Let's Talk About Social Security

Most married people know that spousal benefits are available from Social Security. First, however, assume that Joe Dokes elected to retire early at age 62. His full retirement benefit would have been $2,500 per month, but the amount that he received at age 62 was 75% of that amount or $1,875. 

Joe is now 66 and has decided to accept a consulting position with his former employer and doesn’t need the Social Security income. What Joe can do now is to voluntarily suspend his Social Security benefit payments. Those deferred payments will grow at 8%, so that when Joe reaches age 70, his benefits from that point on will total $,1875 x 132% =$2,471 each month.

One thing to remember about suspension of benefits is that Medicare Part B premiums are deducted from your Social Security check each month, so in this case, Joe will have to pay those premiums each month by other means.

Jack and Jill are both 66, but Jack is going to continue working until his age 70 but Jill has had enough of work and is going to retire now. Assume Jack’s retirement benefit as 66 would have been $2500 per month, while Jill’s benefit, based on her own employment record, is only $1100 per month. However, Jack can file for his own benefits now, but suspend receipt immediately. That will qualify Jill to receive a spousal benefit equal to 1⁄2 of Jack’s benefit or $1250 per month. Since she would not take her “own” benefits, those would continue to grow until Jill reaches 70. At that point, she can switch to her own benefit, which would have grown to $1100 x 132%=$1452. Remember that Jack must have filed for his own benefit to qualify Jill for her spousal benefits.

Also, bear in mind that suspension of benefits is only available if you have attained your full retirement age, which is 66 for everyone born before 1954. Finally, if you elected a retirement benefit from Social Security no longer than 12 months ago, you may “change your mind” and repay all of the monies you received, and wait until later to commence your benefit payments, without any penalties.

On another topic, if you are a non-spousal beneficiary of an IRA, there are some pitfalls to avoid. One major trap to avoid is simply to take the required minimum distributions, beginning in the year following the year in which the former owner died. Remember too, that, in this example, if the IRA had been a Roth, you will be required to take RMD’s.

If you fail to take a RMD, the penalty is 50% of the required amount. If the account is small, it may make sense, however, to avoid the penalty by withdrawing all of the monies within five years of the account owner’s death, thereby escaping the penalty.

If an IRA has multiple beneficiaries, it is important to split the IRA account among the various persons by the end of the year following the year of the owner’s death. Assume that the beneficiaries were an 80 year old sister, a 55 year old son and a 20 year old grandson. Were the account not to be split, all of the heirs would be required to base their RMD’s on the life expectancy of the 80 year old, rather than based on their individual life expectancies.

Speaking of required minimum distributions, it turns out that using this technique as a strategy to calculate how much to withdraw from your retirement assets each year makes a lot of sense, even if you are younger than 70 1⁄2 . The reason is that the calculation of a minimum distribution is based on your remaining life expectancy, and those amounts recognize investment returns. If your year-end IRA value has grown by 10%, your RMD will be 10% greater as a result.

A 2010 Vanguard Group study found that by combining an inflation-adjusted immediate annuity with an RMD approach generated stable cash flows that increased at a faster rate than other withdrawal strategies.

Got a financial planning question for Greg? You may e-mail him at greg@lifesolutionsonline.net  

Full disclosure: Greg Roberts is a certified life underwriter and a Certified Financial Planner. He holds an MBA from the Wharton School of Business. He is also the brother of Athens Patch editor Rebecca McCarthy.  

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