How the New Changes to Social Security May Affect You

How-Social-Security-Works-cartoonPresident Barack Obama signed the Bipartisan Budget Act of 2015 into law on November 2, 2015. The budget provides relief for sequester cuts and allows for increased investments to support economic growth and build a strong middle-class for the next two years. To offset the cost of additional discretionary spending, the budget had to make cuts or changes to certain programs, including the Social Security program. The adjustments to Social Security will eliminate the file and suspend and restricted application strategies that helped some couples increase their lifetime Social Security benefits.

The new Social Security laws will take effect May 1, 2016. For those individuals currently using the file and suspend or restricted application strategies, they will not be affected by the rule changes. In addition, those individuals that turn age 66 before April 30, 2016 may elect to use the file and suspend strategy, if completed before May 1, 2016. The restricted application strategy will be available for those individuals that turned age 62 by December 31, 2015.

The file and suspend strategy allowed for one spouse, who reached their full retirement age, to file for and immediately suspend his or her benefits. By doing so, the second spouse would be allowed to start receiving a spousal benefit. The suspended benefits of the first spouse would then accrue delayed retirement credits at 8% a year. Under the new rules, if an individual decides to suspend his or her benefits, all benefits payable on his or her earnings record to other individuals will be suspended as well.

The restricted application strategy was often used in conjunction with the file and suspend strategy. By filing a restricted application, a person could apply for just a spousal benefit while his or her benefits accrued delayed retirement credits. Under the new rules, filing for a spousal benefit will trigger a person’s own retirement benefit. The Social Security Administration will pay only the greater of the spousal benefit or a person’s own benefit.

These two strategies were actually unintended loopholes that extended from the “voluntary suspension” concept introduced by the Senior Citizen Freedom to Work Act of 2000. The idea was originally intended to allow seniors that had mistakenly applied to receive their benefits early, stop their payments and earn delayed retirement credits. This allowed for these seniors to continue working, or even rejoin the workforce, without the risk of reducing or eliminating their social security benefit. The Social Security Administration will reduce a person’s annual benefit, if under the full retirement age, by $1 for every $2 made over a certain dollar threshold ($15,720 for 2016). Earned income includes W-2 wages and net earnings if self-employed. It does not include pensions, annuities, investment income, interest, or government or military retirement benefits.

It’s important to note that even if you missed out on using one of these strategies, you still may receive your maximum benefit. According to an analysis done by Social Security Choices, a software company that helps individuals optimize Social Security strategies, only about 18% of the cases analyzed showed it was beneficial to use the file and suspend and restricted application strategies. In addition, if these strategies were implemented, it could take as many as 12 years until a cumulative benefit was received.

With Social Security benefits playing a large part in calculating financial independence, DWM has researched the new adjustments to better understand how our clients will be affected. Although the new laws will limit the amount of planning available, we will continue to analyze each client’s Social Security situations in an effort to maximize their benefits, as there are still options and strategies available.

Furthermore, any quantitative analysis is complicated by the risk that there will be future changes to Social Security, which could include “means testing”.   Individuals, whose retirement incomes exceed established thresholds, could have their future benefits reduced or eliminated. We anticipate that maximizing Social Security strategies will continue to be a moving target. We look forward to working with each of our clients as they approach “retirement age”.

Strategies to Stretch Your Nest Egg

cash as nest for eggsOne of the most emailed NYT articles in the last week has been Tara Siegel Bernard’s “6 Strategies to Extend Savings Without Working Longer.” We thought today we would take a look at her six suggestions and critique them.

Ms. Bernard’s suggestions:

Practice Living on Less. This is a great strategy to consider. Over the years, we’ve reviewed the finances of hundreds of clients and prospects. It’s amazing to see how little some spend, even when they could spend more. Of course, then there are others that spend vast sums of money and still seem to need more money to be happy. And, of course, there are lots of Goldilocks situations, whose spending seems “just right,” providing all they need to do all the things they want to do in a cost efficient manner, without wasting money.

Maximize Social Security. This is another very important strategy. Many couples are scheduled to receive over $1 million in social security benefits in their lifetimes. And, handled properly, they might increase that by 15 to 20%. Social security is a fairly complicated maze of rules. We use a software to investigate scenarios for clients to illustrate the impact of planning strategies. Of course, the 800 pound gorilla in the room is when the social security system will change. It’s a hot current topic, even in Presidential debates. Some proposals would raise retirement age, suspend COLAs, and limit or eliminate social security for those with retirement income and assets above a certain amount. Therefore, the analysis of maximizing social security needs to be reviewed while looking at possible changes to social security potentially impacting couples with significant anticipated retirement income and/or assets.

Reduce Taxes. Another very important strategy. Like the first two, this just doesn’t happen; it requires planning. Again, there are lots of different planning ideas if income declines at retirement time. These may include possible Roth conversions, deductible rental losses, starting a consulting business and making sure your investments are allocated tax-efficiently. It’s a good idea to review your income taxes at least twice a year. Once early in the year when your returns are being prepared, and again in the late summer or early fall. Your wealth manager may have an idea or two for you and/or your CPA to consider at both times of year.

Get a Reverse Mortgage. Home equity is a huge asset for many. And, more and more people are “aging in place.” We’ve been modeling “reverse mortgages” for clients using our MoneyGuidePro software for years. One approach is a standby reverse mortgage, where borrowers obtain a line of credit to be used as needed. A reverse mortgage doesn’t have to be paid back until the borrower dies or moves out of the house.

Buy an Annuity. We don’t agree with Ms. Bernard on this one. You’ve read our blogs on annuities in the past. Annuities really appeal to folks for their simplicity and the idea that they get a “payment for life.” Here’s the problem: an annuity locks up your money and pretty much pays you back your principal plus a tiny (usually 2% or less per year) return. Can you imagine what happens if interest rates rise to double digits (like 35 years ago) and all of your money is now coming back at low fixed rates and you can’t get out of your contract? Here’s a better solution: build your own “liquid” annuity by creating a diversified investment portfolio from which you draw monthly amounts. And, this can be done without the huge commissions, costs and inflexibility of an annuity.

Radically Downsize. We don’t see this as an appropriate strategy for our clients. In Ms. Bernard’s example, she has a couple selling their farm in Essex, NY and moving to the Philippines, where they could afford to live on $2,000 a month. While their monthly overhead has been reduced, in my opinion, they are incurring a huge “cost” of moving away from family and friends at a very important time of life. If Ms. Bernard had eliminated the word “radically,” I would have agreed with her that this is a strategy to consider. Many couples should consider downsizing or right-sizing in retirement. Equity developed from this process could provide funding for other goals they might want.

Overall, I do commend the article by Ms. Bernard. She outlined some really good strategies and we’ve been recommending for decades. What she doesn’t suggest though is a strategy perhaps more important than her six:

Start your Long-Term Planning Early. Start in your 20s and early 30s to identify your needs, wants and wishes. Calculate what you might need over your lifetime. Develop a plan to get you there. Start saving, even if it’s a small amount, early on. And monitor your plan at least annually and update as you go. Don’t wait until you are on the brink of retirement to ask: “How do I stretch my nest egg?” Rather, as a young person, ask: “How soon can I achieve financial independence?” If you can, work with a wealth manager to help you objectively do this. At DWM, long-term planning is one of our major strengths and passions, for clients of all ages.

Quick Bytes: Tech Tips for Real Life

binary-code-475664_12801. Where not to use your debit card: Although your debit card may look just like a credit card, there are some key differences and places you really shouldn’t use it:

  • Online or over the phone. If your card information is hijacked, your bank account could be wiped out and you might have a cash flow problem until your claim is processed and the funds are reimbursed. If the same thing happens with a credit card, the worst case scenario is you can’t use that card until it’s sorted out.
  • Use a credit card for big ticket items, recurring payments, or anything else you might potentially have a dispute over. Besides rewards program benefits, credit cards offer dispute rights that debit cards typically do not.
  • Don’t use your debit card for future travel or hotel reservations because they will keep your information in their system until your trip and it will be at risk of a data breach for an extended period of time.
  • Lastly, don’t use your debit card anywhere ‘risky’. Restaurants, businesses you haven’t dealt with before, and self-checkout or ATM equipment that looks like it’s been tampered with can put you at risk of having your information stolen and account drained.

2. What ever happened to my Social Security statements? Remember when you used to receive a report from Social Security with your yearly earnings history and estimated benefit in the mail each year? It’s been a while since the Social Security Administration stopped mailing those, but you can still request one by completing a form. Better yet, go to socialsecurity.gov/mystatement to set up an account. (Be prepared- they ask some very specific questions to help prevent identify theft.) With an online account you can keep track of your earnings, get estimated future benefits, update your address, start or modify your direct deposit information if you’re receiving benefits, etc. We urge everyone to verify your earnings annually and monitor your estimated benefit so you don’t have any surprises when you’re ready to retire.

3. Scams- not just for email anymore: Most people who have used email for years are pretty savvy when it comes to avoiding common scams. (I.e. when you receive an email riddled with grammatical errors, from an unknown person in another country, claiming someone left you $10MM or that you won a lottery you didn’t enter, you don’t open it). However, scam artists are always adapting. Many have started using more believable angles like ‘delivery failure notification’ emails that look like a well-known carrier is notifying you they weren’t able to deliver a package. If you click on the tracking number or attachment, you will inadvertently download malicious software. They also target certain groups who are likely to be interested in a certain ‘opportunity’, such as the work from home scam recently targeted at university students. Other recent scams include:

  • Fake (but familiar sounding) charities soliciting donations after a natural disaster,
  • Notices of unpaid parking tickets or other government fees or taxes (where the user may be directed to an official looking website and enter personal information in addition to paying the ‘fine’), and
  • Family/friend in distress emails where it looks as if your friend or family member is stranded in another country and needs money to obtain new documents and get home.

Always verify before you do anything. Have established charities you give to- don’t accept solicitations. (You can verify their worthiness through websites such as CharityWatch). Received a notification of an unpaid parking ticket or IRS back taxes you didn’t know you owed? Look up the phone number of the city or agency that allegedly sent it and call them to inquire. (Don’t rely on contact information listed on the notice). Didn’t know your friend was in Spain? Call them. The Federal Trade Commission, FBI, and Snopes are good places to check if you’re suspicious of something.

In the last few years, as social media has rapidly grown in popularity, scammers have followed. Scams can be found everywhere: LinkedIn, Snapchat, Pinterest, Instagram, Google+; you name it! Because most users aren’t as experienced with these platforms as they are with email, they may be more likely to fall for a scam. Countless people on Twitter and Facebook forward chain letters they would have deleted immediately had they shown up through email. (Apple is not giving away the newest iPhone to the first 500 people to repost/retweet the message. Sorry). Other common, more malicious scams, include being directed to fake homepages that look like the real thing. For example, shortened URLs are common on Twitter. But since you can’t see the actual address, you don’t know what site it’s really taking you to until it’s too late. If you enter your login information you just inadvertently gave it to a scammer. You’ve been phished. Now they can use your account to post friend/family in distress messages (see above) and take their money and information, and so on. Other than verifying before acting, make sure your spyware, malware, and antivirus are always up to date. Scams are nothing new but they are always changing to take advantage of the latest news, trends, apps, and seasons (ie tax season or holiday giving). They use psychology to appeal to our charitable, greedy, religious, social, or law-abiding nature.

Obama’s MyRA: A Short Recap

myRAIn his recent State of the Union speech, President Obama introduced a new program of retirement saving for the 50% of Americans that do not currently have employer-funded retirement plans. This MyRA, as it is called for “My IRA”, allows workers to contribute up to $15,000 in a starter-saving plan that exclusively uses government Treasury Bonds. The accounts offer guaranteed principal, tax-free withdrawals of principal and no fees. Couples with an adjusted income of $191,000 or less and individuals with $129,000 or less may contribute after-tax a maximum per-year of $5,500 or $6,500, if older than 50. Once the account reaches $15,000, principal can be transferred to a traditional IRA or withdrawn without penalty for other uses. Any growth earned in the account will face a 10% withdrawal penalty if taken before age 59.5. Self-employed workers are not candidates for these accounts.

As a way to encourage saving for those workers who currently are not offered another vehicle, the rates of return on the bonds are running at an average of 3.6%, which is superior to standard bank savings accounts or CD’s. Other incentives for using the MyRA as a short-term saving plan include the fact that the principal is guaranteed, there are no fees and no withdrawal penalties on principal. This could  encourage workers to get in the habit of automatically deducting contributions directly from a paycheck for savings or used as a potential way to accrue a home down-payment or emergency fund. It requires little to get started – $25 initial minimum, and then allows deductions of as little as $5 per paycheck. Also, because the Treasury Bonds are the only investment, there is no education or decision-making required. Workers can easily transfer their account from employer to employer, either for full-time or part-time jobs.

The detractors maintain that this is simply a new market for buying Government bonds to fund overspending and to unload the Treasury Bonds purchased under the Obama administration’s recent policy of “quantitative easing”,  where the Fed  has purchased large amounts of Treasury bonds to help contain interest rates and encourage growth. Also, rising interest rates would have a major negative effect on the value of 30 year bonds. Others point out that this program is inadequate to overcome the estimated $6-8 trillion in retirement saving shortfalls and that concentration should instead be on fixing Social Security. There are no tax deductions for these contributions and the government gets to use your money and keep it from being invested in higher-earning choices. Also, employers are not required to offer this plan and it is unclear how the program will launch at its predicted start-date at the end of 2014.

There appear to be some benefits to using this as a short-term savings plan and it may act as an incentive to encourage personal savings, but it falls far short of the intended fix for under-funded retirement accounts and is an unlikely fit for most DWM clients. It provides little tax benefits and the only investment option, long-term treasury bonds, is not a good one. Further, it can certainly be argued that the spotlight should be on fixing the other government-sponsored and non-voluntary retirement savings program – Social Security.

Social Security: Show Me the Money!

showmethe money3Should you wait until age 70 to collect social security? Some say yes, I say no. I’ll take the money early.

Generally, the earliest you can collect social security is age 62. However, if you are making more than $15,120 per year, social security will withhold $1 of benefits for every $2 in earnings above the limit. In addition, there is a 25% reduction in benefits for taking them early. Current “full retirement age” is 66. You can also wait until age 70 to start collecting. Social Security provides a “guaranteed” 8% increase per year if you wait to age 70.

So, many financial advisers do a simple calculation and conclude that you should wait to age 70 and get a slightly larger monthly check. I believe they are missing four key factors in analyzing this important decision.

  • COLA.  Social security payments increase each year by a Cost of Living Adjustment (COLA). This amount was 1.7% for 2013 and will be 1.5% in 2014. Historically, COLA has been close to 3%.
  • Time value of money.  If I take the money early and spend it, that means I didn’t need to draw those funds from my investment accounts. Alternatively, I can invest it. Either way, the social security funds have a 5-8% annual return (economic) benefit to me.
  • Potential changes to social security.  The Social Security Disability Insurance Trust Fund will likely be exhausted in 2016. The Social Security retirement program reserves are expected to run out in 2033. One of these days, Congress may actually deal with the problem. Changes could include extending full retirement ages, cutting back on the COLA, means testing to eliminate/reduce payments to those with substantial income/assets or other methods to reduce future benefits.
  • We don’t know when we are going to die.  Social security stops when you die. However, spouses may be able to take over their deceased spouse’s benefits if they exceed their own.

Here’s an example on how this works and why I think it is worthwhile to take the money.  Let’s assume a person reaching full retirement age of 66 could receive $2,500 per month now. Alternatively, they could wait until age 70 and receive $3,400 per month then.  If they take the $2,500 per month at age 66, invest it at 5% and get a COLA adjustment of 3% each year, their monthly benefit when they reach 70 is $2,813.  In addition, they will have accumulated $136,000 in four years. Yes, if they waited four years, the monthly payment would be $587 more.  However, it will take another 24 years (age 94) before the person waiting until 70 will have as large a pot of money (or economic benefit) as the individual starting at age 66.

Secondly, there are going to be changes in social security. If they introduce means testing, many of us will have our social security benefits reduced or eliminated. Let’s take the money now. If they push out the “full retirement age” that could mean fewer years of payments. Furthermore, none of us knows our “eventual age”. Hence, while many of us hope and expect to live beyond age 94, there is no guarantee that we will. When we die, our benefits die as well.

We’ve done the same calculations for people who want to start collecting early, at age 62. Again, this doesn’t apply if you still have earned income above $15,120 per year. Similarly, taking benefits at age 62 instead of age 66 or 70 is likely advantageous. In addition, there are still some very nice strategies that couples can use to maximize their social security benefits and still start early. Of course, everyone’s situation is different and it is possible that delaying social security may, in some cases, be better. Working with sophisticated software programs such as www.maximizemysocialsecurity.com and an experienced financial adviser like DWM can be quite helpful in customizing this analysis for you.

Don’t delay collecting social security. The gravy train may be slowing down soon.

“Where’s my social security statement?”

fee-only financial planning, going digital

Remember that special green and white report, which includes your retirement benefit estimates at various ages and also a personal earnings history, that would show up in your mailbox every twelve months?

Well, if it seems like it’s been awhile since you last received one, it’s because the Social Security Administration, in cost-cutting mode, suspended mailing hard-copy statements with few exceptions beginning in mid-2011. The info is still available but you’ll need to go to www.socialsecurity.gov/mystatement and set up your account. (Be prepared for some deep questions that the agency employs in an effort to thwart identify theft.)  We’re urging all of our clients to do this this month as this information is a critical tool in financial planning. It can also serve as a reminder of the need for adequate personal savings to supplement these benefits. 

By the way, benefit payments are going digital-only too. If you’re currently receiving Social Security checks by mail, you must switch to direct deposit by March. You can set up direct deposits by going to the Social Security link above or by calling 800-772-1213.

Even though this switch from paper to digital will save the government $70MM+ per year, please recall that this program is “under water” and we wouldn’t be surprised to see these “entitlements” have significant changes in the near future. DWM uses sophisticated financial planning software to address these issues. We can literally stress-test your plan to see what happens if your Social Security benefits were cut or totally eliminated. There are also tools like www.maximizemysocialsecurity.com that we use to calculate maximum distribution strategies.

If you don’t already have an online Social Security account set up, take action now thereby keeping your financial planning up-to-date and making sure the government gets your hard earned benefits to you without any issues.