by Joe Hearn | Dec 6, 2011 | Social Security
If you’re like most, you know what Social Security is, but you’re a little hazy on the details. Don’t feel bad. There are 78 million others in the same boat. Retirement is on the horizon, though, so it’s time to bring you up to speed. Give me 10 minutes and I’ll give you answers to the 10 most frequently asked Social Security questions.
Q: Is Social Security enough to live on?
A: I won’t say it’s impossible, but it’s not easy. For 2011, the maximum monthly benefit for a person retiring at full retirement age (66) is $2,366. That assumes you earned the maximum taxable amount of income every single year after turning 21. Not many people are in that category. In fact, the average monthly payment was $1,177 for 2010. Multiply that times 12 and you’re officially below the poverty line. Social Security is a great way to supplement your income, but being totally reliant on it is not a retirement plan. In all likelihood it means that your retirement planning has failed.
Q: Can I count on Social Security?
A: Those at or near retirement will probably receive most (if not all) of what was promised. Those with a long ways to go probably won’t be so lucky. Why? Social Security is a self-financed program that uses tax dollars from current workers to pay the benefits of current retirees. In 1945 there were 40 workers for every person collecting benefits. Now there are about 3 workers for every retiree. High unemployment and a wave of retiring baby boomers have put further strain on the program.
Benefits being paid already exceed tax revenues collected and in their 2011 report, the Social Security Board of Trustees estimated that the program will only be able to pay promised benefits through 2036 (one year earlier than previously estimated). At that point the Social Security trust fund will be exhausted and revenue from workers will only be able to pay about 75 percent of promised benefits. Expect taxes to be raised and benefits to be cut long before we get to that point.
Q: When can I begin collecting benefits?
A: If you are eligible to receive Social Security benefits, you can begin collecting reduced benefits as early as age sixty-two. Most people (all 78 million baby boomers included) will need to be on the downhill slide to seventy before becoming eligible for full benefits. Click here to see a detailed chart of full retirement ages.
Q: What if I retire early or late?
A: Retire early and your benefits will be permanently reduced. Retire late and they will be increased. How much depends on how early or late in relation to your full retirement age. Retire up to 36 months early and your benefits will be reduced by 5/9ths of 1 percent per month. Anything over 36 months results in a 5/12ths of 1 percent reduction per month. For example, if your full retirement age is 66 years and 8 months and you retire at 62 (56 months early), then you can expect an almost 30 percent reduction in benefits.
Those retiring late get a credit for each year they wait. If you were born after 1943, the credit is 8 percent per year and it is paid to a maximum age of 70. For example, if your full retirement age is 67 and you retire when you’re 70, then you will have a 24 percent permanent increase in your monthly benefits.
Q: Will my benefits be subject to tax?
A: Maybe. If you have income sources in addition to Social Security, you may need to pay taxes on a portion of your benefits. If your modified adjusted gross income (MAGI) plus half of your Social Security benefits exceed a certain amount ($34,000 if you’re a single filer and $44,000 if you’re a joint filer), you will likely need to pay taxes on 85 percent of your Social Security benefits. If your MAGI is less than that, but still more than $25,000 for single files or $32,000 for joint filers, then you may need to pay taxes on 50 percent of your benefits. For further information on taxation of Social Security benefits, see IRS Publications 554 or 915. Tax law is complicated and subject to change, so always consult a trusted tax adviser.
Q: Will continuing to work affect my benefits?
A: You can work while collecting benefits, but if you haven’t reached full retirement age, your benefits will likely be reduced. I say likely because you are allowed to earn a certain amount of income before they begin docking your benefits. For 2011, the earnings limit is $14,160. If you are under full retirement age, your benefits will be reduced $1 for every $2 you earn above that limit. In the year you reach full retirement age, the penalty will be reduced to $1 for every $3 of earnings and the earnings limit will be increased. Once you reach full retirement age, you are free to earn as much as you want with no reduction in benefits. Also, the earnings test reduction is not permanent. At full retirement age your benefits will be increased to compensate for the benefits withheld because of your earned income.
Q: How do spousal or family benefits work?
A: Others in your family may be entitled to receive Social Security benefits based on your earnings history. This could include a spouse, former spouse of at least 10 years, disabled children, unmarried children under age 18, or children under 19 who are full-time students. These benefits are in addition to the benefits that you are entitled to and could be worth as much as 50 percent of your benefit for each person who qualifies. Each family has a maximum benefit that they can receive, however, which is roughly equivalent to 150 to 180 percent of your full retirement benefit. If this amount is exceeded, your benefits won’t be affected, but everyone receiving benefits based on your work history will see their benefits reduced proportionately.
Q: How can I get an estimate for my Social Security benefits?
A: Unfortunately, the Social Security Administration no longer sends out annual statements that show a record of your earnings and accumulated benefits. You can still estimate your benefits, but it will take a little work. Go to http://www.ssa.gov/ and click on “Estimate Your Retirement Benefits.” Begin by entering your name, Social Security number, date of birth, place of birth, and mother’s maiden name. If that information matches what they have on file, you will be able to use the estimator to enter your planned retirement date and expected future wages. That information is then combined with your past earnings history (already on file with SSA) to generate a reliable estimate of your expected future benefits.
Q: How do I apply for benefits?
A: You can apply online at http://www.ssa.gov/ using the Internet Social Security Benefit Application. You can also apply by phone, mail, or in person at any Social Security office. To cut down on your wait time, it’s recommended that you call 1-800-772-1213 (TTY 1-800-325-0778) to make an appointment. You will need certain documents to apply, such as your birth certificate, naturalization papers, U.S. Military discharge papers, and/or W-2 forms (or self employment tax returns if applicable) for last year.
Q: When should I file for benefits?
A: You basically have four choices. You can file early, file on time, delay filing to accrue increased benefits, or file and suspend. If you are married, your spouse has the same options. Most want to maximize the benefits they receive, so it makes sense to choose the option or combination of options that result in the greatest cash flow for you and your family. In the interest of space, I’ll leave it at that for now. In a future post I’ll talk much more in depth about how to maximize benefits and decide which option is best for you and your family.
Well, those are the 10 most frequently asked Social Security questions. If you have a question that I didn’t answer, touch base with me and I’ll do my best to help. Thanks for reading!
Joe
by Joe Hearn | Nov 30, 2011 | Pursuits, Retirement, Travel
In case you missed anything, below is a list of articles published at Intentional Retirement during the month of November. We’re heading into the home stretch of 2011. Touch base if I there’s ever anything I can do to help you out.
Thanks for reading!
Joe
by Joe Hearn | Nov 29, 2011 | Pursuits, Retirement
Well, another year is almost in the record books. How did you do? Did you accomplish what you’d hoped? Did you achieve any key milestones during the last eleven months or did you find yourself a slave to daily maintenance (those things that take up a lot of time, but don’t provide a whole lot of meaning or get you any closer to your goals)? If you’re like me, there were some of both, but you’d love to do better in 2012. After all, the clock is ticking and retirement is a year closer!
In my last post I mentioned how I spend time at the end of each year thinking about life, reviewing the past year and planning for the next. Doing this has made a huge difference and has helped me with key goals like running a marathon, starting a business, being a better husband and father, and writing two books. Below I take a detailed look at my simple, three step process, but first…
More than just resolutions
Don’t confuse this article with the usual New Year’s Resolutions talk that you hear this time of year. It’s more than good intentions and wishful thinking. It’s about setting measurable goals in key areas of your life so that you can make huge strides in the coming year. With that said, let’s jump right in.
Step 1: The annual review
I kick off my planning each year by reviewing the past year. I look at what I did well and not so well; at what worked and what crashed and burned. I’ll go through my plan for the previous year and see which of my goals I was able to accomplish and which are still in process. I’ll also look at a number of metrics that I use to gauge my progress, such as words written, books sold, and new clients served.
This review process gives me a good overview of what I was able to accomplish as well as what still needs to be done. Once I know the “state of the union” I can move on to Step 2.
Step 2: Outline specific, measurable goals for each key category
After reviewing how I did the previous year, I spend time thinking about the things I’d like to accomplish in the coming year and what I’ll need to do to make those things happen. For me, it’s easier to break my life down into major categories and then spend time planning and setting goals in each area. My categories are marriage, parenting, faith, finances, health, business, writing, pursuits (e.g. guitar, photography, reading), and travel. For each area I’ll lay out between three and six specific, measurable goals for the coming year.
Step 3: Strategy and tactics
Once the goals are in place, I spend time thinking through the steps (strategy and tactics) that I will need to take to accomplish each goal. To stay on track and to make sure that I’m focused on milestones instead of just maintenance, I start each month by filling out a simple spreadsheet that I call my 4 x 4. On it I list the four key goals that I will be working on over the next four weeks. That sits on my desk each day as a reminder of the key things that I should be working on.
That’s it. Pretty simple really, but don’t underestimate the importance of planning. The type of life you want to live—one filled with meaning, accomplishment, and purpose—does not happen by accident. You need to be intentional. You need to know what kinds of things you value and work toward making them a reality. Intentional Retirement is here to help, but as the old saying goes, “If it’s going to be, it’s up to me.”
A few more things to keep in mind as you plan…
Dream Big
When you dream big, something happens. It changes how you think and how you act. It changes the types of questions you ask. It inspires and changes those around you. Dreaming big has led to things like cures, computers and space travel. Don’t limit yourself to those things that seem “reasonable” or “probable.” Take a risk and dream big.
Start small
Someone once said that people tend to overestimate what they can do in one year and underestimate what they can do in ten years. That is so true. Don’t put so much stuff on your to-do list that you don’t know where to begin. Big goals (like retirement) can take years to plan and execute. Don’t try to do too much too soon or you’ll just find yourself overwhelmed and discouraged. Outline your strategy and then take the smallest step possible to get started. Then do it again tomorrow and the next day and the next. Before you know it, you’ll have some real momentum.
Allow room for serendipity
Goals are great, but don’t be a slave to them. Be open to opportunities that you hadn’t anticipated or planned for. One of the coolest things that happened to me this year was not a part of my plan and I initially turned it down. The Financial Planning Association asked me to write a monthly retirement column for them and I said no because it didn’t fit into my schedule. Luckily I changed my mind and that opportunity grew into not only a column for them, but a column for the Omaha World Herald and a broader platform for my ideas on retirement. Don’t be afraid to say yes.
Have a vision for your life
Imagine trying to put together a puzzle without the picture on the box. It would be incredibly difficult because you wouldn’t know the end goal. The same is true of your life. Your goals are important, but you need to have a vision for where you want those goals to take you. What are your dreams for the future? What is the vision you have, not just for retirement, but also for the rest of your life? If you can’t answer that question or if your answer doesn’t really inspire you, then stop everything else you’re doing and really think that through. It’s your life. No one else is going to know more about it or take it more seriously than you.
Celebrate along the way
Don’t forget to celebrate along the way. Take time to enjoy your incremental progress and reward yourself for a job well done.
Good luck with your planning! Let me know if there’s ever anything I can do to help.
Joe
by Joe Hearn | Nov 23, 2011 | Pursuits, Retirement
“In preparing for battle, I have always found that plans are useless, but planning is indispensable.” ~Dwight Eisenhower
Reading that quote, you might think that Eisenhower didn’t have much use for plans. In reality, though, he was both a meticulous planner and brilliant strategist. I doubt he ever entered a battle without some sort of detailed plan.
I think his point wasn’t “Don’t plan” but rather “Things rarely go according to plan.” It’s impossible to prepare for every conceivable contingency and variable. Rather than trying, he relied heavily on a concept called Commander’s Intent.
Commander’s intent (or CI) is the end goal of the operation. It is the final objective or desired outcome. For all practical purposes, it is unchanging. Subordinates, staff and soldiers can modify tactics and strategies to fit the realities on the ground, but the commander’s intent is the driving force behind every decision.
Why am I talking about old generals and battle plans? Because there’s a lot we can learn from the parallels between planning for battle and planning for retirement.
With any major undertaking (like retirement), it’s impossible to think through every possible contingency. That’s especially true the further out you try to plan. Raise your hand if ten years ago you predicted the housing bubble, the failure of Lehman/Merrill/et al, or the European debt crisis. There are plenty of retirements smoldering at the foot of that wreckage.
Rather than trying to predict the future twenty years hence and then rigidly adhering to an obsolete plan, it’s better to have a plan that can adapt and evolve. That way, you can change tactics, while keeping your overall mission intact.
Key to having a flexible plan is having a deep understanding of your end goal (your personal CI, if you will). Be as specific as possible. Really think through things like where you want to live, what you want to do, and whom you want to do it with. Once you know what you really want out of life, you can get up each day and make logical choices that get you closer to that goal.
If you fail to really understand your retirement goals, two things will happen. First, you’ll find yourself copying other peoples’ tactics without fully understanding the strategy. You’ll quit your job at 65 because that’s what your friends are doing. You’ll take up golf or move to a warmer climate because that’s what they do on TV. Rather than blazing your own trail with a plan that works for you, you’ll follow someone else down his or her road. Inevitably you’ll look up one day feeling lost and asking yourself “How did I get here?”
Second, when uncertainty comes—a health scare, job change, or investment volatility—you won’t know how to react because you don’t have a clear understanding of the final objective. Any action you do take will likely make things worse, because it’s not made in support of any overarching goal. Without a clearly defined commander’s intent, the uncertain and unexpected will leave you feeling rudderless.
Unfortunately, I talk to people all the time who made this mistake. What can you do to avoid the same fate?
The year-end plan
Circling back to Eisenhower, planning is indispensable. At the end of each year, I spend time over several weeks thinking about life, reviewing the past year and planning for the next. It’s a time where I can think about big goals and major priorities. I have always found it valuable, because it not only helps me to be more intentional with life, but also ensures that each year is spent in support of the overall plan.
I’ll write more about my process in a future post, with the hope that you can adapt it to your own circumstances. For now, I just wanted to encourage you to start thinking about what you really want out of life so you can build your plan around that. It’s time to begin taking your plans very seriously.
Have a great Thanksgiving. Thanks for reading.
Joe
by Joe Hearn | Nov 15, 2011 | Investing, Medicare, Retirement
As 2011 draws to a close, there are several financial moves that you should consider. Below are 10 steps that could help reduce your tax bill, solidify your investment strategy and ensure that your retirement planning is on track.
Review beneficiary designations
Many accounts, such as Individual Retirement Accounts (IRAs), 401(k)s, annuities, and insurance policies allow you to name a beneficiary who will receive those assets when you die. Many people don’t realize that those designations take precedence over their will, even if the will is more accurate and up to date. Because of this, it is important to review the beneficiary designations on all your accounts annually to make sure that they accurately reflect your wishes. Meet with your financial adviser and estate planning attorney to ensure that your designations not only pass property to the correct people, but also minimize expense and taxes.
Take required minimum distributions
If you turned (or will turn) 70 ½ during 2011 then it’s time to start taking required minimum distributions (RMDs) from IRAs and other tax deferred accounts like your 401(k). RMDs don’t apply to Roth IRAs. Your financial adviser can help you calculate your RMD based on IRS guidelines. You are required to take the distribution by December 31st of each year with one exception. If you turned 70 ½ during 2011 you can delay your distribution until April 1, 2012. If you do that, remember you will need to take two distributions next year—one for 2011 and one for 2012.
IRA charitable exclusion
The government extended the IRA charitable exclusion for 2011. Basically this exclusion allows you to distribute (tax-free) up to $100,000 from your IRA and direct it to a charitable organization. If you are charitably minded and don’t need the income from your distribution, then this could be a good way to avoid the tax bite on your RMD.
Medicare open enrollment
The Medicare open enrollment period is the time each year when those on Medicare can make changes to their existing plans to better suit their needs. If you are on Medicare, then you should review your health and prescription drug plans and decide if you want to stick with them or if you would be better served by switching to another plan. The open enrollment period typically runs from November 15 to December 31, but it has been moved up this year to October 15 through December 7. Visit www.medicare.gov for more information.
Year-end charitable contributions
One way to reduce your tax liability in a given year is to make charitable contributions. If you are considering making charitable contributions prior to year-end, consider using appreciated stock rather than cash. Not only will you benefit from the charitable deduction, but you could also avoid paying the built in capital gains tax on the stock.
Year-end gains and losses
Capital gains and losses can be used to offset each other. If you took profits in some of your investment positions this year, look to see if you have any positions that could be sold for a loss to offset the gain and minimize your taxes. Excess losses can be used to offset up to $3,000 in ordinary income taxes. Losses beyond that can be carried forward indefinitely to offset future gains.
Maximize retirement contributions
For 2011, you can contribute a maximum of $5,000 to your IRA and $16,500 to your 401(k). If you are over 50, you can contribute an additional $1,000 to your IRA and $5,500 to your 401(k) per year. By maximizing your contributions each year, you greatly increase your chances of being able to adequately fund your retirement.
Review your asset allocation
The market upheaval of the last several years and investors’ response to that upheaval has wreaked havoc on many people’s asset allocations. Rather than having a balanced, diversified portfolio, many have sought safety by moving everything to cash or bonds. That could cause serious problems in the future if inflation picks up or the bond market stumbles. To protect your assets and maximize your returns, you should meet with a trusted adviser and make sure the investments you hold are appropriate based on your risk tolerance, goals and time frame.
Review your estate plan
Your estate plan should not be a static document. As your life changes, your planning must change with it. Getting married or divorced would likely change how you want to distribute your property; likewise if there is a death in the family. Each year you should review your documents, including your will, trust, and powers of attorney to make sure that they still reflect your wishes and have the correct people taking charge if you were to die or become incapacitated. Also, if you move to another state when you retire, meet with your attorney to make sure that your documents will be valid in your new state of residence. Make revisions as necessary.
Shred unnecessary paperwork
Much of the paperwork you have can be purged once a year. For example, if your December investment statements summarize the year’s activity, you can shred the statements for the previous 11 months. Likewise, any bills, credit card statements, and receipts that you are not using as supporting documentation for your taxes can go.
According to the IRS, you should keep your tax records for “the period of time during which you can amend your tax return to claim a credit or refund, or that the IRS can assess more tax.” Seven years should do the trick for most tax documents, such as returns and any supporting documentation like cancelled checks, receipts, or credit card statements. Identity theft is on the rise, so always remember to shred documents before discarding them.
As you can see, by taking a few simple steps before year-end you can enter 2012 organized and on a firm financial footing.
Note: I first published this article at www.fpanet.org and the Omaha World Herald.
