Should I Wait to Start My Social Security Benefits?

Presented by Lisa Hayes, CFP®, ChFC, AIF®

Deciding when to begin taking your social security retirement benefits can be difficult, as there are many factors to consider. Even if you plan to keep working, social security benefits are available to most workers as early as age 62, but you can also delay collecting up until age 70 or choose any age in between.

The first step in making your decision is to determine your full retirement age (FRA)—the age at which you can collect your full benefits. For workers born between 1943 and 1954, the FRA is 66; for those born later, the FRA gradually increases to age 67. Claiming benefits prior to your FRA can reduce your monthly payment by as much as 30 percent—but you will receive benefits for a longer period. If you postpone claiming benefits beyond your FRA, your social security payment will increase by a certain percentage, depending on your year of birth, until you reach age 70.

It’s important to consider your options carefully. The decision to claim benefits early can result in a lower standard of living for the rest of your life. And claiming later can mean more financial security for your surviving spouse.

The benefit reduction incurred by claiming early is permanent. If you elect to start receiving benefits early, your benefits will still be increased annually by cost-of-living allowances. Despite social security’s annual inflation adjustment, however, your payments may never equal the benefit that you would have received by waiting until your FRA.

What timeline is best for you? You can crunch the numbers using AARP’s Social Security Benefits Calculator, available at www.aarp.org/work/social-security/social-security-benefits-calculator.

How Benefits Differ Based on Starting Age
Source: Social Security Administration. The chart above illustrates how benefits can differ based on the age at which you start receiving social security. It assumes a benefit of $1,000 per month at age 66. Your own benefits will be based on your own work history and may differ.

Questions to ask yourself

From a purely mathematical point of view, most people are better off waiting to start collecting their social security benefits, but there are questions you need to ask yourself.

Do you need the cash? If you need help paying for your basic living expenses, you probably should elect to begin receiving benefits as soon as possible.

How is your health? According to the most recent Social Security Administration (SSA) life expectancy tables, a healthy 62-year-old male has a 50-percent chance of living to age 77. Age 77 is considered the breakeven point at which the reduced amount a person began collecting at age 62 would be the same as the unreduced benefit paid from FRA to age 77.

Many people, however, will live longer than the breakeven age, and it is interesting to note that other life expectancy studies draw different conclusions. According to MetLife, a 62-year-old male has a 72-percent chance of living beyond age 79; a 62-year-old female has an 82-percent chance of living past 79.

In any case, it is important to consider your family’s pattern of longevity. The longer you live, the more you benefit from delaying. If your health and family history predict a long life, you may be better off delaying your benefits until FRA or later.

If you don’t expect to attain a normal life expectancy and you are single, consider taking benefits early. But if you are married, be aware that doing so will reduce your spouse’s survivor benefit.

Will you continue to work? If your working wages are greater than $16,920 in 2017and you selected early benefits, your (and your dependents’) social security benefits will be reduced by $1 for every $2 you earn. If you earn more than $44,880 in the year you reach your FRA, your benefits will be reduced by $1 for every $3 you earn. After that point, working has no effect on the amount of your benefit, although it may impact whether your benefits are taxed.

Although your benefits will be reduced if your earned income exceeds the threshold, this is a temporary reduction. The SSA will recalculate your benefits at your FRA and credit any months where your earnings from work completely offset your monthly benefit. Further, since your benefit includes your highest 35 years of indexed earnings, wages you earned today may replace lower-earning years in the benefit calculation, which could result in higher benefits.

How much do you earn from pensions and other investments? For retirees earning more than $25,000 ($32,000 for married couples), 50 percent of your social security benefits will be taxed. If you earn more than $34,000 ($44,000 for married couples), 85 percent of your social security benefits will be included in your taxable income. To determine your income for this purpose, the IRS looks at wages, self-employment, interest, dividends, and otherwise tax-free municipal bond income. The IRS adds all these to one-half of your social security benefit to determine how much of your benefits will be taxed.

Are you in a high tax bracket? Since social security benefits may be taxed, those in the highest tax brackets and with other sources of income can benefit from delaying social security and thus deferring taxes.

Were you or your spouse born in 1953 or earlier? Normally, if both you and your spouse are living, the SSA will pay you the higher of your own social security retirement benefit or 50 percent of your spouse’s benefit. If you were born in 1953 or earlier and delay benefits until your FRA, however, you will have a choice of either benefit.

One strategy would be for the lower-earning spouse to take reduced benefits after age 62 and for the higher-earning spouse to wait to take a spousal benefit at his or her own FRA. Then, at age 70, the latter would switch to a benefit based on his or her own work history. This would allow you to accrue delayed retirement credits and provide a higher benefit. Because the rules are somewhat complicated, however, be sure to consult your local social security office about your eligibility for this strategy.

Are you a surviving spouse? As a widow or widower at FRA, you are eligible for 100 percent of what your spouse’s benefits would have been if he or she were living. Reduced survivor benefits are available at age 60. Taking a reduced survivor benefit does not affect the benefit based on your own earning history. Thus, you can apply for a survivor benefit and switch to your unreduced retirement benefit at your FRA or later.

Will you spend or save your social security benefits? You may be able to earn more on your reinvested payments than you lose by taking a reduced benefit. We can calculate the after-tax, breakeven interest rate that would be necessary for this strategy to make sense.

Before you can decide when to take your retirement benefits, it’s necessary to check with the SSA to find out which benefits you’re entitled to claim. Verify your earnings history with the SSA’s records and correct any errors. Based on the social security benefit statement and your recent tax records, we can run sophisticated financial models to help you make your decision.

Take your benefits early Wait until your FRA Delay benefits up to age 70
·         If you need the cash flow to pay living expenses

·         If you prefer the flexibility of investing benefits

·         If you’re not in good health and are single

·         If you are still working and earning more than $16,920 (2017)

·         If you want to receive the highest spousal benefit available

·         If you want to increase your monthly benefit

·         If you are very healthy and have a family history of long life expectancies

·         If you want your spouse to receive the highest survivor benefits

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

Lisa Hayes is a financial advisor located at Creative Financial Planning, Inc., 101 South Broadway, South Nyack, NY 10960. She offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. She can be reached at 845-634-6050 or at lisa.hayes@creativeplanners.net.  

© 2016 Commonwealth Financial Network®

Health Savings Accounts: FAQs

Presented by Lisa Hayes, CFP®, ChFC, AIF®

Thanks to their flexibility and tax benefits, health savings accounts (HSAs) are emerging as a popular savings method for covering current out-of-pocket health care costs, as well as qualified medical expenses in retirement. Changes in the health care marketplace, rising medical costs, and the tax advantages that accounts offer make them an attractive planning tool for many individuals covered by high-deductible health plans (HDHPs).

What is an HSA?

An HSA is a tax-advantaged account that can be used to pay for specific qualified medical expenses. Unlike money in flexible spending accounts (FSAs), which are designed to cover current out-of-pocket medical costs, HSA funds never expire and can be used to pay for health care expenses now and in retirement. HSAs may be offered through your employer or purchased directly if you are eligible. Accounts can be established at a bank, insurance company, or IRS-recognized third-party administrator.

Generally, contributions to an HSA are tax-deductible, earnings accumulate tax-deferred, and withdrawals are tax-free as long as they’re used to pay for qualified expenses. If, before you turn 65, you withdraw funds from an HSA that are not used for qualified medical expenses, the withdrawal will be subject to a 20-percent penalty, in addition to income tax. After age 65, distributions not used for qualified medical expenses are no longer subject to the 20-percent penalty.

Who is eligible?

In order to establish an HSA, you must be covered by an eligible HDHP. For 2017, this is defined as a plan for which the family annual deductible minimum is at least $2,600 ($1,300 for an individual), and the annual out-of-pocket costs are limited to $13,100 for family coverage ($6,550 for an individual).[1] Your health care benefit provider can confirm if your plan is considered an HDHP that is eligible for an HSA.

You are generally not eligible to contribute to an HSA if:

  • You are enrolled in Medicare
  • You are claimed as a dependent by another taxpayer 

What are the contribution limits for 2017?

In 2017, the HSA contribution limits are $6,750 for a family account and $3,400 for an individual account.[2] If you are 55 or older, you may make an additional catch-up contribution of $1,000 per tax year. You can contribute to an HSA for the current tax year any time prior to the tax filing date of April 15.

Contributions to an HSA may be made by you, another individual, or your employer. Employer contributions made on your behalf through a cafeteria plan are generally not income taxable to you. If you contribute directly to an HSA, these contributions are considered “above the line deductions,” which means that you can claim them without itemizing deductions on your tax return. Your tax advisor can provide more information on the tax treatment and deductibility of HSA contributions.

What medical expenses are covered?

You can make tax-free withdrawals from an HSA for qualified medical expenses for you, your spouse, or other dependents. Eligible expenses include lab fees, prescription drugs, and dental and vision care, as well as out-of-pocket health insurance deductible costs.

You may also use distributions to pay for certain insurance coverage, including:

  • Long-term care insurance (subject to specific limits and guidelines)
  • COBRA health care continuation coverage
  • Health care coverage while receiving unemployment compensation under federal or state law
  • Medicare and other health care coverage if you are 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap)

Qualified medical expenses are detailed in IRS Publication 502.

Can both spouses contribute to an HSA?

Both spouses can contribute to an HSA if they are covered separately under eligible HDHPs.

Can I take a distribution from an existing individual retirement account (IRA) and contribute this to an HSA?

You are allowed to take a qualified HSA funding distribution from your traditional IRA or Roth IRA into an HSA once in a lifetime. This must be a trustee-to-trustee transfer. The amount is limited to your maximum HSA contribution for the year minus any contributions you have made for the year. (Distributions are not allowed for SEP IRAs or SIMPLE IRAs.) A benefit of doing this is that there are no required minimum distributions beginning at age 70½ from an HSA. Plus, withdrawals can be taken income tax-free when used for qualified medical expenses.

What other planning considerations should I be aware of?

Since there are no restrictions on when you need to distribute HSA funds, you may wish to pay out-of-pocket health care costs from your current income and allow the HSA to continue to grow tax-deferred, reserving those funds to cover medical care in retirement.

HSAs offer a number of other advantages, including the ability to take the account with you if you leave your employer. You can also name a beneficiary to inherit the account in the event of your death. It’s important to note that your spouse can step into your role upon your death and the account will remain an HSA. If you name a nonspouse beneficiary, however, the account will no longer be considered an HSA and the inherited amount will be treated as taxable income.

Additional information on HSAs is available in IRS Publication 969. 

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

Lisa Hayes is a financial advisor located at Creative Financial Planning, Inc., 101 South Broadway, South Nyack, NY 10960. She offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. She can be reached at 845-634-6050 or at lisa.hayes@creativeplanners.net.  

© 2017 Commonwealth Financial Network®

[1] Limits are indexed annually.

[2] Limits are indexed annually.

What You Need to Know About TOD Accounts

Presented by Lisa Hayes, CFP®, ChFC, AIF®

A relatively new option for clients, transfer on death (TOD) accounts offer a unique beneficiary feature. Unlike similar non-retirement accounts, TOD accounts allow investors’ assets to transfer directly to their designated beneficiaries when they pass away, circumventing the probate court process. The TOD registration, which is available for both individual and joint accounts, not only streamlines the account disbursement process, it also lets account holders rest assured that their beneficiaries will receive the intended amount of assets.

TOD features

Streamlined administration. With a traditional brokerage account, the owner’s assets go to the estate upon his or her death, and distribution is delayed until the probate process has been completed By contrast, funds held in TOD accounts are considered non-probate assets and pass straight to the designated beneficiaries. Once a TOD account has been established, neither a court appointment nor an account holder’s will can supersede the Supplemental Transfer on Death Registration and Beneficiary Designation Form, which designates the account’s beneficiaries. If necessary, powers of attorney may be added to TOD accounts, but they cannot establish the account or update the beneficiary designation.

TOD accounts have no contribution limits and can hold all types of positions. When the owner dies, all trading in the account must cease to prevent taxable events to the estate. The TOD account assets can, however, be transferred to the beneficiaries’ accounts, and the beneficiaries may then sell the positions, if desired. In order for a beneficiary to receive assets from a TOD account, he or she must have a brokerage account open at Commonwealth.

Tip: Before opening a TOD account, consider the location of your beneficiaries. For example, if a beneficiary lives out of the country, Commonwealth will need to plan accordingly.

Unlimited number of beneficiaries. TOD account holders can designate an unlimited number of beneficiaries, each of whom will be considered a primary beneficiary. Contingent beneficiaries may be added as well. The TOD account owner can choose, among other entities, his or her estate, individuals (including minors), trusts, and churches, as beneficiaries.

You retain control. As the account owner, you continue to manage the account assets as you wish. Your beneficiaries have no rights to the account while you are living. If necessary, you can revise your beneficiary designations.

Keep in mind

TOD accounts are not for everyone. It’s important to consider how establishing this type of account will affect your overall estate plan and the provisions of your revocable trust or will.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

Lisa Hayes is a financial advisor located at Creative Financial Planning, Inc., 101 South Broadway, South Nyack, NY 10960. She offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. She can be reached at 845-634-6050 or at lisa.hayes@creativeplanners.net. 

© 2013 Commonwealth Financial Network®