#181 Social Security, Beautiful Portfolios

We're just at the end of "National My Social Security Week," a perfect time to field your Social Security 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!

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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.

Here is more information about Social Security:

• Social Security: Broken, But Not Broke
• Social Security Q&A
• Social Security Administration Web site
• AARP
• T.Rowe Price

We also discussed "Beautiful" investment portfolios, which loosely defined means: easy, cheap and effective. For Jill in Florida, here are a few ideas:

BEAUTIFUL INDEX FUND PORTFOLIO

• 40% Bond Fund (Vanguard's Intermediate Term Bond Index fund (VFICX), Vanguard Short-Term Investment Grade fund (VFSTX), Vanguard Total Bond Market Index Fund (VBMFX),Schwab Total Bond Market (SWLBX),Fidelity U.S. Bond Index (FBIDX)
• 50% Total Stock Market Index Fund (Fidelity Spartan Total Market Index, Schwab 1000 Index Fund Investor or Vanguard Total Stock Market Index)
• 10% Int’l Stock Fund (Fidelity Spartan Int’l Index (FSIIX), Vanguard Total Int’l Stock Index (VGTSX)

BEAUTIFUL ETF PORTFOLIO

• 50% Vanguard Total Stock Market ETF (VTI)
• 20% Vanguard FTSE All-World Ex-U.S. ETF (VEU)
• 30% Vanguard Total Bond Market ETF (BND)

BEAUTIFUL ETF PORTFOLIO (>$500K)

• 10% Vanguard Total Stock Market ETF (VTI)
• 10% Vanguard Small-Cap ETF (VB)
• 15% Vanguard Dividend Appreciation ETF (VIG)
• 15% Vanguard FTSE All-World Ex-U.S. ETF (VEU)
• 5% Vanguard Emerging Mkts ETF (VWO)
• 30% Vanguard Total Bond Market ETF (BND)
• 5% SPDR DB International Government Inflation Protected Bond ETF (WIP)
• 5% Wisdom Tree Dreyfus Commodity Currency (CCX)
• 5% Gold (IAU OR GLD)

All of the sudden, Mark and I have become the arbiters of how much to spend on an engagement ring, which is funny, since neither of us has ever purchased one!

Thanks to everyone who participated and to Mark, the BEST producer in the world. Check out Mark's first-producing credit for this CBS Evening News segment that aired recently. 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 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 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.