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. 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?

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

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?

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?

For most boomers the concerns about changes in Social Security should be minimal. Even those who believe aggressive changes are needed to Medicare and Social Security tend to agree that the changes should not affect those who are near retirement. Means testing may come into play at some point but I doubt it will be applied to those who are at least age 60.

On the other hand, some folks who are hitting age 62 are taking another approach to the Social Security benefit question, one that I think is irrational. Their argument is that if you don’t claim the retirement benefit now, you may lose it. Rubbish.

The more rational approach is actuarial, as I have discussed before. The AARP has recently released its new online Social Security benefit calculator. To use the calculator, you enter your age, gender, and estimated monthly benefit at your full retirement age. The calculator immediately graphs your different anticipated benefit levels at different ages.

You can also enter your estimated retirement living expenses so that the calculator will determine the percentage of your retirement income needs will be met by Social Security.

I give credit to the AARP calculator for including a section that graphically explains what will happen to your Social Security retirement benefit if you claim the benefit early (before full retirement age) and also work.  (Here is more information on working past age 62 while claiming Social Security.)  There are data sliders that you can manipulate to dynamically show the effects of changes in the different data inputs. The calculator also reports the odds that you will live beyond a certain age. Consideration of impact of your life expectancy on your income plan is imperative.

The concluding “What does it all mean?” section of the AARP calculator allows you to print a summary report personalized for you. It doesn’t answer the question of when you should claim your Social Security retirement benefit but it gives you plenty of information to consider.  I particularly liked these tidbits on my report:

• It may be better to spend your savings than claim earlier.
• For every year you wait, your benefits go up by $2,109 annually.

The idea that you should spend savings first so that you can delay claiming Social Security may appear counter-intuitive but it’s not. Remember that Social Security has three important attributes: (a) it provides income like a lifetime annuity; (b) the benefit is indexed to inflation; and (c) it has almost zero risk. A conventional retirement nest egg has none of these attributes.

I strongly recommend that you give the calculator a try for you and your spouse. Here is the link: Social Security Calculator – Estimate SSI Retirement Benefits and Income

Meanwhile, I have learned about yet another new tool for determining the best age to start Social Security. I am evaluating it now and will report on it soon.

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1. Finding the Best Strategy for Social Security Spousal Benefits
2. Filing a Restricted Application for Social Security Retirement Benefits
3. Your Social Security Statement is Now Online

I can’t place all of the blame on boomers for their decisions to take SS benefits at age 62. In some cases, they are encouraged by their “financial advisers” to take the benefits and invest them. These advisers, of course, are primarily salesmen. What they don’t tell you is that many of their clients lack the discipline to actually invest the money when it arrives every month. They are tempted to spend it and they do.

But the article continues with the assumption that you will invest it. How does that work out?  Here is the short answer, in the words of the author:

Does the “start early and invest” strategy result in more income than if you had simply waited until age 70 to start your Social Security benefits? The answer is yes if you don’t live to at least average life expectancies, and/or if you achieve good rates of return. The answer is no if you live to average life expectancies or beyond and/or you achieve modest rates of return.

In more concrete terms, if you invest and achieve a 5% return on your investments, and further assuming 3% average COLA benefit adjustments, the break-even age for taking benefits at age 62 compared to age 70 is 82. If you achieve an 8% return, the break-even age increases to 89.

Do you really expect to earn 8% or even 5% for the next eight years in this economic climate? I hope so but I am not counting on it. A double-dip recession will kill that idea in a hurry.

The author points out that his simple actuarial analysis of taking Social Security early does not consider spousal benefits. This is a serious omission for married couples in which one spouse was the primary wage earner.

Here is a link to the full article: Start Social Security Early and Invest? Ask the Actuary

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This trend is bad for the retiree but perhaps good for the long term health of the Social Security system. For each year prior to age 70 that benefits begin, the retiree gives up 7%-8% in benefits. This loss  applies as well to the surviving spouse. This can make sense if your health is expected to give you a short life span. It may also be necessary if you are unemployed and broke.

However, it seems that a lot of folks are claiming benefits at age 62 because they fear that Congress will cut their benefits if they don’t. This is crazy thinking in my opinion. That might be a concern if you are 42 but not 62. I’m not alone in this thinking. Alicia H. Munnell, director of the Center for Retirement Research at Boston College, had this to say about boomer fears:

It’s so off the mark. There is no question the benefits will be paid. The worst that could happen is that the system would be able to provide only 80% of the benefits under current law.

The Social Security Administration estimates that benefits could be reduced by 22% and could continue to decline, barring any changes to the system, starting in 2037. A fear of benefit cuts in 2037 is no reason to surrender so much now, by claiming at age 62.

The author of a recent article on this subject also surmises that many boomers simply fail to comprehend what they are losing by taking Social Security benefits early. I agree and I suspect that this ignorance is particularly acute when the interests of the surviving spouse are considered.

Perhaps every early potential claimer should first be forced to read the hard numbers on paper, such as these from the article:

A top-earner retiring at 62 would get $1,803 a month. By waiting until 66, he’d increase that amount to $2,442, and delaying until 70 would bump the monthly payment to $3,256. Another way to look at it: someone who delays taking Social Security until 66 rather 62 will collect more money over time if they live until at least age 77.

Read more here: When Should You Take Social Security?

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1. Starting Social Security Early – Break-Even Age Actuarial Analysis
2. New Social Security Calculator for Estimating Retirement Benefits
3. Finding the Best Strategy for Social Security Spousal Benefits

First, let’s consider what has happened to our so-called wealth:

According to a report by the Center for Economic and Policy Research, a liberal Washington think tank, households headed by boomers between the ages of 55 and 65 lost about half of their wealth between 2004 and 2009 as a result of the real estate collapse and the shrinkage of 401(k) retirement accounts

(Source) This was a boomer calamity of the highest order because we do not have enough working years remaining to recover this lost wealth. Many boomers who lost jobs in the recession were forced to “retire” at 62 just to keep food on the table.

Retirement plans – such as the 401(k) – were supposed to be the retirement income salvation for boomers but that is not the case. Only 1/2 of working Americans even have access to tax-deferred retirement plans and the average pre-crash value of those was only $45,500. That won’t be much help.

Old folks just don’t have much income – period.  Consider this from the same article:

The archetype of the greedy geezer is based partly on a misconception about today’s oldest Americans: the World War II generation. The frequently repeated statistic that 75% of all assets are owned by people over 65 is utterly misleading, because those assets are held in a minority of very rich hands. Nearly half of older Americans receive no income — none — from assets such as stocks and savings accounts. Of those who do, half receive less than $2,000 a year. Three-fourths of those over 65, according to a report by the nonpartisan Congressional Research Service, have annual incomes, including Social Security, of less than $34,000.

Will there be baby boomers who receive Social Security and Medicare benefits who don’t need them? Sure – but not many.

How ironic that when polled during the debate over healthcare reform, two-thirds of the over-65 generation opposed it – even though almost all of them were receiving it themselves from Medicare. Hypocrisy in action.

Boomers have made a lot of borrow-and-spend mistakes but we are not alone. We should not be punished as a generation based on the myth that we are all sitting on gigantic retirement nest eggs.

Here is the link to the full op-ed piece – a must read: Social Security, Medicare and the nest-egg myth

No related posts.

If a retiree owns investments that are providing consistently high returns, and if an early (albeit diminished) Social Security benefit would allow the retiree to keep those investments earning, it may make sense to use the early benefit strategy. In other words, the total dollars gained by keeping high-return investments working could exceed the dollars lost by claiming an early SS retirement benefit.

The problem in today’s economy is I doubt there are any reasonably safe investments that would provide the high returns needed to make the math work. Keep in mind that by waiting until age 66 to claim Social Security, your benefit will increase by 25%. That is a permanent increase, month after month and year after year. Moreover, the benefit difference is further compounded by cost-of living increases that are built into the system. If inflation strikes with a vengeance, those cost of living increases will be worth a lot more than a high yield investment that is suitable for a retiree.

It does give us something to think about when contemplating when to claim a SS benefit. For more reading on this topic, read this excellent article by Jane Bryant Quinn, courtesy of the AARP: Financially Speaking: Social Security, Longevity Insurance; When to Claim Benefits

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