Posts Tagged Die Broke

Photo by alan(ator)

Yahoo! Finance recently published a guide to the five most common questions about Social Security benefits.  You can read the original article by clicking on the following link:

What You Need to Know About Social Security

Given all of the doubt that the entitlement program will survive when I reach retirement age, should I count on it as part of my retirement income?

You should. In fact, Social Security provides 50% of the income for more than half of married retired couples and about 20% for high earners. Moreover, it’s the only source of income you’re likely to have that’s guaranteed to last for life and keep pace with inflation.

OK, they’ve got my attention.  I hope that I’ll fall into that high-earner category.  But 20% is nothing to sneeze at.  Let’s take a peek at the guide:

QUESTION 1: Can I count on Social Security to be there?

You can. Despite what you may hear about the system going broke, the funds from workers’ payroll taxes will cover all retirees’ payments until 2016 even if no changes are made to the current program. After that the Social Security Administration can cover full benefits until 2037 by cashing in its Treasury bonds from the Social Security trust fund. And when the bonds run out, income from payroll taxes would be enough to cover about 75% of payments for decades.

That said, the government is looking at ways to shore up the system. President Obama has talked about imposing Social Security payroll taxes on income over $200,000 (currently, earnings over $106,800 are exempt). Other possible fixes: upping payroll taxes, raising the retirement age, and scaling back payments in some way.

The good news for anyone in or near retirement: “People 55 and over are likely to see no change or just a marginal change in benefits,” says actuary Bruce Schobel, who worked on the commission headed by Alan Greenspan nearly 30 years ago that fixed the system (at least until now). But even younger workers can rest assured that drastic cuts are unlikely.

In 2016, I’ll still be working, and for a long while after that.  I’m not comfortable with the liquidation of Treasury bonds to meet current obligations.  And it looks like I’ll never hit the magic exemption level if they keep raising the threshold.

QUESTION 2: How much will I get every month?

Like all things Social Security, there’s a complex formula involved. But essentially, the amount you’ll get at your full retirement age is based on your average lifetime earnings, adjusted for rising wage levels over the years. Depending on when you were born, your full retirement age varies between 65 and 67. Grab your payments earlier than your full retirement age, and they’ll be reduced: Wait, and you’ll get more.

Spouses can also qualify for up to 50% of their husband or wife’s full retirement age payment; if that amount is larger than what you would get based on your own earnings, you’ll get the higher figure. Similarly, if your spouse dies, you would receive a survivor’s benefit of up to 100% of what your deceased spouse was collecting, if that amount is higher than your own payment. Divorced? You may still be eligible for spouse and survivor benefits as well.

Your checks are also automatically adjusted for inflation each January. Payments increased by 5.8% for 2009. But given the near-term inflation outlook, the Congressional Budget Office estimates there may not be a cost of living increase for the next few years.

Because I won’t retire for a long while (read my review of Die Broke), I’m not worried about COLAs.  I have more to worry about just getting a raise each year.  My cost of living isn’t taken into account.  I’m also not planning for a traditional retirement; I actually like going to work.  It gives me a reason to get up each day.  So, I’ll probably let my benefits marinate, and draw a larger number later on.

QUESTION 3: At what age should I begin collecting?

The majority of people take Social Security before full retirement age. But it often pays to wait. Just in terms of benefits accrued, if you have an average life expectancy or better, you’d probably come out ahead waiting for a larger payment that you won’t collect as long. More important, you’ll have a bigger check at an age when your retirement savings are diminished and you aren’t likely to be able to work to supplement your income.

The math gets more complicated for married couples, however, since in addition to what they get from their own earnings, one of them may also qualify for spousal benefits and eventually collect payments as a surviving spouse. So married couples should aim to max out their benefits over both their lifetimes.

Generally, the best strategy is for the higher-earning spouse to delay taking Social Security for as long as possible. That’s because survivor benefits are based on the larger of the couple’s checks. The lower-earner, meanwhile, should usually claim benefits earlier. That will often, though not always, provide the greatest amount of income as well as security in old age.

Like I mentioned in the last comment, I plan on waiting to collect my benefits.  That could change, but that’s the game plan for now.  Being the higher-earning spouse, my wife will claim her benefits earlier.

QUESTION 4: Will I lose benefits if I work?

It’s true that if you collect early and work at the same time, your payments may be reduced (once you reach full retirement age, feel free to toil away; your golf game might suffer, but there’s no effect on your Social Security). Your checks will be reduced by $1 for every $2 you earn over an annual limit, currently $14,160 (the hit is considerably less during the calendar year you hit full retirement age).

But despite what you often read or hear, you don’t actually “lose” that money. At full retirement age Social Security will begin compensating you with a larger check for the benefits that were withheld. And you’ll receive that higher payment for the rest of your life. If you are reasonably long-lived, you’ll wind up collecting more — and you’ll have extra income from your additional years as a wage slave.

Working in retirement can also up your payments in other ways. Your check is based on your 35 highest years of wages. If you work fewer during your career, your benefit will be adjusted to reflect any extra years of work. Even if you clocked all 35 years pre-retirement, you could still get a bump if your annual earnings during your golden years were higher than some years earlier in your career.

Looks like I won’t be affected if I continue to work.  But as long as I have an income from a job, I probably won’t tap my Social Security benefits until I stop working.  Hopefully I’ll be earning enough to bump up my benefits.

QUESTION 5: Will my benefits be taxed?

You thought Uncle Sam would cut you a break after retirement? Fat chance. Currently, about a third of Social Security recipients pay income tax on a portion of their benefits, and the Social Security Administration projects upwards of 42% of recipients will be doing so by 2018.

To see whether you’ll owe taxes and, if so, to estimate what the bill might be, use our simplified worksheet (”Add up the tax bill,” above, right) or fill out the extremely detailed one in IRS Publication 915: Social Security and Equivalent Railroad Retirement Benefits, available at irs.gov.

If you want to lessen the tax bite, there are a couple of options. One is to wait at least until full retirement age to claim Social Security, if you think that income from a post-retirement job could result in a big tax bill.

Another way to avoid taxes is to pull money from a Roth IRA instead of a traditional IRA or 401(k). That’s because Roth withdrawals don’t count as income in figuring whether your benefits are taxable. So if you don’t already have money in a Roth, you may want to fund one or convert some of your traditional IRA to a Roth. After all, in retirement, you’re likely to need all the cash you can get.

Let’s see, work to full retirement age, check.  Contribute to Roth IRA, check.  Looks like I’m good to go.  How about you?

• Are Your Savings on Track for Retirement? Photo by aussiegall A Business Week article by Amy Feldman helps you evaluate your retirement savings.  You can read the original article by clicking here: Sizing Up Your Nest Egg The article offers data points for your retirement savings, in order for you to gauge if you're on the......
• Getting Rich in America Book Review and Summary, Part 2 This is Part 2 of my review and chapter summary of Getting Rich in America: 8 Simple Rules for Building a Fortune and a Satisfying Life by Dwight R. Lee and Richard B. McKenzie. You can read Part 1 of this review by clicking the following link: Getting Rich in......
• Barbaric Book Review: Die Broke by Stephen M. Pollan, Part 4 This is Part 4 of my review of Die Broke.  You can read the first three parts of this series by clicking on the following links: Die Broke, Part 1 - Quit Today Die Broke, Part 2 - Pay Cash Die Broke, Part 3 - Don't Retire Step 4: Die......

• Understanding Taxes on Retirement Job Income The government does a good job of making our tax system incomprehensible to the average citizen.   Things are even harder to figure out for people who are retired, receiving Social Security, and working full or part-time.  Most retirees don't have a clear understanding of how much they are taxed......
• Personal Retirement Plan Investment Options Good financial management consists of two different distinct facets, the first of which is learning how to make the best use out of your limited earned income in order to best meet your current expenses, and the second of which has to do with learning how to implement strategies that......
• Maximizing our Social Security Benefits Although we are still quite a long ways from being eligible for Social Security benefits, I've looking into ways we can maximize our benefits. For our situation, a strategy know as the 62/70 solution appears to be most promising, allowing us to have the proverbial cake and eating it too.The......