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Evaluating Your Social Security Options

As retirement age approaches many questions arise about Social Security including the following:

  • Should I start drawing benefits as soon as possible or postpone?
  • If I do postpone, how long should I wait?
  • If I am married or divorced, how can that impact my decision?
  • When will I “breakeven” on my decision to postpone?

Rules of Thumb:
If you are expecting death in the near future, or do not have sufficient savings to postpone claiming Social Security, it is advised that you begin receiving Social Security at age 62, the earliest available time.

  • If you must claim benefits at age 62 but continue to work and are able to pay the money back at age 70 it will be as if you never filed for benefits and at age 70 you will receive the 8% increase that you would have received if you never filed for benefits in the first place.

OTHERWISE…

  • If you have enough saved, and are able to postpone receiving Social Security until age 70, this will result in an approximate 8% increase for every year you postpone. If you postpone until age 70 and live past the age of 80, your total gains from Social Security will be larger than if you began taking Social Security at age 62.

The decision to postpone results in several different options to maximize benefits:

  • One strategy for married couples is called the “Start-and-Suspend” strategy; this should be used if one spouse has a much larger income than the other. The first step of this process is for the spouse with the larger income to file for Social Security benefits when they reach full retirement age, age 65-67 (depending on date of birth), and then immediately suspend their benefits. After this is done the spouse with the smaller income can file for benefits based on their spouse’s salary, and they will receive 50% of the benefits. If the spouse with the higher salary suspends his/her benefits until age 70 they will continue to receive the 8% increase even though their spouse is receiving benefits based on their salary.
  • Another strategy for couples is claiming “spousal benefits”, which should be used when the incomes of each spouse are approximately the same. This strategy is carried out by one spouse filing for Social Security when they have reached full retirement age, age 65-67. After they have done this the other spouse can file for spousal benefits, which means they will receive 50% of the benefits from the other spouse’s income. This will allow the second spouse to continue receiving an 8% increase on their benefits while they are receiving benefits based on their spouse.
  • If you are divorced you can claim benefits on your former spouse’s earnings, as long as the marriage lasted 10 years or more. However, if you remarry before age 60 you can no longer claim benefits on your former spouse, and are only eligible to claim benefits on your current spouse.

Resources:

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Planning for Medicare

Why would an investment advisor’s website contain a blog about Medicare?

The cost of health care is an increasingly important piece of retirement planning, and it is a shock to many who have been covered under an employer plan that is often subsidized by the employer, sometimes at 100%.  Most employers either reduce the subsidy or discontinue health coverage completely for retirees because it is too costly to continue.  This trend is sure to continue.  Costs are a combination of premiums, co-pays, and deductibles.

Those age 65 and over who are eligible for Medicare are beginning to receive mailings about Medicare Supplemental Plans and Medicare Advantage Plans because the enrollment period begins October 15 and extends to December 7 for 2012.  As usual, these mailings tend to create more confusion than clarity with their various plan costs and coverages.

There are three basic parts to Medicare:  Part A (Hospital Insurance), Part B (Medical Insurance), and Part D (Prescription Drug Coverage).

Most pay no premium for Part A Medicare (Hospital Insurance) because they paid Medicare taxes while working so, essentially, one could have some coverage and pay no premium.  This is called ”self insuring,” assuming that any health care expenses not covered under Part A would be paid from personal funds.  I don’t recommend this approach because the cost of care from a serious illness could be astronomical and devastating.

The monthly Part B premium can be anywhere from $95 to about $460 depending on income.  Lower income retirees generally pay $95 or $115.  At income levels of $85,000 ($170,000 for joint tax filers) the premium increases accordingly.  The monthly cost for a couple reaching age 65 today would be at least $230 for Parts A & B.  This would be basic coverage with co-pays, deductibles and no drug plan.

From this point it really depends on how much additional coverage is desired and the expectation of individual health care needs, i.e., how many doctor visits, how many and what kind of drugs, and overall health status.  Doctor and specialist visits can cost $100 or more.  Drugs are very expensive – mine, for example, would cost over $300 per month without drug insurance coverage.

For planning purposes, a person on Medicare can expect monthly costs (premiums, co-pays, and deductibles) of from $0 (unlikely) to over $1,000.  Without Medicare, one person could spend over $1,500 per month just on basic premiums and coverages.

My next post will discuss the Medicare Supplement and Medicare Advantage options.

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Retirement Income Strategies

I was recently challenged by an investor couple attempting to determine the amount of annual spending they can make based on their portfolio.  How, they asked, can we make a rational decision when we do not know the future return in investment markets, the future rate of inflation or their life expectancy?

My general rule of thumb has been to take no more than 4 to 5 % of the portfolio per year.  For many of my clients this translates to having an investment portfolio around $2 million in addition to social security in order to maintain the life style they are comfortable with.  A five percent withdrawal rate would be the maximum unless the time horizon is under 20 years.  For purposes of determining life expectancy, I generally use age 95 unless the client suggests otherwise.  This assumes a portfolio with a 50/50 split between stocks and bonds.

Sometimes clients prefer to use a set monthly dollar amount for a withdrawal, such as $7500 per month, and annually adjust this amount as needed to pay expenses.  This disadvantage of this approach is if financial markets decline significantly, we need reduce the monthly amount.

I have recently read an excellent article by Jaconetti and Kinniry that serves as a useful reminder of the factors to consider and how best to balance competing retirement goals.

It is important to annually review your spending strategy and your investment portfolio with your investment advisor.

 

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More on Portfolio Inflation Strategies

\A May 2011 lengthy article by Gahagan and Martin,  suggests a modest, permanent allocation to inflation-hedging -assets , such as TIPS, commodity futures, and REITs.

The interesting part of the article is a discussion of how different inflation-hedging assets perform across the inflation cycle.  For example, TIPS perform best in an inflationary period of less than 5% inflation while Commodity Futures perform best when inflation is more than 5%.

The bottom line of the analysis is that a mix of inflation-hedging assets provides a better risk-adjusted outcome across an inflation cycle.

 

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