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Spousal benefits and the demise of social security

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Paul Hamilton | More Than Money | Posted: Thursday, February 4, 2016 1:38 pm

Hey Paul: I am a physician who will turn 66 this year. What’s the highest possible social-security benefit that I would receive based on high earnings? I was married to my first wife for 20 years and have been married to my second wife also for 20 years. How do their social-security claims change my benefit?

Good Doc

Assuming you earned over the social security earnings cap — $118,500 in 2016 — every year for the past 35 years, your full retirement benefit at age 66 would be about $2,663 monthly — $31,956 annually. Your spouse — and your ex-spouse since you were married for more than 10 years and assuming she is currently unmarried — would be eligible to receive an amount equivalent to 50 percent of your benefit. These spousal benefits are in addition to your benefit and don’t reduce it or each other’s potential spousal benefit.

If you delay the start of benefits to age 70 your benefits will be 32 percent higher — $3,515 monthly and $42,182 each year in today’s dollars. If you predecease either of your spouses they could switch from the spousal benefit to a survivor benefit equal to your own benefit. So, to your wives, you are annually worth $31,956 alive and $84,364 dead — be careful!

Hey Paul:

A coworker of mine just retired and, according to him, he is receiving his own benefit of $2,000 and his wife, who never was in the work force, is getting a spousal benefit of $1,000. I worked the same position with identical pay as my friend and my wife worked part-time earning about 30 percent of my salary. We looked up our potential benefits and were surprised to see that they were identical to our friends’ — my benefits at $2,000 and my wife’s benefits at $1,000 per month. Is this right?

Show Me the SS $

It depends on what you mean by “right.” For the lower-earner the SSA first calculates a worker’s own benefits based on their earning and then tops this off with a spousal benefit to bring the combined total up to 50 percent of the higher-earner’s benefit at age 66. For your friend’s wife she had no benefits of her own but received the full spousal benefit of $1,000. Your wife may have had her own benefit of roughly $700 but then an excess spousal benefit of $300 made her combined benefit $1000. So technically and in reality these are the right amounts.

Is it fair that your wife paid 6.2 percent of her wages toward social security and won’t receive any higher social security benefit than if she never worked? Many people would agree that seems unfair for the government to collect payroll taxes and not reciprocate with higher social security benefits. A countering question: Is it fair that a married couple can receive 150 percent of the benefits of a single person who has an identical earnings history? Tough call.

Hey Paul:

I met the love of my life at an AARP meeting. We are planning to tie the knot this year. How will marriage impact our social security benefits?

Mrs. Wonderful

Congratulations on your impending nuptials or as we say around here, getting hitched. Evidently the AARP informational events are doubling as excellent social mixers.

One near-term impact is that you will become eligible to draw spousal and survivor benefits on your new love. Spousal benefits become available after one year of marriage along with other stipulations, such as that you are 62 or older and your spouse has begun their own benefits.

Survivor benefits eligibility occurs after nine months of marriage — and regrettably the passing of your spouse. The surviving spouse must be 60 or older (or 50 or over and disabled) to begin survivor benefits. There could be additional survivor or retirement benefits if you have minor children.

If either you or Mr. Wonderful had a previous marriage then your new marriage will impact social security benefits based on those previous relationships. If you are divorced and remarry then you forfeit receiving spousal benefits based on your ex-spouse’s earnings. If you were widowed and remarry before age 60 you also forfeit survivor benefits from your deceased spouse’s earnings. If you remarry after 60 you maintain the survivor benefits.

Hopefully yours and any marriage won’t let social security be the deciding factor in whether to wed. However, some combinations of marrying a relatively low earner, being widowed and remarrying before age 60 will result in significant loss of social security benefits.

Hey Paul:

I am in my early 50’s and greatly looking forward to a comfortable retirement starting in a decade, partially financed by social security benefits. Do you think social security will be different by the time I am retired?

Counting the Days

Yes, likely very different and not in the direction you’ll like. Some policy changes are already set to happen such as upping you full retirement age from 66 to 67. This will increase the benefit reduction if you take benefits at the earliest age of 62 and diminish the benefits of waiting to age 70 to start benefits.

Recent legislative changes will also phase out strategies such as one spouse being able to take their spousal benefit at age 66 while the other spouse delays until age 70 to receive their maximum benefit. This is the so-called “file-and-suspend” strategy.

Let me suggest a more radical social security policy change related to my recent posts on spousal benefits. Currently a non-working spouse can receive up to 50 percent of their spouse’s full retirement age benefit. This is a benefit that my mom and many others currently enjoy as reward for “raising the kids.” But actually there doesn’t have to be any procreation or cohabitation — only a marriage license that is available for a nominal fee to any two adults in every county, with the possible exception of Rowan. Can an old geezer marry a single mom and upon his death provide survivor benefits to her and her kids? Can two people meet on social media, get married, never meet in person and then draw spousal or survivor benefits? Can a happily married couple get divorced, continue to live together and then simultaneously draw ex-spousal benefits? Yes. All these are entirely within the letter — but not the spirit — of social-security law.

I believe it is likely that we’ll see social security benefits reconfigured to be similar to many private pensions in that the wage earner can designate different payouts to fit their family situation. The highest payout would be based on only their own lifetime. A lower payout would occur if the payout continued over two lives with adjustments for the ages of the beneficiaries. This payout method would do away with arbitrary definitions of marriage and the 10-year marriage rule as well as first-dollar recognition of payroll taxes toward potential social security benefits.

In summary, I don’t think you need to worry about social security not being there at all for you in 15 years. But the benefit levels will certainly be mildly if not significantly reduced for people of your age and younger.

Dr. Paul Hamilton is an Economics Professor at Asbury University and a Certified Financial Planner. Questions you’d like to see answered in the column can be sent to paul.hamilton@asbury.edu. All reader-submitted questions answered in the column will be published anonymously and questions may be edited for clarity or generality.

Dr. Hamilton can provide free workshops for local churches, businesses or other groups. His website is usa-economics.com.

Be thoughtful with timing of Social Security retirement

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Paul Hamilton | More Than Money | Posted: Friday, January 29, 2016 7:12 am  

Question: I am a 66-year-old lifelong bachelorette. I have just retired from a career in real estate sales where my typical income was $45,000. I visited the social security office in Lexington and was told I could begin my social security benefits next month and receive $1,500 monthly. I came across a financial website that claimed there are social security strategies that would add $200,000 to my lifetime social security benefits. Are these claims valid? If so, what are the tricks?

The timing of when to start Social Security benefits is an important part of retirement planning.

As you may know, social security benefits are paid for life (or as long as the U.S. government is solvent — but that’s another column). These benefits are adjusted annually to keep up with the rising cost of living.

Without any current or past spouses — and I assume no minor children — your benefits will be paid based on your own earnings and only to you. You have reached what the Social Security Administration calls “full retirement age” of 66 (this will be shifted up to 67 in few years). You can start your benefits now and receive the equivalent in today’s dollars of $18,000 annually for the rest of your life.

Let’s suppose you live to 82. Your total benefits would be $288,000 — 16 years of receiving $18,000 per year.

But each year you delay benefits past age 66, your benefit will increase by 8 percent. If you can hold off starting benefits until 70, then your benefit will be $23,760 — 32 percent higher than the $18,000 you would have received retiring at 66.

If you live to age 82 under this new scenario, the total benefits will be $285,120. The benefits are set up such that they are “actuarially fair” — a single person will receive about the same benefits whether they start benefits at 66 or 70 (or any age between 62 and 70) and live to their life expectancy of 82. Of course, you may live to age 99 or pass away tomorrow, so averages aren’t always the best target.

This is where many popular financial planning outfits such as MaximizeMySocialSecurity.com are able to come up with much higher projected lifetime benefits. The general idea is that you should plan for the ‘best-case’ scenario of living to 90 or maybe even 100.

The reasoning behind this is that if you die “young” — say, in your 70s — then you didn’t need the extra money. But if you live into your 90s, you’ll be grateful for the much higher social security benefits.

Suppose you live for thirty years after retiring. Your lifetime benefits would be $540,000 if you start them at age 66, but they will be $712,800 if you wait until 70. But this $172,800 in extra lifetime benefits is only as valid as the assumption of you living to 96.

So when is the real best age for you to begin social security? That decision has to be based on what other retirement income sources you have — such as a pension, 401(k) or annuities — and how they can meet your living expenses over an unknown future.

Many financial professionals will side with the software and advise you to be patient and hold out to age 70 for social security. But only about 2 percent of retirees wait that long.

I recommend that you liberally plan the next 16 years of life – big vacations, generous gifting to family and charities and even negative events like high medical or long-term care expenses.

If $18,000 a year along with your other financial resources will support your “lavish lifestyle” until 82 — and you’re OK to live simply on $18,000 and whatever money may still be available for the rest of your days, then start social security right now.

If you can’t meet your lifestyle goals, then it may be best to delay social security and forgo that cruise around the world.

Handling financial riddles and resolutions

Paul Hamilton | More Than Money | Posted: Wednesday, January 20, 2016 5:30 pm

More Than Money is a new weekly financial-advice column published by The Jessamine Journal. It will generally follow a question-and-answer format concerning personal finance issues such as college costs, social security, managing debt and starting a business. The column will also take a look at local economic issues such as the bypass extension, education policy and Kentucky’s health-insurance market.

Three guys go to a hotel to rent a room that costs $30. They each pay $10. They head to their room when the manager realizes the weekday rate is only $25. He sends the $5 overcharge with a bellboy up to the room. The three men each accept a dollar refund and tip the bellboy $2. So each man paid $9 and the bellboy received $2 for a total of $29. What happened to the missing dollar to bring the total up to $30?

I first heard this riddle three decades ago in Jessamine Junior High from my good friend, Kent Slusher. This story may very well have launched my career as an economist.

It illustrates a few important facets of financial planning.

One: It is easy to get turned around when contemplating even a relatively simple situation.

Two: The value of a dollar changes dramatically over decades. In today’s dollars, the room may cost $90, but the riddle can still be asked the same way.

Three: The story appears to be about money, but other life realities matter. The logistics of three guys and two beds may be the trickier question.

So what happened to the dollar? The travelers’ expenses of $27 match the sum of revenues of $25 for the hotel and $2 for the bellboy. That means the tip should be counted as part of the $27 sum, not in addition to the $27. Suppose there was no tip; should $27 in expenses equal the original cost of $30? No way.

Question: What is the best way to follow through on a New Year’s resolution?

Answer: Setting goals to better our lives each January — no matter how many times we’ve fallen off the wagon — is better than accepting the status quo.

We typically know what we need to do: eat less and exercise more; or, for financial resolutions, spend less and save more. Following these resolutions will undoubtedly drop both pounds and debt.

Those who are successful in these goals usually share three traits: they set attainable goals, hold themselves accountable and have a plan.

Suppose your goal is to become debt-free. That may be too ambitious to accomplish in a year. Instead, you could set a series of monthly goals, such as not eating at restaurants or setting up a budgeting app such as Mint.

You can be accountable to yourself or a friend. You could throw down a challenge to a friend to see who can hold out the longest without dining out. Keep score and text your progress each day.

Putting a plan in place lets you set attainable monthly goals and track your progress. It’s important to have a written plan; I suggest tracking your goals on your email calendar. If you are unsure of how to set up a plan, I am more than willing to help you establish one.

I would add to these ideas doing something in the next two minutes to set up early success.

If you have high-interest debt, take all your credit cards out of your wallet and cut them up. Text your friend and ask him or her to be an accountability partner. And here’s my challenge to you: Do this before you turn to the next article in the newspaper.

Dr. Paul Hamilton is an Economics Professor at Asbury University and a Certified Financial Planner. Questions you’d like to see answered in the column can be sent to paul.hamilton@asbury.edu. All reader-submitted questions answered in the column will be published anonymously and questions may be edited for clarity or generality.

Dr. Hamilton can provide free workshops for local churches, businesses or other groups. His website is usa-economics.com.