Money Matters

Consider these 5 tips to help get the most out of your money

September 1, 2013 

Holly Nicholson, who writes the Money Matters column in Sunday’s Work & Money section, answers your five most frequently asked questions about retirement planning and saving.

Q. At what age should my spouse and I take Social Security?

The age a person begins Social Security payments is very important and will affect benefits for their lifetime and, if married, perhaps those of their spouse as well. Factors that should be considered when making this decision include but are not limited to the following: anticipated life expectancy, need for income, planned earned income, income from other sources, time value of money and concern about running out of money in your lifetime. If married, the life expectancy of the spouse, disparities in age, which of you is the higher wage earner and concern of running out of money in your joint lifetimes also need to be considered.

A person’s primary insurance amount is key to determining the age to start receiving benefits and the impact this will have on current and future monthly benefits. The primary insurance amount is the amount a person would receive when they apply for Social Security at their full retirement age. Full retirement age for those born in years 1943 to 1954 is 66. If the benefit is taken early at age 62, it will be 25 percent lower than at age 66.

The actuaries have worked the numbers so if you live until age 82, you will receive the same amount of total benefits as if you had waited until age 66. If you die before age 82, you were smart to begin benefits early. You would have been smarter to wait until full retirement age the longer you live beyond this gender-neutral life expectancy projected by the actuaries. When annual cost of living adjustments are taken into account, this “break-even” age is reduced to around 76. If taking benefits early allows you to either invest this money or leave other funds untouched and your rate of return is 4 percent or more, the break-even age is somewhere between 76 and 82.

A spouse who has little or no lifetime earnings record can receive benefits based on their spouse’s work history. A spouse will receive any benefit based on their own work record, and if that is less than the spousal benefit, an amount will be added to bring the total up to the spousal benefit. Spousal benefits do not earn delayed credits, so if the spousal benefit is greater than the spouse’s own benefit, the spouse would not gain anything by waiting until after full retirement age to apply.

A spousal benefit applied for at full retirement age will be 50 percent of the higher wage earner spouse’s primary insurance amount. If the spousal benefit is applied for at age 62, the benefit will be 35 percent of the other spouse’s PIA. If between the ages of 62 and 66, the percentage will be prorated. When one spouse dies, the survivor will receive 100 percent of the deceased spouse’s benefit or their own, whichever is higher.

Q. How much can I work without my earnings interfering with Social Security?

For every $2 you make over the earnings limit, which in 2013 is $15,120, $1 in benefits will be forfeited. The earnings test is different for the year in which you reach full retirement age. Age 66 in 2013 is full retirement age. If you turn 66 in 2013, the early benefit will be reduced by $1 for each $3 you earn above $40,080 until full retirement age is reached. Once you reach full retirement age, the earnings limit test disappears and you can make as much money as you want with no reduction in benefits.

Q. Do I need to maintain any life insurance once retired?

The two main reasons you may need life insurance in retirement are income replacement and liquidity for estate taxes. If you have a pension that will be drastically reduced or be eliminated upon your death and have a spouse or dependents, you probably need life insurance. If you have a high net worth and are concerned about estate taxes, life insurance may be needed.

Q. How can I know that I will not outlive my money?

Use an online service or hire an adviser to run a retirement projection using conservative assumptions of rates of return and inflation. Be honest about your intended expenses in retirement, and don’t leave out major periodic or one-time expenses such as home maintenance, replacement vehicles or weddings. Update the projection annually and see if you are on track. If not, and if you are already retired, determine whether you are spending more than anticipated and figure out where to cut back. If your spending is as anticipated, your rate of return may be lower than anticipated, and an investment review may be in order as well as trimming expenses. If you are in the accumulation phase and not on track, review your savings, rate of return and make adjustments as necessary.

Q. Once I begin withdrawing from my investment accounts, from which type of account should I begin withdrawals?

Many people assume that tapping into their IRAs, especially Roth IRAs, should be the last source from which to obtain retirement income. Both types of accounts grow tax deferred, with the Roth having the additional advantage of tax-free withdrawals, so there is some logic to leaving these alone while spending down after-tax investment accounts.

The problem with doing this is the possibility of placing yourself in a future high-income tax bracket. You may enjoy several years in a low tax bracket while spending down after-tax accounts only to find yourself in a very high tax bracket when you begin taking large distributions from pre-tax accounts. The more you take out, the more tax you owe. If that is your only source of funds, you’ll compound the problem, because you will need to take out more money to pay the tax and then owe tax on that money too.

High incomes can also impact your Medicare Part B premiums and Part D prescription-drug coverage premiums. In 2013, most people will pay $104.90 per month for Part B, but those with high incomes in 2011 (there is a two year look-back period) may pay monthly premiums from $146.90 to $335.70 depending on 2011 income. These same people will also pay a monthly surcharge of $11.60 to $66.40 for Part D prescription-drug coverage. Work with your tax or financial adviser to “dove-tail” withdrawals from pre- and post-tax accounts so you can remain in a relatively low tax bracket throughout retirement.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624

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