Age 59½: Beginning at this age, we can begin penalty-free withdrawals from our various tax-deferred retirement accounts, e.g., 401(k) and IRA accounts. Hopefully, this decision is not one that is forced by economic necessity.

Age 62:  At this age we can start collecting Social Security retirement benefits but at an amount reduced by 25% compared to what we can receive at full retirement age. I turn 62 in 7 months.  I concede that it will be strange knowing that I could receive Social Security then if I wanted it.

Age 65:  This is the age of eligibility for Medicare. This age is actually a bit tricky.  We will have a seven-month window of opportunity to sign up, beginning three months before our 65th birthday.  We do not have to enroll in Medicare if we are still covered by employer health insurance.  Otherwise, missing this window could cause you to have larger Medicare premiums for the rest of your life.

Age 66:  This is full retirement age for those of us born between 1943 and 1954.  At this age  we are entitled to 100 percent of our Social Security retirement benefit.  Also, at this age we are no longer penalized by working for other income and, if your benefits were reduced by working earlier, your benefit amount will now be adjusted upward to compensate.

Age 70:  If we wait until this age, our Social Security benefit is maximized to 132% of our benefit at full retirement age. This is my goal and we will spend other retirement assets as needed to achieve it.

Age 70½:  Retirees at this age must begin “required minimum distributions” from tax-deferred retirement accounts (except for Roth IRAs).

Age 85:  Many so-called longevity insurance policies a/k/a deferred annuities begin payments at this age. I am going to take a serious look at buying one of these policies as a retirement planning strategy. Knowing that this benefit will be available, we can spend our other retirement assets without being afraid of running out of money when we are much older. It’s all about the peace of mind that flows from risk management.

Now I have to take care of my health so I will be around to experience these milestones!

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1. Retirement Planning and Lack of Trust

To access your statement online, you first need to establish a “My Social Security” account. This requires answering numerous questions to confirm your identity, etc. I recommend that everyone do this, not only to reduce paper but to improve access to information you will need to complete your retirement plan. We can no longer use the excuse that we don’t know what our likely retirement benefit will be.

Back in 2008, I wrote about how I read my annual Social Security Statement. At that time, my estimated monthly retirement benefit at full retirement age was $2,314. When I checked this morning online, the estimated benefit had increased 7.4% to $2,485. If I delay until age 70 (probable), my monthly benefit will be $3,326.

There is an upper limit on a monthly Social Security retirement benefit. For 2012, a person retiring at full retirement age can receive a maximum benefit of $2,513.

I was pleased to see how user-friendly the My Social Security account interface is.  If you are worried about other folks accessing your account, you have the option of having a text message sent to you each time someone (including you) logs in to your account.

The SSA will email you annually, reminding you to review your updated statement. Generally, the updates occur after your birthday.

If you still like paper, paper statements will still be mailed to people age 60 and older who haven’t yet signed up for benefits, to 25-year-olds (to jolt them back to reality), and to other people who are unable to use the online tool.

To start the process of creating a My Social Security account and accessing your statement, follow this link.

Related posts:

1. New Social Security Calculator for Estimating Retirement Benefits
2. Finding the Best Strategy for Social Security Spousal Benefits
3. Filing a Restricted Application for Social Security Retirement Benefits

A writer at Smart Money magazine recently asked some experts in Social Security at the Stanford Institute for Economic Policy Research to analyze the economic benefit of delaying claiming Social Security in terms of an equivalent retirement investment. The results were very informative.

As one example, if a 62 year old unmarried man in average health waits until age 67 to collect Social Security (instead of age 62), that is the equivalent of buying a long-term bond that pays 3.2% a year. (If that man were a woman, the annual return is 4%.)

The numbers get even better for married couples, if they follow a “restricted application” strategy.  Using this strategy, the  higher-earning married spouse delays claiming his or her own benefit from age 62 to age 70. Instead, that spouse begins collecting spousal benefits at age 66 from the lower-earner’s earnings record. The investment return arising from this strategy is equivalent to owning a bond that yields 7.0% annually!

Actually, the equivalent investment return is even better than from a conventional bond, because the Social Security payments are government-guaranteed, adjusted for inflation, and for most folks, tax-free.  A typical retiree would have to earn more than 10% on a fixed rate, taxable CD to do this well.

As the article points out, the wild card in this analysis is health. But unless my expectations of a normal life span are already in doubt, I am not going to “take the money and run” early just because I am afraid of dying young.

Will you?

Read the full article here.

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1. Starting Social Security Early – Break-Even Age Actuarial Analysis
2. Taxes and Social Security: Random Thoughts and Concepts
3. New Social Security Calculator for Estimating Retirement Benefits

There is lots of pessimism and general gloom and doom to be found in the retirement confidence survey data. Sadly, the gloom and doom attitude is probably justified by the facts. Here are some of the survey “highlights”:

• Only 14 percent of Americans are “very confident”  they will have enough money to live comfortably in retirement. This is an historic low number.  A lot of this is related to uncertainty in the job market, a concern expressed by 42% of the respondents.  Similar financial concerns are linked to an inability to meet future health care and long term care obligations.  Employment insecurity looms large: Forty-two percent identify job uncertainty as the most pressing financial issue facing most Americans today.

• For so many people, retirement savings and investments are non-existent. Specifically, 60 percent of workers state that the total value of their household savings and investments (not including pensions and home equity) is less than $25,000.  For a worker over 40, that is a scary bad statistic.

• One-half of current retirees surveyed say their retirement was unplanned. Instead, they stopped working because of health problems, a disability, or a job action by their employer (e.g., the infamous ”downsizing”).  Folks who rely on the “I’ll just work longer” retirement plan should take careful note of this.

• This next stat is crazy:  56 percent of workers say neither they nor their spouse have tried to calculate how much money they will need save so that they can live comfortably in retirement. This is the “head in the sand” retirement plan. (The adult children of these folks should probably intervene for their own future protection!)

For baby boomers with no meaningful savings, there is not much opportunity to fix the problem, particularly if they become one of the 50% who retire involuntarily.  Social Security will be it for them. If they also retire with debt, financial survival is questionable.

There are non-financial reasons to be uncertain about retirement. I think I will write more about those another time.

Where does your retirement confidence fall on a scale of 1-10 where 1=”I’m doomed”, 5=”I might make it if I stay healthy, the markets improve, and inflation is low” and 10=”No worries – I am financially set for a satisfactory retirement lifestyle under all foreseeable cirumstances.”

I would say that we are an 8 for now but shooting for 10.

Here is a link to the EBRI survey.

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1. Are You Part of the Great Retirement Rethink?

Some states that hit working taxpayers hard are less aggressive with retirees. To understand this, you must consider all forms of taxes and and all sources of income. Location-specific taxation of retirees can include income taxes, property taxes (state and local), sales taxes, and use taxes. For some, inheritance taxes may also be relevant. Regarding income taxes, pension and Social Security income may be treated differently from investment and employment income. For example, our state of Tennessee has no conventional “income tax” but has a special “Hall Tax” that applies to certain sources and levels of investment income.

CCH is a major player in the tax publication industry and likes to create charts, calculate and rank tax burdens by state. Market Watch used the CCH data to create a slide show featuring the states most tax-friendly to retirees.

Number one is Alaska but given other cost of living issues, its remoteness, and weather, it would not be on my list.

Texas and Florida make the list also, which is a plus for them.

If course, these are generalized rankings. If the gap between your anticipated retirement income and desired spending budget is small, it would be important to do an individualized analysis based on your own sources of income, etc. and to look at related taxation trends. For example, Nevada has a low tax burden on retirees but that may have to change somewhat for Nevada to get its finances in order

Here is the link to the slide show and article.

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1. More Opinions on the Worst States to Retire
2. Ranking the 50 States for Retirement 2011
3. Taxes and Social Security: Random Thoughts and Concepts

1. Depending on the types and amount of your other income, Social Security retirement benefits are taxable.

2. To estimate whether your benefits are taxable, add up all of your adjusted gross income as shown on your tax return plus any tax-exempt interest income. To this total, add 1/2 of your Social Security benefits. If this “combined income” grand total is more than $25,000 for an individual or $32,000 for a married couple, you will owe taxes on your benefits. (If you want to use the official IRS Form 703 to make this calculation, you can find the form here.

3. If the combined income calculation according to paragraph 2 above is between $25,000 and $34,000 for an individual ($32,000 to $44,000 for a married couple), 50% of your Social Security benefits will be taxed as ordinary income

4. If the combined income calculation according to paragraph 2 above is above $34,000 for an individual ($44,000 for a married couple), up to 85% of your Social Security benefits will be taxed as ordinary income. Strangely, no matter how much other income you have, at least 15% of your Social Security benefit is never taxed.

5. If your Social Security benefits are taxable, you may voluntarily request tax withholding from your benefit checks but withholding is not mandatory. Withholding may be a good idea to avoid year end surprises. To make a withholding request, use IRS Form W-4V.  You can then to choose to withhold either 7%, 10%, 15% or 25% of your benefit to pay income taxes.

6.  Tax calculation example:  Assume you are married and filing  jointly, receiving $12,000 in Social Security benefits with a “combined income” of $42,000. This combined income exceeds the $32,000 threshold by $10,000.  Based on this, the amount of benefits that will be included in your taxable income is $5,000 which is the smaller of  half your benefits ($6,000) or half the excess income over the threshold ($5,000). If your marginal rate is 15%, the tax on your Social Security benefits is $750.  (This really is quite sad because if you are still working, you are still paying the Social Security payroll tax plus now you are paying a tax on benefits for which you previously (at least theoretically) paid payroll taxes.

7.  Some state and local income taxing authorities also will tax Social Security retirement income. The Social Security Administration cannot help you with those numbers nor will it withhold state or local income taxes from your benefits.

8.  To minimize the income taxes you will pay on Social Security income, you should try to stay below the threshold for as many years as possible. Sometimes you can control this by careful timing of when you elect to receive income, e.g., choosing to receive income immediately before or after 12/31.

Aren’t taxes fun?

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1. New Social Security Calculator for Estimating Retirement Benefits
2. Finding the Best Strategy for Social Security Spousal Benefits
3. Filing a Restricted Application for Social Security Retirement Benefits

If you ask a specific question about a specific claiming strategy (e.g., a filing a “restricted application”)  you may receive a correct answer or maybe not, depending on the knowledge level of the employee. One thing I consistently read is that Social Security representatives are not trained to analyze and answer questions like “What is the best claiming strategy for me and my spouse?” That is up to you to discover, on your own or with the help of a financial adviser.

The strategy of filing a “restricted application” for benefits is not generally known or considered.  A recent report from the AARP quantifies the general lack of knowledge by baby boomers of how Social Security benefits are even determined.   Only 3% of the participants in the survey scored 75 or greater on a basic Social Security knowledge test. That is unfortunate and sad because a lot of lifetime income can be at stake.

So what is a “restricted application” for Social Security retirement benefits?

The answer is actually simple. The questions of if and when you should use a restricted application are more difficult to answer.

A “restricted application” is used when a “retiree” wants to file for Social Security retirement benefits but not his or her own benefit. Instead, the retiree ”restricts” the application to a spousal benefit.

So who would file a restricted application and why?

Let’s assume that a “retiree” is married and has determined that it makes financial sense to delay receiving Social Security benefits until past full retirement age, e.g., age 70.  This delayed claiming strategy makes good sense because of the significant increase in benefit amount that can be realized. (For example, if you would be entitled to a $15,000 annual benefit at age 62, that benefit increases to $26,400 if you wait until age 70.)

However, if the retiree’s spouse has reached age 62 and is receiving benefits, the retiree can claim and receive a spousal benefit while continuing to accrue credits for delaying the retiree’s own benefits.

Here is an example of how this would work:

Assume that a wife started collecting benefits years at age 62. The husband, who is now 66, is still working and wants to delay receiving his own Social Security benefit until he stops working at age 70.  Further assume that the wife would have been entitled to a Social Security benefit at full retirement age of $1,750/month.  Therefore, the husband is entitled to receive a spousal benefit of $875/month for every month that the husband does not claim his own benefit. If he waits until age 70 as planned, he would receive $42,000 in spousal benefits from his wife’s earnings record. More important, for each year of receiving the spousal benefit, the husband is receiving credits that will earn him an 8% annual increase in his own benefit.  Of course, he switches to his own Social Security benefit at age 70.

To be clear: Filing a restricted application would give this couple $42,000 in additional income over a four year period!

The restricted application strategy is usually best if the lower earning spouse has a Social Security retirement benefit that is at least half as large as the higher earning spouse’s benefit. If that is not the case, the better strategy for spouses may be “claim and suspend.”

Keep in mind that a restricted application for Social Security benefits can be filed only if your spouse is already receiving a retirement benefit.

Also keep in mind that you may not be told any of this at the Social Security office unless you ask the right person.  This is when it pays to apply for benefits in person, not online.

There is much to consider when deciding on Social Security benefit strategies, don’t you agree?

Related posts:

1. New Social Security Calculator for Estimating Retirement Benefits
2. Finding the Best Strategy for Social Security Spousal Benefits
3. Delaying Social Security – A Smart Investment?

Some may say that creating a retirement budget before you are retired is futile and pointless because of inflation and other factors. My response to those concerns is two-fold.

First, if you don’t make a reasonable attempt to predict your retirement living expenses, you will not be able to predict if or when you can afford to retire. Second, you can factor inflation into your hypothetical retirement budget by using one of two strategies. The first strategy is to predict an average inflation rate and apply that rate mathematically to your current predicted amounts.

The second strategy is to design your retirement portfolio so that you fund at least your basic living expenses with assets that produce income that adjusts with inflation.   Examples would include Social Security income, annuity income with an inflation rider, and government-issued TIPS and I-Bonds.

I prefer the second strategy because it removes at least one significant prediction (inflation rate) from the equation.

Many so-called retirement planning experts like to use income replacement ratios instead of actually predicting retirement expenses.  I  believe this is a silly, arbitrary,  and potentially dangerous approach to retirement planning that is not based on good science. It’s just another rule of “dumb” that permeates the financial planning industry.  Some of these “experts” use the income replacement approach to frighten us into making more risky investments that just happen to  pay them higher fees and commissions.

None of us can really know with certainty what we will spend when we retire no matter how diligent we are in maintaining and updating our hypothetical retirement budget. This is where knowledge of the experiences of those who retired before us can help.  Fortunately for not-yet-retired baby boomers, that real world data is increasingly available. We can use this data to cross-check and quality control our own predictions.

Recently the Employee Benefit Research Institute (EBRI) published a paper entitled “Expenditure Patterns of Older Americans 2001-2009. The EBRI used data gathered by other organizations and its own survey of 5,000 retired households.  The study broke down these seniors’ retirement expenses into seven categories:  home-related, food, health, transportation, clothing, entertainment, and other.

Here are some of the EBRI survey and analytical results that I found to be the most compelling:

1.  The median annual expenses for all retired households aged 50+ declined with age. Interestingly, the decline is almost linear.  For example, median expenses at age 65 were approximately $35,000 then declined by 34% to approximately $24,000 at age 85.  (The expense  figures are expressed in 2010 dollars.)

2.  While retired households have a median income that is 57 percent that of working households, these retired households spend 80 percent of what working households spend.  For these numbers to actually work, a retired household must have retirement assets that can be used to close the gap between their income and their spending.

3.  For all retired age groups, home-related expenses were the largest category, by far.  Housing expenses increased as a percentage of total retirement expenses from 38% in 2001 to 47% in 2009.  This is another red flag that signals the importance of killing that mortgage (or downsizing) before retiring.

4.  Health care expenses increase with age. This should not be surprising. What you may not have considered – but the survey shows – is the long term care expenses and private health insurance premiums are significant components of this increase.

I encourage everyone to read and digest the EBRI report. Use what the EBRI provides – and what our predecessors have actually spent – to reconsider your own retirement plan and budget.

You can find a link to the EBRI report here.

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“Money death” is simply a shock-value way of saying that a retiree has run out of money so that his or her basic retirement income needs are no longer being met. The authors of the article that describes their proposed strategy also use the phrase “boomers behaving badly.” The referenced “bad behavior” is a failure to create and implement a plan that to support yourself when you retire. (More than likely, it is a failure to create any plan.)

The strategy is interesting to me and should have appeal to baby boomers who are (a) close to retirement and (b) have already have significant retirement investments in their nest egg, but not enough that they can survive on an ultra-conservative portfolio. What they may not have is (c) a plan to make their nest egg last.

The authors of the strategy note first that trying to survive a lifetime on a low risk retirement portfolio is probably not going to work for most retirees. This is particularly apparent in today’s low interest rate economic environment where Fed policy continues to punish savers in favor of spenders.

What is proposed, then, is this: First, boomers should create a retirement investment portfolio that is heavily weighted in dividend-paying stocks and high-yield corporate bonds. More important, rather than decreasing equity and corporate bond exposure as retirement approaches and begins, this portfolio should remain in place. This creates a reasonable possibility of achieving returns that will support your retirement income needs. This brings us to the second part of the plan: Buy a deferred fixed annuity now as “longevity insurance.” The deferred annuity functions as a safety net, in case the higher risk retirement portfolio crashes and burns (e.g., 2008 all over again.)

A key to the second step is purchasing the deferred annuity at least 20-30 years before you will need it, so that the cost-benefit ratio is quite low. For example, someone who is 60-65 could spend $100k now for an annuity that would pay $75k annually beginning at age 85. The authors caution that this part of the plan would only make sense if the cost of the annuity represented no more than 10% of your wealth. After all, once you spend that $100k, you won’t see any of it again even if you died way before age 85.

The big problem/risk I see with this plan is inflation. Let’s assume that at age 60 you purchase a deferred annuity that will pay you $100k annually beginning at age 85. With average annual inflation at only 3%, the spending power of that $100k will shrink to $48k when payouts start at age 85. If we experience a period of high inflation (certainly possible given recent government spending and borrowing), the picture looks even worse.

But, overall the plan is worth considering. What helps are recent rule changes announced by the federal government that will allow 401(k) funds to be used directly to purchase annuities, without a lot of red tape and immediate tax consequences.

Here is a link to an article that discusses the plan: Do You Face Money Death in Old Age?

If you are  a student of retirement planning like me, you will want to read the full plan article here.

Comments?

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There are organizations that study spousal benefit strategies a lot more than I do. Based on their research and ever increasing lifespans, here is what is now considered to be an optimal “claim now, claim more later” Social Security strategy for many couples:

1. Because women live longer than men but tend to earn less, husbands should begin their Social Security retirement by claiming a spousal benefit.

2. Therefore, the wife should claim benefits as soon as she can (age 62) on her own earnings record and continue claiming her own Social benefit until her husband dies.

3. The husband should claim a spousal benefit based on his wife’s earnings record when he reaches his full retirement age (e.g., age 66).

4. When the husband turns 70, and assuming he was the higher lifetime wage earner, he claim his own retirement benefit and stops the spousal benefit.

5. If the husband dies before the wife (statistically likely), the wife then switches to a survivor’s benefit based on her husband’s record.

This strategy should maximize the total Social Security benefits received by the couple over their combined lifetimes.

This should work OK for us.  I am four years older than my wife. When she turns 62, I will be 66 so she will claim her benefit, I will claim a spousal benefit (50% of her benefit) until I turn 70, at which time I will claim my own, maximized benefit .  I will have to run the numbers to compare this strategy to the “claim and suspend” strategy in which I claim my own benefit at age 66, she claims a spousal benefit, then I suspend my benefit until I turn 70 which will increase my benefit by more than 30%.

Lots to think about but you can read more about spousal benefit strategies here.

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1. Filing a Restricted Application for Social Security Retirement Benefits
2. New Social Security Calculator for Estimating Retirement Benefits
3. Delaying Social Security – A Smart Investment?