Social Security Statements Return! …but not for everyone

Although the Social Security Administration recently announced that they will resume mailing estimated benefits statements, that only applies to certain individuals. Most individuals will not receive a statement every year.  Watch this short video to find out when you can expect to receive your next Social Security statement.

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New Social Security Services on the Internet

Over the past couple of years the Social Security Administration has made great strides to catching up to the rest of the world in terms of technology.

Prior to May 1, 2012 there were not very many services available online.  For example, if you wanted to see a statement you would be able to log on and request it…but it could take weeks to arrive.  That has all changed now!

If you go to http://www.ssa.gov/myaccount/   it is fairly easy to set up an account and do a number of things including:

  • Changing your address and phone number
  • Starting or changing a direct deposit
  • Checking your payment history
  • Print a Social Security statement
  • Print a Benefits Verification Letter (effective January 2013!)

Last year the Social Security representatives processed 9 million benefit verification letters either in person or on the phone.  Adding a service like this to the list of online conveniences should significantly reduce the workload of the Social Security representatives which subsequently should reduce your time spend on hold when nothing but a phone call will do.

If you have any questions about Social Security planning or other financial planning topic please don’t hesitate to find us online at www.carrollinvestmentmanagement.com or send us an email at devin@carrollinvestmentmanagement.com.

 

The opinion voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

 

The $115 Billion Social Security Cut

Throughout the remainder of 2013 there will be much discussion in Washington over how to reduce spending and lower the deficit.  There are many proposals but it appears that your Social Security Benefits may not be immune to cuts as part of the changes in spending laws.

When most people think of a cut, they automatically think of an immediate decrease in benefits.  It’s not likely that’s the way this cut would work.  Instead, the method used to calculate cost of living increases would change which would probably result in a lower annual increase to your benefit amount.   While that is not a cut now, the end result is that your benefit will probably be lower in 10 years than it would have been if the current calculation was continued.  To many, that still sounds like a cut.

As it stands now, Social Security cost of living increases are calculated by the Bureau of Labor Statistics using a measure of inflation know as CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers).  This index was meant to measure the prices of goods by gathering data from retailers.  If prices were up, the CPI-W would increase and the following year there would be an increase in the amount of Social Security Benefits.  In most years there is an increase but in some years where inflation is low, such as 2010 & 2011, there were no adjustments to the benefits amounts.

The decrease to future Social Security benefits would occur by changing the method of measuring inflation.  Instead of using the CPI-W, it could be replaced with a relatively new measurement call the C-CPI-U (Chained Consumer Price Index for all Urban Consumers).  This has also widely been referred to as simply “Chained CPI.”  Instead of simply measuring price changes, this measurement of inflation assumes that consumers will change their purchase habits when prices increase—simply buying less, for example, or switching to store brands from the more expensive brands.

So how much of a decrease in future benefits are we talking about?  The Congressional Budget Office has forecasted that using Chained CPI would cause Social Security Benefits to increase by a quarter of a percentage (0.25%) less each year than they would if using the CPI-W.  The Congressional Budget office has further forecast that benefits would only drop by $1.4 billion in the first year of using Chained CPI from what they would be if CPI-W was used.   But by the tenth year, payments would be almost $22 billion less each year that what they would be if CPI-W would have been used.  If you add up the numbers, this change would reduce Social Security spending by approximately $115 billion dollars over the next ten years.

Source: http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/120xx/doc12085/03-10-reducingthedeficit.pdf 

Those are huge numbers!  But how will this cut impact an average recipient of Social Security?  If your monthly benefit is $2,000 today and we assume an average inflation of 2% per year you could expect to see a monthly benefit amount of $2,438 in 10 years.  If we reduce the cost of living adjustment to 1.75% with Chained CPI, the monthly benefit would be $2,379 in 10 years.  That’s $708 less per year.  If you take those same calculations out to 25 years you would see a difference of $2,352 less per year.  For some, that change wouldn’t be too noticeable.  But for the 33% of Americans who rely on Social Security for 90% of their income it’s the difference in being able to pay a water bill, groceries or some other essential need.

 

The opinion voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

When Should You File For Social Security?

The number one question asked about Social Security is “when should I file?” Mostly this is looked at as a  multiple choice question with only 3 possible answers. Should it be 62, 66 or 70?

It could be none of the above.

In general, how much you will receive in lifetime benefits depends on:

  • your earnings history
  • how & when you elect
  • how long you live

You can’t control how long you live and you can’t go back and change your earnings history so there is only one thing that you really control.  That is how and when you elect benefits.

Before we get too far let’s review the chart of filing ages and reductions or increases in benefits.  For workers born between 1943 and 1954 the Full Retirement Age is 66.  That is the age at which you can get the full Primary Insurance Amount (PIA).If you elect prior to that age you will take a reduced payment amount. If you file later than age 66 your PIA will grow by 8% for every year you wait up until age 70.

 

Traditional “when to file” calculations” would use the data above and create a “break even” analysis. This analysis would show you the age at which you would catch up to the other election ages in the total amount of benefits paid. If you think you would live longer than the “break-even” age, you should elect at a later time. The chart illustrates that 77 is the “break even” age for filing at 62 as opposed to filing at 66. If you live beyond 77 it would have been better off to have filed at 66. If you live beyond 82 it would have been better to have filed at 70.

The BIG problem with using this strategy is that it does not consider the two benefits that married couples have available to them.

• Spousal Benefits

• Survivor Benefits

These benefits are some of the most generous benefits that Social Security provides. As a result they turn the question of, “When should I file?” into the complex decision of “When and how should I file?”

When and how you should file.

Unfortunately, there is no single “best” age or easy answer. There are multiple things that must be considered that may impact you such as spousal benefits, survivor benefits and switching strategies.

Let’s take a brief look at each of these:

Spousal Benefits

As a spouse, you can claim a Social Security benefit based on your own earnings record, or you can collect a spousal benefit that will provide you 50% of the amount of your spouse’s Social Security benefit as calculated at their full retirement age (assuming that you are also at full retirement age).

Survivor Benefits

The benefit available to the surviving spouse is simply the highest benefit that was being paid at death. If the husband had the highest benefit that would become the wife’s new benefit amount and her old benefit would simply go away or vice-versa.

• Switching Strategies

A “switch strategy” allows a spouse to switch from a spousal benefit to their own or vice versa. This type of strategy is usually used to delay the benefits of at least one spouse to allow the delayed retirement credits to build. There are two basic switch strategies:

  •  File & Suspend:

Spousal benefits are not available until the primary earner has filed for his or her benefits. The Senior Citizens’ Freedom to Work Act of 2000 allows a worker to earn delayed retirement credits after filing for benefits if he requests that he not receive benefits during a given period. As a result, a higher-earning spouse can file for benefits, then immediately suspend the benefit, and continue to earn delayed credits. In the process, he will have made his spouse eligible for spousal benefits under his earnings record.

  • Restricting the application

Once you reach Normal Retirement Age, you have the option to restrict your application to exclude certain benefits. If a benefit is excluded, it will continue to build delayed retirement credits. As an example, a higher-earning spouse, who may want to wait until age 70 to collect his own benefit may be able to file at 66 for only the benefit available under his spouse’s work record, while still allowing his own benefit to build delayed retirement credits. At age 70, he would switch to his own benefit. Alternatively, a lower earning spouse could restrict his or her application to only spousal benefits while continuing to claim delayed credits on his or her own earnings record.

Certain combinations of the two switching techniques are also allowed. For example, the higher earner could file and suspend to make a spousal benefit available to the secondary earner, who could then file a restricted application for only spousal benefits. This would allow both earners to earn delayed retirement credits on their own earnings records while one spouse still collects benefits now.

With these moving parts you can see that this is a very complicated decision. But I often tell people that although this decision is complex you should have a basic understanding of the “whys” in doing this planning even if you intend to hire a planner. It’s much like driving my car. I understand that if I press the accelerator I will begin to move or move faster. Understanding the intricacies of the internal combustion engine is not necessary to perform this basic action. I understand that if I turn the steering wheel my automobile will change direction. However I do not understand caster angles, steering linkages or the variation of Ackermann steering geometry that my vehicle uses. In short, I have enough knowledge to keep me safe and allow me to perform the basic operations that I need. But when it’s time to dig deeper, I go to a professional.

How to find someone to help you.

So where do you turn for advice? One place to start would be to find a financial planner that is knowledgeable about Social Security benefits. You can go to www.socialsecuritytiming.com** and look at their directory or just call a local financial planner to see what they know.  Here are a few qualifying questions to ask them:

• “How much of a cut in benefits will I take if I apply early instead of the normal retirement age?”

• “If I decide to go back to work after starting retirement, how much can I earn before my benefits are reduced? Does that apply prior to age 66 or after?”

• “What is provisional income?”

• “How will it impact my spouse if I elect now and then die?”

• “What is the file and suspend strategy?”

• “What is a restricted application?”

If they make it through these questions without too much bumbling around they may know more about Social Security than the average financial advisor. A word of caution here, expect to pay for this. If they offer Social Security planning for “free” there will most likely be an investment pitch tied to it.

If you have any questions about this or other financial planning topics please don’t hesitate to contact me at devin@carrollinvestmentmanagment.com or find me online at http://www.carrollinvestmentmanagment.com

 

*Income of the Population 55 and Older, 2008—Social Security Administration

**Social Security Timing is not affiliated with or endorsed by Carroll Investment Management or LPL Financial.

 

Chart 2: This illustration assumes the following benefits:

Age 62 $1,500 per month to age 91

Age 66 $2,000 per month to age 91

Age 70 $2,640 per month to age 91

 

The opinion voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

 

 

 

 

 

High-Income Individuals Face New Medicare Taxes in 2013

Two new Medicare-related taxes take effect in 2013: an additional 0.9% payroll tax on high-wage earners, and a 3.8% tax on the unearned income of high-income individuals. Here’s what you need to know.

New additional Medicare payroll tax

Beginning in 2013, the employee share of the hospital insurance (HI), or Medicare, portion of the Federal Insurance Contributions Act (FICA) payroll tax will increase by 0.9% (from 1.45% to 2.35%) for high-wage earners. Will you be affected? The tax applies to the extent that your wages exceed $200,000 ($250,000 in combined wages if you’re married and file a joint federal income tax return, $125,000 if you’re married and file separately). So, in 2013, a single individual with wages of $230,000 will owe HI tax at a rate of 1.45% on the first $200,000 of wages, and HI tax at a rate of 2.35% on the remaining $30,000 of wages for the year.

The additional tax doesn’t apply to the employer portion of the FICA payroll tax, but your employer is responsible for withholding your portion of the tax–the additional 0.9% will be withheld on any wages you receive over $200,000. Your employer won’t account for any wages earned by your spouse, so if you are married, you may owe more (or less) tax than the amount that’s withheld. In that case, you will pay any additional tax due (or claim a refund for taxes overpaid) on your federal income tax return for the year.

If you’re self-employed, the additional 0.9% tax applies to self-employment income that exceeds the dollar amounts above (reduced, though, by any wages subject to FICA tax). If you’re self-employed, you won’t be able to deduct any portion of the additional tax.

New tax on investment income

Beginning in 2013, a new 3.8% Medicare contribution tax will generally be imposed on the unearned income of high-income individuals. The tax is equal to 3.8% of the lesser of:

  • Your net investment income
  • The amount of your modified adjusted gross income (basically, your adjusted gross income increased by an amount associated with any foreign earned income exclusion) that exceeds $200,000 ($250,000 if married filing a joint federal income tax return, $125,000 if married filing a separate return)

So, if you’re single and have modified adjusted gross income of $250,000, consisting of $150,000 in earned income and $100,000 in net investment income, the 3.8% Medicare contribution tax will only apply to $50,000 of your investment income.

What is “net investment income”?

Net investment income generally includes all net income (income less any allowable associated deductions) from interest, dividends, capital gains, annuities, royalties, and rents. It also includes income from any business that’s considered a passive activity, or any business that trades financial instruments or commodities.

Net investment income does not include interest on tax-exempt bonds, or any gain from the sale of a principal residence that is excluded from income. Distributions you take from a qualified retirement plan, IRA, IRC Section 457(b) deferred compensation plan, or IRC Section 403(b) retirement plan are also not included in the definition of net investment income.

Both taxes can apply

If you have high wages and investment income, you could be subject to both the 0.9% additional HI payroll tax and the 3.8% Medicare contribution tax on your investment income. So, you’ll want to be sure to account for them in your overall tax plan.

 

This article was prepared for the representative’s use.

Age-Sensitive Dates in Social Security

There are multiple age-sensitive dates to remember when considering your options with Social Security.  Here is a convenient reference to help you keep track.

 

Ages up to 18 —Child can receive benefits for a deceased parent or for a parent who is retired and eligible for Social Security.

 

Age 60–Survivor benefits are available with a reduction.  This is also a great age for you and your financial advisor to begin the discussion about your filing strategy.

Age 61 Years & 9 Months—Earliest date on which filing for benefits may be made on your own record, your spouse’s record or your ex-spouse’s record.

Age 64 Years & 9 Months—File for Medicare!

Age 66—Full Retirement Age for those born 1943-1954. 

Age 66-67—Full Retirement Age for those born in 1955-1959 is 66 years plus 2 months for every year over 1954.

Age 67– Full Retirement Age for those born in 1960 or later. 

Age 70—Maximum benefit is reached.

 

Source: SSA.gov