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.
Once upon a time, when you hit retirement age, you could retire. It doesn’t work like that anymore. No longer is the question: “am I old enough to retire?” Now, the question is: “how am I possibly going to afford life after work?”
Reports claim that 10,000 Baby Boomers are retiring every day. But many of them are retiring into a standard of life that is significantly less ideal than they imagined. You don’t want that for you.
Don’t worry. If you’re smart, retirement will be a breeze. It just boils down to asking the right questions.
One of the biggest fears people have about retirement is that they’ll retire broke. The problem with this way of thinking is that retirement isn’t an event. Rather, it’s a process that starts even before you reach your prime working years.
Unfortunately, more than half of Americans go into retirement broke, with nothing to show for the 35+ years they’ve been working. According to a GoBankingRates research, there is a significant chunk of the population that has less than $10,000 saved for retirement. Worse, many don’t have any savings at all.
A survey by Bank of America Merrill Lynch revealed that about 81% of Americans don’t even know how much they need to save for retirement.
Below are 3 questions to help you be more proactive in how you handle the retirement process.
1. “Can you afford it?”
The current economic environment has led to a rise in the number of people who are ready to retire but can’t. The common phenomenon is a hybrid; people are in retirement but they’re still working.
So, how much money do you need to avoid this situation?
To be able to answer that question, it boils down to one simple idea: your expenses need to be less than your income. There’s more to it, but that’s the basis.
Being retired means living on a fixed income without a possibility of salary increment. Also, your expenses won’t always be fixed: healthcare goes up, taxes fluctuate, and things cost more in general over time. There are assumptions you’ll need to make when saving up.
As a guideline, many financial planners advise you to start saving up to 15% of your income while you’re still in your 20s. If you want to know the exact amount, professionals estimate that you should have at least 10 times your last full-year income by retirement. Thus, if you make $100,000 in your last year of work, you’ll need at least $1,000,000. Use this online calculator to estimate how much you need.
To increase your income, start saving and investing as early as possible. Take advantage of accounts such as Roth 401(k)s and Roth IRAs.
2. “Where should you retire?”
Another thing most people overlook is the impact where they live has on their income. For instance, did you know that 13 states tax Social Security benefits while 37 don’t? Of the 13, 9 exempt tax up to a certain limit. The remaining 4 (Minnesota, Vermont, North Dakota and West Virginia) tax your benefits, no exemption.
Also, different states have different laws regarding estate and inheritance taxes. Some states have estate tax while others have inheritance tax. Yet, New Jersey and Maryland have both taxes.
You may also want to understand the different property tax rates across states. This will be crucial in helping you understand how you spend your money once you retire.
Bottom line: Understand the tax implications of your retirement state or city to save yourself from unnecessary surprises.
3. “Do you know how to maximize your Social Security benefits?”
A MassMutual quiz aimed at testing how much Americans know about the Social Security retirement benefits asked over 1,500 adults 10 basic Social Security questions and only one answered all correctly. Only 28% got seven or more questions right––this was the passing grade.
Will you be part of the many that retire without understanding how they can maximize their Social Security Benefits?
Although Social Security is designed to cover the disabled and survivors of deceased workers, is primary purpose is to assist retired workers with their monthly expenses and without it, most retirees would probably be in big trouble. According to a Gallup report, more than half of the retirees says Social Security is a major source of income.
While the Social Security benefits at Full Retirement Age (FRA) are capped at $2,687 a month in 2017, there are a number of ways that a retiree could use Social Security to boost benefits.
For instance, there’s a “Social Security secret” you can use to get an additional $15,978 each year. Retirees can influence the amount they are paid in Social Security by choosing when (what age) to claim their benefits. At FRA, a retiree is entitled to 100% of their benefits. Retiring before reaching the FRA reduces the monthly benefit. However, holding off filing for the benefits by a year increases your benefit by about 8%. This method works so well that 23% of retirees regret not waiting longer before filing.
Depending on how “lavish” you plan your retirement being, you might need a little more or less money. When in doubt, always opt for the higher amount. You never want to be surprised by post-retirement costs, and you always want to be ready.
For more, you can follow Goldstone Financial Group on Twitter @GoldstoneFG.
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.
Life is full of unexpected situations that may have required you to pull from your retirement savings to cover pressing, unanticipated expenses. Although such situations can present challenges to the integrity of your retirement fund, there are several things you can do to reinvigorate your savings.
First, identify what caused the drain in your retirement savings. This step may seem obvious, but it’s important to take time to evaluate the factors that led to your emergent situation so that you can take steps to avoid them again in the future. With time and careful consideration, you can prepare for future unexpected situations.
Generally, it is advisable to save cash reserves to cover expenses for anywhere between three and six months. If you’re a homeowner, you should be able to cover six to 12 months. In addition, you should keep the amounts of the deductibles for your homeowners, flood, car, and health insurance. As an added precaution, set aside 1 percent of your home’s value each year for repairs.
Next, cut expenses and prioritize retirement. Because people spend the majority of their careers thinking that retirement is far away, other more immediate expenses often take priority over saving for a seemingly distant eventuality. However, dipping into retirement savings to cover an emergency signals that spending less on lower priority expenses may be necessary in order to recoup your losses. To help you accomplish this, refer back to the first step and evaluate what expenses you can minimize or maybe live without (at least for a while). Finding tax preferential vehicles such as municipal bonds, MLPs, and real estate in addition to the retirement accounts you already hold can help you get back on track as well.
Start saving small amounts to develop good saving habits and begin replenishing your retirement fund. Easing into monthly saving can help you get your retirement savings back on track without presenting you with a harsh burden. Starting by saving just 1 percent of your annual income in a company retirement plan helps you form a habit of saving. The 1 percent amount is small enough that it won’t be missed but big enough to keep the need to save for retirement fresh in your mind. It also helps you to save more as time goes on. By increasing the amount you save by an addition 1 percent of your income every other month, you will quickly be on your way to substantially rebuilding your retirement savings.
Eventually, you should increase your contributions to company retirement funds to the maximum amounts allowed by your 401(k)s and IRAs. Taking advantage of matching employer contributions will also be beneficial. If you are aged 50 or above, you can also potentially take advantage of up to $1,000 in catch-up IRA contributions and up to $6,000 for catch-up 401(k) contributions.
Pursue an extra job or income-generating side project to help fill in the gap.
Picking up a second job or an extra client or two can help generate additional income that can be set aside for retirement without impacting present-day expenses. If your spouse or partner does not work, having him or her join the workforce can be a great boon. Alternatively, if you are already retired, consider turning a hobby into an income-generating project. Or, apply to a big company, whose employee insurance plan can help cover healthcare costs. However, if you are unable to pursue any of the examples above, even simple things like tutoring or helping neighbors with some yard work can help supplement other income.
Delay retirement and social security to make sure you have more money for later. The best way to improve a retirement portfolio’s longevity is to delay drawing on it. Delaying retirement allows more time to build greater savings and also ensures that saved funds that you have accumulated will last longer into the future because they are being drawn on later in time. If you delay your social security benefits until after retirement age, your benefit grows with each year of delay.
If you’re a homeowner and your home has sizable home equity, consider a reverse mortgage. A reverse mortgage allows people aged 62 and over to receive tax-free cash in a lump sum or fixed payments. Moreover, the mortgage does not need to be paid until the homeowner moves out or dies. However, there are closing costs associated with this type of mortgage, and the homeowner must maintain the home. Although seniors often consider a reverse mortgage to be a last resort, it is a viable option provided that it is obtained from a reputable lender and that the homeowner understands how the mortgage works.
Many economists agree that the personal savings rate in America is too low. Even though it climbed to 5.7% in late 2016, it’s still behind most other developed countries.
For instance, Switzerland households save 13.4% of their income. In Japan, workers have averaged a savings rate of 11.74% from 1970 to 2016.
For those looking to save more, what’s the solution? Obviously, making more money helps, but that may not be entirely possible for everybody.
What anyone can do right now is manage their budget better. Smarter spending equals higher savings—a good step towards ensuring a secure financial future. Here are 4 reasons why considering the impact of spending is just as important as saving.
1. A penny saved is still a penny earned
Benjamin Franklin’s famous quote is simple but profound. Anybody that’s worried about their financial well-being should remember it. Say it out loud, “A penny saved is a penny earned.”
Though most are familiar with this quote, it’s not being put into practice the way it should be. According to research from GOBankingRates, one in three Americans don’t have any retirement savings.
Cameron Huddleston, an expert columnist at GOBankingRates, believes this can be fixed. “There are plenty of obstacles Americans claim are in their way when it comes to saving for retirement,” she says. But things likes student loan debt, low wages, and a child’s education “don’t necessarily make it impossible to save for retirement.”
For those on a strained budget, the best way to save more money is to look at how you’re spending. There are many easy ways to save a few or even hundreds of dollars a month, from cutting the cord on cable to bargaining at flea markets.
2. Overspending carries future financial consequences
According to a study published in the Journal of Consumer Research, consumers overspend due to impatience and not thinking about long-term consequences. Examples of this play out every day.
For instance, 30-year olds probably don’t think about how buying a super-expensive TV today could negatively impact their quality of life at 65. That’s just so far away, and that TV can offer immediate pleasure.
This is what motivated the study’s researchers, Daniel M. Bartels and Oleg Urminsky, to look for ways to change this behavior. The two University of Chicago professors found that the solution is more complex than just thinking about one’s future self. While spending money, people must also care about their financial future. If someone doesn’t care, then spending less and saving more becomes less likely.
As Bartels and Urminsky say, “The best way to help consumers avoid overspending is to get them to both care about the future and recognize how their current behaviors affect the future.” Thinking and caring about the future is key to spending wisely today.
3. There is waste everywhere
Think of something like lean management in business. The core idea is to eliminate waste and improve efficiency. People should be applying this philosophy to the way they spend money.
Many may argue that saving is tough because all their income is spent on essentials, but research doesn’t necessarily support that claim. A survey by 24/7 Wall Street found that Americans spend roughly 15% on non-essentials (which means $15 out of every $100 doesn’t necessarily need to be spent).
Some common non-essentials include the following:
Eating out at restaurants
It’s worth noting that things that can be classified as “non-essentials” offer necessary relief from the stresses of life. Yet the fact remains that this is the primary area where wasteful spending occurs. Cut down any wasteful spending here and savings rates rise immediately.
4. Overspending leads to debt
It shouldn’t be a surprise that student loan debt can delay saving for retirement. It’s hard to stash away cash when lenders need those monthly payments.
For those that overspend and get caught in debt, the same idea applies. Habitual overspending makes getting out of debt—and saving—quite difficult.
It’s rather alarming that the average credit card per U.S. household is around $16,000. This indicates consumers are buying things without having the ability to pay in full. Carrying a credit card balance is necessary sometimes when the unexpected arises. But for many, high balances are simply a result of bad money management (overspending).
Also, since credit cards have higher interest rates, this means people are getting burnt by interest payments. That interest money could have been savings instead.
Saving more by spending wisely
In the end, it’s not necessarily about being stingy. It’s about spending more wisely. This means buying things at the lowest possible prices, staying away from unnecessary purchases, keeping credit card balances as low as possible, and more. If more folks start to pay attention to the impact of their spending, they’ll see their savings rise.