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Is it better to take your Social Security benefits now, or spend your retirement savings first?

I want to thank everyone for the overwhelming response to my new book, The Little Black Book of Social Security Secrets.  We’ve received an unprecedented number of phone calls and emails from readers who have read it, and who now realize that the choices that they make about Social Security can have an enormous impact on their retirement years.  Many of you want to know if you’re making the right decision about when to collect Social Security, and have written with the specifics of your situation.  Unfortunately, I just cannot answer all of your questions personally.  But what I will try to do on this blog is address some of the major issues that seem to be of the most concern to my readers.  For same-sex readers who are legally married and who have filed for Social Security benefits, the burning question seems to be, “Are they ever going to process my claim?”

What is the status of the backlog of claims that have already been filed by same-sex couples?

Social Security recently released Emergency Message EM-16013 REV, which provides their employees with long-overdue guidance on how to process the existing claims of same-sex individuals who were trapped by conflicts created when they married in one state, but lived in another.  This guidance effectively makes same-sex couples subject to the same deemed filing rule that is applied to opposite-sex couples.  And, while the Emergency Message is a good start, I’m not convinced that we will see a resolution to the backlog any time soon.  Many readers who are not even subject to the subtle interpretations of the Social Security rules that came as a result of The United States vs Windsor have told us about the backlog in processing their claims – so this is not necessarily a problem unique to same-sex couples.  We’re hearing horror stories from many traditional married couples whose applications have been in limbo for over a year!

I will devote a future blog post to some ideas that might help you move your existing claim along a little more quickly.  But for now, let’s look at some of the other questions raised by readers who are evaluating their options, but who have not yet filed.

When is the best time to apply for Social Security?  Should I take my benefits now, or spend my retirement savings and apply later?

Several readers have written and said that they are in a situation similar to this one:

My employer has just told us that the company has filed for bankruptcy and will be closing its doors later this year.  I don’t know if I will be able to get another job at my age and, even if I do, I’m  not sure I will be able to make as much money  as I am making now.  My spouse doesn’t work outside of the house.  I was thinking about signing up for my Social Security benefits once the company closes, but then I read your book.  I do have some savings in retirement plans (both traditional and Roth), and an investment account.   When is the best time for me to apply for Social Security if I can’t find another job?  Should I spend my savings now and apply for Social Security later, or should I save my money and apply now?

The loss of a job, especially at this point in your life, can be traumatic.  Before we review the options that you have, let’s go through a quick refresher on two of the points covered in The Little Black Book of Social Security Secrets.

When Should You Take Social Security?

How does the age at which you actually collect Social Security affect the amount you receive? Legally married same-sex couples are now eligible to receive the same Social Security benefits as traditional married couples.  If you are now 62, your Full Retirement Age (FRA) is 66.  If you wait until your FRA to collect your benefits, you will receive your Primary Insurance Amount (PIA).  If you collect at 62, your monthly check will be permanently reduced, by 25 percent of your PIA.  If you wait until you are 70 to collect, your check amount will be permanently increased by Delayed Retirement Credits (DRCs) of 8 percent per year (up to a maximum of 32 percent), plus Cost of Living Adjustments (COLAs).

When Should Your Spouse Take Social Security?

This next part is critical to understanding why you may have more options than you realize.  If you file for your own benefit (or, if you already filed for and then suspended your own benefit), your spouse will be permitted to file for spousal benefits based on your record as soon as he or she is eligible.   When your spouse files, though, is as important as when you file.  If your spouse waits until her FRA (for readers born between 1943 and 1954, this is 66), she’ll receive the highest spousal benefit possible – which is 50 percent of your own PIA.  She is allowed to file as soon as she turns 62 but, if she does, she will only receive 35 percent of your PIA.  In this example, we’re going to assume that your spouse is not entitled to a benefit based on her own earnings record.  I have some examples for two-income households coming up in a later post.

The answer to the above question posed by my readers, therefore, will depend on how old both of you are.  If you filed for and suspended your own benefit by the deadline of April 29, 2016, that will make it possible for your spouse, assuming that she is at least 66, to file for a spousal benefit that will be 50 percent of your own PIA.  (She can file at 62, but her benefit will be reduced.)  The spousal benefit will give your family some income from Social Security every month, while at the same time allowing your own benefit to grow by those DRCs and COLAs.  Maybe you can’t get another job that pays as well as the one you have right now, but you might be able to get one that you enjoy a lot more – like working on a golf course – because your spouse now has a source of income that can make up the difference.

Remember that, in order for your spouse to be able to claim spousal benefits based on your record without you having to collect your benefit, you had to have filed for and suspended your own benefit by April 29, 2016.  If you did, your spouse can collect spousal benefits while your own benefit continues to grow by DRCs and COLAs.  If you didn’t file and suspend by April 29, 2016, your spouse cannot collect spousal benefits unless you are also collecting your own benefit.

So what happens when you do get that pink slip?  As tempting as it might be to just throw in the towel and collect whatever Social Security you can, I’d recommend that you continue working in some capacity if you are able to do so.  Even a part-time job will provide you with some money and, if your spouse is able to claim spousal benefits based on your record, you just might have enough income to meet your expenses while still allowing your own benefit to grow to the maximum possible.

Should I Spend My 401(k) Money First?

Many of my readers have some money in retirement plans (both traditional and Roth), and also some money in non-retirement accounts.  They’ve asked me which account they should spend first, and whether it is better to take Social Security early so that they can delay spending their retirement accounts for as long as possible.  So let’s look at the alternatives.

For most people, it is better to spend your non-retirement accounts before your retirement accounts.  The graph that follows is from my book, Retire Secure!  It shows that, the longer you can leave your money in a tax-deferred (or tax-free) account, the longer it will last.

Should I spend my 401(k) money

 

Once your investment account is liquidated, the question becomes complicated. You should spend your traditional and Roth IRAs strategically, depending on your own personal tax situation. What the heck does that mean? I wish there was a one-size-fits-all answer, but there isn’t. However, Chapter 4 of my book, Retire Secure!, does contain an extensive analysis of this topic, and includes specific examples that may provide you with some additional insight. If you’d like to learn more about why it’s so important to spend the right money first, you can get a copy of the book from this website.

If you don’t want to read the book, here are some general points to consider. You’ll be required to take withdrawals from your traditional IRA when you turn 70 ½, and those withdrawals will be taxable. Income generated from non-qualified investment accounts is taxable. If you have enough taxable income from other sources, a portion of your Social Security will also be taxable. Most retirees don’t plan for unavoidable changes in their tax situations, and their failure to do so can be very expensive. What we strive to do in our practice is find the spending and tax management strategies that make your money last as long as possible. Ultimately, the solution is different for each client.

Readers, thank you for the questions and please keep them coming! I love hearing from you! And check back soon to read about some more real-life challenges that people like you are dealing with!

 

 

The Essence of Retire Secure For Same-Sex Couples – Part 5

This 9 part blog post series discusses along with graphs the essence of my book Retire Secure! For Same-Sex Couples: Live Gay, Retire Rich.

Retire Secure! for Same Sex Couples: Live Gay, Retire Rich quantitatively compares various courses of action. For those who don’t want to read through the explanation and detail, just looking at the 9 graphs could provide critical information with a minimum of reading effort. Please be aware that the recommendations beneath each figure will be advantageous in most situations, but not for everyone.

Starting Social Security Benefits At 62 Years Old vs. 70 Years Old

 

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Independent of getting married, it’s better to wait until 70 to take
Social Security than electing to take Social Security at 62.

The graph shows the total of all Social Security benefits received, plus interest, by two different people with identical earnings records. One begins collecting Social Security at age 62 and the other begins collecting at age 70.

Your benefit will be 76% plus the cost of living adjustment larger if you wait until age 70 to start collecting Social Security, as compared to starting at 62. The longer you live, the more you may need that larger benefit.

 

The Essence of Retire Secure For Same-Sex Couples – Part 4

This 9 part blog post series discusses along with graphs the essence of my book Retire Secure! For Same-Sex Couples: Live Gay, Retire Rich.

Retire Secure! for Same Sex Couples: Live Gay, Retire Rich quantitatively compares various courses of action. For those who don’t want to read through the explanation and detail, just looking at the 9 graphs could provide critical information with a minimum of reading effort. Please be aware that the recommendations beneath each figure will be advantageous in most situations, but not for everyone.

Inheriting a Second Generation IRA From a Married Parent vs. an Unmarried Parent

 

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Estate planning: Get married to provide maximum assets for your children or other heirs after both you and your partner die.

This graph shows the difference to the eventual heir depending on whether the person leaving him the IRA had married vs. had not gotten married. Tax laws favor the married couple when one of the spouses dies, allowing the surviving spouse to “pay taxes later.” In addition to this advantage, tax laws favor heirs of a married couple. When the surviving spouse dies, his heir is permitted to “stretch” the IRA and “pay taxes (much) later.”

Tax laws penalize the unmarried couple. The first time an IRA is inherited by a non-spouse, the unmarried partner is forced to “pay taxes sooner.” The rules are even less favorable for the surviving partner’s heir, forcing him to “pay taxes (much) sooner.” Don’t Pay Taxes Now, Pay Taxes Later—even after both you and your partner/spouse are gone.

The Essence of Retire Secure For Same-Sex Couples – Part 3

This 9 part blog post series discusses along with graphs the essence of my book Retire Secure! For Same-Sex Couples: Live Gay, Retire Rich.

Retire Secure! for Same Sex Couples: Live Gay, Retire Rich quantitatively compares various courses of action. For those who don’t want to read through the explanation and detail, just looking at the 9 graphs could provide critical information with a minimum of reading effort. Please be aware that the recommendations beneath each figure will be advantageous in most situations, but not for everyone.

Inheriting an IRA From a Spouse vs. an Unmarried Partner

 

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Estate planning: Get married to provide maximum IRA and retirement plan assets for your partner after your death.

This graph shows the total assets for two individuals who each inherit a $1,000,000 IRA at the age of 72—one inherits from his spouse and the other from his unmarried partner. The tax laws will allow a surviving spouse to keep the money growing tax-deferred much longer than they allow for a surviving partner. Under the projected law changes for Inherited IRAs, the scenario is even worse for the unmarried survivor. Getting married allows your surviving spouse to pay taxes later than if you stayed unmarried. Don’t Pay Taxes Now, Pay Taxes Later—even after you die.

The Essence of Retire Secure For Same-Sex Couples – Part 2

This 9 part blog post series discusses along with graphs the essence of my book Retire Secure! For Same-Sex Couples: Live Gay, Retire Rich.

Retire Secure! for Same Sex Couples: Live Gay, Retire Rich quantitatively compares various courses of action. For those who don’t want to read through the explanation and detail, just looking at the 9 graphs could provide critical information with a minimum of reading effort. Please be aware that the recommendations beneath each figure will be advantageous in most situations, but not for everyone.

Benefits of Spending After-Tax Savings
before IRAs and Other Retirement Assets

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It’s generally best to spend assets in this order:

1) After-Tax Savings

2) Traditional IRA and Retirement Assets.

Of course at age 70 you will have to take money out of your IRA. Given a choice, however, you should spend your after tax savings first. You will have more money if you keep your money growing tax-deferred for as long as possible. Don’t Pay Taxes Now, Pay Taxes Later—when you are retired in the distribution stage.

Stay tuned next week where I’ll discuss Inheriting an IRA From a Spouse vs. an Unmarried Partner.  If you are interested in seeing if you qualify for a free consultation please fill out the form on this page http://outestateplanning.com/what-we-do/ or give us a call at 412-521-2732.

– James Lange

The Essence of Retire Secure For Same-Sex Couples – Part 1

In this 9 part blog post series I will discuss along with graphs the essence of my book Retire Secure! For Same-Sex Couples: Live Gay, Retire Rich.

Retire Secure! for Same Sex Couples: Live Gay, Retire Rich quantitatively compares various courses of action. For those who don’t want to read through the explanation and detail, just looking at the 9 graphs could provide critical information with a minimum of reading effort. Please be aware that the recommendations beneath each figure will be advantageous in most situations, but not for everyone.

Taking Advantage of Retirement Plans Rather than Saving Outside Retirement Plans
It’s better to save in IRAs and retirement plans versus saving in after-tax accounts (regular investments outside IRAs or retirement plans).


This graph shows the total net assets* for two identically situated people, except one contributes to his retirement plan at work and the other saves outside the retirement plan. They each have the same earnings, invest the same out of pocket amount at the same rate, have the same tax bracket, spend the same, etc. The difference is dramatic. The lesson: Don’t pay taxes now, pay taxes later—during the accumulation stage while you are working.

Please see page 30 in my book Retire Secure! For Same-Sex Couples: Live Gay, Retire Rich for further details.

* We measure $100 in an IRA as $75 net assets because there is a $25 income tax associated with the $100 IRA. This applies to this and the following graph.


Stay tuned next week where I’ll touch on the Benefits of Spending After-Tax Savings before IRAs and other Retirement Assets.  If you are interested in seeing if you qualify for a free consultation please fill out the form on this page http://outestateplanning.com/what-we-do/ or give us a call at 412-521-2732.

– James Lange

The Impact of Same-Sex Marriage on the Accumulation Years

While you are still working, you shouldn’t pass up the opportunity to contribute the maximum allowable to your retirement plans. Same-sex marriage may afford you additional possibilities to contribute that may not be available to you as an unmarried individual; on the other hand, marriage might also eliminate possibilities to contribute.

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One advantage of marriage comes into play if one member of the couple is not working. This is relevant because you must have earned income to contribute to any IRA, including a Roth IRA. If a couple is not married, and one partner is not working, that non-working partner will not be allowed to contribute to an IRA or a Roth IRA. However, if the couple marries, the nonworking spouse would be able to contribute to an IRA or Roth IRA based upon their working spouse’s income. Marriage makes it possible for the couple to put more money in the tax-deferred or tax-free environment. For example, consider the couple Anne and Susan. In 2014, Anne earns $150,000 per year and is not covered by a retirement plan at work. Susan is not working outside the home. If they are unmarried, Anne can contribute to an IRA, but Susan has no earned income and cannot. If they marry, then both Anne and Susan can each contribute $5,500 ($6,500 if they are age 50 or older) to their respective IRAs.

 

When it comes to Roth IRAs, there is a potential benefit if your income is too high for you to be eligible to make a full Roth IRA contribution. These income limits are different for married and unmarried individuals (refer to table below). You may find that your income is too high for you to make a Roth IRA contribution as an unmarried taxpayer, but you are able to make a contribution as a married taxpayer. For example, consider Anne and Susan again. In 2014, if they are unmarried, neither Anne nor Susan can contribute to their Roth IRAs. Anne earns above the maximum of $129,000 for a single taxpayer and Susan has no earned income. If Anne and Susan marry, then their combined income of $150,000 is under the $181,000 limit for married couples, so they are both permitted to make the maximum allowable contributions to their Roth IRAs.

 

In other cases, marriage may suddenly make you ineligible to contribute to a Roth IRA. You may find that both you and your partner, as an unmarried couple, are both near the upper income limit for single taxpayers and are able to contribute to Roth IRAs; however, if you were to marry and combine your salaries, you may find yourselves above the Roth IRA limits. Consider a different situation for Anne and Susan. In this case, Anne and Susan each earn $100,000 in 2014. As an unmarried couple, they are each eligible to contribute fully to a Roth IRA, because they are each below the $114,000 limit. If they marry, their combined income would be $200,000, putting them above the $191,000 phase-out limit and preventing both of them from making any Roth IRA contributions at all.

 

Gay Marriage, James Lange, Retire Secure For Same-Sex CouplesGay Marriage, James Lange, Retire Secure For Same-Sex Couples, Pittsburgh, PAGay Marriage, James Lange, Retire Secure For Same-Sex Couples, Western Pennsylvania

Finally, if your income exceeds the limitations for a Roth IRA, consider contributing to a nondeductible IRA. You can convert the nondeductible IRA to a Roth IRA the minute after you make the nondeductible IRA contribution. That is exactly what I do personally, in addition to my 401(k) contribution. So, in January, 2014 I made my 2013 and 2014 nondeductible IRA contributions for me and my wife Cindy (even though she doesn’t work outside the home). We immediately made Roth IRA conversions of the nondeductible IRAs. So, we put away a quick $26,000 tax-free into Roth IRAs ($6,500 each for 2013 and 2014), not including what I contributed to my 401(k). Please note this conversion of nondeductible IRA to a Roth without incurring taxable income only works if you don’t have any traditional IRAs. In effect, after the monkey business, it is just like making a Roth IRA contribution, but you have to do the monkey business first to get around the limitation.

 

Because retirement plans allow your money to grow tax-deferred or tax-free, and we have already seen the enormous power of retirement plans, you may want to consider the impact that marriage will have on your ability to contribute to an IRA or a Roth IRA.

 
Retire Secure! For Same-Sex Couples – James Lange, (pages 61-65) www.outestateplanning.com/contact-us 412-521-2732