Social Security is a simple idea with complex administration. Depending on when you start taking your benefits and how you choose to allocate them to your spouse, you can save or scrap tens of thousands of dollars. Below, you will learn the basics of when you can start claiming benefits. You will also discover strategies which can help you maximize benefits over a lifetime.
The Basics of When, Why and How to Claim
There are many ways to collect some, all, or even more than 100 percent of your Social Security benefit, depending on when you start collecting.
To collect your full benefit, you should start claiming at your full retirement age. For people born between 1943 and 1954, the retirement age is 66. For those born in 1955 and beyond, the retirement age is 67.
To claim a partial benefit, you need to be 62. Claimants aged between 62 and retirement age can receive 75 percent of their Social Security benefit. Alternatively, people who do not claim their benefit between retirement age and age 70 receive an 8 percent increase to their benefit for every year they wait to claim.
Married claimants who are of retirement age can also claim up to 50 percent of their spouse’s benefit. If they are between age 62 and retirement age, they can claim their spouse’s benefit at a 30 percent reduction. Widows and widowers can receive a survivor’s benefit in the same amount received by their late spouse.
Divorced spouses can qualify for survivor benefits under certain conditions. It does not matter if your ex-spouse remarried, but if you remarry before age 60 you are disqualified from receiving survivor benefits unless your remarriage ends in death, divorce, or annulment before your ex-spouse dies. You must also be 60 years of age (50 if claiming disability benefits) or care for your ex-spouse’s child aged 16 or less who receives Social Security benefits under your ex-spouse’s record. Finally, if you are already eligible for Social Security benefits that are higher than your ex-spouse’s you are not eligible to collect a survivor benefit.
Recommended Strategies to Maximize Benefits
Waiting until 70 to collect your benefit is the best strategy for maximizing it. Financially, people are in greater danger of living too long instead of dying too soon, so taking Social Security benefits early should not be done unless you genuinely need them at 62 or 66. The Social Security program calculates benefits to cover payments to men’s and women’s expected lifespans, 83 and 85, respectively. However, there is a 61 percent chance that one spouse will live to at least 87. Delaying a claim until 70 yields higher lifetime benefits, which can help protect against inflation after retirement.
Married couples have some additional strategies to maximize their lifetime Social Security wealth. First, they can claim and switch. For example, if one spouse is still working while the other is not, the non-working spouse can start collecting Social Security at 62 if the other spouse is of full retirement age. This is because the retirement-aged spouse is entitled to collect half the other spouse’s Social Security benefit (this is called a restricted application). Meanwhile, because the retirement-aged spouse is not taking his own benefit, it will continue to grow until he reaches 70, at which time his spouse can claim half of his higher benefit, to which she also has survivorship rights to.
Next, they can file and suspend. The basic idea is that when one spouse reaches 66, she can file for benefits and immediately suspend them so they will continue to grow by 8 percent per year. Meanwhile, her spouse can file for spousal benefits on her account and receive 50 percent of them. By the time she reaches 70, her account will still have grown even though it was drawn on by the spouse. Meanwhile, the spouse’s own account has grown, ensuring that they can both collect more money when they switch back to their own benefits. Some people claim their Social Security benefits as early as possible for the pleasure of having extra money each month. While it might be tempting to put that extra money toward a cruise or a new television you have been eyeing, the temptation is not worth all the money you could save with just a few extra years of managing on your normal income, something you have already become accustomed to.
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During his campaign, President Trump promised a significant overhaul to the federal tax code. If he comes through on his promises, the seven federal tax brackets would be streamlined to just three: 12, 25, and 33 percent.
Under such a plan, taxpayers who make between $48,000 and $83,000 would see roughly a $1,000 reduction in income taxes per year. High earners—America’s 1 percent—would enjoy an average reduction of $214,000. But not everyone will pay less.
For instance, removing the head of household filing status, as Trump proposes, would force single parents to pay more in taxes. So, it’s important to assess how these tax policies could affect what you pay. Because you could end up with more or less money in your hand each year.
With all that said, a new tax plan like the one White House leadership wants will impact your retirement as well, especially if you change tax brackets. Here’s what you need to know:
The possibility of lower taxes equals more options for retirement
As mentioned, Trump’s tax plan will save many folks money each filing season. Overall, taxes would decrease by $2,940 per filer on average. That extra money can be spent on retirement investments, like life insurance, stocks, mutual funds, or real estate, rather than a new TV or car.
If a new tax plan is implemented, and your taxes are reduced, start planning for what to do with the extra cash you save. You want to make the right investments for your retirement, which involves taking a look at how the entire tax plan affects where you should put your money.
Pre-tax investments may become less attractive
One of the advantages of a pre-tax investment, like a traditional IRA or 401K, is that it reduces your present tax burden. You can let that investment grow and then pay taxes on it when you retire.
But if you have less tax to pay, then it becomes less beneficial to save money on those taxes today. It may actually be smarter to pay the taxes now and then invest the money (especially if you believe taxes will go up in the future).
Consider this scenario:
- In Trump’s proposed plan, a married couple with $100,000 in taxable income would pay $12,000 in taxes (a 12 percent rate).
- Previously, a married couple having $100,000 in taxable income would have paid $25,000 in taxes (a 25 percent rate).
Clearly, it makes less sense to toss money into a traditional IRA or 401K to decrease your taxes. What you’re able to save is reduced because you’re already paying less in taxes (at least in this case).
Also, since pre-tax investments would become less attractive for most, after-tax investments, like a Roth IRA or annuity, would become more attractive. For most people, it might be wise to pay taxes on income now since rates are lower, and invest in something like a Roth IRA account to ensure money can be withdrawn tax-free in retirement.
Cutting Medicare surtax would benefit the wealthy
The Affordable Care Act helped fund Medicare partially with a surtax on investment income of 3.8 percent for those in the highest tax bracket. Trump and the GOP plan to eliminate this surtax, which would give high-income investors significantly more return on their investments.
The capital gains tax rate for them would decrease from 23.8 percent to 20 percent.
Opponents say this surtax would reduce federal revenues by $117 billion over a decade and accelerate Medicare insolvency, all the while putting an incredible amount of money back in the pockets of the wealthy. This could result in Congress raising Medicare’s eligibility age from 65 to 67 or higher. It also could lead to a reduction in benefits from Medicare, which is seen as a bedrock of health care coverage.
You should pay serious attention to what goes on with the Medicare surtax and even the Medicare employer tax (which could change).
Other factors to consider
Although President Trump has promised to protect Social Security, no concrete plans have been put forward. Some research institutions estimate Social Security will be insolvent by 2035, and there may be changes in the tax code that will impact the program. Pay serious attention to this, especially if you’re going to depend on that income in retirement.
Additionally, Medicare isn’t the only medical issue you need to consider. The Trump administration has talked a lot making Health Savings Accounts (HSAs) more accessible for Americans. Plans include increasing contribution limits, establishing easier ways to pass HSAs on to beneficiaries, and making the accounts more portable.
HSAs, which are tax-deductible, will definitely become a more useful option if the Medicare surtax is repealed and the Cadillac plan is canceled. That plan, starting in 2020, would impose a 40% excise tax on high-cost employer-sponsored plans.
Wait to see what happens—then make the right move
Tax policies change with every administration, so it’s always best to observe what’s being changed and how it affects what you’re doing for your retirement.
Analyze your personal situation and do your research. See what investment vehicles suit you best—and make those investments. Watch out for changes in the tax plan that will affect Social Security and health care in retirement—and prepare accordingly. Doing all this will put you in a better spot for retirement.
Student debt is at an all-time high; about 44 million Americans hold almost $1.4 trillion in outstanding debts. The issue was hotly debated during the presidential elections, and higher education institutions have been soul-searching for innovative ways to help students deal with rising costs of education.
While the topic has gotten a lot of attention, though, the perception of those affected usually fits a certain stereotype: young millennials just starting down the road to a long-term career, with many years ahead of them to pay down their debt. The reality is more complicated. Currently, 6.4% of student loan borrowers are age 60 or older. That number is expected to grow as young Americans carry their debt further into their futures. Borrowers would do well to understand the resulting implications and the best ways to approach student debt as they get older.
Setting favorable terms for loan repayment
Some borrowers mistakenly think that their student debts will automatically be forgiven after a certain age. There is indeed precedent for this line of thinking; in the U.K., for example, federal student loans are forgiven when the borrower reaches age 65. This is not the case in the U.S., and federal loans are only cancelled upon the borrower’s death.
While this fact may be grim, it can still be used to the borrower’s advantage. Because older Americans are usually living on a set fixed income and federal loans are nullified upon death, it often makes sense to reduce monthly payments by arranging to stretch out the loan term. While this increases the total amount of interest paid, it serves to keep monthly payments to a minimum which can assist with budgeting purposes. Also, if the borrower passes away before the loan is completely paid off, the resulting loan forgiveness would end up reducing the total lifetime costs.
Additionally, borrowers should be aware that some loan servicer providers automatically enter borrowers into a repayment plan where costs start low and increase gradually, in anticipation of a recent graduate starting with a lower salary and slowly increasing their income. This arrangement clearly does not make sense for older borrowers on a fixed income, who should work with their servicer to arrange an alternate agreement that is a better fit for their predicted future income.
Forgiveness programs do exist
Although an automatic, one-size-fits-all forgiveness program does not exist, borrowers should be aware that there are still other avenues to help lessen their debt. Some older borrowers may be eligible for programs that help limit total payments.
While three-fourths of older borrowers with student loan balances are only holding balances on their own education, the remainder are holding balances on a child or other relative’s education. The latter may be eligible for an Obama-era repayment program called the Pay as You Earn PAYE program, which limits required payments based on earnings. Borrowers can check on the Federal Student Aid website to determine eligibility.
Another federal program of interest is the Income-Based Repayment (IBR) program, which caps maximum monthly payments at 15% of discretionary income. One of the most appealing aspects of this program is that after 25 years of continuous repayments, borrowers may be eligible for loan forgiveness for the remaining balance.
Be prepared to pay a Social Security offset
In 2005, the U.S. Supreme Court upheld the principle of “administrative offsets” that allow the government to collect on unpaid student loan debts by withholding Social Security benefits. The amount of the offset can range up to 15% of the borrower’s disability and retirement benefits, which may come as a surprise to elderly Americans who are depending on the income.
Many people are caught off guard is that Social Security used to be off limits for student loan offsets. Until 1991, there was a 10-year time limit on the government’s ability to collect student loan debt through administrative offsets. And until 1996, those offsets could not include Social Security. Now, though, 173,000 Americans received reduced Social Security checks because of unpaid student loan debts.
These factors are important to consider early so that Americans with student loan debt can be aware of the costs that may lie ahead.
Communicate with your loan servicer
The best repayment arrangement always depends on the specific circumstances of each individual borrower. To avoid getting lumped into terms that may not be the best for you, make sure to communicate with your loan service provider frequently and update them on any major changes. Open and frequent communication is the best way to help them help you.
As the adage goes, “a life without regrets is a life not lived,” but it is also “better to regret what you have done than what you haven’t.” The three biggest regrets of retired baby boomers center on the things they have not done and teach the next generation to make more informed choices.
1. Not Saving for Retirement Earlier
A rare absolute rule of finance is that people should start saving for retirement as early as possible, with the best time to start being in one’s twenties. Life expectancies are growing and show no signs of slowing down, so more money is needed to be stretched out for a longer period of time. Starting to save and invest as soon as one enters the full-time workforce can make a dramatic difference in the amount of money that accumulates by the time a person is ready to retire.
Many baby boomers failed to start saving on time and properly because they did not understand just how much money would be needed for their retirement. Some also did not know that receiving social security benefits or taking money out of retirement accounts before it is needed can have tax consequences that can substantially lower savings. Finally, many people tend to forget to adjust for inflation when considering whether they are satisfied with the rate of return on their investments.
2.Not Working Less and Traveling More
A study of 2,000 baby boomers commissioned by British Airways revealed that one out of five boomers regrets not doing more traveling around the world. The survey data also indicate that only 9% of American workers get more than nine vacations days per year and that only 37% of Americans took all of their vacation days in 2015, suggesting that working too much may be an issue whose scope extends far beyond just the baby boomer generation.
A 10-year research project conducted by Karl Pillemer, Professor of Human Development at Cornell University, into the lives of 1,200 people aged 65 and older also revealed that lack of travel during one’s youth is a common regret. He writes, “To sum up what I learned in a sentence: When your traveling days are over, you will wish you had taken one more trip.”
3. Not Working More
It might sound surprising given the decades of work they’ve done, but more than two-thirds of middle-income baby boomer retirees wish they had worked longer, and not for expected reasons. One might assume that people would want to continue working to keep earning their salaries, but for many baby boomers, wanting to keep working is about the work. People who are passionate about their careers and enjoy their work want to keep doing it. For this reason, many baby boomers return to the workforce on a part-time basis or as consultants. A number of baby boomers also enjoy working during their later years because they find that it keeps them mentally sharp, physically fit, and gives them a sense of purpose.