Another good year keeps the Social Security system on life support

Contrary to popular belief, the Social Security System actually makes money….sometimes. The only things the trust fund assets are allowed to invest in is treasury securities which they refer to as “interest bearing special issue” bonds. So when interest rates go down, the value of these bonds and notes go up therefore raising the value of the Social Security trust fund. It has happened fairly often in the 10 years or so which typically adds more time to the D-Day moment of when the benefits may have to lowered without some kind of legislative intervention. If the “special issue” bonds go up in value, it generally means the system can stay solvent for another year.

The Social Security Administration comes out with their annual report every year around this time and according to the newest report the above mentioned is exactly what’s happened. They give the prognosis for the program for the next 10 years and the next 75 years using a host of different economic numbers and stats like wage growth, population, mortality and immigration to try to get a handle on how many future claimants there will be.

The harbinger of bad things to come is what’s they call the “net-cash outflows” which means after everything that comes in and costs are taken out, the administration had to dip into the trust fund reserves to cover the shortfall. Recently they’ve been warning that this could happen but at the end of 2018, 3 billion of unexpected income made it profitable.

For 2019, the margin was a little slimmer. At the beginning of 2019, the total was $2,895,174, 945,000(almost 2.9 trillion) and it ended the year at $2, 897, 492, 826, 000 — $2.3 billion higher. So the system didn’t have to dip into reserves to cover the 64 million checks it issues to it’s recipients. However as positive as that is, it was the lowest gain since 1982. What about 2020?

Well I ‘m glad you asked. The Administration’s projections for 2020 not so rosy. A lot of people blame Social Security’s woes on the baby boomers but they might be just part of the problem. Here are some other contributors:

1) People are living longer. The system was never meant to pay people for 20 yrs after retirement. More 80 yrs olds out there than ever.

2) Immigration is down. Usually the people who are immigrants are typically younger and will pay into the system longer ergo supporting more of the older recipients.

3) Birth rates are down. People are not having as many babies as they did in the past. Younger workers pay into it and the older workers’ payments stay funded.

4) More high earners collecting more. These beneficiaries are getting a higher payout than the system has ever paid. And they usually live longer.

There’s a Connecticut democrat named John Larson who introduced legislation that would raise the payroll taxes from 6.2 % to 7.4% and added other rules about any beneficiary with income under $49,000 would not have to report their Social Security income. That was back in 2013– there’s been calls to vote on whether to vote on it(yes that’s really how it works in Congress) to no avail. Social Security has been a 3rd rail for politicians but with the upcoming shortfalls acting sooner than later would be advisable.

That’s all for now. More to come in this brave new decade.

January 16, 2020 0

What are the 3 most crucial things you should do BEFORE you take your Social Security benefit?

What do they say…a pound of prevention is worth 100 pounds of cure? Sound advice I’d say. This old axiom goes a long way with regard to Social Security. Some simple planning looking forward to what could happen is very important. Remember this is a lifetime benefit so you want to get it right.

Number one– Retiring without considering how that effects your benefits. What happens if you don’t have enough quarters paid into the system? Your check is going to be less. At age 62 they will look at your top 35 years that you’ve paid into the program; they call it your AIME or average indexed monthly earnings. Does the government like to abbreviate things? Yeah just a little bit. If you haven’t paid in for 35–doesn’t have to be consecutive- then you can get a zero for the years in which there were no payments. This brings the average down in a most punitive way costing you potentially many thousands in income. If you don’t pay in 10 years or 40 quarters then you don’t get any retirement benefits at all from Social Security. Ouch! Even if you’ve paid in the whole 35 years what if there’s some years that are lower amounts like when you were 22 and worked at Dairy Queen? Could those numbers be easily replaced even with a part time job in this day and age? Most certainly they could and that would make your benefit higher.

Number 2 — The government is always right aren’t they? How about NOT! Can they make mistakes? Of course they can because the US government is made up of people and people aren’t perfect and they do screw up sometimes. So is it possible they can make a mistake on calculating or reporting your earnings record that’s considered for your Social Security payments? Of course it’s very possible. So go to the website and get your statement. They will proof you vigorously during this process which is good. Then take a look at the 3rd page. This is your earnings record. Sit down, get a drink, some place quiet preferably and really think about what you were doing for a job in 1994 or 1988. Try to go back in your mind and remember what you got paid etc. Are the numbers right? If they aren’t the onus is on you to change them…old w2’s or old 1099’s etc. and old tax returns. These numbers reflect what you paid in and can ABSOLUTELY effect your monthly check so they must be corrected if they are wrong.

Number 3 — Make sure to take advantage of spousal benefits if possible. If you take you benefits early for example at age 62 your reduction in benefits is 75% and if you were born after 1960 the reduction is 70% but if you wait until your full retirement age which is 66 yrs old if you were born before 1960 and 67 after which your benefit check would be higher. If you wait until your are 70 the amount grows at 8% simple interest –these are called delayed credits– which would lead to a higher income in your golden years.

You can however if you plan ahead of time with your spouse by coordinating benefits, the lower earning spouse could take benefits early so there’s a least one check coming into the house while a higher earning spouse lets their benefits build up with delayed credits and then the spouse that filed earlier can switch over. When they switch over to the higher spousal benefit, it’s half of whatever the amount was at the higher earning spouse’s full retirement age as the delayed credits are not eligible for the spousal benefit. When the higher earning spouse takes their benefit and the lower earning spouse switches to the higher check, its a nice pay raise for everyone. A very happy 70th birthday indeed!

If you have never been married then just skip this section as you aren’t eligible for any of it. However if you are divorced, then a version of the same aforementioned benefits can be filed for by you. If you were married for at least 10 years, then you can get spousal benefits. This will not reduce your ex’s check in any way nor will it reduce the checks of their other ex’s or their current spouse. Moreover they will never know you’re doing it either unless you tell them. You both have to be 62 or older and if you’ve been divorce for over 2 years you don’t have to wait for them to file individually. If you were separated and not divorced, that time would count toward your eligibility as its the date on the decree that counts here. But you must remember if you get married again, you will lose these benefits. How does the old saying go “First time for love, second time for money.” Important words to live by.

October 7, 2019 0

What’s one of the biggest mistakes you can make it retirement that no one talks about?

Jean and David had been planning their retirement for many years. They both had pensions at their jobs, had saved a lot in their 401k plans and had paid down their mortgage to the point where they almost owned their home. They had friends and hobbies that they both were looking forward spending more time on when they finally stopped working.

However, David had been playing out with his band at various bars and weddings which is probably where he met his new lady friend. Jean found out and after much drama, they got divorced. Now this new reality threw a major monkey wrench in their well thought out retirement plans.

This is the new reality for so many seniors these days. The Pew Research Center reported in 2017 that the divorce rate for those over the age of 50 has doubled since the 1990’s. Further, for those 65 and older, the divorce rate tripled from 1990 to 2015. A late-in-life divorce create massive challenges financially. Why is this happening?

1) Its easy for couples to grow apart. Maybe both people work 40 plus hours or travel for business where there’s overnights involved. Now suddenly these 2 strangers are living together with all this time on their hands. Either they reconnect or maybe they’ve grown apart so much that they don’t really have anything in common anymore. My client Joan lived in the same house with her ex husband for years because neither could afford to move out. He lives on the second floor that has a private entrance and pays her a small amount of rent to cover the expenses. They still live like this now after 20 years of retirement.

2) No more children at home . A lot of retirees start to figure out they were a “couple” based on the lives they created around their children. Once they become “empty nesters” spouses can realize that’s all they had in common and may feel distant.

3) Retirement. “My husband is driving me crazy” is something you may hear from the wife who has been spending time by themselves and her newly retired husband is disrupting that life at home or leisure. The normal routine is not so normal anymore and life is so different now.

4) Health issues. Maybe a spouse’s health has gone downhill and the “in sickness and in health” vow that was taken is not so important anymore. Maybe someone wants to trade in the old model for a newer one. This can lead to lifestyle differences in which someone wants to go out an do things– hiking, biking, tennis etc while the other is ok with being home and relaxing in front of the computer or Netflix.

5) Mid life crisis. We all have regrets in our lives. Now that you are free and have lots of time on your hands in retirement you may not want to spend the next 20 years tethered to someone who makes you unhappy or isn’t experiencing the same life changes you are. Standing looking back at your life you realize you’ve been living for just work or just family and you’ve had enough. The next 20 years are going to be different and you may feel you need to live more for you. So you get a new hairstyle and a convertible because you’re free free free! There may be a cost to that as a late in life divorce can gut your 401K plan or split that rich pension payment you’ve worked hard for. That beach house with the water view you dreamed of living in when you retired is a condo with a view of the highway.

Do most couples plan on divorce? Usually no. But now there’s alimony to pay, your IRA has been divided up, and you have to find an apartment or another place to live. The amount of income you thought you were going to get has been compromised. Not only that where do you spend the holidays? How do your kids feel about this? Maybe they side with one spouse or the other. Harsh reality but very true.

My client David ended up marrying his new lady friend which led to another divorce. Statistics show that second marriages are less stable than first ones. Now he’s got a new job because he needs the income and seems OK but there’s an unhappiness to him that wasn’t there before. Also there’s a lot of his money that isn’t there anymore either.

Jean on the other hand , has devoted herself more to grandchildren and family and seems to feel like the divorce was a good new beginning to the rest of her life. She spends time with her friends more than she did when she was married so sometimes these things work out. She sold the family home and used the money to generate an income for herself . But once again there’s an underlying feeling of loss that neither she or David ever planned for. As their financial advisor I have to admit I never saw it coming either.

Sorry gentle reader not all of these blogs have a happy ending. I have another client named Stuart-always full of sage advice– who is fond of saying “no matter who you marry, you want to make sure they love you just a little more than you love them.” I will sign off with that choice bit of wisdom.

October 1, 2019 0