US and French Social Security

Posted On April 14, 2023 By Scott Stratton, CFP(R), CFA In Retirement Planning /

We are in Paris and several clients have reached out to make sure we are doing okay, given the demonstrations and riots regarding France’s retirement system. Yes, we are fine and actually never saw any of these events other than on the news. Day to day life in Paris is normal, and thankfully the garbage strike is over. It has been perfectly tranquil in our neighborhood and we are enjoying life in the city.

Why are the French upset? Currently, if you are 62 and have worked for 42 years, a French citizen can receive their full retirement benefit of 50% of the average salary of their highest paid 20 years of work. If you don’t have 42 years of contributions, you will receive less than 50%, or you can work for longer to increase your benefit up to 50%. So, if you had been making $60,000 (Euros actually), you could potentially retire at 62 with a $30,000 pension. Under the new rules, the full retirement benefit will not become available until age 64 with 43 years of work. There are some interesting parallels between US and French Social Security.

The French Connection

In a recent interview, France’s President Macron defended the changes, which have been enormously unpopular. Macron explained that the program has always been an entitlement program, where current benefits are paid by current taxes. It is not a personal savings or investment account. When Macron took office, there were 10 million retirees receiving benefits, out of France’s 67 million population. Today, there are 17 million retirees and that number will grow to 20 million by 2030. 20 million pensioners out of a total of 67 million people. There are 1.7 workers in France for each retiree.

1.7 workers cannot provide an average monthly benefit of 1300 Euros for each retiree. There are only two options, increase taxes or decrease benefits. France already has high taxes, 20% just for social programs (this also includes health insurance, unemployment, maternity benefits, and other programs). 14% of France’s GDP is just retirement pensions. France compared their program and expenditures to similar countries and recognized that their retirement age was too low, given how much longer people are living today.

Macron tried to work with representatives in their Parliament on a solution. But when no agreement could be reached, he issued an executive order to make the changes without a vote. He noted that he had to do what was in the country’s best interest in the long term and preserve the program for their children and grandchildren, even if it was not the most popular thing to do. I was impressed by his directness, intelligent explanation of a complex problem, and courage to do the right thing even when it is not easy or popular.

The US Conundrum

I’ve been writing about the problems facing US Social Security since 2008. Back then, the 2036 projected collapse of the Social Security Trust Fund seemed like a lifetime away. Today, Social Security projects that the Trust Fund will be depleted by 2033. At that time, taxes will only cover about 70% of promised benefits. And every year, the Social Security Trustees report tells us how much we need to increase taxes or decrease benefits to keep the program solvent for 75 years.

Unfortunately, over the last 15 years no changes have occurred. It has been political suicide for any politician to suggest reforming Social Security. The easiest attack ad has always been to say that your opponent wants to “take away your Social Security check”. So we keep on marching towards that cliff with no change in direction. Shame on our politicians for not being willing to save the foundation of our retirement.

When Social Security started, there were 16 workers for every retiree and the average life expectancy was 65. Today, there are 2.8 workers for every retiree and that ratio continues to shrink. The typical 65 year old, in 2023, will live for at least 20 years. Like in France, it doesn’t matter what “you paid into Social Security”. That’s not how the program ever worked. Current taxes pay current beneficiaries. Your past contributions were spent on your parent’s or grandparent’s check.

No Easy Solution

Compared to France, the US demographics may look better. However, France actually is running a smaller deficit on their retirement program – only a 10 Billion Euro average annual shortfall for the next decade. They actually ran a surplus in 2022 and are proactively making these changes looking forward to the decade ahead. They’re making changes before there is a deficit! (Social Security spent only $56 Billion of the Trust Fund last year, but this will accelerate and deplete the whole $2.8 Trillion over the next 10 years.)

For the US, if we we wait, it will magnify the size of the changes needed. It would be better to start today to save Social Security. We can either increase taxes or reduce benefits. Those are the only two options. No one wants to do either, so we have to reach a compromise.

Thankfully, there are actuaries at Social Security who study all proposals. Their annual report estimates how much of the shortfall could be reduced for each change. Here are some of their calculations, looking at the improvement of the long-range actuarial balance. (We should be looking for some combination which equals at least 100%.)

Impact of Possible Changes to US Social Security

Reduce COLAs by 1% annually: 56%
Change COLA to chained CPI-W: 18%
Calculate new benefits using inflation rather than SSA Average Wage Index: 80%
Reduce benefits for new retirees by 5% starting 2023: 18%
Wage test. Reduce SS benefits from 0-50% if income is $60k-180k single/$120k-360k married: 15%
Increase Full Retirement Age from 67 to 69 by 2034, and then increase FRA by 1 month every 2 years going forward: 38%
Increase the Payroll Tax from 12.4% to 16% in 2023: 103%
Eliminate SS cap and tax all wages: 58%
Eliminate SS cap, tax all wages, but do not increase benefits above the current law maximum: 75%
New 6.2% tax on investment income, for single $200k / married $250k: 29%

I don’t have an answer for what Washington will do. But we can look at what will actually work. And what is perhaps even more interesting is what doesn’t work. It is shocking, for example, that wage testing SS only improves the shortfall by 18%. Or that Reducing COLAs by 1% every year only will cover half the shortfall. Unfortunately, we may need to increase taxes. Moving to 16% payroll tax would fully cover the shortfall. That would be a relatively small increase from 6.2% to 8%, each, for an employee and the employer. But that is a regressive tax, which would impact low earners more than high earners. For reforms to work, it might require a combination of both increased taxes and reductions in the way benefits increase.

Kicking The Can Down The Road

Will the US take action to save Social Security, or will the reaction in France scare US Politicians? It’s hard to imagine our divided Congress reaching a compromise on an issue as difficult and controversial as changing Social Security. But any politician who is still talking about the other side as “trying to take away your Social Security” is now part of the problem and not part of the solution. Kicking the can down the road is not going to help America.

What is certain is the need to save Social Security. It is the largest source of retirement income for most Americans. And the lower your income, the more Social Security is needed to cover retirement expenses. We can’t keep ignoring the future of Social Security, it’s not going to get better on its own. The status quo is not an option.

I hope the US won’t see the same riots as Paris. But I also hope US politicians will do their job and have the courage to make the tough choices that are in the best interest of the public. US and French Social Security are both in the same precarious state. Let’s hope Winston Churchill was right: “You can always count on Americans to do the right thing, after they have exhausted all other possibilities.” That day is coming soon.

How to Reduce IRMAA

Posted On January 18, 2022 By Scott Stratton, CFP(R), CFA In Retirement Planning /

Many retirees want to find ways to avoid or reduce IRMAA. Why do retirees hate Irma? No, not a person, IRMAA is Income Related Monthly Adjustment Amount. That means that your Medicare Part B and D premiums are increased because of your income. We are going to show how IRMAA is calculated and then share ways you can reduce IRMAA.

Medicare Part A is generally free at age 65, and most people enroll immediately. Part A provides hospital insurance for inpatient care. Part B is medical insurance for outpatient care, doctor visits, check ups, lab work, etc. And Part D is for prescription drugs. When you enroll in Parts B and D, you are required to pay a monthly premium. How much? Well, it depends on IRMAA.

IRMAA Levels for 2022

IRMAA increases your Medicare Part B and D premiums based on your income. There is a two year lag, so your 2022 Medicare premiums are based on your 2020 income tax return. Here are the 2022 premiums, based on your Modified Adjusted Gross Income, or MAGI.

2020 Single MAGI

$91,000 or less

$91,001 to $114,000

$114,001 to $142,000

$142,001 to $170,000

$170,001 to $500,000

$500,001 and higher

2020 Married/Joint MAGI

$182,000 or less

$182,001 to $228,000

$228,001 to $284,000

$284,001 to $340,000

$340,001 to $750,000

$750,001 and higher

2022 Monthly Part B / Part D

$170.10 / Plan Premium (PP)

$238.10 / PP + $12.40

$340.20 / PP + $32.10

$442.30 / PP + $51.70

$544.30 / PP + $71.30

$578.30 / PP + $77.90

How to Calculate MAGI

I have written previously about how the IRS uses a figure called Modified Adjusted Gross Income or MAGI. MAGI is not the same as AGI and does not appear anywhere on your tax return. Even more maddening, there is no one definition of MAGI. Are you calculating MAGI for IRA Eligibility, the Premium Tax Credit, or for Medicare? All three use different calculations and can vary. It’s crazy, but our government seems to like making things complex. So, here is the MAGI calculation for Medicare:

MAGI starts with the Adjusted Gross Income on your tax return. For Medicare IRMAA, you then need to add back four items, which you may or may not have:

Tax-exempt interest from municipal bonds
Interest from US Savings Bonds used for higher education expenses
Income earned abroad which was excluded from AGI
Income from US territories (Puerto Rico, Guam, etc.) which was non-taxable

Add back those items to your AGI and the new number is your MAGI for Medicare.

Why Retirees Hate IRMAA

The IRMAA levels are a “Cliff” tax. Make one dollar over these levels and your premiums jump up. Many retirees plan on a comfortable retirement and find out that their Social Security benefits are much less than they expected because of Medicare Premiums. For a married couple, if your MAGI increases from $182,000 to $228,001, you will see your premiums double. And while young people think it must be so nice to get “free” health insurance for retirees, this couple is actually paying $8,164.80 just for their Part B Premiums every year! And then there are still deductibles, co-pays, prescriptions, etc.

Sure, $228,001 in income sounds a lot for a retiree, right? Well, that amount includes pensions, 85% of Social Security, Required Minimum Distributions, capital gains from houses or stocks, interest, etc. There are a lot of retirees who do get hit with IRMAA. And this is after having paid 2.9% of every single paycheck for Medicare over your entire working career. That’s why many want to understand how to reduce IRMAA.

10 Ways to Reduce MAGI for IRMAA

The key to reducing IRMAA is to understand the income thresholds and then carefully plan out your MAGI. Here is what you need to know.

Watch your IRA/401(k) distributions. Avoid taking a large distribution in one year. It’s better to smooth out distributions or just take RMDs.
Good news, Roth distributions are non-taxable. IRMAA is another reason that pre-retirees should be building up their Roth accounts. And there are no RMDs on Roth IRAs.
Be careful of Roth Conversions. Conversions are included in MAGI and could trigger IRMAA.
If you are still working, keep contributing to a Traditional IRA or 401(k) to reduce MAGI. If you are self-employed, consider a SEP or Individual 401(k). The age limit on Traditional IRAs has been eliminated.
Itemized Deductions do NOT lower AGI. While State and Local Taxes, Mortgage Interest, Charitable Donations, and Medical Expenses could lower taxable income, they will not help with MAGI for IRMAA.
However, if you are 70 1/2, Qualified Charitable Distributions (QCDs) do reduce MAGI. If you are younger than 70 1/2, donating appreciated securities can avoid capital gains.
Avoid large capital gains from sales in any one year. Be sure to harvest losses annually in taxable accounts to reduce capital gains. Use ETFs rather than mutual funds in taxable accounts for better tax efficiency. Place income-generating investments such as bonds into tax-deferred accounts rather than taxable accounts. Consider non-qualified annuities to defer income.
If you still have a high income at age 65, consider delaying Social Security benefits until age 70.
Once you are 65, you cannot contribute to a Health Savings Account (HSA). However, you may be able to contribute to an FSA (Flexible Spending Account), if your employer offers one. The maximum contribution for 2022 is $2,850 and you may be able to rollover $570 in unused funds to the next year.
Avoid Married filing separately. File jointly.

Life-Changing Event

Medicare does recognize that situations change and your income from two years ago may not represent your current financial situation. Under specific circumstances, you can request IRMAA be reduced or waived if you have a drop in income. This is filed using form SSA-44, as a “Life Changing Event”. Reasons for the request include:

Marriage, Divorce, or Death of a Spouse
You stopped working or reduced your hours
You lost income-producing property due to a disaster
An employer pension planned stopped or was reduced
You received an employer settlement due to bankruptcy or closure

Outside of the “Life-Changing Event” process, you can also appeal IRMAA within 60 days if there was an error in the calculation. For example, if you filed an amended tax return, and Social Security did not use the most recent return, that would be grounds for an appeal.

A few other tips: If you are subject to IRMAA and have Part D, Prescription Drug, coverage, consider Part C. Medicare Part C is Medicare Advantage. Many Part C plans include prescription drug coverage, so you will not need Part D. And there is no IRMAA for Part C. Lastly, while you can delay Part B if you work past 65, be sure to sign up immediately when you become eligible to avoid penalties.

IRMAA catches a lot of retirees, even though they don’t have any wages or traditional “income”. Between RMDs, capital gains, and other retirement income, it’s common for retirees to end up paying extra for their Medicare premiums. If you want to learn how to reduce IRMAA, talk with your financial advisor and analyze your individual situation. I’m here to help with these types of questions and planning for clients.

7 Ways for Women to Not Outlive Their Money

Posted On March 31, 2019 By Scott Stratton, CFP(R), CFA In Retirement Planning /

Once a month, my brass quintet goes to a retirement home/nursing home and plays a concert for the residents. Over the past 15 years, I’ve visited more than 100 locations in Dallas. They run the gamut from Ritz-Carlton levels of luxury to places that, well, aren’t very nice and don’t smell so great.

What all these places do have in common is this: 75 to 80 percent of their residents are women. Women outlive men, and in many marriages, the husband is older. Wives are outliving their husbands by a substantial number of years. While no one dreams of ending up in a nursing home, living alone at that age is even more lonely, unhealthy, and perilous.

For women who have seen their own mother, aunt, or other relative live to a grand old age, you know that there are many older women who are living in genuine poverty in America today. Husbands, you may not worry about your old age or what happens to you, but certainly you don’t wish to leave your wife in dire financial straits after you are gone.

Longevity risk – the risk of outliving your money – is a primary concern for many women investors. A good plan to address longevity begins decades earlier. Here are some of the best ways to make sure you don’t outlive your money.

1. Delay Social Security benefits. Social Security is guaranteed for life and it is often the only source of guaranteed income that will also keep up with inflation, through Cost of Living Adjustments. By waiting from age 62 to age 70, you will receive a 76% increase in your monthly Social Security benefit. For married couples, there is a survivorship benefit, so if the higher earning spouse can wait until 70, that benefit amount will effectively apply for both lives. Husbands: even if you are in poor health, delaying your SS benefit will provide a higher benefit for your wife if she should outlive you.Read more: Social Security: It Pays to Wait

2. Buy a Single Premium Immediate Annuity (SPIA) when you retire. This provides lifetime income. The more guaranteed income you have, the less likely you will run out of money to withdraw. While the implied rate of return is not terribly high on a SPIA, you could consider that purchase to be part of your allocation to bonds. Read more: How to Create Your Own Pension

3. Delay retirement until age 70. If you can work a few more years, you can significantly improve your retirement readiness. This gives you more years to save, for your money to grow, and it reduces the number of years you need withdrawals by a significant percentage. Read more: Stop Retiring Early, People!

4. Don’t need your RMDs? Look into a QLAC. A Qualified Longevity Annuity Contract is a deferred annuity that you purchase in your IRA. By delaying benefits (up to age 80), you get to grow your future income stream, while avoiding Required Minimum Distributions.Read more: Longevity Annuity

5. Invest for Growth. If you are 62 and retiring in four years, your time horizon is not four years, you are really investing for 30 or more years. If your goal is to not run out of money and to maintain your purchasing power, putting your nest egg into cash might be the worst possible choice. Being ultra-conservative is placing more importance on short-term volatility avoidance than on the long-term risk of longevity.

6. Don’t blow up your investments. Here’s what we suggest:

Don’t buy individual stocks. Don’t chase the hot fad, whether that is today’s star manager, sector or country fund, or cryptocurrency. Don’t get greedy.
No private investments. Yes, some are excellent, but the ones that end up being Ponzi schemes also sound excellent. Seniors are targets for fraudsters. (Like radio host Doc Gallagher arrested this month in Dallas for a $20 million Ponzi scheme.)
Determine a target asset allocation, such as 60% stocks and 40% bonds (“60/40”), and either stick with it, or follow the Rising Equity Glidepath.
Use Index funds or Index ETFs for your equity exposure. Keep it simple.- Get professional advice you can trust.

7. Consider Long-Term Care Insurance. Why would you want that? Today’s LTCI policies also offer home care coverage, which means it might actually be thing which saves you from having to move to an assisted living facility. These policies aren’t cheap: $3,000 to $5,000 a year for a couple at age 60, but if you consider that assisted living would easily be $5,000 a month down the road, it’s a policy more people should be considering. Contact me for more information and we can walk you through the process and offer independent quotes from multiple companies.

There is no magic bullet for longevity risk for women, but a combination of these strategies, along with saving and creating a substantial retirement nest egg, could mean you won’t have to worry about money for the rest of your life. The best time to start planning for your future is today.

When a 2% COLA Equals $0

Posted On July 16, 2017 By Scott Stratton, CFP(R), CFA In Retirement Planning /

Social Security provides Cost of Living Adjustments (COLAs) annually to recipients, based on changes to the Consumer Price Index. According to an article in Reuters this week, the Social Security COLA for 2018 should be around 2%. Social Security participants may be feeling like breaking out the Champagne and party hats, following a 0.3% raise for 2017 and a 0% COLA for 2016.

Unfortunately, and I hate to rain on your parade, the average Social Security participant will not see any of the 2% COLA in 2018. Why not? Because of increases in premiums for Medicare Part B. Most Social Security recipients begin Part B at age 65, and those premiums are automatically withheld from your Social Security payments.

Social Security has a nice benefit, called the “Hold Harmless” rule, which says that your Social Security payment can not drop because of an increase in Medicare costs. In 2016 and 2017 when Medicare costs went up, but Social Security payments did not, recipients did not see a decrease in their benefit amounts. Now, that’s going to catch up with them in 2018.

In 2015, Medicare Part B was $105/month and today premiums are $134. For a typical Social Security benefit of $1,300 a month, a 2% COLA (an increase of $26 a month) will be less than the increase for Part B, so recipients at this level and below will likely see no increase their net payments in 2018. While many didn’t have to pay the increases in Part B over the past two years, their 2018 COLA will be applied first to the changes in Medicare premiums.

I should add that the “Hold Harmless” rule does not apply if you are subject to Medicare’s Income Related Monthly Adjustment Amount. If your income was above $85,000 single, or $170,000 married (two years ago), you would already pay higher premiums for Medicare and would be ineligible for the “Hold Harmless” provision. And if you had worked outside of Social Security, as a Teacher in Texas, for example, you were also ineligible for “Hold Harmless”.

The cost, length, and complexity of retirement has gone up considerably in the past generation. Not sure where to begin? Give me a call, we can help. Preparation begins with planning.

The Future of Social Security

Posted On May 14, 2017 By Scott Stratton, CFP(R), CFA In Retirement Planning /

It seems like the Internet Age has helped create a culture of instant gratification, short attention spans, and sound bites. There is less interest and patience for detailed discussions, long-form journalism, or acknowledging the complex trade-offs of decisions. We have moved into a post-factual world where the truth gets less airplay than spin. Politically, everything is black and white, right or wrong.

Frequently, I see people posting political comments or memes on Facebook about Social Security. These posts are meant to make the other party look like villains, but are often factually incorrect, incomplete, and short-sighted. I avoid getting sucked into these unproductive conversations, but many people could use a better understanding of the numbers and reality of our situation.

We should be having a real, adult conversation about Social Security. It is the future of not only retirement planning, but of our country’s prosperity and debt. I hope this primer below will make the case for why we need to reform Social Security and the challenges we face.

First, it is a myth that Social Security saves your contributions. Social Security is and always has been an entitlement program, like Welfare or Food Stamps. Current taxes are used to pay current benefits. The Social Security taxes you paid in 2015 were paid out to Social Security Beneficiaries in 2015. None of that money was saved for you.

Because of post-WWII demographics, there was for a very long time, a Social Security surplus. They took in more payroll taxes than they paid out in benefits. That annual surplus was invested in the Social Security Trust Fund, to pay a portion of future benefits. It was never the intent or expectation that the Trust Fund would cover all future expenses.

For decades, the Trust Fund saved this surplus. However, in the 1970’s politicians looked for a way to close the budget gap and decided to spend the Trust Fund and replace those assets with IOU’s in the form of Treasury Bonds.

Several years ago, the annual Social Security surplus disappeared and became negative. Today, there is a short-fall where current OASDI taxes are insufficient to cover benefits paid. The short-fall is presently being covered by the Trust Fund through cashing in their Treasury Bonds. This is where all the Facebookers get things wrong – Social Security does have an impact on the deficit. Benefits which are paid from the Trust Fund are now part of our national debt, as new bonds are issued to replace those cashed by the Trust Fund.

Once the Trust Fund reaches zero, the Social Security Administration will be able to cover only 77% of their promised benefits. Every year, the Social Security trustees project when this will occur, presently thought to be 2035. This is the date that Social Security will be insolvent, or “bankrupt”.

People say, But I paid into Social Security, I am OWED those benefits! Unfortunately, the Social Security System is broken and the numbers are simply not going to work. When the program began, there were 16 workers for every retiree. Today, there are 3 workers for every retiree, and that ratio is expected to continue to fall to 2 to 1, before the mid-century.

There are a couple of reasons why this has happened. Demographically, the Baby Boomer generation is enormous and there are thousands of people who are starting benefits every day for the next two decades. When Social Security began, the life expectancy at birth was only 65. Today, if you are already 65, the typical beneficiary will probably live another two decades. The retirement period being funded by Social Security has swelled from a couple of years to 20, 30, or more years because of our increasing longevity.

What originally worked in 1935 isn’t possible with today’s population. Every year, the Trustees tell Congress exactly how to fix Social Security. There are only two options: increase taxes or decrease benefits. There is no magic unicorn of preserving promised benefits and not raising taxes. That’s not how Math works. So when a politician promises that they will not lower benefits, they are either in favor of higher taxes or they are just blowing smoke. If they ignore the issue for long enough, it will become their successor’s problem.

Seniors vote and turn out better than any other age group. Politicians and candidates know this. The easiest attack in politics is to say that your opponent wants to “take away your Social Security check”. Up to this point, that war cry has silenced every politician who has proposed Social Security reform, including the bi-partisan Simpson-Bowles commission which came up with comprehensive solutions.

The present approach from politicians is the worst for America: kick the can down the road and let someone else fix it. Parties are too concerned with maintaining their seats over the next two years (or taking them back), to be willing to think longer-term than the next election cycle. The longer we wait to address the short-fall, the more drastic steps will be required.

Simpson-Bowles proposed increasing the Full Retirement Age from 67 to 69 over several decades. This would have had zero impact on current retirees and gave 20 years notice to future retirees. But even this small change brought the full opposition of the AARP, and ultimately none of the commission’s proposals were ever enacted.

Presently, workers and employers pay OASDI taxes on the first $127,200 of earnings (2017). Raising the income ceiling on Social Security taxes will not be sufficient to fully fund benefits, even if we were to eliminate it entirely. There will probably need to be some reduction in benefits if we are to avoid increasing taxes significantly on all workers. But that doesn’t mean that everyone will see their benefits plummet. Ways to reduce benefits include:

Increasing the Full Retirement Age gradually from 67 to 70
Changing how SS calculates cost of living adjustments (COLAs)
Means-testing benefits
Creating a cap on benefits, say to the first $75,000 in income
Adjusting mortality calculations for today’s increased longevity
Lowering the payout formulas and tying them to future increases in longevity

By the way, increasing immigration and the population of younger people would help retirement programs like Social Security. Look at a country like Japan, which has an even higher percentage of retirees than the US, to see the challenges of financially supporting a large segment of the population. The money that is spent on retirement programs, or to finance the debt of those programs, crowds out other government spending which might be better for economic development.

There is no quick fix or easy solution to save Social Security, but it’s time we expect more from our politicians. Fixing Social Security and Medicare will not be easy or painless, but we need to be thinking now about how we can preserve these programs and ensure their viability for younger workers and future generations. Become an informed voter and be on the lookout for when politicians are using issues as ammunition to lob at their opponents, rather than looking at solutions for America. Likes is the one of the most important reactions that a TikTok creator can get for their videos. You feel much more appreciated, when you notice a dramatic growth of the number of free TikTok likes you get. Obviously, TikTokers of all levels are looking for the opportunities to increase the number of likes they get. In this article we will share this information! Here are some tips: Catchy description; Follow the trends; Post videos daily and Paid Promotion. Paid promotion is one of the most effective ways to get more TikTok likes. However, choose the trusted providers wisely, such as tiktoknito.com.

Social Security Planning: Marriage, Divorce, and Survivors

Posted On April 29, 2017 By Scott Stratton, CFP(R), CFA In Retirement Planning /

The Social Security Statement you receive is often incomplete if you are married, were married, or are a widow or widower. Your statement shows your own earnings history and a projection of your individual benefits, but never shows your eligible benefits as a spouse, ex-spouse, or survivor.

In general, when someone is eligible for more than one type of Social Security benefit, they will receive the larger benefit, not both. But how are you supposed to know if the spousal benefit is the larger option? Social Security is helpful with applying for benefits, but they don’t exactly go out of their way to let you know in advance about what benefits you might receive or when you should file for these benefits.

The rules for claiming spousal benefits, divorced spouse benefits, and survivor benefits are poorly understood by the public. And unfortunately, many financial advisors don’t understand these rules either, even though Social Security is the cornerstone of retirement planning for most Americans. Today we are giving you the basics of what you need to know. With this information, you may want to delay or accelerate benefits. The timing of when you take Social Security is a big decision, one which has a major impact on the total lifetime benefits you will receive.

1) Spousal Benefits. If you are married, you are eligible for a benefit based on your spouse’s earnings, once your spouse has filed to receive those benefits. If you are at Full Retirement Age (FRA) of 66 or 67, your spousal benefit is equal to 50% of your spouse’s Primary Insurance Amount (PIA). If you start benefits before your FRA, the benefit is reduced. You could start as early as age 62, which would provide a benefit of 32.5% of your spouse’s PIA. Calculate your benefit reduction here.

If your own benefit is already more than 50% of your spouse’s benefit, you would not receive an additional the spousal benefit. When you file for Social Security benefits, the administration will automatically calculate your eligibility for a spousal benefit and pay you whichever amount is higher. A quick check is to compare both spouse’s Social Security statements; if one of your benefits is more than double the other person’s benefit, you are a potential candidate for spousal benefits.

If your spouse is receiving benefits and you have a qualifying child under age 16 or who receives Social Security disability benefits, your spousal benefit is not reduced from the 50% level regardless of age.

Please note that spousal benefits are based on PIA and do not receive increases for Deferred Retirement Credits (DRCs), which occur after FRA until age 70. While the higher-earning spouse will receive DRCs for delaying his or her benefits past FRA, the spousal benefit does not increase. Furthermore, the spousal benefit does not increase after the spouse’s FRA; it is never more than one-half of the PIA. If you are going to receive a spousal benefit, do not wait past your age 66, doing so will not increase your benefit!

2) Divorced Spouse Benefits. If you were married for at least 10 years, you are eligible for a spousal benefit based on your ex-spouse’s earnings. You are eligible for this benefit if you are age 62 or older, unmarried, and your own benefit is less than the spousal benefit. A lot of divorced women, who may have spent years out of the workforce raising a family, are unaware of this benefit.

Unlike regular spousal benefits, your ex-spouse does not have to start receiving Social Security benefits for you to be eligible for a benefit as an ex-spouse, as long as you have been divorced for at least two years.The ex-spouse benefit has no impact on the former spouse or on their subsequent spouses. See Social Security: If You Are Divorced.

If you remarry, you are no longer eligible for a benefit from your first marriage, unless your second marriage also ends by divorce, death, or annulment.

A couple of hypothetical scenarios, below. Please note that the gender in these examples is irrelevant. It could be reversed. The same rules also apply for same-sex marriages now.

a) A man is married four times. The first marriage lasted 11 years, the second lasted 10 years, the third lasted 8 years, and his current (fourth) marriage started three years ago. The current spouse is eligible for a spousal benefit. The first two spouses are eligible for an ex-spouse benefit, but the third is not because that marriage lasted less than 10 years. A person can have multiple ex-spouses, and all marriages which lasted 10+ years qualify for an ex-spouse benefit!

b) A woman was married for 27 years to a high-wage earner, and they divorced years ago. She did not work outside of the home and does not have an earnings record to qualify for her own benefit. She is 66 and unmarried, so she would qualify for a benefit based on her ex-spouse’s record.

However, if she were to marry her current partner, she would no longer be eligible for her ex-spousal benefits. If the new spouse was not receiving benefits, she could not claim spousal benefits until he or she filed for benefits. Additionally, if the new partner is not a high wage earner, her “old” benefit based on the ex-spouse may be higher! Some retirees today are actually not remarrying because of the complexity it adds to their retirement and estate planning. And in some cases, there is an actual reduction in benefits by remarrying.

3) Survivor Benefits. If a spouse has already started their Social Security benefits and then passes away, the surviving spouse may continue to receive that amount or their own, whichever is higher. The survivor’s benefit can never be more than what they would receive if the spouse was still alive.

If the deceased spouse had not yet started benefits, the widow or widower can start survivor benefits as early as age 60, but this amount is reduced based on their age (See Chart). Widows or widowers who remarry after they reach age 60 do not have their survivorship eligibility withdrawn or reduced.

One way to look at the survivorship benefit: which ever spouse has the higher earnings history, that benefit will apply for both spouse’s lifetimes. The higher benefit is essentially a joint benefit. For this reason, it may make sense for the higher earner to delay until age 70 to maximize their benefit. If their spouse is younger, is in terrific health, and has a family history of substantial longevity, it may be profitable to think of the benefit in terms of joint lifetimes.

Additionally, Social Security offers a one-time $255 death benefit and also has benefits for survivors who are disabled or have children under age 16 or who are disabled.

The challenge for planning is that none of these three benefits – spousal, ex-spouse, or survivor – are indicated on your Social Security statement. So it is very easy to make a mistake and not apply for a benefit. I like for my clients to send me a copy of their Social Security statements, and I have to say that more than half of the clients I have met don’t understand how these benefits work, even if they are aware that they are eligible.

Social Security Administration: it’s time to fix your statements. You can do better.

2016 Contribution Limits and Medicare Information

Posted On December 7, 2015 By Admin In Retirement Planning /

Inflation was almost non-existent in 2015 due to falling commodity prices. This means that for 2016, most of the IRS contribution limits to retirement accounts are unchanged. Zero inflation creates some unique problems for Social Security and Medicare beneficiaries, which we will explain.

If you are automatically contributing the maximum to your retirement plan, good for you! You need not make any changes for 2016. If your contributions are less than the amounts below, consider increasing your deposits in the new year.

2016 Contribution Limits
Roth and/or Traditional IRA: $5,500 ($6,500 if age 50 or over)
401(k), 403(b), 457: $18,000 ($24,000 if age 50 or over)
SIMPLE IRA: $12,500 ($15,500 if age 50 or over)
SEP IRA: 25% of eligible compensation, up to $53,000
Gift tax annual exclusion: $14,000 per person

Tax brackets and income phaseouts increase slightly for 2016, but there are no material changes. People are still getting used to the new Medicare surtaxes, which include a 3.8% tax on net investment income (unearned income), and a 0.9% tax on wages (earned income). The surtax is applied on income above $200,000 (single), or $250,000 (married filing jointly).

Capital gains tax remains at 15%, with two exceptions. Taxpayers in the 10% and 15% tax brackets pay 0% capital gains, and taxpayers in the 39.6% bracket pay a higher capital gains rate of 20%. For 2016, you will be in the 0% capital gains rate if your taxable income is below $37,650 (single) or $75,330 (married).

For Social Security recipients, the Cost of Living Adjustment (COLA) for 2016 is 0%. We previously had a 0% COLA in 2010 and 2011, and it creates an interesting situation for Medicare participants. Medicare Part A is offered free to beneficiaries over age 65. Medicare Part B requires a monthly premium.

Part B premiums should be going up in 2016, but about 75% of Part B participants will see no change, thanks to Social Security’s “Hold Harmless” provisions. The “Hold Harmless” rule stipulates that if Medicare Part B costs increase faster than Social Security COLAs, beneficiaries will not have their SS benefits decline from the previous year. And since there is no COLA for 2016, any Medicare Part B premium increase would cause SS benefits to negative.

For the past three years, Part B premiums have remained at $104.90 per month. You are eligible for no increase under the “Hold Harmless” rule, if you are having your Part B payments deducted from your Social Security benefit AND you are not subject to increased Medicare premiums under the Income Related Monthly Adjustment Amount (IRMAA).

For most Part B recipients, Medicare premiums are fixed. For higher income participants, IRMAA increases your premium, as follows for 2016:

MAGI $85,000 (single), $170,000 (married): $170.50
MAGI $107,000 (single), $214,000 (married): $243.60
MAGI $160,000 (single), $320,000 (married): $316.70
MAGI $214,000 (single), $428,000 (married): $389.80

If you fall into one of these income categories, above $85,000 (single) or $170,000 (married), you are ineligible for the “Hold Harmless” rule and will have to pay the premiums above, even if this causes your Social Security benefit to decline from 2015.

If you are delaying your Social Security benefits and pay your Part B premiums directly, you are also ineligible for the “Hold Harmless” rule. Finally, if you did not participate in Social Security, for example, teachers in Texas, you would also not be eligible for the “Hold Harmless” rule.

What Should You Expect from Social Security?

Posted On November 2, 2015 By Admin In Retirement Planning /

The big surprise this week was that the new budget approved by Congress and signed by President Obama on Monday abolishes two popular Social Security strategies for married couples. The two strategies that are going away are:

1) File and Suspend. A spouse could file his or her application but immediately suspend receiving any benefits. This would enable the other spouse to be eligible for a spousal benefit, while the first spouse could continue to delay benefits to receive deferred retirement credits until age 70.

2) Restricted Application. Also called the “claim now, claim more later” strategy, this would allow a spouse to restrict their application to just their spousal benefit at age 66, while continuing to defer and grow their own benefit until age 70.

Both of these strategies were ways for married couples to access a smaller spousal benefit, while still deferring their primary benefits until age 70 for maximum growth. And now, these strategies will be gone in 6 months from today. It was estimated that these strategies could provide as much as $50,000 in additional benefits for married couples. Needless to say, people close to retirement who were planning on implementing these strategies feel disappointed and upset.

Some Baby Boomers have done a lousy job of saving for retirement and are going to be heavily reliant on Social Security. According to Fidelity Investments, the average 401(k) balance as of June 30 was $91,100 and their average IRA balance is $96,300. If an investor had both an average IRA and 401(k), they’d still have only $187,400. But those figures don’t tell the true depth of the problem facing our nation, because those “average balances” don’t count the 34% of all employees who have zero saved for retirement. For many retirees, savings or investments are not going to be a significant source of retirement income.

Looking at current beneficiaries, the Social Security Administration notes that 53% of married couples and 74% of single individuals receive at least 50% of their income from Social Security. For 47% of single beneficiaries, Social Security is at least 90% of their retirement income! As of June 2015, the average monthly benefit is only $1,335, so that should give you some idea of how little income many retirees have today.

Our country simply cannot afford to let Social Security fail, and yet the current approach is unsustainable. People think that Social Security is a pension or savings program, but it is not. It is an entitlement program where current taxes go to current beneficiaries. Back in the years when the ratio of contributors to retirees was 5 to 1, there was a surplus of taxes which was saved in the Social Security Trust Fund. Currently, there are only 2.8 workers per beneficiary and since 2010 Social Security benefits paid out have exceeded annual revenue into the program. By 2035, there will be only 2.1 workers per beneficiary, and this demographic change is the primary reason the system cannot work in its current form.

Today’s estimate is that the Trust Fund will be depleted by 2034. The Disability Trust Fund will be depleted next year, in 2016, at which time funds will have to shifted within Social Security to pay for Disability benefits not covered by payroll taxes.

The 2015 Trustees Report calculates that to fix Social Security for the next 75 years, the actuarial deficit is 2.68% of taxable payroll. This represents an unfunded obligation with a present value of $10.7 Trillion. Every year, the Trustee’s Report tells Congress the size of the shortfall, so Congress can take steps to either reduce benefits or raise taxes to correct the problem.

Unfortunately, changing Social Security has become a “hot potato” which no politician wants to touch. For those who have been brave enough to propose a solution, they are attacked with one-liner sound bites, accusing them of “trying to take away your Social Security benefits.” It is so disappointing that our elected officials cannot come together on a solution to ensure the solvency of our primary source of national retirement income.

It was surprising that the two Social Security claiming strategies were abolished so quickly and with such little opposition or discussion. This will save Social Security a small amount, but it’s doubtful this will make any material improvement in the program’s long-term viability.

For workers close to retirement, it seems unlikely that there will be any significant changes to the Social Security system as we know it today. The best thing you can do is to delay benefits from age 62 to age 70, which will result in a 76% increase in benefits. If you live a long time (to your late 80’s or longer), you will end up receiving greater lifetime benefits for having waited, and the guaranteed income from Social Security will decrease the “longevity risk” that you will deplete your portfolio over time.

For younger workers, I think it is highly probable that we will see the Full Retirement Age increase or a change in how the Cost of Living Adjustments are calculated. For high earners, I believe that you will see the current income cap of $118,500 increase significantly or be removed altogether. Another proposal is to apply a Social Security tax to unearned income, such as dividends and capital gains, to prevent business owners from shifting income away from wages in order to avoid taxes.

I think the strongest approach for investors will be to save aggressively so that your nest egg can be the primary source of your retirement income. Then you can consider any Social Security benefits as a bonus.