Ways to Maximize Social Security Benefits

 Recently I had the privilege of presenting at the Michigan Association of CPA’s continuing education conference on the topic of Maximizing Social Security benefits.  Social security is an important source of income for most of the estimated 58 million people who receive benefits.  Over my 22 years as a practitioner, I have tried to counsel clients to be sure to coordinate social security retirement benefits with their overall retirement plan.  As pensions (not just the City of Detroit) continue to become more obsolete, social security remains one of the few, if not only, guaranteed income sources for future retirees.

Following Ida Mae Fuller’s Lead

Before getting to how to maximize social security retirement benefits – how about a little fun social security history?  Do you know Ida Mae Fuller?  She is the first reported person to receive social security retirement benefits.  Apparently Ida went into the SS office after contributing a total of $24.75 over three years in payroll taxes and told the staff that she was retiring and didn’t expect to receive anything – but thought she might as well check. She ended up collecting $22.54/month and lived to age 100 – not a bad return on her contributions!

When to Begin Collecting Benefits

A traditional breakeven analysis works pretty well for single folks.  One of the best research articles that I have come across was in the Journal for Financial Planning and written by Doug Lemons.  Mr. Lemons outlined three main variables in the breakeven analysis: inflation/cost of living, income taxes, and time value of money. Mr. Lemons’ research addressed multiple variations and combinations.  The general rule based on his research is:

• The breakeven between taking at age 62 and 66 (assume full retirement age) is roughly age 78.  Meaning, you need to live past age 78 to be better off by waiting until age 66.
• The breakeven between taking at age 66 and 70 is roughly age 83.  Meaning, you need to live past age 83 to be better off. 

Social Security Analysis for Couples

The breakeven analysis breaks down a bit for couples (two life expectancies vs one). I have written about spousal benefits in the past.  In this post I’d like to provide two strategies for couples to consider.

File & Suspend Strategy

June Cleaver:  As you may know, June Cleaver of the “Leave it to Beaver” show was the classic stay-at-home mom.  Her husband Ward, who sometimes was known to be a “bit too hard” on their son the Beaver, was the sole income earner. If June and Ward were close to retirement today, their respective social security benefits at full retirement age might be $2,000/month for Ward and $0 for June.  How can they maximize benefits?  At full retirement age (assume 66) Ward files for social security retirement benefits but then immediately suspends.  This allows June to begin receiving a spousal benefit (assuming she is at full retirement age) which is $1,000/month or 50% of Ward’s benefit. Then, when Ward turns age 70, Ward may elect to begin receiving his own benefit ($2,640 in this example) that has increased 8% per year from age 66-70 thanks to “Delayed Retirement Credits”. Assuming average life expectancy, this combination will provide June and Ward the maximum benefit.  What if Ward passes away at age 75? June will receive the higher of her benefit or Ward’s as a survivorship benefit - $2,640 in this example.

Claim Now, Claim More Later

Elyse Keaton: Elyse Keaton of “Family Ties” was played by Meredith Baxter (and mother of Michael J. Fox in the show).  Elyse, unlike June Cleaver, had income of her own as an architect. Elyse and her husband Steven Keaton had similar earnings. If Elyse and Steven were close to retirement today, both of their social security benefits at full retirement age might be $2,000/month. Rather than “filing & suspending” like June and Ward, the Keatons might consider another strategy to maximize their total benefits.  At full retirement age Elyse should consider taking her own benefit or $2,000/month.  Steven, at full retirement age, may choose to restrict his benefit to a spousal benefit only (50% of Elyse’s benefit) or $1,000/month.  This allows Steven to collect some benefits now while allowing his own benefit to grow at 8% until age 70.  At age 70, Steven may elect to begin receiving benefits based on his own earnings – or $2,640/month.  Note that the survivor benefit for each of them now becomes $2,640.  The election to “restrict” to a spousal benefit can only be done at full retirement age or later. 

So, are you more like June or Elyse?  If your situation is more like June’s then consider the “File & Suspend” strategy.  If your circumstances are more like Elyse’s then consider the “Claim Now, Claim More Later” strategy. Do you have a social security question? Let us know – we love to research and help you maximize the benefits. 

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing information is accurate or complete. Any information is not a complete summary or statement of al available data necessary for making a decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of Raymond James. The examples provided are for illustrative purposes only. Every individual’s situation is unique and you should consult with the appropriate professional regarding your individual situation.  Every individual’s situation is unique and you should consult with the appropriate professional regarding your individual situation. Guarantees are based on the paying ability of the issuer. #C14-000038

Ladies – Don’t be left out of the Retirement Income Discussion

 We know that statistically women outlive men.  By age 85, there are approximately five women alive for every three men.  By age 95, the ratio of women to men doubles.  (Source: 2010 U.S. Census Bureau).  We also know that income disparities over time can have significant implications on the amount women are able to save for retirement.  Ultimately this means women need to fund a longer retirement with fewer financial resources.  

To help frame the retirement income decisions women have to make when approaching retirement, use the following suggestions as general guidelines:

• Establishing a target age is important because when you retire will affect how much you need to save.  For example, if you retire early at age 55 the number of years you have to save is lessened and the number of years that you will be living off retirement savings is longer.
• Medicare generally doesn’t start until you reach age 65.  Retiring prior to eligibility for Medicare means you may have to look into COBRA or a private individual policy, which can be expensive.
• You can begin receiving your Social Security benefit as early as age 62.  However, your benefit is then reduced 25% to 30% if you do not waiting to collect until full retirement age.
• Working part time during retirement will allow you to rely less on retirement savings in the beginning and you may also have access to affordable health care while waiting for Medicare.
• If you are married, and your spouse is still working too, it may pay to think about staggering retirements to ease the financial transition into retirement.

Creating a retirement income roadmap is a practical suggestion for managing and overcoming the unique challenges women face in retirement.  Don't sit this one out.  Join the discussion and learn along the way if necessary.  A financial professional can help sort through the options to develop a plan that is right for you.   One of my favorite quotes by Henry David Thoreau provides a timeless message for looking to the future; "Go confidently in the direction of your dreams. Live the life you have imagined."

Laurie Renchik, CFP® is a Senior Financial Planner at Center for Financial Planning, Inc. In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie was named to the 2013 Five Star Wealth Managers list in Detroit Hour magazine, is a member of the Leadership Oakland Alumni Association and in addition to her frequent contributions to Money Centered, she manages and is a frequent contributor to Center Connections at The Center.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

Information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

How You Can Ruin Your Retirement Plan With Too Much Optimism

 If you ask most folks who are heading for retirement what their major goals are, you will get an answer something like this:  I hope to maintain my current lifestyle and I do not want to run out of money until I die.  And if you ask them if they will make it, they will most likely say, they think they will.

Yet, the decisions people make may be too optimistic and may actually sabotage those very goals. Let me give you some examples.

• Taking early retirement packages because they are offered.  If you do this in your 50’s, you have potentially 40 years of income needs. Where is the income going to come from?  Many hope their assets will “hold out”.  Perhaps consideration to sticking with the current job, finding another one for cash flow and knowing if assets will “hold out” is a better plan.
• Thinking you will live well today and cut back when you are really old.  Catch 22 here.   You may be able to work now but that is not the case when you are 8o years old and need the income to cover inflated expenses and health care costs.
• Buying too much house with too big a mortgage because houses always appreciate.  Homes are often the biggest investment consumers make but not necessarily the best investment.   Homes have not appreciated much in the past 15 years and many folks have pulled out the equity like they are a bank account.  When selecting a home as you near retirement, consider if you will be able to continue to afford to live in it. 
• Leasing high priced cars and several of them.  We have been sucked into the “I deserve a nice car” advertisements.   Consumers are enjoying expensive rides, but they are putting out big bucks each month for the pleasure.   Most people know the cheapest way to buy a car is with cash.  If we put on that sensible hat when selecting cars, even when leasing, we might make some very different choices and have money at the end of the month to save toward retirement.
• Being overly generous to family members when you may not be able to afford it. You are kindest to your family when they don’t have to worry about paying your bills.
• “I am in great health!”  I do not need expensive health insurance, long term care insurance or life insurance.  It can’t happen to me syndrome is alive and well.  A little hedging with insurance to cover these potential risks is prudent.
• Last but not least, if I am careful with my investments, I can make at least “X”%. Maybe, but risking your financial future on an overly optimistic number is a disaster. Remember we are talking 30- 40 years of retirement income here.

How do you avoid these pitfalls and yet have a good life today?  You have a financial plan.  A plan is like a road map.  It should help you to get to where you want to go without taking too many side roads.  A plan helps you pick and choose what you want today but plan for tomorrow.  A financial plan is based upon realistic expectations and not hopeful or optimistic expectations.

The information contained in this report does not purport to be a complete description of the securities or markets referred to in this material.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Is the Social Security System Bankrupt?

Will future retirees be a part of the largest renege by our elected officials? I am certainly not brave enough to address the political aspects of Social Security in a blog – so today – just the facts.  According to recent data from the Social Security Administration, in 2012 the maximum social security retirement benefit that could be earned by an individual reaching full retirement age (age 66) is currently $2,513 a month or $30,156 per year. Not a fortune, but you certainly wouldn’t pass it up.

As traditional pension plans go the way of the dinosaur, social security and personal investments are left to pick up your retirement income needs.  Although many folks discount the value of social security – the fact is that it provides a larger benefit than most believe (this is not to suggest that social security is a good or bad program – just that the retirement benefits can be significant). Assuming a life expectancy of 20-30 years past retirement age, the present value of the $2,513 a month income stream is roughly $670,000!  Thought of another way, if you needed to generate $30,000 per year from an investment portfolio for the next 20-30 years, you would require investments to the tune of $670,000 (assuming a 4.5% inflation adjusted withdrawal rate). 

As you can see, social security benefits can add up to a significant portion of your total retirement income.

In our next post, we will discuss when to take Social Security Benefits.

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

The Key to Planning for Your Lifestyle in Retirement

After working with retirement clients for nearly 30 years, I have learned many things.  One of the most important lessons I have learned is that we all need to have the answer to one very simple question before we begin the planning process -- “what does it cost for me to live per month”?   As planners we can develop scenarios to help achieve retirement goals, but if we start with the wrong premise, we may be forming strategies to meet the wrong goal. 

Why is it so difficult to come up with a figure for our income needs? The general tendency is to underestimate expenditures and overestimate income. We also think about what we should be spending, not what we do spend.  Not knowing our expenditures comes about because we forget a few things:

• Food, shelter, transportation and clothing are only the beginning of expenses. They are the ones we see each month.
• We need to add insurances, taxes, gifts, car replacements, vacations, travel, family visits, and hobby and entertainment expenses. 
• If you have children, your educational expenses may drop off by the time you retire but you need to determine how much you might need for weddings and launching (yes—getting your darlings out of the parental home)
• If you plan to change your living arrangements, you need to factor in not only the additional cost of making a change but also the change in monthly expenditures related to the move.

There are circumstances that are out of our control, such as the rising cost of health care and insurance, declining markets and inflation.  To guard against these events we need to factor in percentage increases over time and to have a savings cushion of at least six months to help us weather the storm.

When I have gone through this analysis with clients, I often find a dramatic difference between projected income needs and actual income needs.  Can you imagine trying to reach your destination with only half a tank of gas?  It doesn’t work. Using the wrong expenditure figure can ruin the lifestyle you anticipated.

Talk to your financial advisor about tools to help you track your monthly income needs.

Taking IRA Distributions Before You Need Them?

My wife truly enjoys talking to our two dogs – not that she expects them to talk back (I don’t think so at least) – but who doesn’t enjoy seeing their heads turn as if that will really help them understand what she has to say.  I had a client give me a similar look a few years back when I suggested taking money from his IRA even though he didn’t need it for current spending.  (The client was past age 59.5 but younger than age 70.5 so he didn’t have to take a distribution quite yet.) 

While, like my dogs, he didn’t say anything his look suggested that he was thinking “why would I take a distribution that I don’t need and accelerate income taxes?”  His head started to turn straight again when I illustrated that he might want to maximize the lower tax brackets.  A married couple filing jointly can have taxable income up to $69,000 in 2011 and still remain in the 15% marginal income tax bracket (remember taxable income is adjusted gross income minus exemptions and deductions). For this client, they could take out roughly $25,000 from their IRA and still be within the 15% marginal bracket.  While no one knows what income tax rates will be for sure in the future –locking in a 15% rate seemed attractive. 

2011 IRS Tax Brackets

To find out if accelerating IRA distributions is the right move for you, work with your financial planner and tax preparer to run “what if” scenarios.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Timothy W. Wyman, CFP®, JD, and Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS we are not qualified to render advice on tax or legal matters.

The Bucket Strategy

If you are in retirement (or close to retirement), you are most certainly concerned about the recent market volatility.  You are likely wondering how your investment portfolio might be structured to provide the income you need without putting the portfolio in a vulnerable position. 

 The Bucket Strategy (not to be confused with the “Bucket List”) is another way to describe a cash distribution method to provide you with income from your nest egg during any kind of market cycle. 

Consider that we each have 4 buckets and that every investment within your portfolio fits into one of these buckets.  The idea is that this strategy can provide cash flow, even if equity markets drop or stay low for extended periods of time. 

Bucket 1:  The first bucket is labeled 1-year or less.  This is the cash and short term securities that mature in less than one year to support the cash flow needs for the client for the first 12 months. 

Bucket 2:  The second bucket would start generating cash flow in the 13 month – 36^th month or years 2 and 3.  This contains short-term bonds and fixed income type securities that have a small amount of volatility and are primarily for preservation of capital.  The holdings in this bucket do pass on interest income that flows into the first bucket. 

Bucket 3:  The third bucket is structured to generate cash flow needs in years 4 and 5 and primarily contains strategic income and higher yielding bonds (lower quality, longer maturing and international type bonds).  However, they do pass on interest income that flows into the first bucket. 

Bucket 4:  The fourth bucket is made up of equities (stock investments) and other assets that have higher volatility like gold, real estate, commodities etc.  Many of these assets produce dividends to help replenish the first bucket, if the dividends are set to pay in cash vs. reinvest. 

The bucket strategy is designed to provide enough cash flow to get through roughly a 6- or 7-year period without needing to liquidate the stock portion of the portfolio.  This should provide you with the confidence and consistent income needed to enjoy your retirement and work on your bucket list! 

Talk to your financial planner to see how the bucket strategy might work for you.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. Investments mentioned may not be suitable for all investors. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. High-yield (below investment grade) bonds are not suitable for all investors. When appropriate, these bonds should only comprise a modest portion of your portfolio. Please note that international investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated. Be advised that investments in real estate and in REITs have various risks, including possible lack of liquidity and devaluation based on adverse economic and regulatory changes. Commodities and currencies investing are generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Dividends are not guaranteed and must be authorized by the company’s board of directors. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation before making any investment decision.