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3 Costly Mistakes Retirees Make about Social Security

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By Steve Davis, CERTIFIED FINANCIAL PLANNER™

Day of Retirement Reckoning

Mansfield Financial PlannerImagine for a moment: It’s 10 o’clock on a beautiful Monday morning and you’re sitting at your kitchen table with a freshly poured cup of coffee. Today is your 62nd birthday and you’ve taken the day off from work because you have an important decision to make.
The sun is shining across the table and there before you are two papers: One is from Social Security and the other is from your 401k. Here’s the deal: Social security is offering you a lifetime monthly income, but if you accept their offer today, you’ll receive up to 30% less income each month than if you waited until your full retirement age. Will it be enough? Of course, your social security income will be supplemented by the amount of money you’ve saved over your entire working career. Your total account balance is listed on the 401k statement. How long will your money last?
When to retire is a highly personal decision. At some point, each one of us will need to sit down and work through a lot of different considerations in order to make a confident decision about how and when to retire. Arriving at good answers will require making assumptions about how long you expect to live, how much you’ll need to pay toward rising health care costs, and what you might experience in terms of inflation and market volatility. Unfortunately, there are no “do-overs” when it comes to retirement so getting it right the first time is important.

Mistake #1: Rushing to collect Social Security and regretting the permanently reduced benefits paid over your lifetime
Choosing when to take Social Security is one of the most important financial decisions you will make in your lifetime. For those born between 1943 and 1954, full retirement benefits start at age 66, but you could begin taking reduced benefits as early as age 62. For many, this is very tempting and the decision to start collecting is sometimes made without adequate thought and analysis. Remember, collecting early means a permanent reduction in monthly benefits. And, for every month you wait, your benefits will get progressively larger, up to age 70.  There are three basic alternatives—delay retirement until age 70 and receive more than 100% of full retirement benefits, receive reduced benefits beginning at age 62, or take full benefits at the normal retirement age. The question that needs to be answered is, “which alternative is best”?

For some, there is no decision to make – they’re unemployed or have health problems and don’t have the flexibility to defer Social Security benefits because they need the income now. But for those who do have the flexibility, the question comes down to a trade-off between receiving permanently reduced monthly benefits versus receiving those benefits early and over a longer number of years.
Some retirees use a very simplistic analysis that merely looks at which alternative gives them the most cumulative benefits over their expected lifetime. It really comes down to whether a retiree thinks they will live longer than their statistical life expectancy. Unfortunately, the decision is usually more complicated than just estimating your longevity. A thorough analysis will also take anticipated earnings in your tax-deferred retirement savings into consideration as well. And don’t forget about working during retirement because it has an impact too.

Mistake #2: Getting whacked by the Social Security Earnings Limit
Think about this: You’ve started collecting benefits early and because the monthly payments are permanently reduced, you decide to work a part-time job. The only problem is that Social Security will take back $1 of benefit for every $2 you earn over $14,640 (this year’s Earnings Limit). That, my friends is a serious haircut! In other words, once you reach the Earnings Limit, your employment pay effectively gets cut in half. It gets better once you reach full retirement age because you can earn as much as you like without incurring a reduction in benefits, but the rules during that year are especially complicated and can often cause big problems. In that one year, up until the month you reach full retirement age, Social Security will deduct $1 from your benefit payments for every $3 you earn above $38,880.
Mistake #3: Not knowing how your decisions affect your spouse’s benefits
For married couples, choosing when to take Social Security can permanently affect the other spouse’s lifetime income. This is especially important for non-working spouses who are generally eligible to receive one-half of their spouse’s benefit. Think about a scenario where a husband worked while his wife stayed at home. If he starts collecting Social Security early, not only will he be reducing his benefits, he will likely be cutting his wife’s lifetime monthly benefits too. If her life expectancy is longer than her husband’s, these reduced benefits could have a major impact in the likelihood of her having a comfortable retirement. Married couples often find it beneficial for the spouse with the lower Social Security benefit to begin taking benefits early, while the delaying the other spouse’s benefits as long as possible. Then, should the higher earning spouse die first, the lower-benefit spouse would see her smaller benefit drop off in exchange for a much higher monthly income based on her husband’s benefits.
Conclusion:
Enjoy that cup of coffee while the sun shines across your table. If you’re worried, confused or even scared about making retirement mistakes, seek out a CERTIFIED FINANCIAL PLANNER ™ for help in evaluating Social Security and how to coordinate these benefits with your retirement income strategies.

 

This article was written by Steve Davis and first appeared in the Mansfield Patch

 

5 Estate Planning Mistakes You Could Be Making Right Now

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Estate Planning — Not for the Rich Only

By Steve Davis, CERTIFIED FINANCIAL PLANNER™

A wise man once said, “If you don’t die before retirement chances are pretty good you’ll die sometime afterwards”.  And while we all know and understand that death is a sad fact of life, we sometimes put off making decisions that will help our loved ones after we’re gone.

Steve Jobs

When Steve Jobs died last year, many financial pundits wondered whether his advisors had helped him set up an effective estate plan.  Given the fact that Jobs famously resisted the advice of his doctors for several months while he explored other alternatives, some wondered if he might have acted similarly when it came to his estate planning.  With a net worth estimated at nearly $7 billion, the stakes were large — his estate could have been hit with nearly $2.5 billion dollars in taxes.  Further, Jobs was known as a very private person and it was quite possible that all his affairs could have been played out in detail at the probate courts for all the world to see.  It turns out that Jobs plans were intact and it appears this helped his estate avoid many taxes, ensured his privacy and made his intentions clear to his surviving family and friends.  And while we might not be able to relate to Steve Jobs at all, the reality is that it would be a major mistake to think that estate planning is just for the rich and famous.

Here are five mistakes you may be making now:

1.  You keep putting it off.  If you postpone planning for your demise until it is too late, you run the risk that your intended beneficiaries — those you love the most — may not receive what you would want them to receive whether due to extra administration costs, unnecessary taxes or squabbling among your heirs.

2.  You have the wrong guardian listed for your children:  A will isn’t just about how to distribute your assets after you die.  It’s also about who you want to care for your minor children.  Some estimates suggest that almost two-thirds of Americans don’t have a will.  The main reason people put off creating one is because they find it difficult to select a guardian for their children.  Sometimes it’s because you can’t bear to think of the possibility of leaving your children orphaned.  At other times it’s because you and your spouse don’t agree on whom to ask.  And sometimes it’s because you just don’t know how to ask a friend or family member to consider taking on the responsibility.  These are all valid concerns, but if you don’t decide now, you’re just passing the buck to someone else who will have to make the decision later on without your input or wishes being known.  If you die intestate – without a will – the court will decide who will care for kids at a hearing.   And even if you have a will, it’s important to review it to make sure that it reflects your current situation and wishes.  Here’s what I mean:

  • Changing situation:  Actor Heath Ledger didn’t update his will after the birth of his daughter so when he died, his assets went to his dad and led to a lot of family disharmony when some of Ledger’s family disagreed about how the estate should be divided.
  • Changing circumstances:  There are times when it might be appropriate to amend your will to choose a different guardian.  Perhaps your guardian moved across the country to take a new job and you don’t want to ask her to relocate nor do you want your children to resettle far from their grandparents and other support networks.

3.  You have the wrong beneficiary on your IRA, 401(k) or life insurance policy:  Single parents and divorced couples are particularly susceptible to this mistake.  Many times single parents will name grandparents when their children are minors, but then forget to update the forms when the children reach the age of majority.  Couples who divorce sometimes never change the beneficiary designation and because the beneficiary information usually isn’t listed on the quarterly performance statements from the 401k or IRA it’s easy to forget.  And even if you remember to update the beneficiary in your will, this won’t help when it comes to your IRA, 401k or life insurance policies because the beneficiary form usually trumps the will.

 

Other people who need to particularly vigilant in watching out for this mistake are frequent job changers.  It used to be that a person would join an employer and work there until it was time to retire.  A recent government study, however, showed that people are now changing jobs every 4.1 years.  If you haven’t consolidated all your old 401k plans, you may want to read “Honey, I Lost my 401k Plan”:

When you update your beneficiary forms be sure to name both primary and contingent (secondary) beneficiaries.  Also, don’t list your estate as beneficiary because that could cause your heirs to lose important tax benefits.

4.  Your Health Care Proxy doesn’t reflect your wishes:  The state of Massachusetts has a simple two page health care proxy form that allows you to name someone you know and trust to act as your agent and make health care decisions for you if you aren’t physically or mentally able to do so yourself.  Completing the form is one thing, but actually talking with your agent is altogether another thing.  As difficult as it might be, imagine that you can no longer make decisions about your care because you’ve survived a serious accident or because you’ve suffered through a chronic illness that has progressed.  Do you want pain relief if it means you won’t be alert?  Do you think there could be circumstances where you would NOT want medical treatment to keep you alive?  Your choices about care at difficult times like this may be very different from the choices even your own family might make.  Be sure to spend some thoughtful time sharing your beliefs, values and choices for medical treatment before you become seriously ill.

5.  You don’t have enough life insurance:   How would your family survive if you only earned an income for the next two or three years?  Many families in recent years have learned what it’s like to live on a reduced income.  Two years ago, nearly 9 out of every 100 workers in Massachusetts were unemployed.  Families were struggling financially and foreclosures were at all time highs.  Thankfully, employment is improving and families are getting back on their feet.  But what if the loss of income wasn’t temporary due to unemployment, but was permanent due to death.  Sure, your company might give you a group insurance policy in the amount of  two or three times your annual salary, but what happens after that?  Check your coverage and if you don’t have enough, get more today.