Retirement – Ready or Not!!

Retirement – Ready or Not!!

This comes from a Mary Beth Franklin article in Investment News and it simply reinforces my opinion that we, as a country, are financially illiterate.  When I entered the financial services industry in 1982, the statistic was that 5% of the folks retiring had achieved true financial independence.  After three decades of historical growth in this country, that 5% still holds true.  That’s job security for me.  That’s scary for most people.  Here’s what Ms. Franklin has to say…..

I read a lot of retirement readiness studies, but frankly, this latest Wells Fargo telephone survey of 1,000 middle-class Americans between the ages of 25 and 75 scares me. It displays a real disconnect between what Americans need to do and what they are doing.

For example, when asked how much money they need to support themselves in retirement, the median response was $300,000. But to date, the median savings of the respondents is only $25,000.

How much does the average American think they can afford to withdraw from that meager nest egg each year? The typical response was 10% – nearly triple the generally accepted rule of thumb of a safe 4% withdrawal rate.

What’s the solution? Work longer, they replied. Yet a third of the respondents admit they would have to work until at least 80 in order to live comfortably in retirement, even though most admitted their boss wouldn’t want them hanging around that long.

For many, their retirement income goal isn’t very realistic. About a third of the respondents estimate their retirement income will be about half or less of their current annual income, compared with the standard 75% of pre-retirement income that is usually considered a bare minimum for most retirees.

How did they come up with these predictions? Most of them — 75% — guessed.

“Retirement has become a guessing game,” said Laurie Nordquist, director of Wells Fargo Institutional Retirement and Trust. “But people can’t afford to approach 20-plus years of their life by ignoring the facts.”

That’s where financial advisers can help, she said, working with business owners to set up retirement plans and individual clients to impose a reality check of how much to save, how to invest and how much they can afford to spend in retirement. “Advisers can help get the message out there,” she said.

Social Security continues to be strong component of retirement planning for the middle class.

More than 70% of non-retired survey respondents said they would prefer to delay collecting social Security benefits so they receive higher payments. That’s the opposite of standard procedure today when the majority of retirees claim Social Security benefits before their normal retirement age even though it means smaller benefits for the rest of their life.

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Medicare Enrollment Begins October 15th, Will You Be Signing Up For The First Time Or Making Changes To An Existing Plan?

Medicare enrollment begins October 15^th,  will you be signing up for the first time or making changes to an existing plan?

Whether you are turning 65 soon or already taking Medicare, the enrollment period begins October 15^th and you have until December 7^th to select a new plan, or replace an existing plan. Here are a few details you need to know about Medicare:

In the United States today, most health plans pay secondary to Medicare. So if you are currently covered by a retiree health plan, and individual policy, or a small employer group plan for less than 20 employees, you must enroll in Medicare when you turn 65. If you don’t enroll in Medicare on time, you coul be subject to late-enrollment penalties.

There are several parts to Medicare:

Part A covers hospital care, skilled nursing facility care, nursing home care, hospice and home health care. The premium is usually free, and the deductible is $1,156 per benefit period in 2012. Based on your needs, there could also be copays and coinsurance.

Part B covers doctor visits, lab tests, surgeries and supplies. The average monthly premium for 2012 was $99.90. Higher income earners pay an extra amount on top of the base premium. The deductible is $140 in 2012. There are copays and a 20% coinsurance for services.

Part D is the prescription drug coverage offered through private companies that contract with Medicare. Terms and premiums vary among drug plans, which is why you will need to shop carefully for the right plan for your needs.

There is no limit to the out-of-pocket expensed you could pay under Medicare alone. This is why most individuals have supplemental insurance. Here are your choices:

Medicare Advantage Plans, or Part C are like HMO, PPO or other Medicare health plans that consolidate Part A and B and may include Medicare prescription drug coverage. Many plans range from no premium to about $149. Check to see if your plan also has deductibles, copays and coinsurance. Out-of-pocket cost are limited to a range of $3,400 to $6,700.

Supplemental insurance, or Medigap is designed to cover the gaps Medicare does not cover, such as deductibles, co-payments, and coinsurance amounts for Medicare approved services. A Medigap policy differs from a Medicare Advantage Plan in that those plans are ways to get Medicare benefits, while a Medigap policy only supplements your original Medicare benefits. Current Medigap policies don’t include prescription drug coverage. Plan premiums can range from hundreds to thousands of dollars each year.

Keep in mind, Medicare is not automatic, you’ll probably need to enroll at 65. Knowing and understanding the different parts of Medicare, and the additional insurance option available, will help you to make the most informed choices for your medical needs.

WARNING: Medicare does not provide Long-Term-Care!

Sources: Connie Cone Sexton, AZ Republic newspaper reporter.

Elaine Floyd, CFP, director of retirement and life planning for Horsesmouth and author of the advisor training program ‘Savvy Social Security Planning for Boomers.’

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Fewer People Are Claiming Social Security At 62.

Fewer people are claiming Social Security at 62.

In 2011, 26.9% of all Americans who were eligible to claim Social Security at 62 did so, says a recent report from the Urban Institute. This is down from 30.8% in 2009 and is the lowest ratio since 1976.

More people are realizing that claiming Social Security early may jeopardize future economic security. When you apply for Social Security before full retirement age, your benefit starts out lower and remains lower for life. If you are married, this results in lower income for the two of you while you are both alive, and lower income for the surviving spouse later in life.

Also, more people are continuing to work past age 62. This allows them to add to their retirement savings while deferring Social Security in order to collect a higher benefit later.

What if you started your Social Security at 62 and now regret the decision? Well, there are a couple of things you can do. First, if you applied within the past 12 months, you can withdraw your application, repay the benefits you received, and restart your benefit at a later date. If the 12-month window has passed, all is not lost.

If you are under full retirement age and working, some or all of your benefits are being withheld due to the earnings test. When you turn full retirement age, your benefit will be recomputed to give you credit for those months in which you did not receive a check. Between the ages of 66 and 70, you may voluntarily suspend your benefit in order to increase your Social Security benefit by 8% per year.

If you would like help deciding when to claim your Social Security benefit, or deciding what to do now if you havealready claimed your benefit, please call us we are here to assit you.

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Q & A on Suvivor Benefits and Divorce Suvivor Benefits

Question: An ex-spouse is entitled to a divorced-survivor benefit. She plans to stop working at age 60 due to health reasons. Her ex-husband died 15 years ago, so her own SS benefit is larger than her divorce-survivor benefit. If she applies for divorce-survivor benefits at age 60 will she still be able to earn delayed retirement credits (DRC) on her own SS benefit all the way until age 70? Or will the SSA automatically switch from divorce-survivor benefits at age 62 to her own SS benefit because her benefit is larger? Not sure if the same rules applied because if you apply before full retirement age (FRA) the SSA automatically gives you the larger benefit and the ability to build credits is gone.

Answer: It’s different with survivor benefits, hence the confusion. If she takes her survivor benefit at 60, her own retirement benefit will continue to earn DRCs to age 70. She will not be forced to take her own benefit at 62. However, just because he died 15 years ago doesn’t necessarily mean her own benefit will be higher. If he was a high earner, they will make the adjustment. It’s important to find out, because if her survivor benefit would be higher, she’ll want to wait and take it at FRA so it will not be reduced. If she does that, she can take her own reduced benefit at 62.

Question: A husband has been taking retirement benefits since 63.5, he is now 65.5. His wife passed away a year ago. Can he suspend his retirement benefits at 66, take survivor benefits for 4 years, and then take his own benefit at age 70? Can he stop his own benefit now for survivor benefits even if the survivor benefits would be smaller? Or is he stuck waiting until age 66 to suspend, so he can then get survivor benefits?

Answer: I’m afraid he’s out of luck. He will not be able to take advantage of survivor benefits. Since he has already applied for his own benefit, he has an active application. This means he may not switch to a different benefit if it is lower. Suspending his benefit at full retirement age would not cancel the application; it would just suspend the benefit. Then if he were to try to apply for his survivor benefit, they would tell him he already has an active application for his own retirement benefit and he must take that because it is higher. If the date of his application were less than 12 months ago, he could withdraw it and repay, but now he’s outside that window. He’ll just have to stick with his own reduced benefit.

P.S. He may suspend his benefit at full retirement age in order to earn delayed credits, but he would not be able to receive the survivor benefit in the meantime.

Question: A wife is 63, he now deceased husband was almost 62. Neither the husband or the wife received SS benefits. She has always worked part-time and husband was an attorney, so I am assuming the best approach is to have her begin claiming benefits on her own work record now, and claim survivor benefits at her full retirement age (FRA) in 3 years. The question I have is whether she can claim survivor benefits at all since her husband had not yet reached the age of 62 to qualify for his own benefits?

Answer:Absolutely, she would qualify for survivor benefits even though he hadn’t reached age 62. It is not at all uncommon for the breadwinner to die before reaching Social Security age and for SSA to effectively hold the “life insurance” until the surviving spouse becomes of age.

The key is that SHE is over the age at which survivor benefits can be claimed. As you suggest, she can maximize her survivor benefit by waiting until she turns 66 to claim it. In the meantime, she can file for her own benefit without it affecting the survivor benefit. As usual, the earnings test will apply before FRA.

(Source: Elaine Floyd, CFP,® director of retirement and life planning for Horsesmouth and author of the advisor training program ‘Savvy Social Security Planning for Boomers.’

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Social Security Earnings Test pre FRA

Question: I have a client who is 62. He lost his job last year and has only been able to find part time work since. He wants to start collecting social security now that he is 62. He asked me how social security will know how much he makes for the earnings test. How does social security determine how much benefit to withhold and how often is this amount re-calculated?

Answer: When he applies, SSA will ask him how much he expects to earn during the rest of the year. Then they will withhold the appropriate number of checks. For example, if his benefit is $1,500 and he expects to earn $30,000 between now and the end of the year, they’ll subtract $14,640 from $30,000 to get $15,360. Then they’ll divide that by 2 to get $7,680. This is the amount that will be withheld. Dividing $7,680 by the $1,500 benefit produces 5.12 months worth of benefits to be withheld. Rounding up to the nearest whole month, they would withhold six months worth of benefits. So if he applied now, benefits for May – October would be withheld. Then he would receive the $1,500 for November and December. When earnings are reported after the end of the year (via W-2 wage statements from the employer), they will make any adjustments – repaying the partial month that was withheld and adjusting for any differences from the $30,000 estimate. When he turns FRA (Full Retirement Age) (66), those months in which benefits were withheld will be credited back to the actuarial reduction. So his FRA benefit, instead of being 75% of his PIA (Primary Insurance Amount), might be 80% or 85% of his PIA depending on the number of months benefits were withheld.

(Source: Elaine Floyd, CFP,® director of retirement and life planning for Horsesmouth and author of the advisor training program ‘Savvy Social Security Planning for Boomers.’)

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Should You “Buy” an Annuity from Social Security?

Question:  Should You “Buy” an Annuity from Social Security?

Answer:  More and more people are deciding to delay Social Security to age 70 in order to receive the highest possible benefit. But what if you retire before then? Does it make sense to withdraw funds from retirement and investment accounts to meet your spending needs before Social Security starts?

Many people would say no. It seems intuitively rational to start Social Security early and “save” personal assets for later. But this is not always the best move, especially for married couples where the surviving spouse steps into the deceased spouse’s benefit and continues to receive that benefit for the remainder of her life.

In the Issue Brief “Should You Buy an Annuity from Social Security,” Steven Sass from the Center for Retirement Research at Boston College compares the Social Security claiming decision to the purchase of an annuity.

The amount you would take out of your personal accounts to meet spending needs before age 70 is the “cost” of the annuity.

He then asks, how would that “purchase” compare to the “cost” of buying a commercial annuity through an insurance carrier?

Sass found that Social Security is the best deal in town.

For example, consider a retiree who could claim $12,000 a year at age 65 and $12,860 at age 66—$860 more. If he delays claiming for a year and uses $12,860 from savings to pay the bills that year, $12,860 is the price of the extra $860 annuity income. The annuity rate—the additional annuity income as a percent of the purchase price would be 6.7% ($860/$12,860).

Commercial annuity rates are lower than that because they have marketing, management, and risk-bearing costs (people who buy commercial annuities tend to live longer, and this actuarial adjustment must be factored into the price).

Also, today’s low interest rates make it hard for investors to beat the Social Security benefit formula, especially if you are trying to maintain the same low risk profile. For the full Issue Brief, go to http://crr.bc.edu.

For a customized analysis of your situation and guidance on how to factor the Social Security claiming decision into your overall retirement income plan, give us a call at 480-513-1830.

(Source: Elaine Floyd, CFP,® director of retirement and life planning for Horsesmouth and author of the advisor training program ‘Savvy Social Security Planning for Boomers.’)

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Will Social Security Be Around Much Longer?

Will Social Security Be Around Much Longer?

About 20 years ago the financial services industry starting sounding the alarm about Social Security. In an effort to get baby boomers to save for retirement, it was pointed out that when Social Security was first instituted in 1935, there were some 40 workers paying into the system for every retiree drawing benefits out. But when baby boomers begin to retire, there will just 2 or 3 workers paying in for every retiree drawing benefits out. This simple math was enough to scare baby boomers into saving for retirement. That was a good thing.  At least conceptually.

Since then, the alarms have gotten louder and crazier. Some people have gone so far as to say the system is “broke.” This has led to lots of misunderstandings and irrational fears about the solvency of the Social Security system. Let’s look now at what the Social Security trustees say. Every year, they publish a comprehensive report showing the long-range outlook for Social Security.  (See more below.)

Social Security was designed as a pay-as-you-go system. Payroll taxes from current workers go into a trust fund and are immediately paid out to current retirees. Because baby boomers have been in their peak earning years, the trust fund has accumulated more than needed for current benefits. Right now the trust fund holds about $2.6 trillion, which is invested in special-issue Treasury securities. As baby boomers start retiring, these trust fund assets will gradually be drawn down.

Over the next 75 years, costs will begin to exceed income. There are enough reserves that the system will be able to pay 100% of promised benefits until 2033. After that, if nothing is done to reform the system, income will be sufficient to cover just 75% of promised benefits.

Reform proposals being studied:

• Increase the maximum earnings subject to Social Security tax (currently $110,100)
• Raise the normal retirement age (currently 66 for individuals born between 1943 and 1954; 67 for those born in 1960 or later)
• Lower benefits for future retirees (escalate  benefits based on increases in consumer prices rather than wages)
• Means testing for higher net worth people
• Reduce cost-of-living adjustments (COLAs) for all retirees

Although the Social Security system is not in imminent danger, most people agree that the earlier reforms are instituted, the less painful they will be on everyone.  Let your Senators and Representatives know you want them to take action on these reforms.

The bottom line for baby boomers is that your benefits are not likely to be affected by much, if at all. So you can stop worrying that Social Security won’t be there for you in the future.

Excerpt from the 2012 Trustees Report

 

The Social Security trust fund is expected to exhaust in 2033, three years sooner than projected last year, according to the latest OASDI Trustees Report (http://www.ssa.gov/oact/tr/2012/trTOC.html). At that time, revenues will be sufficient to pay about 75% of promised benefits, down from the 76% projected last year.

 

The annual cost for the OASDI program will exceed non-interest income in 2012, as it did in 2010 and 2011, and remain higher throughout the remainder of the 75-year long-range period. When interest income is taken into account, trust fund assets will grow from the current $2.7 trillion to $3.1 trillion through 2020. Beginning in 2021 the trust fund will begin to diminish until it is exhausted in 2033. Payroll taxes will continue to be collected and will be sufficient to pay 75% of promised benefits.

 

So the question becomes this: When is the best time to claim Social Security if you know your benefits are going to drop by 25% in 2033? Just for fun, I ran this through the Simple Breakeven Calculator for a hypothetical 62-year-old maximum earner who has the option of claiming a reduced benefit of $1,880 now, or a DRC-enhanced benefit with COLAs of $4,127 at age 70. As it turns out, the breakeven age occurs in the year 2028—five years before the drop in benefits in 2033—when our hypothetical client is 78. After 2028 the late claiming scenario gains a greater edge. So the argument that it’s better to claim early because of Social Security’s deteriorating financial condition doesn’t hold water. Today’s 62-year-olds will be better off delaying benefits to age 70 if they think that they—or their surviving spouses—will live past age 78. That hasn’t changed.

(Source: Elaine Floyd, CFP,® director of retirement and life planning for Horsesmouth and author of the advisor training program ‘Savvy Social Security Planning for Boomers.’)

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Social Security statements are now available online.

Social Security statements are now available online.

After suspending the mailing of annual statements to save money, the Social Security Administration has worked out the security details necessary to make the statements accessible online. To access your statement, just go to www.socialsecurity.gov/mystatement, and open an account by answering a series of questions designed to confirm your identity.

This process may seem a bit cumbersome, since the system taps into Equifax, the credit reporting agency, which maintains obscure information like where you lived 15 years ago and which company you were making car payments to in 1999. To pass security, you will need to answer a few of these random questions, which could be a challenge for some.

After your account has been established, write down your username and password so you will be able to access your statement in the future. Once your account is set up, click on “Print/Save Your Full Statement.” You will see the familiar format which shows your benefit estimates on page 2, and your earnings record on page 3. First check your earnings record to make sure it is accurate. If not, call the number shown at the bottom of page 3. Then read over the rest of the statement to learn more about Social Security and Medicare.

If you would like to find out more about your potential benefits, and how to maximize them, feel free to contact us.

(Source: Elaine Floyd, CFP,® director of retirement and life planning for Horsesmouth and author of the advisor training program ‘Savvy Social Security Planning for Boomers.’)

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For further information, visit our website or call us at 1-800-567-3115

 

Savvy Social Security Planning: What Baby Boomers Need to Know to Maximize Retirement Income.

Savvy Social Security Planning: What Baby Boomers Need to Know to Maximize Retirement Income.

This is the first in a series of blogs about Social Security.  It’s our intent to make some sense about this very complicated subject, and hopefully shed some light on the murky details of it and allow you readers to realize that there are ways to be able to take advantage of the benefits if you know how to go about it correctly.  As is often the case, the devil’s in the details.  And there are lots of details in the Social Security regulations.

Why am I writing about this now?  Because on an average day, nearly 10,000 Baby Boomers hit retirement age, and this phenomenon will continue for 16+ years longer, as the biggest demographic bubble in the history of the world gets older!

Our clients are coming to us all the time with questions, and we realized we needed to get educated about the subject, so the upcoming blogs will attempt to share some of the knowledge we’ve picked up as we journey down this path of enlightenment – knowing you’re never too old to learn something new – and in this case, very useful.

I’m going to usually format it in the way of a question and answer, or multiple questions and answers.  This beats the heck out of just reading the regulations, and will give examples of real people and their situations.  And of course, some definitions, especially in the case of the abbreviations used, which are everywhere.

So, look for the next blog in a few days, and then one every week or ten days or so.  At least that’s the plan.

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Social Security News

Social Security News

“Social Security makes up 40% of retirement income” is how the recent article in Financial Planning begins, and “most people lean heavily on Social Security during retirement” probably comes as no surprise to many of you.

The Employee Benefit Research Institute goes on to report that U.S. Census Bureau data shows pensions and annuities make up just 20% of income for people age 65 and older, earnings and wages make up 26%, and income from assets accounts for 13%.

Perhaps the most alarming statistic is that median income is just $18,001.  That’s their number, and I think it’s scary!

What’s more, they’re saying “that the data really hasn’t changed much since 1975”.

Let’s throw out some more Social Security information.  When it was enacted in 1933, the average life expectancy for male workers was 63.  Social Security benefits kicked in at age 65.  From an actuarial point of view, statistically the government would never pay out anything since, on average, all workers would be dead before they collected.

And if you advanced the “retirement” age from 65 to keep up with life expectancy gains, the current retirement age would be approximately 82.

Hopefully interesting food for thought.

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