Category Archives: Retirement Planning

Ideas to help preserve and grow your money

How to run out of life before you run out of money

Today’s Thoughts About Retirement: Though it can be argued that money is the root of all evil, it can also be argued that it is essential for peace of mind. The challenge for all of us is to pay our bills in a timely manner and not create burdens for our survivors.

I think of retirement as having three phases, each of which carries a different demand for money. They are the Go-Go years, the Slow-Go years and the No-Go years. Few of us are in a hurry to reach the end. In the meantime, we need funds from somewhere to sustain us.

These thoughts from Jason Butler are informative.

by Jason Butler, September 6, 2018

Early in my career as a financial adviser I met a new client who was approaching retirement. I asked what he was trying to achieve with his money during his retirement. He responded: “I want to live the life of Riley and when I die, for the cheque to the undertaker to bounce.”

That statement has stayed with me because it was so simple in principle, but rather more difficult to apply in practice.

Having the freedom to retire is something many people dream of. But for many, having enough money to enjoy that freedom, which might last 30 or 40 years, is becoming a challenge.

A guaranteed private pension income is becoming as rare as a pregnant panda. Increasingly, and since “pension freedoms” relaxed the UK rules regarding annuity purchases in 2015, people need to fund the bulk of their retirement spending from invested capital.

In retirement, you face several unknowns. How long will you live? Will you suffer poor health? What other life events might happen? What investment returns will markets deliver? And what taxes will you suffer?

Know the true cost of living in retirement
You need to be clear on the cost of your desired lifestyle in retirement, split between core living, a contingency fund for unexpected expenses, spending on fun and luxuries and any gifts or financial support you want to give others in your lifetime.

Understanding what spending you’re prepared to reduce or stop in the event of a stock market meltdown or persistently low investment returns is your first line of defence against running out of money.

A sustainable withdrawal rate
If you draw down too much income from your portfolio each year, you’ll greatly increase the chances of running out of money. On the other hand, draw too little and you might not enjoy life as much — and may end up leaving a much bigger legacy than you envisaged. Failing to plan ahead raises the possibility that the tax authorities will be one of your significant heirs in the form of inheritance tax.

A rough rule of thumb from the US is that an investment portfolio allocated equally to shares and bonds could sustain, for 30 years, an annual withdrawal rate starting at 4 per cent of the initial portfolio value, increased each year by the amount of inflation.

More recent research by Morningstar suggests the comparable starting annual withdrawal rate for UK investors is nearer to 3 per cent (increasing by inflation) to account for lower historic capital market returns outside of the US.

An alternative approach is to take only a fixed percentage of the portfolio each year. This reduces the possibility of running out of money, but is likely to see annual withdrawals fluctuating significantly as the portfolio moves up and down in value.

A sensible investment strategy

How you invest your portfolio can also determine the sustainability of annual withdrawals. Invest too conservatively for the withdrawal strategy and you’ll run out of money. Invest too aggressively — particularly in the first 10 years of withdrawals if the portfolio suffers poor returns — and you’ll also increase the chance of running out of money. This is known as sequence of return risk.

Conventional wisdom suggests that as you approach retirement, you should move more of your portfolio out of equities and into bonds as a retired worker can’t replace any capital lost from a stock market crash or prolonged period of poor returns. However, more recent research from the US suggests that while gradually reducing equity exposure in the 10 years leading to retirement makes sense, the optimal withdrawal strategy is where the portfolio’s exposure to equities is gradually increased in the first 10 years after retirement. This approach is known as the V- or U- shaped equity glide path.

Researchers have found that the optimal approach is to reduce exposure to equities to between 20 to 40 per cent of the portfolio by the time of retirement, and then gradually increase exposure to equities over the first 10 years of retirement to somewhere between 60 to 80 per cent.

To find the right approach for your own circumstances, you might find it helpful to discuss some of these strategies with an independent adviser.

And while the undertaker might not take kindly to the cheque for your funeral bouncing, if you devise a sensible portfolio withdrawal strategy in retirement, the day of financial reckoning will be a long time coming.

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What Is Missing From Most Retirement Advice

Tony’s thoughts about this: For those of you who have not yet ‘retired’, know that it will be dramatically different from your ‘before retired’ years. Planning for those years, if you expect to enjoy life and consider your retirement a success, is essential.

My days as an active, looking for new clients financial person are on the wane. But my interest in taking care of existing clients and finding ways to help others have not diminished. To that end I offer you these useful comments from Kevin Brock.

Kevin Bock, Impact Partners, July 5, 2018

After nearly 30 years in retirement and legacy planning, I’ve noticed some common threads that could devastate many retirement plans! Most people don’t know where to turn or what to expect as they get closer to retirement, and they may think that they have everything taken care of … Wrong!

Before we proceed, here are some thoughts on the two main professionals who many people think have everything taken care of for them.

If you’ve met with your lawyer and think you have everything taken care of, ask yourself: Are they licensed to give financial/insurance advice? Most aren’t. Do they have a working knowledge of taxes and how to minimize or potentially avoid them? Is their main source of income from retirement and estate planning (not administration), or do they do other things and use wills and estates as just a sideline?

If you’ve been working with an investment advisor, have they coordinated a plan that covers income planning, asset planning, tax planning, health care planning, legacy planning, and legal planning? I believe these are the 6 most important parts of proper retirement and estate planing!

Now: Do you still think everything is taken care of?

As we mature and become retirees, things change. Our needs change; our wants and desires change; our goals change … and our retirement and estate plans need to change to meet these new needs, wants, desires, goals, and concerns!

As we age, we may need others to help us occasionally. We may eventually need help with daily living activities, like eating, bathing, dressing, toileting, transferring, and maintaining continence. Some other considerations may be the need for mental support or companionship, transportation, meal preparation, managing household needs (cleaning, laundry, trash, yard maintenance, etc.), help with medication, finances, and more!

Does your lawyer or advisor have a depth of knowledge in these areas, and can they direct you to quality resources that can help with in-home care, personal care homes, or assisted living placement when staying at home is no longer an option?

So, do you really have everything taken care of?

A good retirement and estate plan should cover most, if not all, of the above areas. You should have a good way to access these resources when needed.

Another area that may be important is protecting your assets from creditors, family members, catastrophic medical expenses, and taxes. For example, did you know that probate and inheritance taxes are optional and can often be reduced or eliminated with proper planning?

So far, is everything taken care of?

Have you ever known someone who was left with a mess when their loved one passed? Their estate may have been substantially reduced by fees and taxes, and the confusion may have taken years to clear up because the family contested a will. The family split up because of arguments, many times because things aren’t spelled out in detail in the last wishes. Most parents don’t want strife after they pass, but fighting and arguing is not a rarity! Simple planning gets simple results. Effective planning gets effective results.

Did you know that when some people die, their estates can become public knowledge at the courthouse? In my experience, I have seen salespeople go to the courthouse to find out who got what, get their personal information, and call them to sell them windows, siding, doors, or whatever else. If you have a will, it will most likely direct your estate into probate, be delayed, and become public knowledge.

Did you know that, with proper planning and beneficiary designations, you could keep your estate private? With proper planning, it can be distributed in a few weeks or months instead of 1-2 years or more!

So, how do you find a professional who can handle most or all of your future needs? It can be difficult. People want more of their needs handled under one roof or with one professional who is knowledgeable about what is available in the categories I mentioned above.

When you are searching for a professional to help you with your retirement journey, ask them how much experience they have with income planning and guaranteed income you cannot outlive, asset planning, tax reduction planning, health care planning, legacy planning, and legal planning. Find a professional with a depth of knowledge in as many of these areas as possible. They don’t have to be a CPA or an attorney, and you may need to include these qualified advisors in your plan. If your main advisor has a working knowledge in all of the above areas, you can potentially reduce holes, gaps, and problems that can derail your wants, needs, goals, and desires in retirement.

In nearly 30 years, we rarely have had someone come into our office who truly had everything taken care of. There is no perfect plan, but there are effective plans that can reduce surprises in the future!

This Is Why People Flunk Retirement

My Comments: Few of us realize as we pass through young adulthood that life is finite. We may lose an elderly family member and we acknowledge the inevitable but few of us are able to get our arms around what it might mean for us.

I describe retirement as that point in your life when you turn off the ‘work for money’ switch and turn on the ‘money works for you’ switch. It may happen voluntarily or it may be forced on you. It may turn out to be a fun time or it may turn out to be a nightmare.

It depends on how willing you are to think beyond tomorrow and develop a strategy that works for you that is not annoying and causes you stress. Understanding the ultimate financial and emotional framework that is retirement will go a long way to help you make it work for you and your family.

Michael Eugenio, CFP® October 13, 2017

People fail retirement because they have failed to do many of the right things necessary to retire comfortably and with peace of mind. Back in the 70s and 80s, retirement was simple. At 65 you left your company with a guaranteed pension, Social Security and perhaps some savings. Times have changed. Most companies have terminated pension plans and Social Security has become a maze of confusion.

Why Do People Fail Retirement?
• Most folks have no idea how much money they need every month to maintain the lifestyle they have grown accustomed to. To add to the problem, they don’t consider future capital expenses such as a new car or appliance. And we often fail to acknowledge that we can’t do the things we used to do, such as maintain our homes. At some point, you may need to start paying professionals to take care of the maintenance.

• The second mistake is just assuming you should take Social Security as soon as you are eligible rather than having a professionally financial advisor do an analysis of your options and discuss how you can truly max out your benefit. Review and carefully consider your choices before leaving thousands of dollars on the table.

• Another error is not understanding Medicare, its weaknesses as well as how the government assesses Medicare premiums. Because Medicare pays so poorly, a Medicare insurance supplement is a must have. Meet with an insurance broker who is an expert in this area. He or she will research the entire market for the optimal plan and premium for your situation.

• The biggest blunder is going into retirement assuming you have plenty of money with no one to help you properly manage your portfolio. So many times, we see people with relatively small portfolios thinking they have plenty of money, only to find out they are drawing down on the funds at a faster rate than the portfolio can earn. This slippery slope is a recipe for disaster. You will run out of money before you run out of oxygen.

• Another glaring error is believing you can manage the portfolio yourself. After all, you saw the commercials of people who went from virtually nothing to millions in no time at all. You drank the Kool-Aid only to find out the information was not realistic or viable, just a way to separate you from your limited funds. That’s how they make their money, convincing you to buy their substandard material.

Even More Retirement Mistakes

Not considering long-term care insurance is still another mistake. After all, you know you will never be that bad off. My question is, how do you know? So many people have said to me, I will just refuse to go to one of those places, I’d rather jump off a bridge. That’s great, but you won’t make that decision, your family will make it for you. Remember to be nice to your children, because they will decide where you are going to live later in life. Yes, long-term care insurance can be a major monthly expense, but nothing compared to the cost of assisted living that averages $4,000 per month or memory care that can average $10,000 per month. Either one can devastate your finances.

Failure to understand inflation will eventually jump up and bite you where it will secure your attention. Our fine government will proudly tell us that inflation in 2017 is less than 2%. However, ask any retiree and they will demonstrably inform you that the government’s numbers are hogwash. Seems groceries go up about 7%, utilities go up about 4% and property taxes go up more than 2% every year. The cost of health insurance goes up typically between 10% and 20%. Out-of-pocket expenses you didn’t have when working, such as vision and dental coverage, are going sky high. If you ignore this basic fact of life, then you are certainly doomed.

The great thing about modern medicine is they keeping coming up with ways for us to live a long life. People turning 100 is more the norm now than an anomaly. Yet so many people go on the assumption that once you hit 80, your days are numbered and you really don’t need to worry about money. They reason if you retire at 65, you most likely will have only 10-15 years left to live. Big mistake!

Vision for Retirement Today

Probably the most obvious change today from years ago is people’s vision of retirement. In the past, you may have hoped you could take that one nice trip you always wanted. Now you plan to take several trips, spend more time on hobbies, maybe start a small part-time business. The challenge here is while the dreams are terrific, no thought is given how it all gets paid for.

The issue that has always flummoxed me is people go into retirement with thousands of dollars in consumer debt. It’s as if they think a fairy godmother will appear and with a sprinkle of glitter the debt just goes away. The reality is you have all this debt because you have been living above your means for years. What’s going to change now that you are retired? Do you have a plan to get that debt paid down before you retire?

All this and more is why you need to have a qualified financial advisor who can walk you through this maze and avoid the potholes and cliffs by creating a plan and making sure it gets executed and monitored. The retirement planning process should begin two to three years before you retire. Why go into retirement on a wing and a prayer?

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Here’s What the Average Retiree Spends on Healthcare Each Year Hint: It’s not a small number.

My Comments: As you approach phase two of your adult life, please understand that the economic and financial dynamics can change dramatically.

Retirement is when you have effectively turned off the ‘work for money’ switch and have turned on the ‘money works for you’ switch. That implies you have money and credits in place to pay your bills.

Unless you’re OK with wandering off into the woods to die, health care costs are going to continue and potentially become a noose around your neck. Just know that if you are alive and well today, the day will arrive when you’re not, and in the interim, you’re likely to have a few medical care visits from time to time, and those people do not work for free. Those that do may not provide you with good care.

Maurie Backman Jul 22, 2018

It’s natural to assume that our living costs will mostly go down in retirement, but if there’s one expense that’s likely to rise during your golden years, it’s healthcare. From deductibles to copays to Medicare premiums, healthcare can easily grow to become your single greatest monthly expense — but planning for it can help alleviate some of the stress it causes so many seniors.

So how much money should you expect to allocate to medical costs? The average retiree spends $4,300 on out-of-pocket healthcare expenses each year, according to the Center for Retirement Research at Boston College. Given that the average Social Security recipient collects just under $17,000 a year in benefits, that’s a large chunk of that income to be spending.

Now the good news is that you can take steps to save money on healthcare in retirement. But while you’re optimizing those strategies, be sure to work on boosting your income as well so that you have the means of paying for whatever costs do inevitably come your way.

Make sure you’re financially prepared for retirement

It stands to reason that the more money you have available in retirement, the less worrisome the notion of covering your medical costs will be. And in that regard, padding your nest egg during your working years is really your best bet.

Currently, workers under 50 can save up to $18,500 per year in a 401(k) and $5,500 in an IRA. For workers 50 and over, these limits increase to $24,500 and $6,500, respectively. If you’re 55 years old and are able to max out a 401(k) for the next decade, you’ll add $338,000 to your nest egg, assuming your investments grow at an average rate of 7% a year during that time.

While you’re working on boosting your retirement savings, start thinking about other income streams you might set yourself up to optimize during your golden years. Maybe you have a home you’re willing to rent out or a hobby you can monetize to drum up extra cash. The key is to get a little creative, especially if you’re nearing retirement and don’t have a lot of time to pad your savings the way you’d like.

But don’t forget about Social Security, either. There are ways you can grow your benefits and get more money out of the program to cover your various living expenses, healthcare included.

If you delay filing for benefits past what’s considered full retirement age, those benefits will go up by 8% a year until you reach age 70. This means that if your full retirement age is 67 and you wait a full three years, you’ll boost your benefits by 24%, and that increase will remain in effect for the rest of your life. Fighting for more money at work will also help your benefits go up, since they’re calculated based on your earnings record.

Take good care of your health

While going into retirement with the highest level of savings possible will help make your medical costs more manageable, another important step to take is keeping tabs on your health as you age. All too often, we neglect medical issues because we don’t want to be bothered with waiting at the doctor’s office or don’t want to dish out a pesky copay. But when you let medical problems linger, they tend to escalate, and once that happens, they can become costlier to treat.

Case in point: A nasty cut on your leg might cost you a $25 doctor visit and a $10 bottle of antibiotics. But if you ignore that cut and it gets infected, you could wind up with a $1,200 ER bill. Of course, this applies whether you’re mid-career or on the verge of retirement, but since our health tends to decline as we age, it pays to be even more vigilant when you’re older.

There’s no question about it: Healthcare is a whopping expense that’s pretty much unavoidable for retirees. But there’s no need to let it ruin your golden years. Read up on how Medicare works so you know what to expect from it, save aggressively, and be vigilant about health problems that inevitably arise. With any luck, you’ll be well prepared to tackle those medical bills once your career comes to a close.


The Stark Reality of Social Security: Someone Has to Take a Pay Cut

My Comments: As a financial planner focused on retirement, I counsel people about where the money is going to come from when they’re 85 and still have bills to pay. And 85 is simply a symbolic number.

A critical source for most of us is Social Security. And it’s under attack by those we’ve elected to represent us in Congress. These words appeared some 20 months ago and since then the pressure has grown stronger.

We need to take a hard look at those we vote for and make sure we’re not shooting ourselves in the foot.

By Sean Williams Published January 22, 2017

According to the November update from the Social Security Administration, nearly 61 million people are receiving monthly Social Security benefit checks, roughly two-thirds of whom are retired workers. For these retirees, more than 60% rely on their Social Security check to account for at least half of their monthly income. In other words, without Social Security there would likely be widespread poverty among the elderly.

The stark reality of Social Security: Someone’s going to lose

Unfortunately, the program that so many seniors have come to rely on is on the decline, so to speak. Two major demographic shifts — the ongoing retirement of baby boomers and lengthening life expectancies — are expected to turn the program’s cash inflow into an outflow by the year 2020, according to the Social Security Board of Trustees 2016 report. By 2034, it’s estimated that the more than $2.8 trillion currently held in special issue bonds and certificates of indebtedness will have been completely exhausted, at which point an across-the-board cut in benefits of up to 21% may be needed to sustain the program for future generations.

The silver lining throughout Social Security’s imminent decline is that there are a bounty of possible fixes — more than a dozen, to be precise. Some of the Social Security solutions tackle the problem by boosting revenue into the program, while others examine the possibility of cutting benefits in a variety of ways. Thus far, an agreeable solution to fix Social Security has eluded lawmakers on Capitol Hill.

However, there’s a stark reality that these lawmakers, Social Security recipients, and working Americans need to understand: There is no “perfect” fix. If Social Security does have a “best solution,” it’s going to mean that someone has to take a pay cut. In order for the program to serve future generations of retirees, there’s going to have to be some give somewhere. The big question is where it’ll come from.

Should all workers take a pay cut?

One solution that offers a presumed-to-be-bonafide fix is an immediate, across-the-board payroll tax increase on all working Americans. According to the aforementioned Trustees report from 2016, the researchers estimated a 75-year actuarial deficit of 2.66%, down two basis points from the previous year. In English, this means enacting a 2.66% increase in the payroll tax should allow the program to generate enough revenue that no benefit cuts would be needed until the year 2090.

As a refresher, the payroll tax for Social Security is 12.4%, and responsibility for this tax is often split down the middle between you and your employer, 6.2% each. If you’re self-employed, you pay the entire 12.4%. In 2017, the payroll tax applies to every dollar earned between $1 and $127,200. However, wages earned above and beyond $127,200 are free and clear of the payroll tax.

Lifting the payroll tax by 2.66% would mean an aggregate tax of 15.06% on the income of self-employed individuals and a cumulative tax of 7.53% of employees and employers. Workers would have to do with less in their take-home pay, but seniors would more than likely not have to worry about a cut to their Social Security benefits.

Do the rich need to fork over more?

Another solution (and this one is by far the most popular among the public) would be to focus on wealthier Americans and have them pay a larger portion of their income into Social Security. This would be done by tinkering with the payroll tax earnings cap — the aforementioned $127,200 cap at which wages no longer become taxable by the payroll tax.

During her campaign, Hillary Clinton had suggested raising the payroll tax earnings cap to $250,000. By doing so, there would be a payroll tax moratorium on wages between $127,200 and $250,000, but any wages over $250,000 would be subject to the 12.4% tax. The reason lifting the payroll tax earnings cap is so popular is that it would only affect about one in 10 Americans. Since most working Americans are paying into Social Security with every dollar they earn, it would only make sense to most Americans to see the wealthy have to do the same. It would also wind up eliminating a good portion but not all of the budgetary shortfall in Social Security through 2090.

The downside? Other than the fact that the well-to-do would be taking home less income, they also wouldn’t see commensurate benefits from Social Security when they retire, despite paying so much extra into the system.

Do future retirees need to make do with less?

The other side of the equation is to leave the revenue aspect of Social Security alone and tinker with the benefits being paid. Most lawmakers wouldn’t dare suggest reducing the benefits of current retirees, but the idea of adjusting the payouts to future retirees is very much on the table, especially for Republican lawmakers.

The most effective way to reduce benefits for a future generation of retirees without using the words “reduce benefits” would be to raise the full retirement age. Your full retirement age is determined by your birth year (you can find yours with this SSA table), and it marks the age at which the SSA determines you’re eligible to receive 100% of your monthly benefit. File for benefits before reaching your full retirement age, and you’ll take a cut in pay from your full retirement benefit. Wait until after your full retirement age and your benefit will grow beyond 100%.

Raising the full retirement age to 68, 69, or 70 would mean that all brand-new and future retirees would either have to wait longer to receive 100% of their benefit, or they’d have to accept an even bigger reduction in their monthly payout if they claim benefits before reaching their full retirement age. Raising the retirement age could encourage healthy seniors to stay in the workforce longer, thus adding to payroll tax revenue in the process. On the flip side, seniors in poor health or those who can’t get a job could be forced to file for benefits at age 62, taking a big cut in lifetime benefits in the process.

Should current retirees deal with reduced income?

It’s certainly not a popular solution, but cutting benefits for current retirees is another possible answer to fixing Social Security.

One such example was recently touted in the Social Security Reform Act of 2016, introduced by Rep. Sam Johnson (R-Texas), the chairman of the Ways and Means Social Security subcommittee. Among the many fixes offered by Johnson, one involved switching from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the Chained CPI when it comes to calculating cost-of-living adjustments (COLA).

The difference between the two is that the Chained CPI factors in “substitution,” which is the perception that consumers will trade down to lesser expensive goods and services if the price of another good or service rises too much, while the CPI-W does not. Because the Chained CPI factors in substitution, it grows at a slower pace than the CPI-W. The implication being that going with a Chained CPI will result in lower COLAs for retirees.

Which solution is best is really up to interpretation, but one thing is very clear: If Social Security is going to be fixed for the generations to come, someone is going to take a pay cut.

7 Myths About Variable Annuities: Exposing Their Dark Side

My Comments: Anyone now retired or thinking about retirement spends time and energy coming to terms with how to manage their money.

Increasingly, fees charged by advisors and/or their companies are perceived as a threat somewhere along the way. However, unless you have the skills to do it all yourself, you are necessarily going to have to pay fees to gain the peace of mind you crave.

But there are fees and there are fees. My experience with variable annuities suggests they are generally excessive and you can gain the same positive outcome at a lower cost using a different approach.

These comments from Craig Kirsner are not definitive. But if you have variable annuities in your portfolio or are being encourage to buy one, I advise you to think again.

by Craig Kirsner, July 31, 2018

One of the most misunderstood investment strategies I’ve come across over the past 25 years is the variable annuity. When I audit existing variable annuities, I get the facts about them by calling the insurance company directly rather than the broker who sold them. Why? Because I believe you should trust but verify, and I like to get my information directly from the horse’s mouth.

When I call the insurance company, among other questions, I ask: What are all the fees? What is the risk? What are the features? After going through that drill numerous times, I’ve pretty much seen it all. Based on my experiences over the past 25 years, the following are the seven most common myths I’ve learned about variable annuities and the facts dispelling those myths:

Myth #1: A variable annuity is a suitable investment for a retiree

I typically work with high-net worth clients, but regardless of your means, your investing goals and strategies evolve as you grow older.

Early in life, you were probably happy to ride with the ebb and flow of the market, waiting and hoping to hit that investment “home run.” And why not? Suffering a loss now and then didn’t bother you because you were certain of a rebound, and you knew you had plenty of time to recover, long before retirement.

But years pass and investing approaches change. Entering retirement, most people start thinking about protecting and preserving what they have, not making a big splash in the market.
You may have heard it said that these days the return OF your principal is more important than the return ON your principal, and that is definitely true for most of our clients. That’s why the variable annuities some retirees count on for a regular income may not be the best route to take. Which brings us directly to Myth #2.

Myth #2: Your money is safe

People are often led to believe by their brokers that with variable annuities their money is safe, which couldn’t be further from the truth. Your money is invested in mutual funds with no real protection of your principal.

The name of the annuity pretty much sums it up: “Variable,” as in the principal varies, unlike a fixed annuity, where the principal is guaranteed by the insurance company.

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3 Myths About Your Social Security Filing Age

My Comments: Social Security benefit payments are critical for millions of Americans. When you apply and the amount of money you are entitled to is a decision fraught with uncertainty.

Since none of know how our life is going to play out, all we can do is develop an understanding of our choices so that we can at least make an informed decision, even if life ultimately throws us a curve ball. Just know that you are going to get about the same amount of money regardless of when you apply.

That’s because payments will end when you die. In the meantime, you can opt for a smaller check for a longer period of time or wait and get a larger check for a shorter period of time.

Know too that if you are the higher earner of the two, and you die first, then you are providing your survivor with more money per month if you wait. There is no real way to know the best answer.

July 30, 2018 by Jim Blankenship, CFP, EA

Figuring out when to claim your Social Security benefits is a tricky question, and people wrestling with the decision often rely on several widely followed rules of thumb. Unfortunately, doing that can potentially lead you astray, because these are generalities, not rules, and they aren’t as clear-cut as you might think.

Let’s take a long, hard look at three “facts” about Social Security filing age and the real math behind them. All three are only true to a point — and as you’re planning your Social Security filing age, you should understand the truth behind these three principles.

First, let’s look at the concept of delaying benefits.

1. You Should Always Delay Your Social Security Filing Age to 70

This one is the easiest to understand why it’s wrong — but the component of truth in it can be important, because it could work in your favor to delay. Of course, an absolute like this is going to be proven incorrect in some circumstances.

Most people know that if you start taking benefits early — as young as age 62 — your Social Security check will be lower than if you had waited until your full retirement age (FRA). And once you pass your FRA, your benefit grows each year beyond that until age 70, when it tops out. So, if you happen to be able to delay your Social Security filing age and you live a long time after age 70, over your lifetime you may receive more from Social Security than if you filed early. However, if you need the cash flow earlier due to lack of other sources of income or expect a shortened life span, filing early may be your only choice.

Filing earlier can provide income earlier, but depending on your circumstances you may be short-changing your family. When you file early, you are permanently reducing the amount of benefit that can be paid based on your earnings record. Your surviving spouse’s benefits will be tied to the amount that you receive when you file, and so if you delay to maximize your own benefit and your spouse survives you, you’re also maximizing the benefit available to him or her. This is assuming that your surviving spouse’s own benefit is something less than your own.

To see how this all works, consider this example. John, who is 62, will have a benefit of $1,500 available to him if he files for Social Security at age 66, his full retirement age. His wife, Sadie, will have a benefit of $500 available at her FRA. If John files at age 62, his benefit would be reduced permanently to $1,125 per month. When John dies, assuming Sadie is at least at FRA at the time, Sadie’s benefit would be stepped up to $1,237 (the minimum survivor benefit is 82.5% of the decedent’s FRA benefit amount).

On the other hand, if John could delay his benefit to age 68, he would receive $1,740 per month, because he would have accrued delayed retirement credits of 16%. Upon John’s death, Sadie would receive $1,740 in survivor benefits. By delaying his benefit six years, John would have improved his surviving spouse’s lot in life by over $500 per month. Of course, this would require him to come up with the funds to get by in life in the meantime, and so if he did have the funds available this would make a lot of sense. If he didn’t have other funds available, one thing that can help matters is if Sadie filed for her own benefit at age 62 — that would provide them with $375 per month while John delayed his benefits.

What to remember: The key here is that it’s often wise for the member of a couple who has the larger benefit to delay benefits for the longest period of time that they can afford, in order to increase the survivor benefit available to the surviving spouse. But it’s also often necessary to file earlier due to household cash flow shortages. As we’ll see a bit later, only the question of surviving benefits makes the idea of delaying benefits to age 70 a truism. Otherwise, it could be more beneficial to file earlier.

2. Increase Your Benefits by 8% Every Year You Delay Filing

This one again comes from a partial truth: For every year after FRA that you delay your Social Security filing, you will add 8% to your benefit. But the year-over-year benefit differences are not always 8%, and often the difference is much less.

It is true that if you compare the benefit you’d receive at age 66 to the benefit you’d receive at age 67, it will have increased by 8%. However, if you compare your age 67 benefit to your age 68 benefit, it will have increased by 7.41%. This age 68 benefit is 16% more than the age 66 benefit, but only 7.41% more than the age 67 benefit. This is because the benefit increase is based on your FRA benefit amount (age 66 in this example), not the amount you could have received at age 67.

What to remember: Don’t be distracted by the differing percentage changes over the years. The bottom line is, Social Security benefit amounts themselves do increase by approximately 8% per year overall every year you wait – but often the year-over-year percentage increase is less. An increase of 8% is an approximation, but in reality, your increase will often be less.

3. The Break-Even Point is 80 Years of Age

I’ve often quoted this as a generality — rarely pinning it down to a specific year but giving the range of around 80 years old. It’s not that simple, though, when you consider all the different ages that an individual can file. The break-even point is the age at which your lifetime payment amount would be equal, whether you claim Social Security early or late, and if you live beyond that, you would come out ahead by waiting. And if you don’t live to the break-even age, it’s better to claim earlier.

For example, when deciding between a Social Security filing age of 62 versus filing at age 63, your break-even point occurs at age 76 (when your FRA is age 66). But when deciding between age 63 and age 64 (with FRA at 66), the break-even occurs at age 78.

On the other end of the spectrum, when choosing between filing at age 69 versus filing at age 70 (FRA of 66), the break-even occurs at age 84 — considerably later than age 80. The break-even for the decision to file at age 68 versus age 69 occurs at age 82.

What to remember: The year-over-year break-even point varies, depending on which Social Security filing age you’re considering. If the two options are earlier (before FRA) the break-even point occurs before age 80. If they are both at or around FRA, then the break-even occurs right around age 80. But if the Social Security filing age you’re considering is near age 70, count on the break-even point being much later, as late as age 85.