Social Security 101; October 2015 Financial Strategies

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Greetings!

At this moment, it's feeling pretty good to be a Packer Fan. 3-0 is a good way to start the season. But I'm not silly enough to get "cocky" yet.

Before I start my explanation of this month's Financial Strategies, I wanted to make a recommendation for your Christmas List. One of my clients (and AF family member) has launched a product, named the Trivae, perfect for your favorite cook's kitchen. The Trivae is "The perfect accessory for your kitchen. Lid holder, trivet & display stand in one, Trivae helps you cook cleaner and smarter." You can find out more about the Trivae and order one here. Get your Christmas shopping done early!

The impetus for my first article was some research done by AARP and the FPA. The research showed that average Americans have gaps in their knowledge about Social Security. While I know that, just like Lake Wobegone, you are all Above Average I thought it might be worth laying out a few Social Security basics.

The second article covers a solution to a problem many investors face...large, un-needed Required Minimum Distributions (RMD) from Retirement Accounts. Recent legislation allows Retirement Accounts to hold longevity annuities which will reduce RMDs. The article explains some basics of longevity annuities and how they would function inside a Retirement Account. Early research seems to indicate that the longevity annuity solution is not a slam-dunk. The article will give you a framework to understand longevity annuities. I'll keep my eye on the research.

If you have children who are Juniors (or younger) in high school, make sure you check out my Quick Comment. The FAFSA is about to change.

The last two articles are tax related. The first article discusses Tax Efficient Investing which is critical (and something we routinely do) to maximizing the after-tax value of your portfolio. The final article discusses how you can gift more than your $14,000 annual excluded amount and not be subject to gift taxes.

On a completely unrelated note, if you have been wondering how the Tooth Fairy has been doing in our current economy you can find out here.

Have a great October and talk to you in November.

Go Air Force! Sink Navy!

Curt

Curtis L. Sheldon, CFP®, EA, AIF®

C.L. Sheldon & Company, LLC

www.CLSheldon.com

(703)542-4000 or (800) 928-1820

Featured Article

Social Security One-O-Dumb

When I was a Freshman at the Academy, Chem 101 was called Chem One-O-Dumb. I was in it. I don't think it was all that dumb, but it did cover the basics of a college level Chemistry course. With that in mind, welcome to Social Security One-O-Dumb. We'll cover the basics of Social Security Claiming Strategies. There are a bunch of them, so this article will just brush the surface and remember, laws change. So, lets take a look...

Eligibility

Beyond the basics of work history, there are at least 4 ways you may be able to claim social security retirement benefits.

On your own earnings.
On your spouse's earnings. (As long as you are currently married, you will receive the higher of your earned benefits or your spousal benefits -- 1/2 of your spouse's FRA payment)
On your ex-spouse's earnings. (If you were married for at least 10 years, not remarried, you will receive the higher of your or 1/2 of your ex-spouse's benefits)
Your deceased spouse's or deceased ex-spouse's earnings. (Same options as spouse or ex-spouse claims)

When Can You Claim?

Under normal circumstances, you can claim benefits as early as age 62 (Widows can claim at age 60 or immediately if caring for a qualifying child). The latest you would want to claim is age 70. Based on when you were born, your Full Retirement Age (FRA) will be between 65 and 67.

Your benefits will be lower the earlier you claim. In general, if you claim benefits at age 62, you will receive 25% less per year than if you wait until FRA. If you delay retirement until age 70, you will receive about 32% more per year than if you claim benefits at FRA. Also, if you work prior to FRA and receive Social Security Benefits, your benefits may be reduced by your earned income.

You may have heard that it doesn't matter when you claim because if you live to your Life Expectancy the total amount received will be the same regardless of how old you are when you claim. This statement is essentially true...as far as it goes. The calculations for reducing and increasing benefits were done based on life expectancy decades ago. Which way do you think life expectancy has moved in the last few decades? So, it is likely that you will live beyond your Social Security life expectancy and the longer you live beyond your life expectancy the more beneficial delaying becomes.

When and How Should You Claim?

There are a lot of considerations in the Claim Decision. Here are some of them...

Married Couple. Married Couples should seriously consider File and Suspend strategies. When using this strategy, the older/higher wage earner spouse will file for and immediately suspend benefits at FRA. When the other spouse reaches FRA, he/she should file for spousal benefits. Upon reaching age 70, the spouse who filed and suspended should file for benefits. If the spouse who claimed spousal benefits has his/her own benefits then at age 70 this spouse should file for his/her benefits as well. Benefits of this plan include

The couple receives some benefits when spousal benefits begin
Benefits are maximized for both spouses if they both have earned benefits or for the spouse who suspended benefits if that is the case
Provides the maximum benefits for a surviving spouse

Single. Just like a Married Couple, a Single Individual with earned benefits may want to File and Suspend when reaching FRA as well. While there are no spousal benefits to claim, the strategy will provide the following benefits:

Benefits continue to grow while suspended
A "Do - Over". If you File and Suspend and your situation changes (such as a drastic change in health), you can change your mind and tell the Social Security Administration you want your benefits going back to your date of suspension. You will receive a lump sum payment for the amount you didn't receive while your benefits were suspended. You will then receive monthly benefits based on your original date of filing. (By the way, this benefit also applies to married couples that file and suspend)

Children Late in Life. If you are age 62 or older and have children younger than age 18, you might want to consider filing for benefits. Generally, speaking the child will "receive" approximately 1/2 the parent's benefits until reaching age 18. That could provide for a pretty good college fund...

Widowed. Cash flow may be the determining factor a widow/widower considers in the claiming strategy. This situation will depend on the exact facts and circumstances.

What is the Bottom Line?

Like most things related to your financial life, it isn't too hard to come up with a satisfactory solution to claiming Social Security. Almost any choice will provide you with valuable benefits. But to come up with an optimum solution you or someone you hire needs to do some in-depth research and calculations. If you'd like some help with this decision (or any other financial issue in your life) give us a call. It's what we do...

Second Thoughts

Longevity Annuities: Coming to a Retirement Plan Near You?

Final rules announced by the Treasury Department on July 1 will allow employers to add longevity annuities to their retirement plan lineup.(1) Specifically, retirement plan participants will be able to convert a portion of their 401(k) or IRA balance into a longevity annuity in exchange for guaranteed lifetime payouts.

Also known as deferred income annuities, these instruments are purchased by individuals with the intention of securing a lifetime stream of income that begins at some point in the future. Under the new ruling, plan participants can use up to 25% of their total account balance -- or $125,000, whichever is less -- and not run afoul of minimum distribution requirements (RMDs) that apply to qualified plans once an account holder reaches age 70½. Prior to this ruling, plan participants would have had to include the value of the annuity contract as part of their account balance when calculating their RMDs. Now, the longevity annuity amount can be excluded from their account balance as long as they adhere to the dollar limits and begin taking income by age 85.

The maximum dollar amount of $125,000 will be adjusted for inflation over time, in $10,000 increments. If an individual exceeds the maximum dollar amount, they will be given the chance to correct the situation without being assessed a penalty.

Other Special Features to Come Onboard

While generally insurance companies will not be allowed to push special features that add to the cost of these products, they will be able to sell a feature called "return of premium," a type of death benefit that guarantees, upon the death of the annuity purchaser, that his or her beneficiaries will receive the amount left on the policy, minus any payments already received. Alternatively, insurers may offer a feature that allows the income stream to continue to beneficiaries after the annuity holder's death.

As of yet, it is unclear what the adoption rate of this new offering will be among employers. The Treasury Department reports that only about 20% of 401(k) plan providers currently offer annuities, and few employees elect to buy them when they do have the opportunity.

Source/Disclaimer:

(1) An annuity is a long-term, tax-deferred investment vehicle designed for investment purposes and contains both an investment and an insurance component. They are sold only by prospectus. Guarantees are based on the claims-paying ability of the issuer and do not apply to an annuity's separate account or its underlying investments. The investment returns and principal value of the available sub-portfolios will fluctuate so that the value of an investor's unit, when redeemed, may be worth more or less than their original value. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal.

The New York Times, "Longevity Insurance Joins Menu of Retirement Plan Options," July 1, 2014.

Forbes, "Treasury Green Lights Longevity Annuities in 401(k)s and IRAs," July 1, 2014.

Required Attribution

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

Around the Horn


Curt's Quick Comment Is your Child a Junior in High School? If so, recent changes to the rules for the FAFSA are headed your way. Unlike previous incoming college freshman, your son or daughter will apply for student aid using income from your prior-prior year tax return. That means if Junior is a Junior now, this year's income will be used to determine financial aid eligibility. So...if this scenario applies to you (or will in the future) this is the year you should try to "control" your income when it comes to Student Aid for 2017 in-coming Freshmen.	Optimizing A Retirement Portfolio For Taxation Locating investments in the right type of account can make a big difference in your retirement savings and lifestyle. Read More Here...	Give Tax-Exempt Gifts Above Annual Gift Tax Exclusion The annual gift tax exclusion provides plenty of leeway for giving cash or property to relatives without paying any gift tax. But you might do even better. By giving a direct gift to an educational institution or a health care provider, you can go above and beyond the annual exclusion-no questions asked! Read More...

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