Personal Security
The economist John Maynard Keynes said that in the long run, we are all dead. If he were around today he might say that, in the long run, we are all on Social Security and Medicare.
-Ben Bernanke
I sat for the exam portion of the CFP® Certification just about twelve years ago. They scare the hell out of you when you go in to take this test - you get a big list a few weeks before hand of what you can and cannot bring with you into the testing room - nothing it turns out - and they make the consequences of violating these policies very clear, you'll have to wait at least a year to sit for the test again. You have to check your bags and coats at the door and they give you scrap paper, pencils and a very basic calculator as some more advanced calculators have memory functions. The first real smartphone didn't come out until later that year and the iPhone was still a couple years off - so I was allowed to keep my Motorola flip phone in my pocket. Turns out once I got there that all the proctors were female, and you could get up and go to the rest room whenever you wanted - meaning an enterprising test taker could have left a study book in the men's room and nobody would have ever known - but I digress. There is only one scenario I distinctly remember from the test itself, most likely because it was the only one where I used lots of scrap paper. Each scenario was followed by several questions - it went sort of like this:
Joe was married to Mary for eleven years, they divorced and Joe married Susan. Joe and Susan were married for eight years then divorced. Joe then married Kathy and they were married for three years before Kathy passed away. Joe then married for a fourth time to Jennifer to whom he was married for five years before Joe died. Jennifer then remarried Kevin to whom she was married for nine years before they divorced. Jennifer then married Bill who passed away after three years of marriage.
It then went on to give you the dates of birth, work histories and incomes of these seven people and went on to ask questions about their Social Security options. Things like,
If Jennifer decides to take her Social Security benefits at age 64 and three months, which option should she take?
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Take her own benefit earned through her working years.
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Take her spousal allowance from Joe's benefit.
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Take her spousal allowance from Kevin's benefit.
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Take her spousal allowance from Bill's benefit.
So I filled a whole page of scrap paper with a family tree style chart connecting Joe to Susan and Kevin to Jennifer and Jennifer to Joe with all their earnings and the various values of their benefits taken at full retirement age- I still remember that if you want to figure out what your benefit will be at some random age you subtract 5/9ths of a percent of your full benefit per month you're early. I did this all long hand, using a pencil and that tiny calculator. Unfortunately you never find out exactly what questions you did or did not get correct on the test - only if you passed - so how much good my scribbling did I'll never know. What has always stuck with me, however, is just how complicated and convoluted the Social Security system is and why I can never quickly answer the question that I get asked quite often: How much Social Security income am I going to get?
Let me take a step back for a minute because it's not always that complicated. If you have been married to only one person, or never married at all, and you paid into Social Security at every job you've ever had and you will definitely not be working anywhere getting any kind of W-2 income when you take your first Social Security Income (SSI), then the answer to that above question is easy to answer. If however you were previously married to someone else who either died while you were married to them or to whom you were married for at least ten years, or if you plan to collect Social Security and still work, or if you worked at a government job for which you earned a pension benefit at some point in your working career, or if you collected widower benefits, or if you started collecting benefits then went back to work and stopped - the equation is far more difficult. Thankfully for both of us you don't need scrap paper and a cheap Staples calculator to figure this out - there are software programs that can help you maximize your benefits. With that said there are a few rules that it's a good idea to understand so at least you can speak intelligently to the folks at the Social Security office if nothing else.
Happy Birthday
For some reason it's still common to believe that you get full Social Security benefits at age 65. While that age is still very important because that's when you are eligible for Medicare and health insurance expenses are a huge impediment to being financially able to retire, that's not the full Social Security retirement age. Unless you are age 77 or older your full retirement age is something in excess of 65. I assume most people born before 1943 are already collecting their SSI so we'll skip that calculation. For those born between 1943-1954, so 60-72 year olds, your full retirement age is 66. For each year of birth after 1954 the full benefit age goes up by 2 months until reaching age 67 for all those born after 1960, therefore for the majority of those who haven't already made their Social Security elections the full retirement age is somewhere between 66 - 67 years old. You can still take your benefit before that, as early as age 62, but it will be reduced by that 5/9% for each month early - so while that was only a 20% reduction for somebody born in 1936 - it's a 30% reduction for somebody born in 1960 or later; like me for example.
You're Hired
We've covered this before in many past newsletters but it bears repeating. If you take your Social Security benefit before your full retirement age and you are still getting W-2 income from employment you have to give back $1 of your SSI for every $2 you earn over the earnings limit which in 2015 is $15,720. However there is a caveat to that rule, during the year you reach your full retirement the give back is only $1 for every $3 of SSI and the limit is raised to $41,880. Plus only the income you earn before your full retirement date is counted. So let me give you an example. If you turn 66 in May of this year and you work making $80,000 per year you can take SSI and not have to give back anything. Assuming you make a consistent amount each week you'll have only earned about $33,000 by your birthday. Since that doesn't exceed the $41,880 and since the earnings after your birthday don't count, there's no reason to delay benefits until you actually hit your birthday - except for the 2.78% reduction in benefits for taking your SSI early.
I Do
This is where it gets fun, and where we are seeing more and more complications as the generation that hit the 50% divorce mark starts to retire. Basically it works like this; if you are married to somebody for at least ten years then you can take one half of their Social Security benefit at retirement in lieu of your own. If they happened to work substantially more, or made a lot more money during their careers, that could be a higher benefit amount. You can still take the benefit of that person you may have divorced twenty years ago, unless that is you are currently married to someone else. So in my scenario above, Jennifer could take Joe's or Bill's benefits since they both died while she was married to them - but she can't take half of Kevin's since they were only married for nine years, and she couldn't have taken Joe's benefits while she was married to Kevin or Bill - but she could after the divorce or between the marriages if she was old enough.
But it gets more complicated even than that. Because unlike when the Social Security system was set up - today both spouses typically have careers and build up their own SSI. The one-half benefit system was set up to give married couples a little more money than single people and based on the assumption that most wives wouldn't work. Now you have a system where the full retirement benefit of each person is probably more than half of the other's. However, there are still ways to get more out of the system. If you have a spouse, or former spouse, who's benefit is higher than yours but not more than double your benefit you may be able to take half of their benefit at age 62 or 64, and allow your benefit to keep growing up to age 70. Then you can switch over to your own benefit. If you were divorced a long time ago and have no idea what your former spouses' benefit might be vs. the benefit you earned yourself or through your current or deceased spouse - that's a question worth asking at the Social Security office.
A Better Place
Once again this topic can get tediously complicated so let's paint a scenario. Molly and Gus are retired and have basically the same SSI payments. When Gus dies Molly has the option to switch to his SSI payment in lieu of her own. But since they both had similar earnings and work histories, doing so provides no benefit to Molly. But a long time ago Molly was married to Lester for more than ten years. Lester had higher earnings than Molly and Gus during his working life and his monthly SSI is about $500 more than either of theirs. When Lester dies a few years later Molly has the option to then switch to Lester's SSI benefit and get herself that $500 extra per month. In fact if Lester had say five different spouses during his lifetime, say four of them he was married to for at least ten years and the fourth was his wife at his death - then all of them can now switch over to Lester's benefits if it's higher than their own.
SSI is a big part of most people's retirements. That guaranteed, less taxable, dependable income stream really can't be duplicated by any self-directed investment no matter how well managed and how well positioned. Even if it only amounts to 10 or 20% of your retirement income, that's probably the 10 or 20% that makes the difference between getting by in retirement and living well in retirement. It's extremely important that you coordinate when you take, and how you take that Social Security income with all the other facets of your financial life. We have not only the software and calculators to help you figure out the numbers - but also the experience to help you reconcile those numbers with the rest of your retirement vision. We hope everyone had a wonderful holiday season and you're working hard on your resolutions for 2015. If one of those resolutions was to get your financial house in order, or even something monetary more specific than that, please give us a call.
