Read about these three toward the end of this post

The traditional view of retirement — working for the same company your entire career and then retiring to draw a lifetime pension — is a thing of the past. Yes, some government workers continue to retire with paid pension plans, but as states and municipalities continue to fight for survival, these pension plans will also be phased out. To add to the angst, Social Security is scheduled to run out of money within the next 25 years.

The bottom line is that many, many of our upcoming retirees are in trouble. The average baby boomer has less than $100,000 set aside for retirement and, according to Financial Planning magazine, 56% of those nearing retirement age have no idea how much income they will have in their retirement years.  Because they have no personal finance plan, the time to wake up is now.

“But Joe”, you stammer. “It is too late for me to do anything now. I have waited too long.”

“Wrong! You just need to redefine your retirement. These tips will help.”

1) Learn where you stand.

Whether you run the numbers yourself or get some help from a financial counselor, you need to know the truth. Answer these questions: “If nothing changes, what will my retirement income be?” and “How does this compare to my current standard of living?”

2) Budget accordingly.

Based on what you learned, make the appropriate changes now.  Make those sacrifices today, while you have a choice, because some day you won’t have that choice.

3) Pay off your house.

Think of it this way: getting that house paid off will bump your retirement cash flow by whatever payment you are currently making. Besides, having your home paid for in your retirement years will give you a security you wouldn’t have otherwise.

4) Invest in your health.

No matter how fit you are financially, your retirement will be dampened if you lose your health. Our local community college offers exercise curriculums, with all of the equipment and a trainer for only $30 a semester. The time to invest in your health, regardless of your age, is now.

5) Don’t retire.

One way to redefine your retirement is to change that definition from one of lazing around for the last 20 or 30 years of your life to one of staying active and productive. Ask yourself, “What dreams have I left undone?” If you do what you love to do, you won’t want to quit doing it…ever! Fulfill that passion and your later years will be full of wonder and meaning.

To close this post, I challenge you to allow some of these seniors inspire you to redefine your retirement:

• Olive Riley: began blogging at age 107, and continued until two weeks before her death at age 108.

• Pierre Jean “Buster” Martin: Claims to be the United Kingdom’s oldest employee at the age of 102, and notably refused to take a day off on the day he celebrated his 100th birthday. Martin entered the 2008 London Marathon and, according to press reports, he walked the 26 mile course in approximately 10 hours.

• Arthur Winston was a Los Angeles Metro employee for 72 years. He is best known for being honored as the “Employee of the Century” because he was never late to work and only took one day off during his entire career.

• Ron Donahue (72), Norm Benson (77) and George Nesbitt (80), who volunteer their carpenter skills to make school desks for special needs children.  (See picture at beginning of post).

Maybe you won’t run a marathon or work for one company 72 years, but you CAN live life to the fullest for all of your life.

Doing so will redefine your retirement.

Readers: In what ways do you need to redefine your retirement?  What changes do you need to be making today?

Most retirees ponder this question: “When should I start taking my Social Security benefits … at age 62? At full retirement age? Somewhere in between?” The conventional response to this question is “Wait as long as you can.” After all, those whose full retirement age is 66 will face a 25% lifetime reduction by starting at 62. They also have the option of an 8% annual boost for every year they delay benefits, up to age 70. In short, the longer you delay, the greater your benefit for the rest of your life.

However, there are times when a beneficiary should consider tapping that benefit early. Here are four:

1. Poor Health

The break even age — the age when the cumulative benefits of starting early equal the total of the higher benefits one would receive by waiting until full retirement age, is around 78. This means that if you live past 78, you are better served by waiting, but if you don’t live to age 78, you would receive a greater total by starting early. Therefore, if your health indicates that you will not live to age 78, you should consider starting your benefits early. Part of that decision, for married couples, should be the impact on the survivor’s benefit, which is generally 100% of the higher-earning spouse’s benefit.

2. Short on cash

If you simply don’t have enough cash flow to make ends meet, it may be better to start receiving your benefit early than to create debt that will haunt you in coming years. However, if you are continuing to work instead of taking an early retirement,  you need to factor in the earnings limit: you forfeit $1 for every $2 earned over $14,160. It generally wouldn’t make sense to begin your benefit early if you will be giving up a chunk of it.

3. You are Single

Maximizing the survivor benefit, (the primary reason many married couples should wait before starting their Social Security) is a non issue for Singles. Therefore, if other factors lean toward starting early, the single person has more reason to do so.

4. You are a lower-earning spouse

If your lifetime earnings are substantially lower than your spouse’s earnings, you should consider starting your pension early while your spouse waits. The logic is to bring some income into the family now, but allow the higher income benefit, which would also be a survivor benefit, to grow. If the higher income is needed as a survivor benefit, you have wisely grown it. If not, that higher benefit will be appreciated by both spouses for years to come.

Many start their Social Security early for the flimsiest of reasons (their neighbor or co-worker or sister said they should). Reality is that there is no “one size fits all” choice. Personal finance is extremely personal, so whatever decision you make about starting your benefit, be sure you clearly understand your Social Security strategy.

Readers: What is your strategy for starting your Social Security? If you are already drawing your SS benefit, did you start before full retirement age or did you wait? Why?

Fixing the national debt is not about politics or economics; it is about human nature.

Some Deficit Reduction Ideas

As President Obama’s bi-partisan deficit reduction commission is nearing their December 1 deadline for a united attack on our federal deficit, numerous ideas are being considered.  This commission, along with a separate19-member group sponsored by the Bipartisan Policy Center, are suggesting such ideas as:

• 6.5 percent national sales tax (not the Fair Tax)

• One year Social Security payroll tax holiday

• Raising Social Security pension age

• Raising the income cap on who pays into Social Security

• Cutting military spending

• Cutting health care while raising Medicare premiums

• Revamp the income tax incremental tax structure

• Dropping home mortgage interest and charitable contributions tax deductions in lieu of a refundable 15% tax credit

An Apt Description of the Debt Problem

Former Senator Pete V. Domenici of New Mexico, who was the senior Republican on the Senate Budget Committee for more than a quarter-century, correctly assesses the quandary, “This problem is so big, so obvious and yet so hard to solve. And it’s not going to be solved unless and until the leadership on both sides and the president decide that it is big enough to be considered a war.”

With current national debt of $13.7 Trillion (see Real Time National Debt Clock) and projected national debt of $19.6 trillion by 2015, I agree with Domenici.  I am not a cynic or a pessimist, and I hope I am wrong, but, as I reiterate: this is about human nature.

What am I talking about? Human beings are basically self-centered.

This one attribute will kill efforts to put sanity into our federal deficit.  Why?  Three reasons:

1) We will transfer the problem.

Although no one knows how long we can corporately tread water, we will try to prolong the eventual collapse by tweaking the system instead of fixing it.  Worded differently, “We are going to protect our own generation even it we have to build a time bomb for future generations”  Self centered?  You bet.

2) We won’t sacrifice.

We want our national problem fixed, but won’t give an inch when our own special interests are threatened.  Some are already carping about the commission’s idea of raising Social Security age to 68 by 2050 and to 69 by 2075.  What?  This is a very minor adjustment for a broken system whose trust fund, according to our current administration, will be exhausted in 2037.  My point is that we want someone to make sacrifices as long as that someone isn’t us.  The unemployed don’t want unemployment compensation cut.  College students don’t want their Pell grants cut.  All entitlement recipients want to keep full funding flowing their way.  Reality is this: our current national debt is about $45,000 per citizen, or $124,000 per tax payer.  Does the word “unsustainable” fit?  If our nation is going to ever take on this monster, all Americans must expect to make sacrifices.  Being self centered won’t get the job done.

3)  Career politicians

Our decision makers have their own careers on the line.  I understand that making unpopular decisions – possibly career threatening decisions – is tough.  I am glad I am not in their shoes.  But then I remember: these are public servants.  The vows of their respective offices should challenge every Congressman and Senator to have the backbone to make decisions on one simple standard: “Do what is best for our nation.”  In a time of crisis, doing what is right means being willing to vote for sacrificial cuts even if their whiny constituents vote them out of office.  Making tough decisions goes with the territory.  Sadly, I am not confident our career politicians have that kind of character.  Protecting their own hind sides is simply another form of being self centered.

The cure for our nation’s woes, as former Senator Domenici aptly stated, “… is so big, so obvious and yet so hard to solve.”

I agree.  Either we sacrifice now, under our own terms, or Disaster will overtake us, under his terms.  The choice is ours.

Like I said, this is about human nature.

Readers:  Jump in with your thoughts.  Do you think there is any hope America will actually attack its national debt?  What would need to happen?  Is human nature the real culprit?  Am I over-reacting?

Have you read the reactions of Seniors on the news that Social Security increases won’t happen next year?

Here is a sampling:

From Huffington Post:

• “I think it’s disgusting,” said Paul McNeil, 69, a retired state worker from Warwick, R.I., who said his food and utility costs have gone up, but his income has not. He lamented decisions by lawmakers that he said do not favor seniors.   “They’ve got this idea that they’ve got to save money and basically they want to take it out of the people that will give them the least resistance,” he said.

From Reading Eagle:

• “No COLA (cost-of-living adjustments) again next year will certainly be problematic for a lot of seniors,” said Andrea Kurtz, director of administration for the Berks County Office of Aging.  “It will be especially hard on those who don’t have pensions or retirement monies, and whose only source of income is Social Security.”

From WAOW:

• “So many people you see shopping the stores these days are looking for bargains and it’s sad that they are going to have to step back because all prices are going up, and their income is going down,” says social security recipient Clifford Vanderwall.

In fairness, not all seniors are cry babies.

Huffington Post also quoted Stella Wehrly, an 86-year-old retired secretary.

• “I’m kind of glad in a way,” Wehrly said of the freeze. “One thing depends on the other and when people aren’t working there’s not enough people feeding into the Social Security system.” Wehrly and her husband, Hank, said curtailing government spending is necessary to maintain the Social Security system.

I agree with the Wehrlys.

The system simply can’t afford being squeezed when there is no funding mechanism to pay for the squeezing. Federal law requires the Social Security Administration to base annual payment increases on the Consumer Price Index for Urban Wage Earners and Clerical Workers, which measures inflation. Simply put, if inflation occurs this year, all Social Security recipients get raises the following year. If there is no inflation, there is no raise. I didn’t hear any complaints when the Social Security Administration announced the largest raise in 27 years (5.8%) in 2009, even though that raise was skewed upward by high energy prices in the 3rd quarter of 2008; prices which fell dramatically in January of 2009. These COLAs can cut both ways.

The point is that Social Security is an extremely fragile system, on target, according to their own literature, to be paying more out in benefits than the amount collected in taxes by 2016 and, without changes, be out of money in 2037.

Yes, going without raises is tough, especially for those whose retirement is primarily dependent on Social Security income. I am not unsympathetic to retirees whose needs increase while their revenues remain stagnant. But I also feel for our younger generations who are funding the system with little hope of ever drawing from it.  A discretionary increase in 2011 would further imperil those chances.  I believe that no COLA  in 2011 is a harbinger of even tougher future decisions if Social Security is going to be rescued. Things could easily get worse before getting better for recipients.

By the way, when I speak of Social Security recipients, I speak not of “they” but of “we”.

I draw a Social Security pension.

What are your thoughts?  Do Seniors have a legitimate gripe?  Should Congress go ahead and give raises even though there has been no inflation?

Married couples: Social Security is complicated and don’t let anyone tell you otherwise. Is either of you (or both of you) close to retirement age? Are you wondering if you should start earlier or later? Before you decide, make sure you understand these two aspects of Social Security: “spousal benefit” and “surviving spouse benefit”. Let’s start with the definitions.

Spousal benefit

The lower earning spouse has a choice: to claim a “spousal” benefit of up to 50% of the higher earning spouse’s benefit or to claim his own earned benefit. The higher earning spouse must be already collecting benefits before the lower earning one can qualify for a spousal benefit. And this spousal benefit will be reduced for every month under full benefit age. For example, if the spouse is already drawing a $1600, the lower earning spouse could qualify for $800 a month at full retirement age; or 75% of $800 ($600) if starting at age 62.

Surviving spouse benefit

A surviving spouse of a retiree drawing Social Security will receive 100% of that pension, with the following provisions:

• The survivor must be full retirement age. If not, the benefit will be reduced based on age.

• If the survivor is insured on her own record and the benefit of the deceased spouse is higher, the survivor will continue to receive her own benefit and also the difference between her benefit and the deceased spouse’s benefit.

Simply put, the surviving spouse will receive the greater of her benefit or the deceased spouse’s benefit, providing she is full retirement age.

Got those definitions? Good! Now for some Social Security strategies.

For clarity’s sake (and because it is this way in most families), I will refer to the higher earner as the man and the lower earner as the woman throughout the rest of this article.

Strategy of waiting

All Social Security benefits are greater when delayed. Because the spousal benefit is dependent on the higher earner’s benefit, the advantages are compounded. Say the higher earning spouse’s benefit is $2,000 at full retirement age. If his spouse also waits until full retirement age to start her spousal benefit, she will draw 50%, or $1,000, for a combined $3,000 monthly benefit. On the other hand, if the higher earning spouse starts his benefit at age 62, it will be reduced by 25% to $1,500. Because 50% of $1,500 is less than 50% of $2,000, this reduction also affects the spousal benefit. But if the spouse starts drawing at age 62, she won’t even receive the full 50% of the $1,500; her benefit will likewise be reduced by 25% from $750 to $562.50 for a combined benefit of $2062.50. Obviously, waiting can make a huge difference.

In the same way, waiting will also affect the surviving spouse benefit. In the above scenario, the surviving spouse benefit drops by $500 (from $2,000 a month to $1,500 a month) when the benefits start early. If you consider this benefit as a form of life insurance, a $500 per month decrease is substantial.

Should Spousal Benefit always be delayed until full retirement age?

Not necessarily. The age differential of the spouses should be considered. For example, if the husband is 70 and the wife is 62, she should consider beginning her spousal benefit at the reduced rate. Why? Because the husband is likely to die earlier and, at that time, her survivor’s benefit (based on HIS pension) would kick in. This is the same benefit she will receive whether she starts at age 62 or not, so she should consider bringing the extra money into the household now.

How to draw Spousal Benefit while waiting

Suppose the husband is full retirement age and wants to wait until age 70 before starting his benefits. Will the wife, who cannot draw the spousal benefit unless her husband has started his pension, need to wait until he is 70? Not if the couple takes advantage of voluntary suspension.

Here is how it works: The husband files for his benefit and the wife files for the spousal benefit. The husband then immediately requests a voluntary suspension of his pension. The wife will be able to collect her spousal benefit while the husband’s future benefit will grow by 8% annually. I like this strategy because the couple is bringing in “bonus” household income while the husband is patiently maxing out both his future pension and his wife’s future survivor benefit.

Another way to claim a Spousal Benefit while waiting

Suppose the husband wants to wait until age 70 to start his pension but his wife also qualifies for benefits based on her own work record. Think through this one with me: she could start her benefit and he could sign up for the spousal benefit while waiting until age 70 to start his own. At that point he switches to his own higher benefit. As in previous examples, this will increase the survivor’s benefit, but will do so while bringing extra income into the household. And the wife could also switch to a spousal benefit based on what the husband’s benefit would have been at age 66. This is very similar to having your cake and eating it too.

One caveat: the higher earning spouse cannot use this tactic if he is younger than full retirement age.

Summary

Social Security can be complicated, but you can make intelligent decisions if you understand these basics. This is your pension that you have paid into all of your working life. Make sure you maximize your benefits.

One more thing: Social Security rules change, so I strongly recommend that you check with the Social Security Administration with all of your questions.

Have you started receiving your Social Security benefits?  What strategies did you use?  Would you recommend to those who haven’t started yet?

photo credit: joguldi

In Part One of this two part series we discussed the following basics of Social Security: how it works, what is a spousal benefit, how does survivor’s benefit work and some things you should think about when considering whether to start receiving your social security benefit early.

In this post, I want to give you some strategies to help you maximize your benefits.

Social Security Strategies for Singles

Unless they have significant savings, or are unable to work because of health reasons, singles generally need to wait until full retirement age before drawing their benefits. Singles simply don’t have the advantage of a second income or a spousal benefit, and living as a single is nearly as expensive as a married couple. Whatever nest egg a single may have will be depleted quicker if they start their benefits earlier, both because they are drawing on it for a longer period of time and because they will need more of that nest egg by virtue of starting Social Security at a lower benefit level. Waiting is especially important for women. Why? Because of their longer life expectancies, they will more often live past the “break even point” (around age 78) when the larger delayed benefit will equal the total of the reduced benefits received by starting early.

Social Security Strategies for Married Couples

For clarity’s sake (and because it is this way in most families), I will refer to the higher earner as the man and the lower earner as the woman throughout the rest of this article.

Because (remember from Part One) the spousal benefit and the survivor’s benefit are based on the benefit of the top earner, married couples need to strategize their start dates in order to get maximum benefits. If the husband delays until full retirement age, he is putting his wife in position to draw his full benefit as a survivor benefit. If he waits until age 70, he is adding another 32% to the survivor benefit. And of course the larger his benefit, the larger her spousal benefit (maximum is 50% of his pension) will be.

Should Spousal Benefit Always be Delayed Till Full Retirement Age?

No. The ages of the spouses should be considered. For example, if the husband is 70 and the wife is 62, she should consider starting her spousal benefit at the reduced rate. Why? Because the husband is likely to die earlier and, at that time, her survivor’s benefit (based on HIS pension) would kick in. This is the same benefit she will receive whether she starts at age 62 or not, so she is better off bringing the extra money into the household now instead of waiting.

How Voluntary Suspension Can Help

Suppose the husband is full retirement age and wants to wait until age 70 before starting his benefits. Will the wife, who cannot draw the spousal benefit unless her husband has started his pension, need to wait until he is 70? Not if the couple takes advantage of voluntary suspension.

Here is how it works: The husband files for his benefit and the wife files for the spousal benefit (which will be less than 50% if she is under full retirement age). The husband then immediately requests a voluntary suspension of his pension. The wife will be able to collect her spousal benefit while the husband’s future benefit will grow by 8% annually. I like this strategy because the couple is bringing in “bonus” household income while the husband is patiently maxing out both his future pension and his wife’s future survivor benefit.

How the Top Earner Can Claim a Spousal Benefit While Waiting

Suppose the husband wants to wait until age 70 to start his pension but his wife also qualifies for benefits based on her own work record. Think through this one with me: she could start her benefit and he could sign up for the spousal benefit while waiting until age 70 to start his own. At that point he switches to his own higher benefit. As in previous examples, this will increase the survivor’s benefit, but will do so while bringing extra income into the household. And the wife could also switch to a spousal benefit based on what the husband’s benefit would have been at age 66. This is very similar to having your cake and eating it too.

One caveat: the higher earning spouse cannot use this tactic if he is younger than full retirement age.

The Second Chance Option

What if you claimed your benefits earlier than full retirement age and then later decide that you should have waited? The Social Security Administration has a plan just for you: you can repay all benefits, free of interest and then reapply for a bigger benefit later. You will need to also return any spousal benefits you have received.

Is this for you? One obvious advantage is that you (and your spouse if she receives a spousal benefit) will receive higher monthly pensions for the rest of your lives. Also, by bumping up the pension amount you have also increased the survivor’s benefit. Of course your health is a major consideration, but if poor health is not an issue, this option starts becoming quite attractive.

Of course the payment must come from a source that will not significantly affect your life. For example, you would not want to deplete your emergency fund, but if you were drawing interest from a nest egg while leaving the principle untouched, using this nest egg could be a consideration.

You would probably want your estate planner to help you crunch these numbers, but this do-over is certainly an option to consider.

Summary

Although Social Security can be complicated, you should be certain that you understand the basics so you can make intelligent decisions on what is right for your household. This is your pension that you have paid into all of your working life. Make sure you maximize your benefits.

Social Security is a little like the Internal Revenue Service. If you try to understand every detail you will get so caught up in the minutia that you could get overwhelmed. On the other hand, if you can simply grasp the Social Security basics you are well on your way to having a grip on how Social Security works and therefore what decisions you should be making. In this post, Part One, I will highlight the basics of Social Security and then discuss the things you should consider when deciding when to start drawing your benefits. Part Two will go into more detail about some little known strategies to help you maximize your Social Security benefits.

Social Security Basics Overview

You can’t start before age 62, but the longer you wait to start, the larger your benefit will be. Full benefit is considered age 66 for those born between 1943 and 1954. Starting at age 62 will permanently reduce your benefit to 75% of what you could have drawn by waiting until age 66. And you can increase that another 8% per year if you keep waiting after age 66 up to age 70. For example, if your full benefit is going to be $1600 monthly at age 66, it will be 75% of that amount ($1200 monthly) by starting at age 62 or up to about $2176 per month by waiting until age 70. Note: these numbers do not include the annual cost of living adjustments, but those will be added to your benefits whether you start or wait.

How Does Spousal Benefit Work?

The lower earning spouse has a choice: to claim a “spousal” benefit of 50% of the spouse’s benefit or to claim the earned benefit as shown on the Social Security report received in the mail each year. The higher earning spouse must be already collecting benefits before the lower earning one can qualify for a spousal benefit. And this spousal benefit, like the earned benefit described above, will be reduced for every month under full benefit age. For example, if the spouse is already drawing a $1600, the lower earning spouse could qualify for $800 a month at full retirement age; or 75% of $800 ($600) if starting at age 62.

What About Survivor Benefits?

A surviving spouse of a retiree drawing Social Security will receive 100% of that pension, with the following provisions:

• The survivor must be full retirement age. If not, the benefit will be reduced based on age.
• If the survivor is insured on her own record and if the benefit of the deceased spouse is higher, the survivor will continue to receive her own benefit and also the difference between her benefit and the deceased spouse’s benefit.

Simply put, the surviving spouse will receive the greater of her benefit or the deceased spouse’s benefit, providing she is full retirement age.

Should I Start Early or Wait?

There is no “one fits all” answer, but these factors all affect your decision:

• How much savings do you have? Assuming you need to start tapping those savings when you retire, the earlier you retire, the bigger the nest egg will need to be. Besides, the decreased benefit of starting earlier will mean that you need more per year from these savings. Ideally, you would only tap the growth of your savings, leaving the nest egg alone. Will this fit your budget? Answer this question clearly before accessing your benefit.
• How is your health? I know this sounds morbid, but if you have good cause to believe you won’t live well into your 70’s, you may consider starting your benefit early. You don’t want to NOT tap into needed money if you seriously believe that waiting will cause you to miss out on the benefit
• Do you have other income streams? Remember: Social Security is meant as a supplemental income. Do you have other retirement checks coming in?
• Do you love your work? If so, keep on working. There is no reason to stop doing what you love just to start a benefit at a reduced rate.

There: you have some basics of Social Security and some things to think about if you are considering starting your benefit early.

Part Two will cover some strategies to make sure you maximize your benefits. You may also want to read some Social Security strategies for married couples.