but if your spouse plans to claim one-half of your benefit, he or she also will face a lifetime of lower benefits. For those who need income, claiming early is not a choice, it is essential for monthly cash flow, but if possible it is so much better to wait.

If the system penalizes you for claiming early, it rewards you for waiting to claim benefits beyond your FRA. For every month you delay, you are entitled to Delayed Retirement Credits, which are worth 0.66 percent per month, for a total of 8 percent per year, until age 70.

#222 The Triple Crown of Financial Shows

This weekend marks the 71st anniversary of the Allied invasion of Normandy (D-Day). In the sports world, the weekend could mean the  end of thoroughbred racing's 37-year Triple Crown drought. As American Pharoah tries to reign at the Belmont Stakes, we’re tackling your financial questions. The "Jill on Money" Triple Crown means that the show aims to be fun, informative and free!

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We started with Mitch from MN, a 26-year-old engineer, who just got engaged. He and his soon-to-be wife are juggling savings, paying down student loans and retirement planning. What’s the best game plan to attack the debt? Should they refinance their mortgage to pay it off early? So many questions and we have the answers!

Jan from Alaska is 62.5 years old and wants to know if she should avoid filing for Social Security retirement benefits before her Full Retirement Age -- YES! Steve wants to minimize losses before a stock market correction occurs and Stanley from CT is wondering about rolling over his 401 (k) into an IRA.

It was a delight to have guest Eleanor Blayney, the CFP Board of Standards’ Consumer Advocate join the show to discuss inheritance disputes. As Eleanor says, fights over estates “are not just a problem for the rich and famous, or for blended families.” Find out who has a right to contest a will and the ways that families can take proactive steps to avoid these messy post-mortem dustups. You can read Eleanor’s great post about the topic here.

Thanks to everyone who participated this week, especially Mark, the Best Producer in the World. Here's how to contact us:

• Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

• Send an email: askjill@jillonmoney.com 

• Tweet us: @jillonmoney and @MTalercio

Social Security Q&A

After providing an update to the finances of the Social Security system (“Social Security: Broken, but not Broke"), I received lots of e-mail questions.  Considering that a total of 59 million Americans will receive some form of Social Security benefits in 2014, with payouts estimated at $863 billion, it's amazing how confusing the system can be. Many of you noted that workers at Social Security offices are often not very helpful. Before you complain about these folks, remember that efforts to reduce government spending have hit the agency hard, as its workforce has shrunk by 12 percent. That means longer waits at field offices, busy signals or long wait times on the customer assistance line (800-772-1213); and if you are lucky enough to talk to a live person, you may encounter a worker who is overwhelmed by the volume of inquiries. Your best bet is to start with the web, because the SSA.gov website is easy to navigate and contains a lot of useful information.

I recommend that you seek personalized information before you make Social Security decisions; here are the top three SS questions that I field:

1. "Should I claim retirement benefits early?"

Every American who has accumulated 40 Social Security credits, which usually amounts to 10 years of work; and earns a certain amount of money, will qualify for Social Security retirement benefits. You can choose to receive benefits as early as age 62, though doing so will amount to a permanent reduction in monthly income. As a result, more people wait until their Full Retirement Age (FRA) before claiming. Workers who wait until age 70 will receive the highest benefit.

Delaying Social Security makes financial sense, with one caveat: You have to live long enough for the trade-off to work. In other words, if you knew when you were going to die, I could tell you when to file. If you can afford to wait, the decision on delaying is a bet on your life expectancy. If you delay retirement until after your full retirement age, you are entitled to "delayed retirement benefits," or 8 percent a year more for each full year that you delay, until age 70. Sounds like a sweet deal, but of course you are not receiving the monthly income for those years.

Here's how the numbers break down: if you live beyond 78, it makes sense to forego SS between the ages of 62 and 66; if you live beyond 82 1/2, it makes sense to delay SS until the maximum level, at age 70. You can take an educated guess based on your general health and your parents' health, or you can plug in your personal information at www.livingto100.com, which may help you get closer to a more data-driven number.

2. “It doesn’t make sense for me to work if I collect, right?”

If you claim retirement benefits early and continue to work, you will be subject to an annual "earnings test," or threshold, which for those people reaching FRA after 2014 is $15,480, and for those reaching FRA in 2014 is $41,400. Social Security withholds $1 for every $2 earned above that year's threshold, until you reach full retirement age. The ratio changes to $1 for every $3 earned during the year you reach full retirement age. However, after you reach full retirement age, Social Security will recalculate your benefit amount to leave out the months when benefits were reduced, which effectively should increase your benefits.

3. “Should I file and suspend?”

File and suspend is strategy for married couples, which allows the primary wage earner to apply for benefits, then suspend collecting, while allowing the other spouse to start collecting spousal benefits (1/2 the primary spouse’s benefit) immediately and then continuing to collect. The primary wage earner must reach full retirement age and the spouse must be at least 62 years old. The bonus is that the primary wage-earning spouse can wait to claim benefits until age 70, which increases the future individual Social Security benefit by eight percent each year between ages 66 and 70.

Here are some additional free SS resources:

SSA: http://www.ssa.gov/oact/anypia/anypia.html

AARP: http://www.aarp.org/work/social-security/social-security-benefits-calculator.html

T.Rowe Price: http://individual.troweprice.com/public/Retail/Retirement/Social-Security-Tool

When to file for Social Security Benefits

In 2013, 37 million Americans will receive Social Security (SS) retirement benefits totaling $47.4 billion. Clearly, Americans have come to rely on Social Security retirement income, with more than half of married couples and nearly three-quarters of unmarried persons receiving 50 percent or more of their total income from the program. Still, the SS system remains more complicated than you might expect. Unfortunately, there is no simple response to one of the most frequently-asked questions that I field: "When should I claim Social Security benefits?" The answer depends on your individual circumstances, but the good news is that there are a great many tools available now to help you navigate the process.

First things first: to qualify for retirement benefits, you need to have worked at least 10 years. You can check out where you stand with Social Security's easy-to-use online benefits statement at www.socialsecurity.gov/mystatement, which is what you used to receive in the mail. (For those over 60, you should still be receiving paper statements via "snail mail.") The statement shows your annual earnings history, which is actually a helpful stroll down your employment history lane.

Your statement will provide your estimated monthly SS payment at your "full" retirement age (FRA). Full retirement age varies on when you were born: if that was before 1938, your FRA is 65 years old; from 1938 to 1942, your FRA rises by two months for each additional year; between 1943 and 1954, it's 66; from 1955 to 1959, it rises 2 months per year; and from 1960 on, the age is 67. You can choose to claim benefits as early as age 62, but your benefit will be permanently lower - for some as much as 25 percent less.

This is when the decision-making comes in. When does it make sense to file early? At your full retirement age, or should you wait until the maximum benefit age of 70? There are a number of tools that can help you crunch the numbers. AARP has a free calculator, and there are a several paid calculators that may intrigue you, including MaximizeMySocialSecurity.com, SocialSecurityChoices.com and SocialSecuritySolutions.com.

Here's the general gist: delaying Social Security makes financial sense, with one caveat: You have to live long enough for the trade-off to work. In other words, if you knew when you are going to die, I could tell you when to file for SS! In essence, you make a bet on your life expectancy in deciding on when to file.

If you delay retirement until after your full retirement age, you are entitled to "delayed retirement benefits," or 8 percent a year more for each full year that you delay, until age 70. Sounds like a sweet deal, but of course you are not receiving the monthly income for those years.

Here's how the numbers break down: if you live beyond 78, it makes sense to forego SS between the ages of 62 and 66; if you live beyond 82 1/2, it makes sense to delay SS until the maximum level, at age 70. You may be wondering, "How do I know when I'm going to die?" You can take an educated guess based on your general health and your parents' health, or you can plug in your personal information at www.livingto100.com, which may help you get closer to a more data-driven number.

These mathematical acrobatics could be moot for some people who lost their jobs sooner than expected and desperately need income. If you do claim benefits early and then are lucky enough to land a job, you will be subject to an annual "earnings test," or threshold, which for those people reaching FRA after 2013 is $15,120, and for those reaching FRA in 2013 is $40,080. Social Security withholds $1 for every $2 earned above that year's threshold, until you reach full retirement age. The ratio changes to $1 for every $3 earned during the year you reach full retirement age.

It may seem complicated – and it is … it’s Social Security! – but doing your due diligence on when to claim benefits can make a huge difference in your financial comfort during your golden years.

© 2013 TRIBUNE MEDIA SERVICES, INC.

Radio Show #129: Brazil, financial advisors

Just back from a quick trip to Brazil and happy to get right back into the groove with questions from the smartest fans around!

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• Download this week's show (MP3)

Kathy from MD started asked a question about re-titling an old stock certificate. We dealt with that quickly, before moving into the thornier topic of how to convince an aging parent to draft a will.

Cheryl from NC, Anne from PA and Barb from OR each asked a question about their respective advisors. If Cheryl’s case, she needs to go back to the advisor/broker to better understand the terms of the new asset management fund. Anne needs to tell her advisor that they want to maintain a separate account with stocks that he will not manage and that the risk of her managed account may need to be adjusted to compensate for that fact. For Barb, it’s time to dump her bank-based advisor and find a fee-only (use NAPFA.org) or a fee-based advisor.

Ron from IL checked in with a question about IRS Rule 72T, which allows access to 401(k) funds before age 59 ½, without the early withdrawal penalty.

Jack from CA and is busy trying to pay down $180K in student loans, while Carl is preparing to assume new debt for college and wants to know appropriate parameters that he should use before starting the process.

Kathryn wrote in to warn against a refinancing scam that is aimed at veterans (ugh!) If any listeners encounter these types of horrible hoaxes, please let me know so we can help spread the word!

We fielded a bunch of Social Security questions from Mark, Janis, Max, Ben, Christopher, Ray, Larry and Lowell. As a reminder, the procedure to calculate benefits involves three steps.

1. A worker’s previous earnings are restated in terms of today’s wages to reflect wage growth.

2. Earnings for the highest 35 years are averaged and divided by 12 to arrive at Average Indexed Monthly Earnings (AIME).

3. The Social Security benefit formula is applied to AIME to produce the Primary Insurance Amount (PIA), the benefit payable at the Full Retirement Age (FRA).

If you have less than 35 years of earnings, you may want to work enough additional years so you have a full 35 years of earnings. Otherwise, the Social Security Administration will average in zeros for any years less than 35.

The maximum SS benefit depends on the age you retire. If you retire at your full retirement age in 2013, your maximum benefit would be $2,533.  If you retire at age 62 in 2013, your maximum benefit would be $1,923. If you retire at age 70 in 2013, your maximum benefit would be $3,350.

Tony asked how many months out of the year are required for state residence and Alan from Buffalo needed help with debt pay down options.

Dave in St Paul, MN asked about a bond fund versus a stable value fund and whether to use retirement assets to build a house.

Thanks to everyone who participated and to Mark, the BEST producer in the world and Christina the intern. If you have a financial question, there are lots of ways to contact us:

• Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

• Send an email: askjill@jillonmoney.com 

• Tweet me: @jillonmoney

When to take Social Security

In 2013, 37 million Americans will receive Social Security (SS) retirement benefits totaling $47.4 billion. Clearly, Americans have come to rely on Social Security retirement income, with more than half of married couples and nearly three-quarters of unmarried persons receiving 50 percent or more of their total income from Social Security. Still, the SS system remains more complicated than you might expect. Unfortunately, there is no simple response to one of the most frequently-asked questions that I field: "When should I claim Social Security benefits?" The answer depends on your individual circumstances, but the good news is that there are a great many tools available now to help you navigate the process.

First things first: to qualify for retirement benefits, you need to have worked at least 10 years. You can check out where you stand with Social Security's easy-to-use online benefits statement at www.socialsecurity.gov/mystatement, which is what you used to receive in the mail. (For those over 60, you should still be receiving paper statements via "snail mail.") The statement shows your annual earnings history, which is actually a helpful stroll down your employment history lane.

Your statement will provide your estimated monthly SS payment at your "full" retirement age (FRA). Full retirement age varies on when you were born: if that was before 1938, your FRA is 65 years old; from 1938 to 1942, your FRA rises by two months for each additional year; between 1943 and 1954, it's 66; from 1955 to 1959, it rises 2 months per year; and from 1960 on, the age is 67. You can choose to claim benefits as early as age 62, but your benefit will be permanently lower - for some as much as 25 percent less.

This is when the decision-making comes in. When does it make sense to file early? At your full retirement age, or should you wait until the maximum benefit age of 70? There are a number of tools that can help you crunch the numbers. AARP has a free calculator (www.aarp.org/work/social-security/social-security-benefits-calculator), and there are a several paid calculators that may intrigue you, including MaximizeMySocialSecurity.com, SocialSecurityChoices.com and SocialSecuritySolutions.com.

Here's the general gist: delaying Social Security makes financial sense, with one caveat: You have to live long enough for the trade-off to work. In other words, if you knew when you are going to die, I could tell you when to file for SS! In essence, you make a bet on your life expectancy in deciding on when to file.

If you delay retirement until after your full retirement age, you are entitled to "delayed retirement benefits," or 8 percent a year more for each full year that you delay, until age 70. Sounds like a sweet deal, but of course you are not receiving the monthly income for those years.

Here's how the numbers break down: if you live beyond 78, it makes sense to forego SS between the ages of 62 and 66; if you live beyond 82 1/2, it makes sense to delay SS until the maximum level, at age 70. You may be wondering, "How do I know when I'm going to die?" You can take an educated guess based on your general health and your parents' health, or you can plug in your personal information at www.livingto100.com, which may help you get closer to a more data-driven number.

These mathematical acrobatics could be moot for some people who lost their jobs sooner than expected and desperately need income. If you do claim benefits early and then are lucky enough to land a job, you will be subject to an annual "earnings test," or threshold, which is $15,120 in 2013. Social Security withholds $1 for every $2 earned above that year's threshold, until you reach full retirement age. The ratio changes to $1 for every $3 earned during the year you reach full retirement age.