If you’ve read my book Guide to Social Security…and A Better Retirement you know that postponing Social Security until age 70 makes a great deal of sense for most healthy, married Americans that can do without the income. I mentioned this in my retirement blog in other posts. Of course, there are numerous exceptions and before postponing your benefits you should seek professional guidance. Obviously most haven’t because about two-thirds of current Social Security recipients started taking benefits before their normal retirement age? For the vast majority, this was a mistake and will cost them dearly in retirement as the result will be lower lifetime benefits. Is there a way to reverse this mistake and start again?

Yes! The Social Security Administration allows you to pay back the money you’ve received in Social Security benefits - without interest and without adjustment for inflation - and reapply for higher benefits. All you need to do is complete form 521, “Request for Withdrawal of Application”. You’ll be asked the reason for your action but don’t worry because any answer is acceptable. Let say you started at age 62 and have been drawing $1,000 a month for eights months but now want to reapply. Along with form 521 you’d write a check for $8,000 and then you can reapply when ready. If you filed a tax return during the period, you’ll probably want to file an amended return because chances are you overpaid your taxes and are due to refund. If you wait until age 70 to reapply, your benefits will grow about 8% annually, plus the cost-of-living-adjustments, which means your benefits will more than double from those at age 62. As you’ll learn from reading my Guide to Social Security there are several other good reasons to postpone Social Security if you can possibly afford to do so. In fact, the typical family may be able to add as much as $200,000 to their lifetime retirement income if the primary breadwinner postpones Social Security until age 70.

Let’s look at Fred and Sue, both aged 65. Both worked outside the home and are entitled to $1,500 each in Social Security benefits for the reminder of their lifetime. A quick glance at a Mortality Table shows that Sue is expected to outlive Fred by several years. The Social Security regulations says that one spouse is entitled to what they qualify for based on their own lifetime earnings record or 50% of what the higher earning spouse will receive, whichever is greater. Since Sue is expected to outlive Fred, wouldn’t it be nice if Fred postponed benefits until age 70 so that Sue would get a big raise in Social Security benefits if Fred dies first? Is there a way for Fred to get benefits based on Sue’s lifetime earnings record and then apply at age 70 for higher benefits based on his lifetime earnings record?

Due to a little-known glitch in the Social Security regulations, there is a way. Fred would apply for spousal benefits and receive 50%, or $750, based on Sue’s earnings. He would draw this amount, increased annually for cost of living adjustments, and at age 70 reapply based on his earnings. Presto, he will get substantially higher benefits for postponing and these, too, will be adjusted annually for inflation. At Fred’s death, Sue will be entitled to the greater of the two and her benefits will ratchet up to what Fred was receiving.

The foregoing shows two easy ways to maximize your Social Security benefits by taking advantage of little known glitches in the rules. More and more married couples are realizing that postponing Social Security is the wise move because there is an increasing probability that at least one of them will live well beyond age 90. Since Social Security is a lifetime annuity promised by the U.S. Government with benefits annually adjusted upward for inflation and tax-favored when taken, making them a relative larger part of your retirement income is smart. This is done by postponing until age 70 if possible and taking advantage of the two “loopholes” we’ve discussed. Of course, by using these loopholes you’re adding to the financial woes of the Social Security System. If you find these glitches attractive, act soon before Congress wakes up and closes the gate.

Shelby J. Smith, Ph.D.
April 2008

If you’re getting the same economic news I am, you’re probably nervous. You’re not worried about losing your job because that is something you used to do before you retired. But bad economic news also means retirement worries. To sidetrack a recession our government has printed a lot more money to bail out the bad boys, pay for imported oil and more, and spur demand for everything from apples to zucchini. More money is now chasing the same, or fewer, things to buy. The inflation rocket is set for launch. Rising prices means fixed retirement income will buy less and you’ll have to make adjustments. The double bogey is higher prices with lower interest earnings on your savings [looked at CD rates lately?]. Once the elections are over and your Congressperson is safe for another term, the triple bogey will be higher taxes across the board, including your Social Security benefits, to arrest a ballooning federal deficit. Not to add insult to injury, but if you happen to have your money exposed to risk - say in mutual funds, stocks, real estate, or anything else that waxes and wanes - you could be in for times-two double bogey if not a quadruple bypass. What can you do to recession proof your lifestyle?

Let’s start by dividing your retirement money into three categories:

(1) money you’ll need during the next five years;

(2) money you’ll need during years six through about years 15;

(3) money you’ll not need for at least 15 years.

Each category is special and “the time of planned use” will determine where to put the money. These categories can vary slightly between individuals and I recommend you get professional help from a financial advisor to help you determine what is right for you and your family.

The first category should be kept in “super safe and super liquid” places. The appropriate investments, or savings places, are: cash, money market accounts, bank CDs, money market mutual funds, savings accounts and high quality bonds that mature in less than five years. I know the rate of return will be depressing but if you take risk or invest in longer terms, you could lose part or all of your money. The price of the liquidity is the lower interest rate you’ll suffer. I know you want a higher rate of return along with low risk, but risk and reward travel together. By working with a financial advisor you can get the proper mix of this low-rate, super-safe investments. Your retirement income is now covered for five years.

Category two is the places you need some liquidity - just in case there is an emergency - and tax deferral would be nice also and you’ll want great safety. But, since market cycles can’t be counted on to be less than 10-12 years, we don’t want this category to be invested in investments whose value is determined by markets. At this point in history there are not many options in this category other than fixed and index-linked annuities. While you may not know anything about annuities now, you need to “get educated” by self-learning or working with a financial advisor who understands annuities. By the way, you’ll want to avoid advisors who don’t understand annuities because they’ll recommend against them. To tell the difference, you’ll need to help yourself get the basic knowledge about annuities by reading my “Is Your Annuity Good or Bad?”.

The last category is, unfortunately, where you currently have most of your retirement money: market investments like mutual funds, stocks, long-term bonds, REITs and other investments that Wall Street proclaims, in a very loud voice, that you should own. All these have one thing in common: risk. To offset this risk, you should be prepared to leave your money in these investments for a minimum of ten years and probably fifteen to be cautious. For example, as this is written the last peak in the market indexes (DJIA, S&Ps, etc.) adjusted for inflation was in 2000. We are coming up on ten years and the markets have not yet recovered from the dot.com bust of 2000-2002. How long will the sub-prime and mortgage bust keep the markets depressed? No one knows - they may say they do, but no one can see the future. While you still have some risk with this category, you odds are pretty good for your longer-term retirement money you’ll need fifteen year or more from now.

What was covered above is called an investment ladder for the retirement-minded. It is not sexy or risky, but it does position your money to last you for full retirement. Since each family’s circumstances are different, I strongly recommend that you engage the services of a financial advisor to help you craft a personalized retirement plan. Good luck.

Shelby J. Smith, Ph.D.
April 17, 2008

In this retirement blog we talk about retirement options that can help you get ready for Life’s Longest and Most Expensive Journey. You’ve reviewed your trip plans and recounted the money you’ll have to pay for your most expensive journey ever: retirement. You think you have enough money, but there could be trouble along the way. You’d feel better if you had a guaranteed lifetime income for you and your spouse. After all, your dad got a guaranteed pension for life from Mega Industries when he retired in 1972. Is there a way for you?

Most Americans have a guaranteed lifetime income: Social Security. The bad news is that this paltry pension will probably fall short of what you’ll need for the retirement lifestyle of your dreams. The good news is that it will be paid until you die. Plus, it has spousal benefits that could provide income to your loved one after you’re gone. If you’re already taking Social Security - and 50 million Americans are - you’ll get lifetime cost-of-living raises unless Congress eliminates them, which is not likely. Sadly, most current Social Security recipients started benefits before normal retirement age and will get lower benefits during their lifetime. Starting Social Security at the right time is a major retirement decision: to get it right, read my ‘Guide to Social Security… and A Better Retirement‘.

If you haven’t started your Social Security benefits yet, use SSA Gov. Calculators to estimate how much you’ll get. Let’s say you and your spouse will be entitled to $25,000 annually when you start. What’s more, you’ve estimated that $55,000 a year in today’s dollars will be needed for the lifestyle you’ve planned. Is there a way to “buy” this $30,000 shortfall so you’ll be assured - guaranteed - your yearly income in today’s dollars will always be $55,000 regardless of how long you live?

When facing a risk - in this case outliving your money - you turn to insurance. Insurance companies protect your home, car, life, health and more, so why not your retirement? They manage risk by spreading it across a large number of individuals. This allows them to accurately predict the probability of loss. For example, the odds of your house being totally destroyed by fire are 1 in 500 or being involved in a car crash are 1 in 82. The homeowners and drivers that have no claims subsidize those that do - the same principle works with guaranteeing you a lifetime income. If you live too long someone else will die too soon. Insurance companies know the odds and price their coverage accordingly. Buying insurance for longevity risk, or outliving your retirement money, is both cheap and easy.

Back to the $30,000 more in annual lifetime income you need to augment your Social Security benefits and maintain the $55,000 lifestyle you’ve planned! If you are age 65 and willing to deposit about $500,000 into an annuity, you can receive the $30,000 annually for as long as you or your spouse lives. The best part is that if you and your spouse die too soon, the balance in your account goes to your loved ones. Mortality tables show that for a couple aged 65, the median expected age that one of them will still be alive is 91. Of course, if one or both live beyond this ripe old age they will continue to get the $30,000 every year. The older you are when you lock-in the lifetime income, the less money it takes. The insurance company offers options about when to stop, start or store your income AND you will maintain control of your money in case you change your mind.

You’ll have more peace of mind knowing that regardless of what happens to the economy, your other investments, or how long you and your spouse live, you’ll have an adequate income for a good retirement lifestyle. Don’t move on this opportunity without shopping the market for the best annuity. The smartest way to do this is work with a financial advisor that specializes in annuities. If you want a guaranteed lifetime income, there is a way.

Shelby J. Smith, Ph.D.
April 2008