One of the biggest challenges in retirement is making sure your money will last the rest of your life—and that number is on a steady rise.
According to the National Academy of Social Insurance, when Social Security launched in 1935, life expectancy at age 65 was another 12½ years to 77.5. In 2011, it was 85 years for women and 82.7 years for men. By 2030, it is projected to be 86.1 for women and 84.2 for men.
Life expectancy plays a critical role in Social Security planning, and while it’s tempting to apply for benefits as soon as you become eligible, it can have long-terms economic consequences. With longer life expectancies, the decision to take your benefits at full retirement age may be the better road to travel. But ultimately, this decision should be based on your individual and family circumstances.
I reached out to David Richmond, president of Richmond Brothers in Jackson, Mich., for tips on how boomers can make an informed decision regarding Social Security benefits and how to identify the best time to apply. Here is what he had to say:
Boomer: Should boomers wait until full retirement age before claiming Social Security benefits?
Richmond: First, every year you wait from early retirement (age 62) to age 70 means approximately 6-8% higher checks per year. Finding a guaranteed 6-8% is impossible in today’s economic world, so this seems to be a good deal.
However, just because it seems the best approach is to wait and capture the increase, there are other factors that should be considered, including:
- Do you have other assets on which to draw, thereby allowing your Social Security to continue to grow?
- What is the life expectancy of your family and for you projected over the next decade or two?
- Do you have a spouse (married at least 10 years) with whom you can maximize claiming strategies? There are 81 different claiming strategies if you are married and qualify. You must do your research.
Boomer: If I work part time once I retire, can I continue collecting my benefits?
Richmond: The amount you can earn while receiving Social Security depends on your age. Your earnings in (and after) the month you reach full retirement age will not affect your Social Security benefits. However, your benefits are reduced if your earnings exceed certain limits for the months before you reach your full retirement age. If you are under full retirement age for the entire year:
• You can earn $15,120 gross wages or net self-employment a year and not lose any benefits in 2013.
• Social Security will deduct $1 in benefits for every $2 earned above $15,120 in the year you reach full retirement age:
• You can earn $40,080 gross wages or net self-employment prior to the month you reach full retirement age and not lose any benefits in 2013.
• The government will deduct $1 in benefits for every $3 earned above $40,080. The same earnings limits apply to a spouse or child who works and receives benefits on your record.
Boomer: Is there a formula we should follow to project our retirement income needs with inflation and the standard of living?
Richmond: Factors that determine how much you need in retirement depend upon how much debt you will carry and create in retirement. Do you plan on buying new cars three years? Plan on a second home? Are you going to be a snowbird?
These questions and others will determine your budget needs. Most experts believe you need at least 70% of your pre-retirement income to live at a similar standard of living. We calculate it a bit differently as I don’t like taking a pay-cut to enter into retirement. What is your net income, after taxes and savings (401(k) or other retirement savings)? You probably will not need to continue to save at the same percentage in retirement as when you were saving for retirement, so those can be cut. Is there any debt (like house) that will be paid off in the near term (12-24 months)? If so, you can deduct that unless new debt will be created or is planned to be created. That is the net you need in today’s dollars.
We then look at the economic environment to determine what you can plan to earn in a diversified portfolio. For example, if you have 50% stocks and 50% bonds you need to look at the recent 5-10 years and what you think those assets will do in the next 5-10 years to determine a rate of return to project forward. We have recently used 6% with an inflation rate of 3-3.5%. So the net draw is really only based upon a 2.5-3%- growth rate. Please be sure to deduct any fees or expenses of the funds or advisors you use
Boomer: What factors should be considered for a married couple reaching retirement age?
Richmond: Many factors need to be considered. First, for retirement planning, do you have the asset size to maintain your standard of living, and if not, what changes need to be made prior to retirement? If debt needs to be paid off, this usually takes several years and must be planned for in advance. What are your risk tolerances and how does that change when you are no longer making money but instead are drawing money off the portfolio.
Living in preparation for retirement is very often a different portfolio than one set up to produce income in retirement. Can you live on a 2, 3, or 4% draw? Second, what risks do you have? Health care not covered by any retiree health care, like long term care. Care is running $4-$6,000 per month in many locations in the country. What are your exposures to these risks and what is your answer for dealing with them? Are you self-insuring or buying insurance and if you self-insure, do you have the asset base to pay for the care and continue to allow a spouse to live at their current standard of living? Is your estate planned? Do you have a will, trust, power of attorney or patient advocate? These are items that we recommend all of our clients at least discuss with a qualified attorney prior to retirement. Fourth, how are you preparing your children to inherit what will probably be the largest amount of money they have ever seen? Are they good with money? Do they know what was important to you and why? Are you just giving them the trophies of your life or are you teaching them how to go earn their own trophies?
Boomer: If my spouse passes away and we are both receiving Social Security, can I continue collecting his/her benefits?
Richmond: The answer is you must claim off your own record first, but then you will get a supplement with whatever the benefits are that are due you as a widow(er), to take your Social Security benefit up to the widow’s rate. You do not get both benefits. When your partner dies, you’re probably due a widow’s benefit
• Widows are due between 71% (at age 60) and 100% (at full retirement age) of what the husband was getting before he died.
• You must pay your own retirement benefit first, then supplement it with whatever extra benefits you are due as a widow to take your Social Security benefit up to the widow’s rate.
• You can also get a $255 one-time death benefit if you were living with your husband when he died.
• If you made more money than your partner, he or she might be due a widower’s benefit on your record if you die before he does
Boomer: If I retire at age 62, and then need to return to work full time for financial reasons, what happens to my benefits?
Richmond: You can stop or suspend them, otherwise you will face the deductions below. The answer depends on your age. For benefit purposes, the Social Security Administration (SSA) defines the full or normal retirement age (NRA) as between 66 and 67 for people born in 1943 or later. If you haven’t yet reached your normal retirement age, earning income could reduce your Social Security benefits.
• If you go back to work and you haven't reached your normal retirement age, $1 in benefits will be deducted for every $2 you earn above the annual limit (which is $15,120 in 2013).
• In the calendar year in which you reach your normal retirement age, $1 in benefits will be deducted for every $3 you earn above a higher limit ($40,080 in 2013), but only counting earnings before the month you reach your NRA.
• Starting the month you hit your normal retirement age, your benefits are no longer reduced no matter how much you earn.
Other points: remember Social Security can be included in your income for tax purposes so be sure to plan for that when determining your retirement budge plans.