EHDH Estate Planning

Why Is Social Security Important?

Knowing the ins and outs of various Social Security strategies is important to make the most of the program for you as an individual and for your family. Questions about making the right financial moves and investing are usually not followed by questions about Social Security. However, they should be. A recent article from CNBC titled “Social Security may be a ‘treasure trove’ for you and your family. But first you have to navigate some complex rules” explains how Social Security includes thirteen different kinds of benefits.

The list of different payments includes disability benefits, spousal benefits, divorced spousal benefits, child-in-care spousal benefits, widow/widower benefits, child benefits, disabled child benefits, mother/father benefits, divorced widow/widower benefits, parent benefits, grandchild benefits and death benefits.

Each type of benefit has its own requirements. The one catch: Social Security is a “use it or lose it” system. If you do not know you are eligible for a benefit, you might miss it.

One basic fact: you can wait until age 70 to get the maximum benefit. However, there is no advantage to delaying taking Social Security benefits past age 70. Eligibility begins at age 62, and for each year you collect benefits before your Full Retirement Age (FRA), you lose about 7%. FRA is based on your date of birth. Therefore, if you can wait to collect at your FRA, you will get 100% of your benefits. For every year past FRA, benefits increase by about 8%.

If you can wait from age 62 to 70, your benefits will be about 76% higher. Most people do not wait because they need the income or have serious health conditions and do not expect to live long enough to benefit from the increase.

For some families, maximizing the benefits is less about the wage earner and more about the family. If the wage earner has a disabled child, claiming benefits could trigger the child-in-care spousal benefit and a disabled child benefit. In this case, it may be better to take benefits earlier to help the entire family.

Another advantage of waiting until age 70 is it will result in a higher surviving spouse benefit, enabling a widow or widower to receive the full amount of their spouse’s monthly benefit plus their own benefits, if the surviving spouse has their own earnings.

Ex-spouses who were married for at least ten years and did not remarry until they reached age 60 are eligible for survivor benefits. You may not want to wait until FRA or age 70 on their behalf, but circumstances vary, so you should at least be aware of this.

The survivor benefit for young children or disabled children of any age, if they were disabled before age 22, does not change regardless of when you claim.

The complexity of all of these programs makes it sometimes difficult to know what the best claiming strategy is. Most people focus on the individual or couple, but not the entire family’s benefits.

Social Security experts advise wage earners to speak with more than one employee to get answers, since you may get different answers. Do your research and be your own advocate to ensure that you and your family receive the correct benefits.

Reference: CNBC (Feb. 7, 2022) “Social Security may be a ‘treasure trove’ for you and your family. But first you have to navigate some complex rules”

Should I Delay Claiming Social Security?

Getting the timing right on Social Security is important. Deciding when to claim is a decision requiring thoughtful planning and accurate information. A recent article from York News-Times titled “3 Reasons to Put Off Social Security for Another Year and 2 Reasons Not to” takes a common-sense approach.

There are good reasons to delay taking Social Security benefits. First, if you are under 70, the longer you delay benefits, the larger your checks. Benefits grow anywhere from 5/12^th of a month to 2/3^rd of 1% per month, depending upon your Full Retirement Age (FRA) and your current age. FRA is the age when you qualify for a standard benefit, based on your work history. For most of today’s wage earners, this is sometime between age 66 and 67.

A second reason to delay: you may get a larger lifetime benefit, if you live into your mid-80s or beyond. However, those who need the income to pay bills may not have a choice, even if they have not reached their FRA. If possible, delaying by a few months might be helpful to increase benefits.

A third reason is if you are still working. If you are working and earning a decent salary and have not yet reached your FRA, you may run into problems with the Social Security Earnings Test. The federal government deducts $1 from each monthly benefit for every $2 you earn over $19,560 in 2022, if you will be younger than your FRA for the entire year. If you will reach your FRA in 2022, you will still have a deduction, but this will be $1 for every $3 you earn over $51,960. If you are still working, delaying taking benefits makes sense.

The good news: the money will not be out of your pocket forever. Once you reach FRA, your benefits are recalculated to include the amount previously withheld, making checks larger. However if you do not need benefits right away, the best decision is to delay taking Social Security until you retire.

There are also reasons why delaying taking Social Security benefits is not necessary. The biggest one is if you are 70 or older. The benefits stop growing on your 70^th birthday, so there is no reason to delay. Make sure to sign up for benefits by your 70^th birthday.

If your life expectancy is not great, then there is no incentive to waiting. If you pass away before signing up for benefits, you might not get any money from Social Security. Take an honest look at your own health and your family’s health history. If you think you might not live all that long, or if everyone in the family passes early, it may make sense to apply for Social Security, even before your FRA.

When you sign up for benefits matters a lot. The Social Security Administration has calculators on its website to use once you have created a my Social Security account. This will give you an idea of how much you can expect to receive in Social Security benefits at various ages, based on your own work history.

It also makes sense to align your estate plan and retirement plans with Social Security.

Reference: York News-Times (Jan. 27, 2022) “3 Reasons to Put Off Social Security for Another Year and 2 Reasons Not to,”

What Should I Know Before Starting Social Security?

It’s not necessary to become an expert on Social Security before starting to take benefits. However, having a good understanding of how things work could make a difference in your household income, explains a recent article from USA Today titled “Explaining Social Security: TLDR edition: The 8 things you should learn about your benefits.” Simply put, if your earnings are wrong, you may get less money than you’re entitled to.

Start by checking your earnings records. In the past, Americans received a yearly paper statement of records and benefits. Today, you’ll need to create a “my Social Security” account to review your earnings and benefits information. It’s easy enough to do, so don’t delay.

There’s no time limit on correcting earnings errors. The information can be found in earnings records, which can be seen in tax returns or W-2 forms. The exception to this is self-employed earners, and their limit is tight. They have exactly three years, three months and 15 days to correct any earnings reports.

Routinely checking benefit amounts is smart for planning household cash flow in retirement. Today’s statements provide estimates of monthly benefits every year from age 62 to 70, including full retirement age.

A critical data point for Social Security benefits: your full retirement age, or FRA. This is the age when you can receive your full benefit retirement amount, determined by the year you were born. All of this information is all on the Social Security website.

You don’t have to wait to reach FRA to start collecting benefits. You can file for benefits anytime between age 62 and 70, but if you decide to start taking benefits before FRA, the monthly amount is reduced permanently. On the other hand, if you delay benefits until after FRA, you are eligible for delayed retirement credits and may see an increase in your monthly benefit. The choice is yours, but it’s better to make an informed decision that best suits your needs.

Social Security benefits were never intended as a sole source of retirement income. The goal is to replace about half of a low earner’s pre-retirement salary, about 40% of an average earner’s pre-retirement salary and about a third of a high earner’s pre-retirement salary.

Benefits are calculated on the monthly average of the top 35 highest earning years. It’s really that simple. If you haven’t worked for 35 years, zeros are used for those non-working years, which lowers the monthly average and by extension, the monthly benefit.

There is an option to start collecting before FRA called the voluntary payment suspension. If you’ve started taking benefits before FRA, you can voluntarily request to suspend retirement benefits at your FRA and wait to receive benefits at a higher amount. This request can be made as many times as you wish between FRA and age 70. Be aware that if you suspend your own benefit, anyone who receives a benefit on your work record will have their benefits suspended as well, except for divorced spouses.

If spouses have different income levels, it often makes sense for the higher earner to wait to collect until age 70. However, if the higher earner dies after starting benefits at age 70, the surviving spouse will receive the deceased’s age 70 benefit.

Reference: USA Today (Nov. 5, 2021) “Explaining Social Security: TLDR edition: The 8 things you should learn about your benefits”

What Happens to Social Security Payments after a Person Dies?

How does the federal government know to stop sending Social Security payments when a recipient has died? What if the surviving spouse or a dependent doesn’t know they are entitled to benefits after a loved one has died?

Tackling this issue when an older person or spouse has died can be complicated, but a helpful article from CNBC titled “Here’s what happens to Social Security payments when you die” provides important answers.

The Social Security Administration needs to be notified of the death of a benefit recipient as soon as possible. In some cases, funeral homes have a notification process, and they report the death. The person who has been named as the deceased’s executor can also call Social Security.

Whoever calls or contacts the Social Security Administration will need to know the decedent’s Social Security number.

The last month a person is eligible for Social Security benefits is the month prior to their death. Any benefit paid after the month of their death must be refunded. That’s because each payment received represents the previous month’s benefits. If a person dies in August—even if they die on August 31—July is the last month they were eligible for benefits.

If benefits are made by direct deposit, the bank needs to be notified, so it can return the benefit. Using those funds after a recipient has died is a federal crime, even if the death is not reported. If the SSA receives notice of this occurring, the agency may initiate a criminal investigation. The SSA and other government agencies coordinate their records to identify any unreported deaths.

Anyone already receiving money based on the deceased’s record will automatically convert to survivor benefits, once the SSA receives notice of the death. However, in other cases, the surviving spouse should contact SSA to apply for survivors’ benefits. This must be done by appointment in person at a local office, since it cannot be done online.

If the surviving spouse has reached full retirement age, they can get their deceased spouse’s full benefit. They can apply for reduced benefits as early as age 60 or age 50, if they are disabled. If the survivor qualifies for Social Security on their own earnings record, they can switch to their own benefit anytime between ages 62 and 70, if the benefit amount would be greater.

There is usually a one-time lump-sum death payment of $255 given to a surviving spouse or qualified child.

Reference: CNBC (Aug. 16, 2021) “Here’s what happens to Social Security payments when you die”

Key Dates for Planning Retirement

Just as there are many types of retirement benefits, there are many dates to keep in mind when creating a retirement plan. Some concern when you can make larger contributions to retirement accounts and others have to do with withdrawals. Knowing the dates for each matters to your retirement planning, according to the recent article title “10 Important Ages for Retirement Planning” from U.S. News & World Report.

When should you max out retirement savings contributions? The sooner you start saving for retirement, the more likely you’ll retire with robust tax-deferred accounts. Tax breaks and employer matches add up, as do compounding interest returns. The 401(k) contribution limit in 2021 is $19,500. Wage earners can deposit up to $6,000 in a traditional IRA or Roth IRA. If you’re in your peak earning years, traditional IRAs and 401(k)s may be better, since your tax bracket is likely higher to be higher than when you started out.

Catch-up contributions begin at age 50. Once you’ve turned 50, you can make catch up contributions to 401(k)s—up to $6,500—and up to $7,000 in traditional IRAs. That’s for 2021. If you’re able to take advantage of these contributions, you can put away additional money and qualify for even bigger tax deductions.

401(k) withdrawals could start at 55. If you left your job in the same year you hit the double nickel, you can take 401(k) withdrawals penalty-free from the account associated with your most recent job. The “Rule of 55” lets you avoid a 10% early penalty, but you’ll still have to pay income taxes on any withdrawals from a 401(k) account. However, if you roll a 401(k) account balance into an IRA, you’ll need to wait until age 59½ to take IRA withdrawals without any penalties.

When does the IRA retirement age begin? The magic number is 59½. However, traditional IRA distributions are not required until age 72. All traditional IRA withdrawals are also taxable.

Social Security eligibility begins at age 62. The earlier you start collecting Social Security, the smaller your monthly benefit. Your full retirement age depends upon your date of birth, when the benefit amount will be higher than at age 62. If you work after signing up for Social Security, your benefits could be temporarily withheld if your salary is higher than the annual earnings limit. If you retire before your full retirement age and earn more than $18,960 per year, for every $2 above this amount, your benefits will be reduced by $1. Benefits will be recalculated once you reach full retirement age.

Medicare eligibility begins at age 65. Enrollment in Medicare may take place during a seven-month period that begins three months before the month you turn 65. Signing up on time matters, because Medicare Part B premiums increase by 10% for every 12-month period you were eligible for benefits but failed to enroll. Are you delaying enrollment because you or your spouse is still covered by a group health plan at work? Make sure to sign up within eight months of leaving your job or health plan and avoid the penalty.

Social Security Full Retirement Age is 66 for most Baby Boomers. 67 is the full retirement age for workers born in 1960 or later. Millennials and younger generations qualify after age 67.

If you can wait until 70, you’ll max out on Social Security. Social Security benefits increase by 8% for each year you wait to start payments between Full Retirement Age and age 70. After age 70, the number remains the same.

RMDs begin for 401(k) and IRA retirement accounts at age 72. These mistakes here are expensive! Your first distribution must be taken by April 1 of the year you turn 72. After that, annual withdrawals from 401(k)s and traditional IRAs must be taken by December 31 of each year. Missing a required distribution and you’ll get hit with a nasty 50% of the amount that you should have withdrawn.

Reference: U.S. News & World Report (July 28, 2021) “10 Important Ages for Retirement Planning”

Claiming Social Security? What You Need to Know

If you’re eligible for Social Security, those monthly benefits may be a big part of how comfortable your lifestyle is once you retire. However, making the most out of your benefits requires some knowledge and good decision making, as described in this recent article “4 Must-Knows Before Claiming Social Security” from The Motley Fool.

What’s Your Full Retirement Age—Your “FRA”? When you start taking benefits will have a big impact on the amount of your benefits. If you wait until your FRA, you’ll get your standard benefit. Born between 1943—1954? Your FRA is age 66. If you were born after 1967, your FRA is 67. If you were born between 1955 and 1959, you’ll want to check with the Social Security Administration to be 100% certain.

You become eligible to take your Social Security benefits once you turn 62. However, the benefit is reduced for every year that you take it early. Another option is to take it as late as age 70. Your benefits will grow for every year you wait. Let’s say your standard benefit would be $2,200. If you take it as early as age 62, it will be $1,650. If you wait to age 70, and it leaps to $2,900. Waiting could make the difference between paying and not paying some bills.

How Long Will You Live? This is the $20 million question. Family longevity and overall health could give you a higher probability of living a long life, but there are no sure answers. If you start taking benefits at age 62 and live to age 75, the total amount in benefits will be $257,400. If you take benefits at age 66, you’ll get $237,600. If you wait until age 70 to claim benefits and live to age 75, you’ll get $174,000.

A longer life means larger numbers. Live to age 80, you will get $365,000 if you start at age 62, $369,000 if you start at age 66, and $348,000 if you start at age 70. Live to age 85, and you will get $455,400 if you start at age 62, $501,600 by starting at age 66, and $522,000 if you wait until age 70.

How Much Have You Saved for Retirement? Social Security makes up about 40% of retirement income for the average American. If you’ve got a pension, consider yourself lucky. The more income streams, the better. If your expenses during retirement are, let’s say, $40,000 a year, and your income is $20,000, then you’ll need an additional $20,000 to keep your bills paid. Studies on investments and retirement (and there are many of these) report that if you have a traditional 60% stocks and 40% bonds investment portfolio, you risk running out of money in retirement, unless you keep withdrawals at no more than 4% of your total account value. An investment account of $500,000 that yields $20,00 annually—is a start. Most Americans do not have that much in retirement savings.

Will You Need or Want to Work During Retirement? Working during retirement is a necessity for some. for others, it’s a way to get out of the house and socialize. If you have $40,000 in expenses and receive $20,000 from guaranteed income streams, the $10,000 earnings from a part time gig could lower the amount you’d need to pull from retirement savings.

There’s a downside to working during retirement. If you work too much, Social Security will decrease your monthly payments based on your income. If you are considering taking Social Security early while working, make sure to check the numbers, so you aren’t getting hit with penalties.

Reference: The Motley Fool (June 7, 2021) “4 Must-Knows Before Claiming Social Security”

Collecting Social Security from Divorced Spouse

Any divorce is tough, but late in life divorce presents special challenges, even as it becomes more and more common. While divorce in general is declining in America, the divorce rate among Americans aged 50 and up has nearly doubled since the 1990s, and nearly tripled (!) for those over age 65. A recent article from Kiplinger entitled “Yes, You Can Collect Social Security from an Ex-Spouse: Here’s How” contains valuable information for those considering or in the midst of a gray divorce.

Most importantly, yes, you can collect Social Security (SS) benefits based on the earnings of your ex, if you meet these requirements:

• At least 62 years old.
• Currently single.
• Were married to the ex-spouse for at least ten years.
• The benefit you would receive from your own work history is less than the benefit you’d receive from your former spouse’s work history.
• Your ex-spouse qualifies for Social Security benefits.

For all spouses, including exes, you may receive up to 50% of the amount your spouse or former spouse would receive in benefits at their full retirement age. Note that this is not in addition to your own benefit. Your benefit must also be lower than half of your ex’s benefit, in order for this rule to apply.

Let’s say your own monthly SS check would be $1,000. If the check of your ex-spouse would be $1,500, then you would not be eligible for former spousal benefits ($1,000 is more than $750, which is half of $1,500).

Timing is another factor in Social Security, for benefits from your own earnings or from an ex-spouse. Your benefits at age 62 are less than what you are eligible for at full retirement age. To get the full 50% of your ex’s benefits, you must wait until your own full retirement age. Unlike applying on your own earnings record, waiting to apply for your ex-spouse’s earnings does not increase after full retirement age.

If your ex is deceased, you may be eligible for the same survivor benefits as current spouses, which may mean you could receive the full amount of your ex’s benefits, rather than half. Your marriage must have lasted at least ten years, and the amount has to be greater than what you would receive based on your own earning records. However, there is one major difference: you can start receiving survivor benefits as early as age 60, and if you are disabled, at age 50.

When applying for benefits on an ex’s record, you’ll need to provide a fair amount of information about yourself and your work history. That includes a birth certificate, proof of citizenship, if you were not born in the U.S., military discharge papers, if you served before 1968, W-2 forms and/or self-employment tax returns, your marriage certificate and final divorce decree. Some of the documents will need to be originals.

There are a number of ways to maximize your Social Security benefits, regardless of your marital status. It’s a good idea to learn all you can about the options before you retire, so you can receive the benefits you deserve.

Reference: Kiplinger (May 13, 2021) “Yes, You Can Collect Social Security from an Ex-Spouse: Here’s How”

How to Maximize Social Security Benefits

Claiming Social Security benefits early costs American households an average of $68,000 in lost wealth. More than a third of Americans claim Social Security at age 62, and two thirds claim long before they reach their Full Retirement Age or FRA, according to a recent article in Think Advisor titled “How to Help Clients Maximize Social Security Benefits.”

People who don’t have enough retirement savings or who stopped working earlier than anticipated may feel they have no alternative but to take Social Security benefits early. This is understandable. There are also those who don’t believe Social Security will be solvent by the time they reach FRA and decide to get their benefits now.

A closer look into the impact of postponing benefits, even when there is no income during the deferral period, can have a profound impact on the recipient and their surviving spouse.

Women (who statistically outlive their male partners) and healthier Americans (often those with higher incomes) who receive the annual income increase from deferring claims are those who stand the most to lose from taking benefits earlier.

If you are among those who think Social Security is going to vanish or cut benefits, Boston University economics professor Larry Kotlikoff says the income of those who claim early will be cut by the same percentage as those who claim later.

Let’s say that benefits are cut by 23% in 2034. The average present value of payments for a man who claims at age 62 is $678,124. If he claims at age 70, the average present value is $764,084. Cutting benefits earlier than 2034 will only increase the difference. Without a benefit cut, the difference between claiming at age 62 and 70 is $131,951 ($818,747 versus $950,698).

Getting the claiming decision right can add six figures to the family balance sheet, so it’s worth a closer look.

It’s best to think like an insurance company when estimating the value of claiming Social Security. When pricing products like annuities and life insurance policies, insurance companies take into account such variables as U.S. government Treasury bonds, actuarial data measuring mortality and market rates on returns on other inflation protected securities.

Health is also a critical factor. How healthy is the person considering when to claim benefits? How healthy is their spouse? Consider how taking benefits early will impact the surviving spouse’s benefits.

Social Security claiming strategies succeed when using an objective fact-based process and recognizing that Social Security is an asset like any other asset and requires decisions to be made with as little emotional or political bias as possible.

Reference: Think Advisor (Feb. 21, 2021) “How to Help Clients Maximize Social Security Benefits”

Can You Increase Your Social Security Benefits?

The desire to get the largest possible benefits from Social Security is a relatively new phenomenon. For decades, people received their monthly benefit check and that was it. However, in the late 1990s, a new law let seniors over age 66 work without any reduction in benefits, says the article “Social Security & You: Seniors obsess over ‘maximizing’ their Social Security” from Tuscon.com. The law led to loopholes that became known as “file and suspend” and “file and restrict.” In a nutshell, they allowed retirees to collect dependent spousal benefits on a spouse’s Social Security record, while delaying their own benefits until age 70.

Congress eventually realized that these loopholes violated the basic concept of the program. Benefits to spouses were always known as “dependent” benefits. To claim benefits as a spouse, you had to prove that you were financially dependent upon the other spouse to collect benefits on their record. However, the loophole let people who were the primary wage earner in the family claim benefits as a “dependent” of the other spouse. Five years ago, Congress closed that loophole.

More specifically, Congress closed the ability to file-and-suspend. It also put file-and-restrict on notice. If you turned 66 before January 2020, you could still wiggle through that loophole, and there are some people who are still eligible. That’s where the term “maximizing your benefits” originated.

Can you get a bigger Social Security check, if you don’t fit into the exception noted above? The only real strategy to maximizing your benefits is simply to wait. The equation is pretty simple. If you wait until your Full Retirement Age (FRA), you will receive 100% of your benefit rate. If you can wait until age 70, you’ll receive 132% of your benefit.

In some households, the higher income earner waits until age 70 to file for retirement, so that the surviving spouse will one day receive higher surviving spouse benefits.

But that’s not the best advice for everyone. If you or your spouse suffer from a chronic illness, it may not make sense to wait.

If you or your spouse have lost your jobs, as so many have because of the pandemic, then Social Security may be the safety net that you need, until you are able to return to some kind of paid employment.

There may be other reasons why you might need to take your benefits earlier, even earlier than your FRA. Some households start taking their Social Security benefits at age 62, as a way to augment other income.

If you don’t already have a “My Social Security” account set up on the Social Security Administration’s portal, now is the time to do so. The Social Security Administration stopped sending annual statements years ago, but you can go into your account and download the statements yourself and start planning for your future.

Reference: Tuscon.com (Feb. 10, 2021) “Social Security & You: Seniors obsess over ‘maximizing’ their Social Security”

When Should You Start Filing for Social Security Benefits?

When it comes to planning for retirement finances, one of the most important decisions concerns when to claim Social Security benefits. There’s no one-size-fits-all answer to the ideal time, but there are some key facts to consider, according to Daily Journal Online’s recent article titled “Are You Ready for Social Security? 3 Questions to Answer Before Claiming Benefits.”

First, how much do you have in retirement savings? Unless you have a healthy pension or another source of income, chances are you’ll rely on Social Security benefits plus your personal savings to cover costs during retirement. How much you have saved, will definitely impact when you file.

Remember, the earlier you claim benefits, the smaller your monthly checks will be. If you start your benefits as early as possible, at age 62, monthly payments will be reduced by up to 30%. Wait until age 70, and your monthly benefits could be up to 32% more each month, in addition to the full benefit amount.

If you expect Social Security benefits to make up the bulk of your retirement income, it’s best to delay taking those benefits as long as you possibly can. If you have more than enough retirement savings, you can take your checks at any time.

How long do you expect to work? You don’t have to retire to claim benefits, but usually that is what happens. When you take benefits, may depend upon when you retire. Be realistic about your retirement date. Almost 40% of people left their jobs earlier than planned, according to a study by the Aegon Center for Longevity and Retirement. A third retired because of health issues, and more than a quarter retired because they were laid off.

If your retirement plan depends upon being able to work until age 70 to max out those Social Security benefits, then you need a backup plan, in case you have to retire early. If you were thinking of retiring in your early 60s, see if you will be able to survive on a smaller monthly benefit, if you claim earlier than your full retirement age.

What’s your spouse’s plan? If both you and your spouse are entitled to Social Security benefits, it makes sense to put a strategy in place. You may both retire and claim at the same time, or one may claim before the other. A common strategy is for the lower earning spouse to claim benefits early, while the higher earning spouse waits a few years. That way, you have a little extra income early in retirement, but the higher-earning spouse’s delay results in larger benefits later.

Life expectancy has to be considered also. Sad, but a fact of this stage of life: one of you will die before the other. When one spouse dies, the survivor can receive 100% of their Social Security benefit amount in survivors’ benefits. If the higher earning spouse can continue to work, the survivor will receive a larger monthly benefit when the first spouse passes.

Take some time to consider all of these elements, when making a plan for Social Security benefits for retirement. While you’re planning, don’t neglect your estate plan. You need to have a Last Will and Testament, Power of Attorney, Medical Proxy, Advance Directive, HIPAA Release form and perhaps a Revocable Living Trust. An estate planning attorney can help create all of these documents to suit your unique situation.

Reference: Daily Journal Online (Dec. 23, 2020) “Are You Ready for Social Security? 3 Questions to Answer Before Claiming Benefits”