Nov 09

I don’t know where I first heard this expression, it might has been a movie line, or it might have been uttered in response to a very bad business proposal. The full line is, “if you’re going to screw me, the least you could do is take me to dinner and a movie first.” Vulgar, yes, but it’s my reaction to the latest budget congress just passed which impacts my projected social security benefit. I just lost over $63K in future benefits.

Let me take a step back and explain. The Social Security rules are so convoluted that Professor Laurence Kotlikoff has both a book, Get What’s Yours — The Secrets to Maxing Out Your Social Security Benefits, as well as a web site, to help people navigate this ridiculous minefield. I always knew a bit about the social security strategies, but didn’t give it much thought until recently, as my wife will turn 60 in 2016. Me, I’m 53, and still have some time, but I figured it’s not too early to understand what benefits we can expect. Larry’s book offers strategies for most combinations of people and relationships you can imagine. Divorced couples, older retirees with children under 18, it’s really a myriad of possibilities.


My situation was relatively simple. My wife has nearly 7 years on me, and the strategy that made the most sense was for her to get her maximum benefit at 70, and then when I hit my full retirement age (67), I’d have the ability to apply for just the “spousal benefit.” My wife’s benefit at 70 would be about $3500, therefore I’d have been eligible for $1750/mo while I waited 3 more years to take the benefit based on my own work record. 3 years of this spousal benefit would have totaled $63,000. The new rules, among other things, prohibit this strategy, along with any strategies that included filing and suspending.

This strategy that impacted me was not used very often, it seems. The Times’ story that discussed it was titled “Rarely Used Social Security Loopholes, Worth Thousands of Dollars, Closed.” Perhaps that headline really summed it up. There wasn’t going to be a groundswell of protest for a strategy relatively few people used. On other sites, the comment to this news story contained remarks like, “I’m glad to see this strategy used by the 1%ers done away with. Maybe it will leave more money in the social security trust fund so I’ll actually get my benefit.”

I’m trying to keep an open mind here. On one hand, $63K. On the other hand, a strategy that was probably used only by the well-informed, which may very well skew to the top 10% or even the 1%. The spousal benefit was useful for any couple to use as a way of collecting a benefit while allowing one person’s own benefit to grow 8%/yr for the time between full retirement age and 70. Those who knew about this strategy and planned for it, need to make a bit of a course correction.

Those are the general details. I’m sorry this strategy wasn’t better known and used by more people. We’ll get by ok without this extra money, but I can’t help but wonder what changes are coming next. Will there be any benefit left by the time I’m old enough to collect?

written by Joe \\ tags: ,

Aug 10

It’s already election season, and we have 15 months to look forward to our politicians each jockeying for position, name calling, debating, all the way to the final two (or three?) we can choose from in November 2016. I am a personal finance blogger, and do my best to stay non-partisan, but when I hear proposals that will affect our tax code or cause me to change my advice on investing, I’m going to analyze it here.

Today, it’s Chris Christie’s proposal to cut social security benefits. First, he’d like to push the age for full retirement benefits from the current 67 to 69. For this part of his proposal, I’d like to address the elephant in the room. The fact that this impacts black men disproportionately from whites.

From the CDC, “In 2011, life expectancy at birth was 78.7 years for the total U.S. population, 76.3 years for males, and 81.1 years for females. Life expectancy was highest for Hispanics for both males and females. In each racial/ethnic group, females had higher life expectancies than males. Life expectancy ranged from 71.7 years for non-Hispanic black males to 83.7 years for Hispanic females.”


In other words, on average, a 67 year old black man has 4.7 years left to live, and a white man, 9.3. This cuts the benefit by 42% for black men, but only 21% for whites. I read his proposal and didn’t have to search too long to find government number for life expectancy. Yet, in all the media I consume, all the articles on the Christie proposal, I have yet to see this addressed by anyone. (To my readers – This observation opens a discussion of a far larger issue, health care. In the long term, instead of tinkering with Social Security benefits, we need to close this gap.)

Next, we have his plan to reduce benefits for that he believes simply don’t need the money. How much is that? He would phase out the benefit for those with incomes from $80K to $200K. For a single person, that’s quite the range. In the last election, I recall $250K/yr being considered rich. And we discussed the difference between rich income vs rich wealth. It’s possible to make $250K and blow through every dime, and it’s also possible to make $100K and save your way to a $2M retirement fund. But here, we’re talking about retirement, and the connection between $80K and the wealth it represents is best thought of via the 4% rule. In other words, assuming I spent a lifetime of work saving to my 401(k) and IRA, pretax, it would take $2M of wealth to let me withdraw $80K per year. This takes an above average wage (or wages for a couple, but if one person passes early than the other, we still have a single person dealing with this money) but nowhere near what we consider “rich.”

At $80K taxable, we’ll ignore deductions for this discussion. This person might have as much as $40K in Social Security benefits. The furnace breaks, the roof needs replacing, a child needs help sending your granddaughter to college. Whatever the reason, $60K extra is withdraw from the 401(k). The tax rate this year would be 28%, netting $43,200 to pay a year’s tuition. But Christie would add an effective tax of $20K (i.e. confiscate half the SS benefit) and the net result is $23,200 from that $60,000 withdrawal. This results in a marginal rate of 61.3%.

What I find most troubling is the Catch-22 in which we all seem to find ourselves. Social Security feels like a retirement plan. From the time I started working, I’d get an annual statement, basically telling me that if I kept working to a certain age, 62,65,70, I’d expect a certain benefit. Yet, as many have noticed, the statement have a warning.

Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2033, the payroll taxes collected will be enough to pay only about 77 percent of scheduled benefits.

This, and the warning that it’s really not a retirement plan, but an insurance, leaves us all encouraged to save all we can, 10-15% of our income being ideal. In my example above, it was more about how the retiree saved than how much. In hindsight, had the savings been post tax, subject to a 25% margin rate, the accumulation might be $1.5M instead of $2M. The tax on dividends would be 15%, as would cap gains. But withdrawals wouldn’t be considered income, and Christie’s horrific proposal could be moot. To be clear, his proposal doesn’t just hit the wealthy, but those who simply saved what they could in a responsible way.

More to come on the topics raised here. What do think about Christie’s proposal? If you agree with him, what am I missing? If not, how would it impact you? Last do you feel that Social Security is a “Entitlement” or do prefer to call it an “Earned Benefit”?

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Mar 31

This week Michael Kitces wrote about The Taxation Of Social Security Benefits As A Marginal Tax Rate Increase? A great take on the Phantom Tax Rate Zone I discussed at Rothmania. It’s great to see this discussed by others as I believe it’s one of the financial timebombs waiting to catch people who are unaware how it will affect them.

At Barbara Friedberg Personal Finance, Barb tells us why we should not be Victims of Mental Accounting. You know what it is, it’s when you treat that Christmas bonus as found money, or perhaps when we treat found money as any less important than money we’ve earned.

Don’t Just Complain. At I Pick Up Pennies, a bit of advice on looking at the positive customer service experiences you might have and stopping to acknowledge it now and then.

Financial Finesse Blog broke the news of Another Celebrity Bankruptcy… It’s a shame when anyone’s finances are so bad they need to file bankruptcy, but when it’s a celebrity who had a great career, it’s doubly sad, years of bad money management.

Neal Frankle wrote What is the Average Retirement Age….and a Surprise. It’s more than just an answer to this average, Neil offers advice on the four questions you must answer to know what your retirement goals are.

Last – a look ahead – Stephanie the Blogger is raising money in the annual Walk for Hunger, and tomorrow, I’ll introduce it with a special guest post and matching challenge.

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Apr 21

The time has come. And the cost savings should at least help a bit. While the numbers are staggering, a dollar or so per month saved for each and every beneficiary is still not just chump change.

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Feb 05

Today is Superbowl Sunday, which I suppose means little outside the US, but it’s especially exciting for those in the Northeast as the N.Y. Giants (who play in New Jersey) meet the New England Patriots, a rematch of the 2008 teams. As someone who grew up in NY, I’m a bit torn between rooting for my old home team and my current home’s team. So much for the sport talk, time for another recap.

First, an update. Just a few days ago, I asked if you were getting 401 K-O’ed, overcharged by your plan. In that article, I mentioned that rules regarding full disclosure of the fees charged within 401(k) accounts would take effect April first. This week, I found that 408(b)(2) Disclosure Regulations are Delayed to July 1, 2012. So it appears the joke will be on us twice, the traditional April fool’s day, and again three months after.

Next, in the wake of Suze Orman’s Twitter meltdown regarding her debit card, the Wall Street Journal reported that the data in a newsletter she co-owns, “understated the performance of the S&P 500” which of course exagerated the relative performance of its model portfolio.  Time for the next round of damage control, I suppose.

Note: the image above is a bowl of San Antonio Chili from Another Fine Meal. A great addition to your Superbowl Menu.

Andrew Tobias discussed Double Taxation and why the claim that all cap gains are from money that’s already been taxed doesn’t stand up to scrutiny. As I view this issue, the average person gets very little in cap gains as most of our savings is probably in retirement accounts, not in regular brokerage accounts. The loopholes that allowed hedge fund managers to turn all their income to cap gains while stealing investing other people’s money should be closed down.

Ron at The Wisdom Journal produced a list of 57 Avoidable Tax Mistakes. Amazing list, worth reading. If I read this years ago, I might have not forgotten to sign my return. Yes, they sent it right back. I was getting a refund that year so no penalty or interest due.

At Free Money Finance, Why You Shouldn’t Count on Social Security. Not that it won’t be there, just that the replacement rate is low enough that for most of us it will only be one component of our retirement funds.

The Financial Buff shared Best Rewards Card for Groceries and Gas: American Express Blue Cash Preferred vs PenFed Platinum Rewards. A 6% back at grocery stores? Hmm, that might just be worth getting.

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