full retirement age

How One More Year of Work Can Transform Your Retirement

Matt Bell — Mon, 02 Jul 2018 08:30:17 +0000

As you glance into the future, do you see a life of endless work stretching out in front of you? If so, you're not alone. An increasing number of people are wondering how they'll ever be able to retire.

But maybe things aren't as bad as they seem. In fact, a recent study found that delaying retirement by just a few months could have a major impact on your ability to retire and your standard of living in retirement.

A National Bureau of Economic Research (NBER) study concluded that "working three to six months longer boosts retirement income by as much as increasing retirement contributions by one percentage point over 30 years of employment."

More specifically, the study found that instead of retiring at age 66, working until age 67 can boost retirement income by 7.75 percent. By contrast, increasing the amount of earnings saved in a retirement account by one percentage point starting at age 36 and keeping it at that level for the next 30 years would raise retirement income by just over 2 percent.

The NBER findings held true for singles as well the primary earner of married couple households across a wide range of incomes.

That isn't to say that increasing your savings rate is a bad idea. It's just that of the two main options available to workers who are behind on their retirement planning — saving more or working longer — working even a little longer will likely pay higher dividends than saving more.

The value of waiting

The researchers noted four benefits from delaying retirement. First, each additional month of work provides an opportunity to save more in a retirement account. Second, it gives that account balance more time to grow. Third, if you plan to buy an annuity, each month that you hold off will increase the benefit amount for the same cost or lower the cost of the same benefit amount.

Fourth, and by far most importantly, each month you delay retirement will boost your Social Security benefits. The earliest you can claim benefits is age 62; the latest is age 70. Between those two points, each month that you wait will increase your monthly benefit.

You can review your estimated Social Security benefits by creating an account on the SSA website. You'll see how dramatically different your estimated monthly benefits will be at age 62, at your "full retirement age" (67 for those born in 1960 or later), and at age 70. For example, my benefit will increase more than 50 percent if I claim at age 67 instead of 62. And if I wait until age 70, my benefit will be nearly twice as high as my age 62 benefit.

Once you know your full retirement age benefit, you can also estimate the month-by-month or year-by-year differences in your benefits by using the SSA's calculator. For example, if I were to claim benefits beginning at age 67 instead of age 66, waiting that extra year would give me a 6.5 percent raise — $2,750 per month vs. $2,582, a difference of $168 per month or $2,016 per year.

To understand how that compares to saving more, let's start with "the 4 percent rule," a common recommendation to withdraw no more than 4 percent of your nest egg each year in order to make sure your retirement savings last throughout retirement. Following that guideline, it would take $50,400 of additional retirement savings in order to provide a $2,016 boost of yearly retirement "income."

To accumulate that much more money in her retirement account, a 56-year-old making $80,000 per year would have to contribute an additional 4.3 percent of salary each month ($289.50) to her workplace retirement plan, generate an average annual return of 7 percent, and do that for 10 years. (See also: 6 Smart Ways to Boost Your Social Security Payout Before Retirement)

There may be other benefits to delaying retirement as well.

Continued employer matches on retirement savings

If your employer matches a portion of the money you contribute to your workplace retirement plan, that's an incredible benefit. The longer you keep taking advantage of it, the larger your nest egg will grow. (See also: 7 Things You Should Know About Your 401(k) Match)

Extended group health insurance

Medicare eligibility begins at age 65, so if you retire before then, you'll need to find coverage elsewhere, which can be expensive. By the same token, if you continue to work past age 65, you may be able to hang onto your group health insurance, which may be more comprehensive than Medicare.

If that's your situation, be sure to contact your benefits department to see how your current health insurance works with Medicare. It may be that you'll have to sign up for Medicare even if you keep your current insurance. The number of people employed at your company will dictate how payment of claims will be coordinated between the two insurance plans. (See also: 4 Common Mistakes to Avoid When You Enroll in Medicare)

More employer-provided education opportunities

Employer-sponsored training is another valuable benefit, whether it comes in the form of tuition reimbursement for college classes or in-house workshops. If you're among the growing number of people who plan to do some type of work for pay after leaving the full-time workforce, new skills you pick up on your current employer's dime could be well worthwhile.

If you're behind on your retirement planning, hopefully this has shown you that you probably won't have to work forever in order to cover your later life expenses. Even relatively small delays in your retirement can make a meaningful difference. And when you factor in the other benefits of working a bit longer, you may be in far better shape than you thought. (See also: 6 Great Retirement Jobs)

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This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Ways to Find Income While Waiting for Full Retirement Age

Emily Guy Birken — Thu, 26 Apr 2018 08:30:16 +0000

Every single retirement expert seems to agree on one thing: You should wait until at least your full retirement age (FRA) before taking your Social Security retirement benefits. The reason for this consensus is the fact that taking retirement benefits before reaching that all-important FRA will result in permanently reduced benefits — which could be a serious problem as you get older.

But what do you do if you can't afford to wait until your FRA? Those same retirement experts may wag their fingers at you for taking early benefits, but are they offering solutions for how to bridge the financial gap until you have reached your FRA?

Thankfully, there are legitimate ways to bring in income while waiting to reach your full retirement age — and none of them require you to pull a Walter White. Here are four options for bringing in money while waiting for that magical moment known as FRA.

Tap your equity with a reverse mortgage

With a reverse mortgage, any homeowner over the age of 62 who owns their home free and clear (or has significant equity in the home) may access the equity in their home, either in a lump sum or in monthly installments, while still living on the property.

If all you know about reverse mortgages comes from the attractive seniors on daytime commercials, you might assume that this is a great option with no downsides. However, reverse mortgages do come at a cost, and it's important for homeowners to understand what they are agreeing to before they sign on the dotted line.

To start, reverse mortgages, just like their traditional counterparts, come with closing costs. In particular, you can expect to pay an origination fee of approximately 2 percent of the home's value, an upfront mortgage insurance premium, and traditional closing costs. In addition, during the life of the loan, you can expect to pay an annual mortgage insurance premium and a monthly servicing charge.

You should also remember that your reverse mortgage loan can come due for any of the following reasons:

If you sell the house.
If you pass away.
If you can no longer consider the home a primary residence. In particular, if you have to spend more than 12 months in a nursing home, your house will no longer be considered your primary residence.
If you don't pay your property taxes, don't have adequate homeowners' insurance, or if you don't maintain your home properly.

Reverse mortgages can be a good option for seniors who need to bridge the gap until reaching full retirement age, but they are certainly not a cure-all solution. If there's any possibility that you can't keep up with maintenance (including paying your taxes and insurance bill), that you might need some sort of long-term, off-site care, or that your kids are counting on inheriting the house from you when you pass away, this is not a good option for you. (See also: 5 Downsides of a Reverse Mortgage)

Rent out your property

You probably don't have a spare house available, but that doesn't mean you can't make some money by renting out your space or even the things you own. To start, if you live in an area that draws tourists, renting out a spare room (or even the entire house) on Airbnb can be an excellent way to bring in extra cash. If you rent out your entire home, you could house or pet sit while your guests are in your home — and potentially make money on both ends. (See also: 5 Easy Ways to Make Good Money From Airbnb)

Of course, not all rentals are about a place to hang your hat. Don't use your car every day? Rent it out with a service like Getaround or Turo. Have a two-car garage and only one vehicle? Rent out that extra parking space with a service like Parking Panda or Spot. Have power tools or sporting equipment gathering dust? Rent it all out with a service like Loanables or RentNotBuy.

Embrace the side hustle

No one wants to hear that they have to work longer in retirement, but side jobs ain't what they used to be. These days, you can find any number of rewarding gigs that can help make ends meet — and fit in with the lifestyle you want in retirement.

For instance, finding a way to make money off a hobby you're already doing can be a good way to bring in extra income without feeling like you're still stuck in the daily grind. Avid gardeners could become garden consultants for neighbors with black thumbs. Animal lovers could offer daily dog-walking services. Crafters could make their wares for sale, or offer classes on how to create their beautiful designs.

If you're not interested in monetizing a hobby, think about what sorts of things people turn to you for. If you have an impeccable eye for fashion, offer to help people look their best. If you know how to get the best deal on a used car, create a consulting service for buying cars. The sky is the limit in terms of creating a side hustle that will fit with your preferences, abilities, and schedule. (See also: 9 Easy Ways Retirees Can Earn Extra Income)

Sell your stuff

If you have the time to post your items on Craigslist or eBay, this can be a great way to both downsize your stuff to a more manageable (and retirement-ready) amount while making some money at the same time. As a bonus, a lot of the stuff that was new when you were in college is considered vintage these days — which means you might get some good money for the stuff you'd otherwise just give away. (See also: 5 Things You Can Resell on eBay That Make the Most Money)

Making it until FRA

Though it can seem like the wait to reach full retirement age is interminable when you could use the Social Security retirement benefits each month, you will be glad you waited. Finding a way to bring in other income while you wait for your FRA may not be the retirement you dreamed of, but you'll feel good that you ensured higher monthly benefits for life.

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

What You Need to Know About Working While Collecting Social Security

Emily Guy Birken — Thu, 22 Feb 2018 09:30:09 +0000

For many older workers, the opportunity to collect Social Security before you fully retire, while still bringing in a paycheck seems like a boon. You get to supplement your work income with a monthly check from Uncle Sam — who doesn't want that?

Unfortunately, working while collecting a Social Security benefit before you reach your full retirement age can take a pretty hefty bite out of your Social Security checks. Here's what you need to know about how working affects your benefits. (See also: 5 Questions to Ask Before You Start Claiming Your Social Security Benefits)

Understanding the earnings test

Your full retirement age is the point at which you receive your full Social Security benefits. Taking benefits before full retirement age means receiving a reduced benefit, and waiting to take benefits until after your full retirement age means getting 8 percent more per year in your benefits, until you reach age 70. Your specific full retirement age depends on what year you were born, but it will be between ages 66 and 67.

Before you reach your full retirement age, your earned income (meaning money you earn through working, rather than money from investments) negatively affects your Social Security benefits. The amount of impact is determined through what is known as "the earnings test."

Specifically, the earnings test stipulates that if you are working and you start drawing your Social Security benefits before you have reached your full retirement age (FRA), you will see $1 deducted from your benefits for every $2 you earn over $17,040 (for 2018).

Beneficiaries who begin drawing their Social Security benefits during the same year that they will attain their full retirement age, but before actually hitting their FRA birthday, are still subject to an earnings test. But the income limit is much higher — $45,360 as of 2018 — and the benefit reduction is lower — $1 reduction for every $3 earned over the limit.

For instance, Frederica is 62 and earns $23,500 per year at her job. If she starts taking her Social Security benefits in 2018, her income will be $6,460 over the earnings limit ($23,500 - $17,040 = $6,460). That means she would have $3,230 total withheld from her Social Security benefits — which equals $1 for every $2 Frederica earns over the threshold, or half of $6,460.

Frederica's sister Serena is a little older, and will reach her full retirement age of 66 later in 2018. Serena earns $52,000 per year, making her income $6,640 above the earnings test threshold for those within a year of reaching their FRA ($52,000 - $45,360 = $6,640). If Serena were to take her Social Security benefits before reaching her full retirement age, she would have $1 withheld for every $3 she earns over the limit, meaning $2,213 (or ⅓ of $6,640) would be withheld.

Once Frederica and Serena reach their full retirement ages, however, they can earn as much as they like from work and it will have no effect on their Social Security benefits.

The Social Security Administration doesn't prorate deductions

What makes the earnings test particularly tough for beneficiaries who need their benefits in order to make ends meet is the fact that the Social Security Administration does not prorate the deductions to your benefits. If you make more than the income limit in earnings, the Social Security Administration will withhold your entire benefit until the full benefit reduction amount has been satisfied. This means that beneficiaries who are working and are required to have benefits withheld will go several months without receiving Social Security benefits at the beginning of each year.

In Frederica's case, let's say she's eligible for a Social Security benefit of $733 per month. If she has $3,230 withheld from her Social Security benefits, she will not receive her $733 monthly benefit for January, February, March, or April in order to make up for the amount she owes Social Security. But rather than give Frederica a partial check in May, Social Security will simply withhold her entire $733 benefit check for that month, which means she will have had $3,665 total withheld from her benefits ($733 x 5 = $3,665). She will not see the leftover $435 she is owed by the Social Security Administration until January of the following year.

The same will be true for Serena, should she decide to take her benefits before reaching her FRA in 2018. Let's say her benefit is $1,500 per month. She will have $2,213 withheld from her benefits because of the earnings test. That means she will not receive any Social Security benefits for two months, and Social Security will withhold $3,000 total. Serena will receive the $787 she is owed the following January.

The good news for Serena is that as soon as she reaches the month of her full retirement age, she can keep every single penny of her benefits, no matter how much she earns elsewhere. All Social Security beneficiaries are immune to the earnings test as soon as they have hit their full retirement age.

Your withheld benefits aren't gone forever

There is a small cherry on top of this sundae of bad news: The Social Security Administration does give you some credit for the months your benefit was withheld. At that point, Social Security basically treats you as if you waited to file your benefits for the number of months your benefits were withheld.

At age 62, Frederica is entitled to a benefit equal to 73.33 percent of the benefit she would have received at her full retirement age. Her full benefit would have been $1,000 at her FRA, which is why she receives a benefit of $733 per month as of age 62.

Each year before her FRA of 66, Frederica does not receive benefits for five months because of the earnings test. As of the month that Frederica reaches her FRA (i.e., the month of her 66th birthday), Social Security will treat her benefits as if she had waited 20 months (five months of withheld benefits for the four years between age 62 and 66) to file for her benefits.

This means that as of her FRA, she'll see her benefit amount increase by 9.06 percent, because not receiving benefits for 20 months is worth a 9.06 percent increase, according to the calculations we've made using the Social Security Administration's website. In other words, she will receive 82.39 percent (73.33 percent + 9.06 percent = 82.39 percent) of the $1,000 she would have earned if she'd waited until age 66 to start taking Social Security. Because of that, Frederica will begin receiving monthly benefits totaling $823.90 (82.39 percent of $1,000) as of her full retirement age.

In addition, if the time she spends working plus getting Social Security benefits turn out to be her highest earnings years, or if she did not have 35 full years of job earnings before she started taking benefits, the Social Security Administration will recalculate her monthly benefit based on these earnings from work each year.

Avoiding the earnings test

The best way to avoid the earnings test altogether is to wait for full retirement age to collect your Social Security benefits. (As we mentioned earlier, this age differs depending on the year you were born.) Not only will that keep you from having to figure out how to manage without your benefits when they are withheld, but it will ultimately increase the amount you receive each month from Social Security.

However, if you can't avoid taking benefits before reaching your full retirement age and while you're still working, it's important for you to understand what to expect and plan ahead for it.

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Signs You're Making All the Right Moves for Retirement

Dan Rafter — Tue, 05 Dec 2017 09:00:07 +0000

The 2017 Retirement Confidence Survey from the Employee Benefit Research Institute made a disheartening discovery; only six in 10 U.S. workers feel confident that they'll be able to retire comfortably. That means 40 percent think they won't.

That's grim news. But you don't have to fall into this group if you're making the right financial moves to prepare for your after-work years.

It can be tricky to know for sure how confident you should feel about your nest egg, but some key signs can indicate that you're on your way to building a happy and healthy retirement.

1. You've worked out the kind of retirement you want

The best way to prepare for retirement? You have to plan for it. This means knowing how you want to spend your after-work years. After all, if you plan on traveling the globe after retiring, you'll need plenty of money. If you instead plan to spend more time visiting your grandchildren, reading, or playing golf, you might not need to save quite as much.

The key is to determine what kind of retirement you want long before it arrives. That way, you can financially plan for it. And if you're in a relationship, remember that both you and your partner have to agree, and prepare for, the retirement lifestyle that suits you both. (See also: How to Find Your New Identity After Retirement)

2. You've set a retirement age

Do you know when you want to retire? You should. That decision can have a huge impact on your finances once you leave the working world.

If you were born between 1943 and 1954, your full retirement age is 66. If you were born after 1959, your full retirement age is 67. You can start claiming Social Security benefits once you turn 62. But if you wait until you hit full retirement age — or beyond — the money you receive each month will be far higher. In fact, if you start claiming your Social Security benefits at 62, your monthly payment will be lowered by 30 percent compared to how much you'd get at full retirement age.

And if you can hang on until age 70, you'll collect a monthly benefit that is 132 percent of the monthly amount you would have received if you started claiming Social Security at full retirement age.

There's nothing wrong with claiming your benefits early, if you've planned for this. But make sure you know how much money you'll need before retiring early. (See also: 5 Questions to Ask Before You Start Claiming Your Social Security Benefits)

3. You've made a retirement budget

Before you hit retirement age, it's important to determine how much money you expect to spend and receive each month once that steady paycheck has disappeared. This means it's time to create a monthly retirement budget.

For income, you can include any pensions, Social Security payments, disability payments, rental income, or annuity income you plan on receiving. You can also include the amount of money you expect to draw from your retirement savings. For expenses, include everything that you'll spend money on each month, including groceries, eating out, mortgage, auto payments, health care expenses, and utility bills.

Once you know how much you'll be spending and how much you'll be earning in retirement, you can better prepare for it. (See also: Here's How You Should Budget Your Social Security Checks)

4. You've paid off your debts

The best way to increase the odds of a happy retirement is entering your post-work years without any debt. That means paying off your credit cards, paying off your mortgage, and making sure you don't owe any money on your car once you've retired.

Paying off debt isn't easy. It's why so many of us are struggling under mountains of credit card debt. Before your retirement hits, though, start funneling money toward your debt. The more you pay off, the less financial stress you'll face in retirement. (See also: The Fastest Way to Pay Off $10,000 in Credit Card Debt)

5. You've maximized your retirement savings contributions

You should be contributing to an IRA, 401(k) plan, or a combination of both. But as retirement gets closer, make sure you are contributing the maximum amount to these retirement savings vehicles. Doing so will leave you with the greatest financial cushion for retirement.

It might seem like a financial sacrifice to devote, say, 15 percent of your regular paycheck to a 401(k) account. But by saving that much, as opposed to 5 percent or 10 percent, you can dramatically increase the amount of money you'll have when retirement arrives. (See also: 10 Signs You Aren't Saving Enough for Retirement)

6. You're playing catch-up

Once you hit your 50th birthday, you can contribute even more money each year to your 401(k) plan or IRAs. Take advantage of this benefit to provide a late-in-life boost to your retirement savings.

For the 2017 tax year, you are allowed to contribute up to a maximum of $18,000 in a 401(k) plan. But if you're 50 or older, you can make what are known as catch-up contributions and contribute an extra $6,000 — meaning that you can put a total of $24,000 into your 401(k) this year. For the 2018 tax year, 401(k) contribution limits will be raised to $18,500, which means those age 50 or older can contribute up to a total of $24,500 per year. (See also: 6 Ways Meeting the 2018 401(k) Contribution Limits Will Brighten Your Future)

Traditional and Roth IRAs also have catch-up policies for investors 50 or older. For the 2017 tax year, you can contribute up to $5,500 in either form of IRA. But if you are 50 older, you can contribute an additional $1,000, meaning that you can save up to $6,500 this year in a Roth or traditional IRA. This will be remaining the same in the 2018 tax year.

7. You've prioritized your spending — even when it comes to your kids

It's not easy telling your kids no, even when both they and you are adults. But when it comes to saving for retirement, you might have to do just this.

You might want to help your children pay for their college tuition. And hopefully, you've already saved for this. But if you didn't, you shouldn't be putting off saving for retirement to help your adult children pay for college.

Your children have other options when it comes to college: They can find a less expensive school, attend community college for two years, or apply for loans and grants. If you can't afford to save for both retirement and your children's college tuition, you absolutely must put saving for retirement first.

If you don't? You might just become a financial burden for your adult children when you can't afford to maintain a healthy retirement lifestyle. (See also: Are You Ruining Your Retirement by Spoiling Your Kids?)

8. You've tinkered with your savings formula

Early in your working days, it's a sound strategy to invest in a riskier mix of stocks, bonds, and other investment vehicles. The potential rewards are higher, and you have more years to recoup whatever losses you might suffer from a potentially more volatile portfolio.

But once you get closer to retirement, it's time to rebalance your investments to eliminate much of the risk. When you're 10 or five years from retirement, you want a safer investment mix because time is running short. You won't have as many years to recover from the downs that sometimes come with a high-risk, high-reward savings portfolio.

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Three of the Toughest Decisions You'll Face in Retirement

Matt Bell — Wed, 27 Sep 2017 08:00:06 +0000

After spending a lifetime saving for retirement, you might think (or hope) the tough financial work is over. But in reality, retirement will bring several new financial challenges. Here are three of the key questions you'll need to address along with some recommendations.

1. When should I take Social Security?

There are many options here, especially when coordinating benefits with a spouse. Understanding the rules around three important age milestones can help you think through the best choice. (See also: 5 Questions to Ask Before You Start Claiming Your Social Security Benefits)

Age 62

This is when you first become eligible to receive Social Security benefits. If you opt to take them this early, you'll get the smallest monthly benefit. While it's true that you may end up collecting benefits for the longest period of time by starting at age 62, if you can afford to do so, it's generally best to wait at least until your full retirement age (FRA). At that point, your monthly benefit will increase by 30 percent.

If you're planning to continue working to some degree in your early to mid 60s, this may be another reason to wait. Claiming Social Security benefits before your FRA will trigger an "earnings test." After you earn a certain amount (about $17,000 in 2017), for every two dollars of income, your Social Security benefits will be reduced by one dollar.

You can learn more about the earnings test on the Social Security Administration's website.

Full retirement age

If you were born in 1960 or later, your full retirement age is 67. That's the age at which you become eligible to receive what the Social Security Administration deems to be your "full" benefit.

An important consideration related to your FRA has to do with spousal benefits. If you earned significantly more than your spouse over your careers, his or her spousal benefit (half your full retirement age benefit) may be larger than his or her own benefit. While your spouse could file for spousal benefits as early as age 62, he or she will get the maximum amount only if you both wait until your full retirement ages before claiming benefits.

Age 70

While it may sound as if full retirement age is when you'll qualify for your maximum benefit, waiting until age 70 will actually give you more. When I checked my benefits on the Social Security Administration website, I found that waiting until age 70 would boost my monthly benefit amount by nearly 28 percent versus claiming it at my FRA of 67.

In addition to qualifying for this higher monthly benefit, another important reason to consider waiting this long has to do with the potential impact on your spouse. Let's say you're the husband and have been the higher earner. When you pass away, your wife will be able to trade her benefit for your larger benefit, which she will receive for the rest of her life. (See also: 6 Smart Ways to Boost Your Social Security Payout Before Retirement)

2. How much of my nest egg can I withdraw?

A long-standing rule of thumb is that you can safely withdraw 4 percent of your nest egg each year, bumping that amount up by the rate of inflation each year, without having to worry about depleting your savings before you die.

However, there are many moving parts to this equation. Your cost of living will probably vary throughout retirement, and so will the stock market's performance.

So, instead of adhering to a fixed formula, rerun the numbers each year using what some planners call a dynamic withdrawal strategy: Determine how much to withdraw based on the performance of your portfolio and your spending needs.

3. Which nest egg funds should I tap first?

If you have money in various accounts, such as a taxable account, a tax-deferred account (traditional IRA/401(k)), and a tax-free account (Roth IRA/401(k)), here's a recommended path for greatest tax efficiency.

Generally, it's best to use money in your taxable accounts first, which allows funds in tax-advantaged accounts to continue growing on a tax-deferred or tax-free basis.

Next, use money from your traditional IRA or 401(k) accounts. In fact, you have to start taking money from these accounts beginning at age 70½. That's when required minimum distribution (RMD) rules kick in. If you don't withdraw at least a specific minimum amount, you'll owe stiff penalties to the IRS.

One factor to keep in mind is that if you have substantial balances in traditional IRA or 401(k) accounts, waiting to tap any of this money until age 70½ may make your RMDs so large that they'll push you into a higher tax bracket. If that's the case, you may want to start taking some withdrawals from these accounts earlier than age 70½.

It's usually best to save your Roth IRA money for last since they are not subject to RMD rules. If you don't need the money, you can let it continue growing tax-free.

Stay in the game

While retirement may be a time when you want to step away from some of the many responsibilities you had during your working years, it's important that you stay proactive with regard to your finances. Making well thought out decisions in the three areas discussed above will go a long way toward helping you enjoy financial peace of mind in your later years.

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This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Questions to Ask Before You Start Claiming Your Social Security Benefits

Dan Rafter — Mon, 08 May 2017 09:00:08 +0000

According to a 2016 poll conducted by Gallup, 59 percent of retirees rely on Social Security payments as a major source of income. Odds are that you, too, will need Social Security benefits to cover at least some of your living expenses after you retire. Because of this, you'll want these benefits to be as large as possible when retirement actually arrives.

Here are five key questions to ask before you start taking your Social Security benefits.

1. Are you willing to take a smaller monthly benefit for the rest of your life?

Taking Social Security benefits before your full retirement age will cost you in the form of a lower monthly payout. This payout will remain at this lower level for the rest of your life.

You can determine how much of a hit you'll take claiming benefits early by visiting the Social Security Administration's retirement planner site. As the site shows, if you start taking your Social Security payments before you hit your full retirement age, your monthly benefit will be lower.

How much lower? If your full retirement age is 67 and you start taking your benefits at 62, your monthly Social Security payment will be reduced by about 30 percent. If you start taking them at 64, they'll be lower by about 20 percent. Even if you start taking them one year earlier at 66, they'll still be lower — by about 6.7 percent a month. And remember, this is for the rest of your life.

As you can see, claiming benefits early can significantly reduce the amount of money you receive each month. Let's say you are slated to receive $1,000 a month in Social Security benefits and your full retirement age is 67. If you started taking your benefits at age 62 — the earliest you can take them — your monthly benefit would fall to $700.

2. Can you continue working?

While retiring early reduces your monthly Social Security benefits, working past your full retirement age actually increases them.

The Social Security Administration says that if you delay receiving your Social Security benefits until you hit 70, your monthly payment will be 32 percent higher than if you had retired at full retirement age.

Say your full retirement age is 66, and you'd receive $1,000 from Social Security every month starting at that age. If you wait to start claiming your benefits until you turn 70, your monthly payment would rise significantly to $1,320. You'd just have to determine whether you could hold off on receiving those payments until your 70th birthday.

3. How much have you saved for retirement?

Most people can't survive on Social Security benefits alone during their retirement years. Instead, they rely on a mix of savings from different sources — everything from 401(k) plans, to IRAs, to annuities.

How much you've saved for retirement will play a key role in how early you should take your Social Security benefits. If you've saved a significant amount of money for retirement, you might not need as large a monthly Social Security payment to meet your retirement goals. But if you haven't saved much, you might need that larger benefit payment. At the same time, working for a few extra years might help you boost your retirement nest egg, at least by a bit.

4. How healthy are you?

While there are financial upsides to waiting to claim your Social Security benefits, there are also times when this doesn't make sense. Often, this depends on your health.

If you're not healthy, you might need to retire early for your physical wellbeing. And while it's impossible to predict how long you'll live after retiring, if you're suffering from health problems, your post-retirement life might not last as long. Retiring as early as possible, and claiming those Social Security benefits earlier, might then be the best choice. (See also: 3 Reasons to Claim Social Security Before Your Retirement Age)

5. What kind of retirement do you want?

How do you plan to spend your retirement years? Are you looking forward to quiet days spent with your grandchildren, reading books, and pursuing a hobby? Or do you want to travel the world?

If you're looking for a lower-key, less-costly retirement, taking your benefits early — and receiving smaller Social Security payments — might make sense. But if you want a busier, more extravagant retirement, holding off until full retirement age, or later, might be the smarter choice.

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Sobering Facts About Social Security You Shouldn't Panic Over

Emily Guy Birken — Thu, 04 May 2017 08:00:08 +0000

Most people tend not to think about Social Security until they are in a position to collect benefits. Unfortunately, letting Social Security be something you worry about "later" can cause costly problems — both for you as a beneficiary, and for the program as a whole.

Here are five sobering facts about Social Security that you should know now so that you will be prepared for potential issues in the future. (See also: 6 Smart Ways to Boost Your Social Security Payout Before Retirement)

1. The Social Security Trust Fund may be entirely depleted by 2034

Social Security is set up as a direct transfer of funds from current workers to current beneficiaries. However, when the taxes coming in to pay for Social Security exceed the expenses for the program, the surplus is placed in the Social Security Trust Fund, where it earns interest. As of 2010, Social Security expenses have exceeded the tax revenue, and the Social Security Administration has had to dip into the Trust Fund in order to pay out all promised benefits. As of 2013, the Trust Fund began losing value, and it is projected to be entirely depleted by the year 2034.

When the Trust Fund runs out of money, the projected tax revenue will cover only 79 percent of promised benefits. This means anyone who is entitled to a $1,500 monthly benefit will only receive $1,185.

Why you shouldn't panic

While the coming depletion of the Social Security Trust Fund is troubling, the problem is neither new nor imminent. It's also important to note that the United States is the only country in the world that attempts to predict the 75-year longevity of its social insurance funds, which means we are in a position to do something about the anticipated shortfall. Over the next couple of decades, it is likely that our government will make relatively small changes to the Social Security program in order to make up the 21 percent anticipated shortfall that will occur once the Trust Fund has run dry.

However, it is smart for current workers to recognize that Social Security should not be heavily relied upon for a financially secure retirement.

2. The average Social Security retirement benefit is $1,360 per month

As of January, 2017, the average benefit for a retired beneficiary is $1,360 per month, which doesn't go very far if that is your only source of income. In addition, beneficiaries who are signed up for Medicare Part B (which is the Medicare medical insurance) will see $134 deducted from their Social Security benefit check for the Part B premium.

While very few retirees live solely on their Social Security benefits, these benefits do constitute at least half the income of 71 percent of single seniors and 48 percent of couples. And for a whopping 43 percent of singles and 21 percent of married couples, Social Security benefits represent 90 percent or more of total income.

Why you shouldn't panic

What you need to remember is that you have a great deal of control over how much of your budget your Social Security benefit will represent. If you diligently save for retirement, then receiving an "average" benefit of $1,360 will provide a nice financial cushion on top of your retirement portfolio. While $1,360 is tough to live on by itself, having it available on top of your necessary expenditures would be a wonderful supplement.

3. Cuts to Social Security benefits may be coming

President Trump promised during his campaign that there would be no cuts to current payments for Social Security or Medicare beneficiaries. However, although the White House has made it clear that current beneficiaries' payments are safe, it will not rule out the possibility of making cuts that will affect future beneficiaries. Some of the changes that have been proposed include:

Raise the full retirement age for workers who reach age 62 in 2023, gradually increasing it from the current age of 66 to age 69.
Change the formula for calculating benefits for retirees becoming newly eligible in 2023 in phases over 10 years. The changes would slightly increase benefits for below-average earners and slightly decrease benefits for above-average earners.
Beginning December 2018, change the calculation of the cost-of-living adjustment (COLA) to a chained consumer price index (CPI) calculation, which will reduce the amount of money beneficiaries receive in their annual COLA. The current formula for determining the COLA uses something called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W is a useful index for tracking the inflation of all goods, but it does not take into account the fact that many consumers make substitutions when prices go up. (For instance, if the price of beef rises, many consumers will buy chicken or pork instead.) A chained CPI calculation takes these sorts of substitutions into account, so its inflation rate is calculated at approximately 0.3 percentage points lower than the CPI-W rate.
Eliminate the earnings test beginning in January 2019. This test reduces benefits for beneficiaries who are younger than Social Security's full retirement age (currently age 66), are currently receiving Social Security benefit payments, and have income from wages or self-employment that exceed $16,920 per year in 2017.
Eliminate federal income taxation of Social Security retirement benefits as of 2054 and later, phased in from 2045 to 2053.

Why you shouldn't panic

Although making cuts to future beneficiaries' payments is hardly something to cheer about, we do need to recognize that it is much more important to protect the benefits of current beneficiaries. Since current beneficiaries generally cannot go back to work or cut expenses, they are much more vulnerable to cuts in payments than current workers are. In fact, the proposed switch to a chained CPI calculation for COLA may be burdensome to current beneficiaries, since it has been proposed for December 2018, thereby affecting those who have already retired.

What current workers need to do is plan for their Social Security to be an addition to their retirement savings. Then, if these changes and cuts do come to pass, you will not be worried about losing important income.

4. High earners don't pay as much into Social Security

Social Security is paid for through a payroll tax of 6.2 percent for workers and 6.2 percent for their employers, making the total tax contribution 12.4 percent of gross income. However, workers and their employers do not pay Social Security taxes on earnings above $127,200.

While $127,200 is a pretty significant chunk of change, it does mean that very high earners get a break once they are earning that amount. The reasoning behind this earnings cap is to maintain the connection between contributions paid in and benefits received. Since Social Security benefits are paid progressively, lower-income beneficiaries receive a higher percentage of their pre-retirement income in benefits than do high-income beneficiaries. The more money that high-income earners pay into Social Security, the less of a return they see on their contributions.

The progressive nature of Social Security benefits is the reason why it is unlikely that there will ever be a complete elimination of this earnings cap, even though the program could certainly use the funds that such a cap elimination would represent. However, even if we were to increase the earnings cap to $229,500 — which would return taxation to the same level it was in the early 1980s — we could make a major dent in the coming benefits shortfall.

Why you shouldn't panic

Although raising taxes is never popular, there is some indication that our government is working to bring the earnings cap closer to early 1980s levels. In 2016, the earnings cap was set at $118,500, which was the same as the 2015 earnings cap. Raising it to $127,200 represents a 7 percent increase.

5. 10,000 baby boomers are retiring every day

Social Security works pretty well when the ratio of workers to retirees is balanced. Unfortunately, the extra-big generation known as the baby boomers is putting the program out of whack. The 76 million members of that generation began reaching age 62 (the earliest you may take Social Security benefits) as of 2008, and they are just going to keep retiring — at a rate of 10,000 per day.

This huge retirement boom could potentially put an enormous burden on our Social Security program, especially considering the increased life expectancy of this generation as compared to their parents and grandparents.

Why you shouldn't panic

While it's true that approximately 10,000 baby boomers are going to be retiring every day until 2034 (when the last of the boomers will reach age 70, which is the latest you would want to start taking Social Security benefits), there is more to this story than just their retirement.

First, it's important to remember that we've known the boomers would be retiring en masse for quite some time. Policymakers began to plan as early as 1983, when Congress raised the full retirement age.

Second, the boomers are the workers who built up the Social Security Trust Fund, so they will be beneficiaries of the money they themselves contributed through taxes.

Finally, as of 2015, millennials had overtaken the boomers as the largest living generation in the U.S. With such a large group of young workers in the workforce, we should be able to handle the financial cost of 10,000 boomers retiring each day.

This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Face 4 Ugly Truths About Retirement Planning

Damian Davila — Fri, 07 Apr 2017 08:00:13 +0000

Most working Americans still have a long way to go to ensure a comfortable, financially secure retirement. But, with consistency and dedication, retirement planning can be a feasible project. Let's review some of the ugly truths of retirement planning, and the strategies you can use to conquer them. (See also: 7 Things Financial Advisers Wish You Knew About Retirement)

1. Employer matches require work

While people often like to think of employer matches as free money, the truth is that you do need to do some "work" to earn those matches.

First, your employer may require a minimum period of employment or contribution to your retirement account before you become eligible for employer contributions. According to a Vanguard analysis of 1,900 401(k) plans with 3.6 million participants, 27 percent of employers require a year of service before providing any matching contributions. And that waiting period may be on top of the waiting period to be eligible for an employer-sponsored 401(k) in the first place.

Second, once you're eligible for the employer match, you may have to contribute a minimum percentage from each paycheck yourself to get it. According to Vanguard, 44 percent of employers required a 6 percent employee contribution to get the entire 401(k) match on offer.

Third, only 47 percent of surveyed employers provide immediate vesting of employer contributions. Since only moneys in your retirement account that are fully vested truly belong to you, you may have to wait up to six years to get to keep it all. If you part ways with your employer earlier than that, you may have to say goodbye to some or all of those employer contributions. (See also: 15 Retirement Terms Every New Investor Needs to Know)

How to handle it

Find out the applicable rules for employer contributions under your employer-sponsored retirement account. Ask about the waiting period for eligibility, how much you should contribute to get the full employer match, and what is the applicable vesting schedule for employer contributions. This way you'll know how to make the most (and keep the most!) of any employer contributions.

2. Full retirement age is higher than many of us think

According to the 2016 Retirement Confidence Survey from the Employee Benefit Research Institute (EBRI), one in every two American workers expected to retire no later than age 65.

The problem with that plan is that only those with born in 1937 or earlier have a full retirement age of 65. Your full retirement age is the age at which you first become entitled to full or unreduced retirement benefits from the Social Security Administration (SSA). Retiring earlier than your full retirement age decreases your retirement benefit from the SSA.

For those born 1960 or later, full retirement age is 67. If this were your case, retiring at age 62 or age 65 would decrease your monthly benefit by about 30 percent or 13.3 percent, respectively. (See also: 13 Crucial Social Security Terms Everyone Needs to Know)

How to handle it

If you're one of the 84 percent of American workers expecting Social Security to be a source of income in retirement, then you need to keep track of your retirement benefits. There are two ways do this.

First, since September 2014, the SSA mails Social Security statements to workers at ages 25, 30, 35, 40, 45, 50, 55, and 60 and over, who aren't yet receiving Social Security benefits and don't have an online "my Social Security" account. Here is a sample of what those letters look like. Second, you could sign up for a my Social Security account at www.ssa.gov/myaccount and have access to your Social Security statement on an ongoing basis.

Through either one of these two ways, you'll get an estimate of your retirement benefit if you were to stop working at age 62 (earliest age you're eligible to receive retirement benefits), full retirement age, and age 70 (latest age that you can continue delaying retirement to receive delayed retirement credits). That way you can plan ahead for when it would make the most sense to start taking your retirement credits.

3. Retirement accounts have fees

One of the most common myths about 401(k) plans is that they don't have any fees. The reality is that both you and your employer pay fees to plan providers offering and managing 401(k) plans. One study estimates that 71 percent of 401(k) plan holders aren't aware that they pay fees.

While an annual fee of 1 to 2 percent of your account balance may not sound like much, it can greatly reduce your nest egg. If you were to contribute $10,000 per year for 30 years in a plan with a 7 percent annual rate of return and an 0.5 percent annual expense ratio, you would end up with a balance of $920,000 at the end of the 30-year period. If the annual expense ratio were to increase to 1 percent or 2 percent, your final balance would be $840,000 or just under $700,000, respectively.

How to handle it

One way to start minimizing investment fees is to pay attention to the annual expense ratio of the funds that you select.

When deciding between two comparable funds, choose the one with the lower annual expense ratio. Research has shown that funds with a lower expense ratio tend to better performers, so you would be minimizing fees and increasing your chances of higher returns.
Explore index funds. For example, the Vanguard 500 Index Investor Shares fund [Nasdaq: VFINX] has an annual expense ratio of 0.14 percent, which is around 84 percent lower than the average expense ratio of funds with similar holdings. The Admiral version of this equity index fund has an even lower annual expense ratio of 0.05 percent.
Check the prospectus of your funds for a schedule of fees. From redemption fees to 12b-1 fees, there are plenty of potential charges. Review the fine print of any fund that you're considering investing in and understand the rules to avoid triggering fees. For example, you may need to hold a fund for at least 65 days to prevent triggering a redemption fee. (See also: Watch Out for These 5 Sneaky 401(k) Fees)

4. 401(k) loans are eating away nest eggs

According to the latest data from the EBRI, 23 percent of American workers took a loan from their retirement savings plans in 2016. On top of the applicable interest rate on your loan, you'll also be liable for an origination fee and an ongoing maintenance fee. Given that origination fees range from $25 to $100 and maintenance fees can go up to $75, 401(k) loans are one expensive form of financing. (See also: 5 Questions to Ask Before You Borrow From Your Retirement Account)

Additionally, when you separate from your employer, the full unpaid balance is due within 60 days from your departure. If you don't pay back in time, that balance becomes taxable income, triggering potential penalties at the federal, state, and local level. One penalty that always applies is the 10 percent early distribution tax for retirement savers under age 59-1/2.

How to handle it

Don't borrow from your retirement account. Studies have shown that 401(k) borrowers tend to come back for additional loans, increasing their chances of default. One study found that 25 percent of 401(k) borrowers came back for a third or fourth loan, and 20 percent of 401(k) borrowers came back for five or more loans. Borrowing from your retirement account should be a very last-resort option because there are few instances when it's worth it. (See also: This Is When You Should Borrow From Your Retirement Account)

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Why Tax Day Is April 15 and Other Weird Financial Deadlines

Emily Guy Birken — Wed, 29 Mar 2017 08:00:22 +0000

April is one of the finest months of the year. The sun breaks through the clouds, the cherry blossoms bloom, and the promise of warm weather beckons.

So of course, the IRS, in its infinite wisdom, decided to place Tax Day right smack dab in the middle of all of this riotous spring beauty.

Though I have always believed that the placement of Tax Day in mid-April is proof of the federal government's grim sense of humor, there is actually some method to their madness — both for this, and all other seemingly arbitrary financial dates and deadlines.

Here are the reasons behind some of the most head-scratching financial dates in the United States.

Why is Tax Day on April 15?

Paying federal income taxes is actually a relatively new phenomenon in American history. The first time an income tax was levied on Americans was in 1861 in order to help pay for the Civil War. In 1872, the law surrounding the tax was repealed after opponents successfully argued that federal income tax was unconstitutional.

Fast forward to February 3, 1913, when Congress adopted the 16th amendment to the constitution, which allows for federal income tax. Congress also determined the first due date for filing 1913 taxes would be March 1, 1914 — one year and a couple of weeks later. March 1 offered an easy-to-remember due date that gave citizens just over a full year to get used to being taxpayers, gather up their receipts into the early 20th century version of a shoe box, and file their first returns.

Then in 1918, the due date was moved to March 15, for reasons that no one in Congress saw fit to explain or write down.

Congress again moved the filing due date in 1955, this time to the now-familiar date of April 15. According to the IRS, the date change helped to spread out the tax season workload for IRS employees.

However, there may be a slightly more mercenary reason for the date change: According to Ed McCaffery, a University of Southern California law professor and tax guru, by the mid 1950s, the income tax was applying to increasing numbers of middle class workers, which meant the government had to issue more refunds. "Pushing the deadline back gives the government more time to hold on to the money," McCaffery claimed in Fortune magazine. And the longer the government holds onto taxes that have been withheld but are destined to be refunded, the more interest it earns on the money.

Okay, so why is Tax Day on April 18 this year?

If you look at an April calendar for 2017, you'll see that April 15 falls on a Saturday this year, which means we get a little extension, since Tax Day can't fall on a weekend. However, you might be confused as to why we get an extension to Tuesday, April 18, instead of Monday, April 17.

The reason for our extra day is a Washington, D.C. holiday known as Emancipation Day. Though only Washington, D.C. observes this holiday, a federal statute enacted decades ago states that holidays observed in our nation's capital have a nationwide impact.

Why was 65 chosen as full retirement age for Social Security?

When the Social Security Act was officially adopted in 1935, the age of 65 was chosen as the standard retirement age for beneficiaries. Why was that age chosen as the proper time for full retirement? Why not 63 or 67 or 70?

There are a couple of persistent myths out there about this choice, but they are nothing more than misconceptions:

Myth #1: People would die before collecting

The age of 65 was chosen so that people would not live long enough to collect benefits. According to life expectancy actuarial tables from 1930, the average life span was 58 for men and 62 for women, which would make it seem as if Social Security was designed to never make a payout to beneficiaries. However, this myth stems from an unfamiliarity with actuarial tables, which offer an average of all life spans, starting from birth. High infant mortality in the 1930s lowered the overall rate of life expectancy, but anyone who made it to adulthood had a much better chance of reaching age 65 and collecting benefits.

Myth #2: Bismarck was 65

The age of 65 was chosen because Otto von Bismarck — the author of the world's first old-age social insurance program upon which our Social Security program was partially based — was 65 when Germany adopted his program. This myth is false on several counts. Bismarck was actually 74 when the German system was adopted, and Germany initially set the retirement age at 70. Germany's retirement age was not lowered to 65 until 1916, at which point Bismarck had been dead for nearly two decades.

The truth behind 65

The actual reason why 65 was chosen as the initial full retirement age for Social Security is pretty boring. The Committee on Economic Security, which Franklin D. Roosevelt created to propose Social Security legislation, conducted a comprehensive analysis of actuarial studies, domestic private pension systems in America, and the social insurance experience in other countries. Based upon that research, the committee recommended 65 as the standard retirement age for Social Security.

Why is 59½ the minimum age to take distributions from tax-deferred retirement accounts?

When it comes to tax-deferred accounts like 401(k)s and traditional IRAs, you are not allowed to take distributions until you have reached the magical age of 59½. Otherwise, you will owe a 10 percent early withdrawal penalty on the amount you withdraw, in addition to the ordinary income tax you'll owe whenever you take a distribution.

So why is the IRS asking you to celebrate half-birthdays when you're nearly 60 years old? Congress used the age of 59½ as the earliest withdrawal age because life insurance actuarial tables consider you to be 60 years old once you have reached the age of 59 and six months — and at the time that the rules were put in place, 60 was a relatively common age for retirement.

Why must you begin taking required minimum distributions from tax-deferred retirement accounts at age 70½?

Of course, the IRS is not just about picking random minimum ages for when you can take distributions from tax-deferred retirement accounts — they also have a random age for when you must take distributions from those accounts.

Since the money in your tax-deferred account was placed there before you paid taxes on it, Uncle Sam does want you to eventually pull the money out again so he can get his cut of the money in the form of taxes. That means the IRS requires each account holder to begin withdrawing money during the year that they reach age 70½. This is called the required minimum distribution (RMD).

But unlike the 59½ rule, 70½ does not actually mean your half-birthday. The IRS makes a distinction between those individuals born in the first half of the year and those born in the second half. If your birthday falls between January 1 and June 30, you have to take your first RMD during the calendar year you turn 70. But if your birthday falls between July 1 and December 31, then you don't officially have to take your first RMD until the calendar year you turn 71.

Describing this year as being when you are 70½ is actually shorthand, since some folks will be taking their first RMD the year they turn 70, and some will be taking their first RMD the year they turn 71.

Why does Social Security think New Year's babies were born in the previous year?

Unless you happen to have a January 1 birthday, you might not know about this odd piece of Social Security dating. But according to the Social Security Administration, individuals born on the first of the year are considered to have birthdays in the previous year. So Social Security will group someone with a January 1, 1954 birthday with beneficiaries who were born in 1953.

This can actually make a big difference when it comes to some Social Security benefits, particularly when those benefits are eliminated. For instance, in 2015 Congress ended the restricted application strategy for any beneficiary born after 1953. The restricted application let applicants specify which Social Security benefits they did not want to apply for, even if they were eligible for all of them. So, for example, beneficiaries who reached full retirement age could claim a spousal benefit while continuing to let their own grow. Beneficiaries who were born on January 1, 1954 were grouped with those with 1953 births — which means anyone born on January 2, 1954 had rotten luck in terms of using the restricted application.

Why does Social Security extend a year 24 hours past the time the rest of us do? This odd birth year dating occurs because the Social Security Administration groups beneficiaries who have birthdays on the first of the month with beneficiaries born in the previous month. This grouping allows first-of-the-month babies to have a little more leeway when it comes to deadlines and other requirements. In order to be completely fair with the first-of-the-month grouping, January 1 babies are then considered to have been born in the previous year.

The government is not entirely lacking in sweet rhyme and pure reason

The financial dates that we all must adhere to may seem like ridiculous and arbitrary decisions, but there was some thought put into them. Those thoughts might only make sense to the people that made the decisions, but at least we know they weren't throwing darts at a calendar.

This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

3 Reasons to Claim Social Security Before Your Retirement Age

Matt Bell — Wed, 01 Mar 2017 10:30:37 +0000

When it comes to Social Security, the usual advice is to hold off on taking benefits as long as possible. While most people could claim benefits as early as age 62, your monthly benefit amount will grow each year that you wait up to age 70. (See also: 6 Smart Ways to Boost Your Social Security Payout Before Retirement)

However, there are some situations where taking benefits as soon as possible may be the better way to go. Here are three such scenarios.

1. You Need the Money

If you can't find a job, or simply don't have enough savings to live on, claiming Social Security benefits at age 62 may be your only option.

Just keep in mind that if you do find a job, there are limits to how much you can earn without impacting your Social Security benefits. In years when you are younger than your "full retirement age" (65–67, depending on when you were born), for every $2 you earn above $16,920, your Social Security benefits will be reduced by $1.

2. Longevity Doesn't Run in Your Family

One way to evaluate the impact of claiming Social Security benefits at various ages is to run what's known as a break-even analysis.

When you claim as early as possible, your monthly benefit amount will be smaller than it would have been if you claimed later. However, the head start that early claiming provides means that if you claim benefits at a later age, even though the monthly amount is higher, it'll take a number of years before you've broken even with the total amount you would have received by claiming earlier.

For example, here's a look at a friend's estimated monthly Social Security benefits and how they vary depending on when he claims benefits:

$1,529 if claimed at age 62
$2,273 if claimed at his full retirement age of 67
$2,873 if claimed at age 70

If he claims benefits beginning at age 62, by the end of the year that he turns 67, he will have received a total of over $100,000. If he waits until age 67 to begin taking benefits, it will take him until approximately age 78 before his accumulated benefits would overtake the total he would have received if he had started taking benefits at age 62.

If he didn't expect to live to age 78, it would make sense to claim benefits earlier. Of course, that's a tough call. Even in families when one or both parents die early, some of their kids live far longer.

To find out your own estimated Social Security benefits, create an account on the Social Security Administration's website.

Run Your Own Break-Even Analysis

Unfortunately, there isn't an easy way to run your own break-even analysis. The Social Security Administration used to have a calculator on its site designed for this purpose, but took it down because they felt it was encouraging too many people to claim early.

One workaround is to run various scenarios with this calculator. As a starting point, enter your "current age" as 62, enter your estimated age of death in the "retirement age" field, enter the annual age-62 benefit amount in the "your current annual income" field (the SSA website lists benefits in monthly amounts, so be sure to multiply by 12), and then use the "annual salary increase" field to enter an estimated inflation rate (Social Security benefits are adjusted for inflation each year; use a relatively low amount — somewhere between 1% and 2%).

Then run the same analysis, but change your "current age" to your full retirement age and change "your current annual income" to the annual amount of your full retirement age benefit.

3. You Have Plenty of Money Already Saved for Retirement

If you have enough money to live on regardless of your Social Security benefits, that may be another reason to take Social Security benefits as early as possible. You could use the money to invest, buy a long-term care insurance policy, or buy a life insurance policy.

It's true that you should think very carefully before claiming Social Security benefits at age 62. There's a hefty increase in the monthly benefit amount for each year that you wait. And if you're married, keep this in mind: When you die, your spouse will be able to choose to take the higher of their benefit or your benefit. If you had been the higher earner, by waiting as long as possible before claiming your benefit, that will be very helpful to your spouse once you're gone.

This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Financial Moves Now That You'll Regret When You Retire

Matt Bell — Thu, 01 Dec 2016 11:00:08 +0000

We all make thousands of decisions every day. Come tomorrow, many of them won't matter much at all. But some decisions do have long-lasting implications. Here are five choices that may leave you longing for a do-over in retirement.

1. Borrowing From Your 401K

It's relatively easy to borrow from most 401K plans. However, the purpose of your 401K isn't to save for a down payment on a house or college bills. It's to build a nest egg for retirement. The more you nibble away at that, the less you'll have for your later years. The best approach? Consider your workplace retirement funds to be off limits — until retirement.

2. Resetting Your Mortgage Clock Past Your Retirement Age

Interest rates are very low, which has prompted many people to refinance their mortgages. It can be wise to swap out a high interest rate loan for one at a lower rate. However, if this is the home you plan to live in during retirement, make sure your new mortgage will be retired by the time you are. That may mean opting for a shorter term (15 or 20 years instead of 30) or committing to making extra monthly payments. (Use this calculator to help you figure out how much extra to pay.)

3. Claiming Social Security Too Early

There are some people who may benefit by claiming their Social Security benefits at the earliest possible age — 62. If longevity doesn't run in your family or if you absolutely have no other options but to take the money sooner than later, go ahead. But good things come to those who wait. When it comes to delaying the start of Social Security, those who can hold off will get quite a boost in benefits.

When I looked up my own benefits (here's where to look up yours), I saw that I'm eligible for $1,780 per month if I claim benefits at age 62. If I wait until my Full Retirement Age of 67, that amount jumps to $2,694 — a 51% increase. And if I wait until age 70, I would receive $3,441 per month — nearly twice as much as my age-62 benefit.

And here's the other benefit from waiting. Men, I hope I'm not the first to break this to you, but you're probably going to die before your wife, unless she's a lot older than you are. And if your Social Security benefit is larger than hers, the more you can maximize yours, the more it'll benefit your wife once you're gone. That's because upon your death, she'll have the choice of continuing to take her benefit or yours.

Social Security claiming strategies are so varied, complex, and important that it would probably benefit you to seek additional guidance via Social Security Solutions or Maximize My Social Security.

4. Ignoring Inflation

I talked with a newly-retired woman recently who thought she was set for life. She took her savings, divided by her estimated number of years remaining, and was satisfied with her answer. Until I rained on her parade by asking how she planned to account for inflation.

She didn't like the idea of investing any of her money in the stock market because she thought that was too risky. And yet, keeping all of her money in a bank savings account virtually guarantees that her buying power will steadily decline. Even a modest annual inflation rate of 2% will cut buying power nearly in half over the course of a 30-year retirement.

Most retirees will need to accept the idea of maintaining some level of exposure to the stock market with their investment portfolio in order to make sure their money lasts as long as they do.

5. Counting on Paid Work in Your Later Years

One of today's most significant retirement-related disconnects is the difference between the number of today's workers who are planning to work in retirement (I know, it sounds like an oxymoron) and the number of retirees who actually do still work.

An increasing number of people still in the workforce are pushing back their retirement date — some because they want the mental stimulation that comes from work, some because they realize they'll need the money. And yet, nearly half of people who are now retired left the workforce sooner than intended, many times because of health issues.

By the same token, nearly two-thirds of today's workers expect to work for pay to some degree after retiring from their main career, whereas less than one-third of those who are now retired have worked for pay since ending their main career.

The best advice? Plan physically, emotionally, and vocationally to work longer than you might prefer while you plan financially to retire earlier than you think you will.

Clearly, what you don't do as you prepare for a successful retirement is just as important as what you do. Avoiding the five miscues just discussed will help you prepare well.

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This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Stop Falling for These 6 Social Security Myths

Emily Guy Birken — Mon, 07 Nov 2016 10:30:29 +0000

Over 166 million taxpayers pay into Social Security, which pays benefits to over 65 million Americans. As with any program as large and sprawling as Social Security, myths about how it works can run rampant — and since the facts tend to require more than a sound bite to explain, those myths become entrenched in our collective consciousness as fact.

But not only are these Social Security myths untrue, believing them can cause you to make poor decisions about your Social Security benefits. Here are six of the most common and harmful myths about Social Security, debunked:

1. The Government Is Raiding the Social Security Trust Fund

You will often hear people complain about how untrustworthy our government is, and offer the fact that Congress "raids" the Social Security Trust Fund as proof. While it is true that the Trust Fund is where excess Social Security taxes are placed for future beneficiaries, and it is also true that the government uses money in this account to pay for government programs, it is simply not true that the fund is being "raided."

Here's what's going on. Money placed in the Social Security Trust Fund may sound like it is being put in a vault somewhere for the safekeeping of future beneficiaries. But that's not how money works. Not only would that be a security risk, but the money in such a vault would lose value to inflation. In order to maintain and increase the value of the trust fund, the money must be invested in government programs.

Think of it this way: Any time you invest money commercially — whether by putting it in an interest-bearing bank account or by buying stocks or bonds — you are probably aware that the institution is immediately spending the money you have invested. The private institution spends your investment with the understanding that it will earn profits and be able to pay you back, with interest.

The government is no different. It spends money invested in the Social Security Trust Fund on infrastructure, military spending, government salaries, welfare, and the like, knowing that those investments will earn interest. But unlike a private institution, this kind of government spending is backed by the full faith and credit of the U.S. government.

The government's spending of money from the Social Security Trust Fund is just as valid a use of invested money as is the lending and spending that a bank or corporation does with investors' money.

2. Social Security Is Going Bankrupt

This myth is based on a kernel of truth — specifically, Social Security benefit payments exceed payroll tax revenues and have done so since 2010. In order to maintain promised benefits, Social Security has had to dip into the Social Security Trust Fund. As of 2013, the Trust Fund began losing value, and it will become entirely depleted by 2037.

This is the point at which most analysis stops, and that is why you will often hear the myth that Social Security is circling the drain. But it is impossible for Social Security to go bankrupt, because it was always designed as an immediate transfer of funds from current workers to current beneficiaries. (When there were more workers than beneficiaries, excess taxes were placed in the Trust Fund. This was the case until 2009). The program does not count on a specific pool of money, but on the tax revenue of current workers.

That being said, once the Trust Fund is depleted, tax revenue is only expected to pay for approximately 79% of promised benefits. This is the shortfall you will hear experts referring to when discussing the future of Social Security. But it does not spell the end of the program. It is just a shortfall that we need to find a way to make up.

Social Security was created specifically so it could be changed and tweaked to meet the changing needs of Americans — changing needs like this anticipated shortfall. We might have little faith in Washington right now, but it is specifically the job of our government to make changes to Social Security to deal with this coming shortfall. Eventually, they'll get around to it.

3. It's the Baby Boomers' Fault We're in This Mess

There are plenty of articles out there that place the blame for Social Security's financial woes squarely at the feet of the baby boomer generation — the largest-ever generation of Americans, born between 1946 and 1964. There are 76 million baby boomers, and having that many people retire over a couple of decades places an enormous burden on Social Security. Since our system is based upon an immediate transfer from current workers to current retirees, having the boomers retire all at once puts too many retirees into the equation.

But the boomers' retirement is hardly a surprise. They've been around for six or seven decades now, and we have seen this mass boomer retirement phase coming for many years. According to Virginia P. Reno and Joni Lavery in the Social Security brief Can We Afford Social Security When Baby Boomers Retire?, "Policymakers began to plan as early as 1983, when Congress lowered the cost of Social Security benefits for boomers and later generations by raising the age at which unreduced retirement benefits will be paid."

Believe it or not, our government has been trying for quite some time to prepare for this moment. Part of the reason we had such a surplus in the Social Security Trust Fund was because of our preparation for the mass retirement of the boomer generation. We are far better prepared for the boomers than many doomsayers might have you believe.

4. Waiting for Benefits Means You Risk Not Getting Your Fair Share

It is possible to take Social Security benefits as early as age 62, although your benefits will be permanently reduced by up to 25% to 30 percent by taking them early. Wait until your full retirement age (66 for individuals born between 1943 and 1954, rising to age 67 for anyone born in 1960 or later), and you will receive your full benefits. If you can wait until age 70, you will receive delayed retirement credit equal to approximately 8% per year between your full retirement age and 70.

If you calculate the break-even analysis on your Social Security benefits, it often looks like you're better off by taking early benefits. Early, reduced benefits offer you more lifetime benefits for nearly 15 years into the break-even analysis.

The problem with this thinking is that the only way for you to "win" these calculations is to die young. It would actually be far worse for you to take early benefits and then live a long life on a reduced income. It is much smarter to delay your benefits as long as possible to provide yourself with the largest benefit you can get.

5. Immigrants Are Taking Social Security Benefits They Didn't Pay For

This myth is an election year favorite, and it conflates Social Security benefits with Supplemental Security Income (SSI) benefits. Social Security benefits are only available to beneficiaries who either paid into the system themselves, or who are the dependents of those who paid into the system. If you have not paid any Social Security payroll taxes (or you haven't been the dependent of someone who has), you are not getting Social Security benefits. Period.

SSI, on the other hand, is a welfare program designed to provide aid to the elderly and disabled, and SSI benefits are paid through general governmental revenues. Immigrants are eligible to collect SSI benefits, but only if they show the same level of extreme need as any other SSI beneficiary.

6. Privatizing Social Security Would Make the System Fairer

The possibility of privatizing Social Security is a common suggestion for fixing many of the problems inherent in such a large government program. These suggestions often promise that privatization will be cheaper for the government, more lucrative for beneficiaries, and fairer for everyone since you will get out what you put in.

Unfortunately, none of those three promises would be true. Social Security is a very efficiently run program, with administrative expenses totaling less than 1% of the program's budget. But creating and maintaining individual investment accounts would be incredibly expensive, since it would incur broker commission fees and/or mutual fund management fees, which would either come from the program budget or individual investors.

In addition, it is unlikely that the majority of beneficiaries would be able to improve upon their Social Security "return on investment" through investment accounts, since humans are notoriously irrational investors. Social Security benefits are guaranteed, while investment returns are not.

Finally, attempting to create pay-for-what-you-get fairness in a social insurance program like Social Security is a non-starter. The intention of Social Security is to provide guaranteed income to the elderly, the disabled, and their families, by spreading the cost of that income over all of society. Strict fairness in such a system would leave our most vulnerable citizens in abject poverty or worse. It's also important to note that the transition costs of privatizing Social Security have been estimated at nearly $5 trillion over the first two decades. Those costs would need to be paid by current workers, who would potentially be paying into their privatized accounts and still be paying taxes that go toward current beneficiaries — which would feel incredibly unfair.

This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

6 Smart Ways to Boost Your Social Security Payout Before Retirement

Damian Davila — Wed, 12 Oct 2016 09:00:06 +0000

According to the Employee Benefit Research Institute, 84% of U.S. workers expect their Social Security benefit to be a significant source income during retirement. So, let's plan ahead with these six smart ways to boost that monthly Social Security check before retirement:

1. Check Reported Earnings on Your Social Security Statements

In September 2014, the Social Security Administration (SSA) began mailing Social Security Statements to workers at ages 25, 30, 35, 40, 45, 50, 55, and 60 and over, who aren't yet receiving Social Security benefits and don't have a my Social Security account. You should receive those statements about three months before your birthday at each one of those ages.

Once you receive one, check your reported earnings for each year to make sure they match your W-2 forms. The SSA uses your average earnings over your lifetime to calculate your benefit amount, so any errors on reported earnings may alter the benefit to which you're entitled. Since you may have many employers during your lifetime, you're the only person who can look at your earnings history and know whether it's complete and correct.

If any earnings before the previous year are missing or shown incorrectly, contact the SSA right away at 1-800-772-1213 (7 a.m. to 7 p.m. on your local time). Have your W-2 or tax return for those years available when you call.

2. Sign Up for a my Social Security Account

There's no need to wait five years before getting your next Social Security Statement. By creating you're my Social Security account at www.ssa.gov/myaccount, you'll be able to check your reported earnings once a year to verify that those posted amounts are correct.

Additionally, you'll receive updated estimates of your future retirement, disability, and survivors benefits. If you meet certain requirements, you'll also be able to request a replacement Social Security card through the my Social Security online portal.

3. Reach Full Retirement Age

When you have earned the necessary 40 credits (individuals with disabilities, recipients of survivor benefits, and some minors may need fewer credits) to qualify for retirement benefits, you can start receiving those benefits as early as age 62. Whether you receive a digital or paper copy of your Social Security statement, you'll receive an estimated benefit of your retirement benefits at age 62.

You'll quickly realize that the estimated benefit at age 62 is much lower than the one at your full retirement age. For example, if you were born between 1943 and 1954, your full retirement age would be 66. If you were to start getting retirement benefits at age 62, they would be reduced to 75% of what they would be four years later. For every month that you delay retirement past age 62, you would gain an additional 0.4% in retirement benefits until you reach your full retirement age. Depending on your birth year, your full retirement age ranges from 65 to 67.

4. Obtain Delayed Retirement Credits

According to estimates from the SSA, about one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95. If you have a family history of longevity, consider delaying retirement until age 70.

Individuals born 1943 or later receive an extra 2/3 of 1% increase on their retirement benefits for every month that they delay retirement past full retirement age. If your full retirement age were 67, you would increase your retirement benefit to 132% by waiting until age 70. You can only gain delayed retirement credits until age 70.

5. Evaluate Spousal Benefits

Spouses can claim retirement benefits based on their own earnings record or receive up to 50% of the higher earner's benefit, whichever is higher. For example, if your own retirement benefit and your spouse's were $600 and $1,800, respectively, you would receive $900 (50% of $1,800).

However, taking the spousal benefit as early as age 62 reduces your payout. A spousal benefit is reduced 25/36 of 1% for each month before full retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5/12 of 1% per month. For those born 1960 or later, a $900 spousal benefit would be reduced to $585 when taking it at age 62.

If you're divorced from a marriage lasting 10 years or longer, remain unmarried, and have a retirement benefit smaller than the one you would receive from your ex-spouse, then you can receive spousal benefits on your ex-spouse's record even if he or she has remarried. However, you'll only be able to keep collecting benefits if you keep single. To learn more details about spousal benefits for divorced spouses, consult the SSA website.

6. Plan Ahead With Your Dependents

Talking about relationship updates later on in life, keep in mind that you can receive additional Social Security payments when you have dependent children under age 19 living with you during retirement.

As long as your biological child, adopted child, stepchild, or dependent grandchild is unmarried and under age 18, then he or she can receive up to one half of your monthly retirement benefit. The benefit can extend until graduation date or two months after the 19th birthday of a dependent who is a full-time student (no higher than grade 12), whichever is earlier.

While each one of your qualifying dependent children can receive a benefit, generally the total amount you and your family can receive is about 150% to 180% of your full retirement benefit. Depending on your child's age, you may find it advantageous to retire earlier than you originally planned to take advantage of a higher total family benefit.

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This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: