Updated insider information by Chellie Campbell, author of “The Wealthy Spirit: Daily Affirmations for Financial Stress Reduction”
“It isn’t necessary to be rich and famous to be happy. It’s only necessary to be rich.”—Alan Alda
She was fifty-five years old and worked on an assembly line for a major corporation. It was time to retire, she told Dianne, the certified financial planner. Other people she knew didn’t have much money and were retiring, and she felt she should, too.
“How much money do you have in your 401K plan?” the financial planner asked.
“Around $20,000,” she replied.
“And do you have additional savings?”
“Investments in real estate?”
“Alimony? Expectation of inheritance? Other sources of income?”
When Dianne told me this story, she told me how frustrated she felt when people didn’t understand, until too late, just how important it was to have a financial plan for the future. Even if you save money on a regular basis, that doesn’t mean that you’ll have enough to live in a castle on a hilltop in Europe when you decide to retire. Another client, who had a million dollars saved for retirement, thought he was going to be able to spend $20,000 a month. Spending $240,000 per year would eat up a million dollars rather quickly.
You have to have a budget worked out for tomorrow just like you have to have a budget worked out for today. Money doesn’t magically appear just because you turned fifty-five or sixty-five. Furthermore, you can’t assume that just because you save money on a regular basis that you are saving enough to allow you to live without working. You have to do the math.
(Continued on page 239 of The Wealthy Spirit)
How much money can you reasonably expect to save each year? How much money will your investments likely produce in interest income? How many years do you have in which to accumulate savings until your projected retirement date? What kind of lifestyle do you want to maintain when you are retired? Will you work part-time? Will you need less money than you do now because you won’t have work related-expenses such as the cost of commuting, networking, business attired, etc.? What amount of social security will you receive in addition to your personal savings?
You probably need help with these questions. Make an appointment with a financial planner. Get some help figuring out your retirement needs. Get a plan together, then take the actions that are on the plan every month. Over time, you will accumulate assets, money, retirement funds.
Or be willing to keep on working.
Today’s Affirmation: “I accumulate wealth daily for my abundant future!”
A great friend and fellow WRS (www.worthwhilereferralsources.com) member, Financial Planner Marc Weiss sent me this very informative article about Social Security. As my senior years approach, I have to decide when to start collecting my benefits. My CPA, Barbara Barschak, advises to start collecting money as soon as you are eligible for some…but we all want to collect as much as we can, eh? Start earlier and collect a lesser amount over a longer period of time, or wait and collect a larger amount over a possibly shorter period of time – that is the question.
I did the math. It really all depends on how long you expect to live…gulp. If I live to 80, I collect the most if I start collecting at 66. If I live to 90, I collect the most if I start at 70. My dad is nearly 92 and still going strong, but mom passed away at 67 – the average of their two ages is 80.
This is just like playing poker – making value-based decisions based on incomplete information. In other words, it’s a gamble!
WHAT YOU NEED TO KNOW ABOUT MAXIMIZING YOUR RETIREMENT INCOME
By Marc H. Weiss
Archer Weiss Insurance & Financial Services, Inc.
Baby Boomers in particular want to know whether Social Security will be there for them and how much they can expect to receive. Most Baby Boomers do not know when they should apply for their Social Security benefits and how to maximize that benefit. Most importantly, many Baby Boomers are concerned that their Social Security benefit will not be enough for them to live on during their retirement.
Before strategies can be discussed, it is crucial to understand the value of Social Security and what it can mean for you. Social Security basically offers a stream of income that you cannot outlive and it offers annual inflation adjustments, familiarly known as COLAs. For example, if your monthly Social Security income today is $2,000 and the annual COLAs are 2.8%, in 20 years your monthly Social Security benefit will be $3,474.
Besides the monthly benefit you may be entitled to based on your own work records, Social Security also offers survivor benefits. To illustrate, if a married woman receiving a monthly benefit of $2,000 dies, her surviving husband, who only had a monthly benefit of $1,200, can now step up and begin receiving his deceased wife’s $2,000 monthly benefit rather than his own.
WILL BENEFITS BE AVAILABLE WHEN I NEED THEM?
A growing concern in the forefront of most Baby Boomers’ minds is whether or not Social Security will be there for them to collect when they need it. With so many Americans approaching or beginning their retirement years, the concern is based on the fact that not enough money is being paid into the Social Security trust fund. In response to this concern, reform proposals are currently being studied to arrive at a solution to this potential disaster.
To restore solvency to the Social Security system, there is talk about increasing the “normal” retirement age, which is currently 66, and lowering the Social Security benefit for future retirees. Reducing the COLAs is also something to consider as well as increasing the maximum earnings that are subject to Social Security taxation, currently $106,800. That said, Baby Boomers are not likely to be impacted by Social Security reforms as they would not likely be applied retroactively.
HOW MUCH WILL I GET?
The amount of Social Security each Baby Boomer is entitled to depends upon their individual earnings over their respective working careers. Your monthly benefit will also be affected by the age at which you choose to apply for your benefits. Social Security is calculated by looking at your highest 35 years of earnings. Any “missing” years count as zeros. Your earnings are then indexed for inflation and averaged, referred to as AIME. A formula is applied to your AIME to calculate your individual primary insurance amount (your PIA). The PIA is the amount that you will receive at your full retirement age, which is 66 for Baby Boomers. Your monthly benefit is then increased each year based on COLAs. Of course, if you apply for your Social Security benefits early, your monthly benefit will be lower. If you chose to apply for your Social Security benefits after your full retirement age, then you will earn delayed credits. For example, if you choose to apply at age 66 and your PIA is $2,230, your will receive 100% of that PIA benefit. If you wait to apply until your turn 70 (assuming the same $2,230 PIA) you will receive 132% of your PIA benefit without factoring in any COLAs.
There are rules regarding Social Security spousal benefits that some Baby Boomers may not be aware of. A spouse will receive the higher of his or her own benefit or their spousal benefit. The spousal benefit is ½ of the higher earning spouse’s benefit. To claim the spousal benefit, however, the higher earning spouse must have applied for his or her benefits and the lower earning spouse must be at least 62 years old for a reduced benefit or 66 to receive a full benefit. There are no delayed credits on spousal benefits after age 66. To illustrate, if Harry’s benefit is $2,000 and Callista’s benefit is $800, Callista’s spousal benefit is $1,000 so she can receive her spousal benefit rather than her own because it is higher than her individual benefit.
WHEN IS THE BEST TIME FOR ME TO APPLY?
There is no catchall “best” age for Baby Boomers to apply for Social Security benefits because this will vary based on individual circumstances. Some factors to consider are your individual health status, your life expectancy based on that health status, your need for income during your retirement, whether or not you intend to work during your retirement years and whether or not there are or you anticipate any survivor needs. The most obvious perk of delaying your benefit is that you will have an opportunity to collect more money. If you apply early, your benefit not only starts lower but it will stay lower for the rest of your life, it does not increase when you turn 66. Remember, COLAs will increase your benefit and the longer you expect to live, the more beneficial it is for you to delay your Social Security benefits. Also keep in mind that your decision will impact survivor benefits so it is an important consideration in planning your strategy as a delay will increase survivor benefits as well.
WILL MY SOCIAL SECURITY BENEFIT BE ENOUGH FOR ME TO LIVE ON?
The real challenge is in determining whether or not your anticipated Social Security income stream will be enough for you. If you are still able to work, you can maximize your benefits by improving your earnings record. If you are unsure what to expect, take a look at your last Social Security statement and see what your estimated benefit is, whether it is accurate, if there any years missing and whether you will be able to improve that benefit by working longer and delaying retirement. If you are married, be sure to coordinate spousal benefits so that both you and your spouse can maximize your collective benefits. There is also a “file and suspend” strategy that you and your spouse may elect to implement. At full retirement age, a higher earning spouse can apply for Social Security benefits and later ask that the claim be suspended. The lower earning spouse in the meantime applies for a spousal benefit. The higher earning spouse then re-claims the benefit at age 70. This creates an opportunity for a lower earning spouse to receive higher benefits while the higher earning spouse continues to earn delayed credits, thereby increasing the higher earning spouse’s benefit after it is “switched” back on at age 70.
The precise application language for this strategy is to say that the higher earning spouse is “restricting” his or her application to his or her spousal benefit. Also, only one spouse may do this, both spouses are not permitted to use a spousal benefit on each other. Beware that you cannot implement a file and suspend strategy before full retirement age!
MINIMIZE THE TAXATION OF YOUR BENEFIT
Social Security benefits are not tax free. There are ways to minimize taxation of your benefits such as reducing other income with tax advantaged investments. It is important to emphasize that municipal bonds will not result in minimizing taxes on Social Security benefits, other tax advantaged investments must be used to help reduce other income. If you have an IRA, you need to take into consideration your RMDs and how they may increase your tax bracket.
KEY POINTS TO KEEP IN MIND
When you are deciding when you should begin your Social Security benefit based on your personal circumstance, there are some important things to keep in mind. When you are developing your overall retirement income plan, you should consider your life expectancy/health, projected income needs, whether or not you plan to work and survivor needs.
If you apply for your Social Security benefit early, your benefit will not only start lower but it will stay lower for the rest of your life. Contrary to a myth circulating out there, your Social Security benefit does not go up when you reach age 66. COLAs will magnify the impact of your early or delayed retirement and the longer you expect to live, the more beneficial it is to delay your benefits. If married, you need to coordinate your spousal benefits to maximize your benefits.
Your decision to start your Social Security benefit impacts survivor benefits as well and delaying your own benefits may give survivors more income. If you do not think your Social Security benefits will be enough to live on, consider other strategies that you may need to explore to supplement your projected benefit.
A spousal planning analysis can help you and your spouse determine which of the various Social Security strategies may work best for you in your particular circumstance. Your overall retirement income plan should take into consideration Social Security in the context of pensions, IRAs and 401(k)s, your investment portfolio and work related issues to maximize your retirement income. Let us help you protect your nest egg and maximize your retirement income!