Posts made in August 2019

What is an Inverted Yield Curve?

If you ask an economist what makes them toss and turn at night, chances are they’ll tell you, “Fear of missing the warning signs of a recession.”  After all, for anyone who studies the economy for a living, few things could be worse than a sudden economic slump catching you by surprise.

That’s why many economists rely on certain indicators to predict if there’s rough weather ahead.  Historically, one of the most reliable indicators is the inverted yield curve.  This is when the yield on long-term bonds drops below the yield on short-term bonds.  Why does this matter to economists?   Because an inverted yield curve has preceded every recession since 1956.1

Long-Term Bond Yield Hits Record Low2
Stocks Skid as Bonds Flash a Warning3
The Wall Street Journal, August 14, 2019

On August 14, the yield on 10-year Treasury bonds dropped below 1.6%, officially falling beneath the yield on 2-year Treasury bonds for the first time since 2007.4  That’s an inverted yield curve.  The markets responded the way children do when a hornet gets inside the family car – they panicked.  The Dow, the S&P 500, and the NASDAQ all fell sharply, with the Dow plunging over 700 points.3

The obvious question, of course, is “Why?”

It’s a smart question!  To the average investor, the term “inverted yield curve” probably doesn’t sound very scary.  So, why does it have the markets freaking out?  Let’s break it down by answering a few basic – but also smart – questions.

  1. What’s a bond yield, again?

A bond yield is the return you get when you put your money in a government or corporate bond.  Whenever an investor buys a bond, they’re agreeing to loan money to the issuer of that bond – the government, in the case of Treasury bonds – for a specific length of time.  Typically, the longer the time, the higher the yield, as investors want a greater return in exchange for locking up their money for years or even decades.  That’s why the yield on long-term bonds is almost always higher than on short-term bonds.  When these trade places, we have an inverted yield curve.

  1. Okay, so why have bond yields inverted?

Bear with me here, because I’m about to get a little technical. 

Bond yields have an inverse relationship with bond prices.  That means when prices go up, yields fall, and vice versa.

What do I mean by price?  Well, investors must pay to buy bonds, of course, and when more people buy them, the price of these bonds goes up.  (It’s the basic law of supply and demand: When the demand for something increases, so does the price.)   When that happens, yields drop.

Investors often see bonds as safe havens of sorts, especially during economic turmoil.  Stocks, on the other hand, tend to be seen as “higher risk, higher reward” investments.  In this case, investors are selling their stocks and plowing more and more money into long-term bonds, pushing prices up and yields below that of short-term bonds.  The fact investors are doing this suggests they’re not optimistic about the near-future health of the economy and are seeking safe places to park their money.

  1. Why are investors so worried about the economy?

On the home front, it’s largely because of the trade war between the U.S. and China.  As the two nations engage in an ever-growing battle of tariffs, the fear is that businesses in the U.S. will have to raise prices, thereby hurting consumers.  On August 13, President Trump decided to delay the most recent round of tariffs until December, saying he didn’t want tariffs to affect shopping during the Christmas season.5  Previously, Trump predicted tariffs would not hurt U.S. businesses, so this sudden about-face suggests even he is worried.

Investors are also worried about a slowdown in the global economy.  Two of the world’s most important economies, China and Germany, have both shrunk.  Put all these things together and it’s not hard to see why investors worry about a recession in the near future.

Fears the recent news about inverted yield curves will only stoke.

  1. So is a recession imminent?

As I mentioned earlier, inverted yield curves have preceded every recession since 1956.  This includes the Great Recession of 2008.  But does this mean a recession is just around the corner?

No!

There are two things to keep in mind here.  First, a brief inverted yield curve is not the same thing as a sustained one.  While inversions have preceded every modern recession, inversions do not always lead to a recession.  Think of it this way: You can’t have a rainstorm without dark gray clouds.  But dark gray clouds don’t always lead to a rainstorm.  Make sense?

You see, correlation does not equal causation.  By this I mean that while inversions and recessions are often seen together, one does not actually cause the other.  An inverted yield curve is like a sneeze: It’s a symptom, not the disease itself.  And while a sneeze can mean you have a cold, it doesn’t lead to a cold.  Sometimes, we sneeze because we got pepper up our nose.

Second, let’s assume for argument’s sake that this recent inversion is a warning sign of a future recession.  That doesn’t mean a recession is imminent.  Some analysis suggests that it takes an average of twenty-two months for a recession to follow an inversion.1  That’s a long time!  A long time to save, invest, plan and prepare.

  1. So does an inverted yield curve even matter, then?

I’ll put it simply: It matters enough to pay attention to.  It doesn’t matter enough to be worth panicking over.

Make no mistake, we’re in a volatile period right now.  There’s a lot of evidence to suggest that volatility will continue.  But while comparing the markets to the weather has become something of a cliché, it also makes a lot of sense.  When storm clouds gather, we pack an umbrella or stay inside.  We don’t run for the hills.

The same is true of market volatility.

Remember, an inverted yield curve is an indicator, not a prophecy.  Economists can toss and turn about such things, but you and I are focusing on something much less abstract: your financial goals.  More important than any indicator, more important than the day-to-day swings in the markets, is the discipline we show.  If you think about it, market volatility is really a symptom, too – a symptom of emotional decision making.  Investors see a good headline, and they buy, buy, buy!  That’s a market rally.  Investors see a bad one, and they sell, sell, sell!  That’s a market dip.

Investing based on emotion leads to one thing: Regret.  Regret that we bought into the hype and bought when we should have waited for a better deal.  Regret that we fell into fear and sold when we should have held on longer.  We invest by being disciplined enough to buy, hold, or sell when it makes sense for your situation.

That’s the best way to stay on track toward your goals.  That’s the best way to not toss and turn at night.  We don’t make decisions based on predictions.  We make decisions based on need.

My team and I will keep watching the indicators.  We’ll keep doing our best to explain the twists and turns in the markets.  And we’ll keep doing our best not to overreact to any of them.  In the meantime, please contact me if you have any questions or concerns.  We always love to hear from you!

 

 

 

1 “The inverted yield curve explained,” CNBC, August 14, 2019.  https://www.cnbc.com/2019/08/14/the-inverted-yield-curve-explained-and-what-it-means-for-your-money.html

2 “Long-Term Bond Yield Hits Record Low,” The Wall Street Journal, August 14, 2019.  https://www.wsj.com/articles/bond-rally-drives-30-year-treasury-yield-to-record-low-11565794665

3 “Stocks Skid as Bonds Flash a Warning,” The Wall Street Journal, August 14, 2019.  https://www.wsj.com/articles/asian-stocks-gain-on-tariff-delay-11565769562

4 “Dow tumbles 700 points after bond market flashes a recession warning,” CNN Business, August 14, 2019.  https://www.cnn.com/2019/08/14/investing/dow-stock-market-today/index.html

5 “U.S. Retreats on Chinese Tariff Threats,” The Wall Street Journal, August 13, 2019.  https://www.wsj.com/articles/u-s-will-delay-some-tariffs-against-china-11565704420

General Social Security Rules

General Social Security Rules

 

Popular wisdom suggests jumping at the opportunity to collect Social Security retirement benefits as soon as possible, which currently is age 62.  About 73% of Social Security beneficiaries collect at 62.  While this strategy may have been prudent for millions of Americans in the past, longer life expectancies have changed the face of retirement planning. Waiting to collect Social Security benefits may well be a more advantageous option. While there is no one-size-fits-all approach, this much is universally clear:

TIPS

Life expectancy is exploding, particularly for our clientele.

 

Warning – Social Security has its own language.

DECIDING WHEN TO BEGIN TAKING SOCIAL SECURITY BENEFITS IS AN IMPORTANT AND MULTIFACETED CONSIDERATION that should be factored into each individual’s broader retirement plan.  In order for us to help you decide how and when to take your Social Security, we must go over some basic Social Security concepts.  In the following memo, we review key details to consider in your Social Security decision-making.  Your Social Security strategy must be integrated with your investment plan and your overall retirement plan.

Social Security Benefits-Divorced

Social Security Benefits for Divorced People

 

When Should I Take My Benefits ?

OVERVIEW:  As an Ex-Spouse you may be entitled to your individual benefits and spousal or survivor benefits.  We will review both sets to decide what decision you should make.

 

Individual Benefit Collection Decision

 

COLLECTING BENEFITS AT FULL RETIREMENT AGE

Your benefits, known as your Primary Insurance Amount (PIA) is the monthly benefit for which you are eligible at your full retirement age (FRA). FRA varies based on year of birth. Originally age 65, the federal government has increased FRA for anyone born after 1937 in recognition of longer life expectancies.  Life expectancy in 1937 was less than 65.  Today, it is about 78.  We expect our clients to live even longer.

TIPS

You must have worked for 40 Quarters to be eligible to receive benefits.

 

Planning Tip:  Social Security aims to encourage you to collect your benefits at Full Retirement Age, known as FRA in Social Security Language.

 

Your monthly benefit, known as your Primary Insurance Amount (PIA), is calculated based on your highest 35 years of employment.

The Social Security Administration (SSA) uses your highest 35 years of employment to arrive at your Average Indexed Monthly Earnings (AIME).  For more information, please visit www.ssa.gov to get your Social Security statement. If you continue working after reaching FRA, the SSA will automatically recalculate your benefits each year you continue to work. If your current income is greater than any of your previously calculated “highest 35 years”, your benefits will be adjusted upward. The increase generally will be made in October of the following year, but will be retroactive to January 1.  In addition, Social Security retirement benefits are automatically modified each year for inflation, known as Cost-Of-Living Adjustments (COLAs).

TIP

COLAs have averaged between 1% and 2% over the past 10 years.  Over the last 90 years inflation has averaged about 3% per year.

TIP

Benefits are reduced by about 6% per year for each year you receive benefits prior to your full retirement age (FRA).

COLLECTING BENEFITS EARLIER THEN FRA

While your full benefit, your PIA, is payable at your FRA, you are entitled to  collect benefits as early as age 62. However, if you choose to collect early, you will permanently reduce the size of your benefits. Your benefits will not be adjusted upward when you attain FRA. The amount of your reduction will depend on two factors—your FRA and the number of months before it that you start collecting. If you begin taking benefits on your 62nd birthday, you are subject to the maximum reduction. That reduction will be smaller for each month you delay benefits after age 62 but prior to reaching FRA.

COLLECTION AGE IMPACTS BENEFIT AMOUNT

WORKING WHILE COLLECTING BENEFITS PRIOR TO FULL RETIREMENT AGE

 

Social Security benefits are intended to supplement retirement income.  There are consequences to collecting your benefits early if you are not retired and are still receiving wages. If you choose to collect benefits prior to FRA, you are subject to an Earnings Test every year until you reach FRA.

 

If your earnings exceed certain thresholds, the SSA will Withhold part or all of your benefits. The earnings test for individual and survivor benefits looks only at the salary or wages of the individual collecting early benefits. It does not consider any other type of income, nor does it

consider the salary or wages of a spouse. However, the test on spousal benefits (see memo on Married Couples) may take into account both spouses' wages if both are under age 62.

TIP

Withheld benefits are different and in addition to reduced benefits.

 

The Withholding on Social Security before FRA eliminates Benefits for many Employees.

WITHHELD BENEFITS

Benefits withheld by the SSA due to early collection will not be refunded. However, your benefits will be adjusted at FRA to account for the benefits that were withheld.  For example, if your FRA was 66 and you began collecting benefits at age 62, the SSA would have reduced your benefit by 25%. Assuming you returned to work at age 64; the SSA may have withheld two years’ worth of benefits by the time you reached FRA. The SSA would then lessen your 25% reduction to give you credit for the two years of lost benefits. Your new reduction would be as if you started collecting benefits at age 64 (13.3% reduction) rather than age 62.

2019 RETIREMENT EARNINGS LIMIT

Under FRA

  • $1 of benefits withheld for every $2 in earnings above $17,640
  • Earned $27,640 – $17,640 = $10,000 over x 1/2 = $5,000 withheld

                                                                                                                                                                                                                                               

Year individual reaches FRA

  • $1 of benefits withheld for every $3 in earnings above $46,920 for months prior to attaining FRA
  • Earned $56,920 – $46,920 = $10,000 over x 1/3 = $3,333 withheld

                                                                                                                                                                                                                                               

Month individual reaches FRA

  • Unlimited

                                                                                                                                                                                                                                               

 

 

WAITING TO COLLECT BENEFITS

If you elect to defer collecting benefits beyond your FRA, the SSA will give you a delayed retirement credit (DRC) for every month you defer between FRA and age 70, the age at which

your benefits max out. This increase will be in addition to the annual COLA, if applicable. Depending on your year of birth, your increase will amount to 7% to 8% annually

TIP

When collecting before FRA, always consider the net (after-tax) benefits you will receive. A working spouse may cause more of your benefits to be taxed, and at potentially higher tax rates.

TAXATION OF BENEFITS

You should plan on income taxes on Social Security Benefits.  Individuals with high total incomes must include up to 85% of their benefits as income for federal income tax purposes. Special step-rate “thresholds” on Provisional Income determine the amount which you may be taxed. We should plan as if you will pay income tax on your benefits when making the decision.

COLLECTING SPOUSAL BENEFITS

If you are married to an individual who is collecting Social Security retirement benefits and you are at least age 62, you may be entitled to collect spousal benefits.  Spousal benefits will be equal to 50% of your spouse’s PIA if you collect benefits at FRA or later. If you are entitled to your own benefits and your PIA is less than 50% of your spouse’s PIA, spousal benefits will be paid in addition to your own. These combined benefits will equal 50% of your spouse’s PIA, assuming you start collecting both benefits at FRA or later.

 

COLLECTING SPOUSAL BENEFITS EARLY

If you collect spousal benefits prior to your FRA, your adjusted spousal benefits (amounts in addition to your own benefits) will be reduced. Your spouse’s collection age has no impact on your spousal benefits.

COLLECTING SURVIVOR BENEFITS

If you have been married for at least nine months and your spouse passes away, you may be entitled to survivor benefits. If you remarry before age 60, survivor benefits will not be paid unless the subsequent marriage ends.  Remarriage after age 60 does not prevent or stop entitlement to benefits. The amount of your survivor benefits depends on when your spouse began taking benefits. If the death occurs prior to your spouse collecting benefits, your survivor benefits will equal 100% of your spouse’s PIA when you attain FRA. If your spouse was collecting benefits at the time of his or her death, your survivor benefits will equal his or her actual benefits, assuming you have attained FRA.  The only exception is if he or she was collecting benefits that were reduced more than 17.5%. In that case, your survivor benefits will be 82.5% of your spouse’s PIA. The survivor benefits, if higher, will replace your other benefits.

COLLECTING SURVIVOR BENEFITS EARLY

You can collect survivor benefits as young as age 60. If you collect at age 60, your survivor benefits will be reduced by up to 28.5% .

 

 

CHOOSING BETWEEN BENEFITS

If you are entitled to both individual and survivor benefits, you can choose to begin collecting one and then switch to the other at a later date. It is possible to collect reduced survivor benefits at age 60, and then convert to your own unreduced benefits at FRA or later. You also have the

option to collect individual benefits and then switch to survivor benefits.

 

SPOUSAL AND SURVIVOR BENEFITS AFTER DIVORCE

If you are not married but previously had been married to the same individual for at least 10 years, you may be entitled to collect spousal and/or survivor benefits based on your ex-spouse’s

work history, as described earlier. To collect spousal benefits you and your ex-spouse must be at least 62. You are not required to wait until your ex-spouse files for benefits.

 

What decision should you make ?  Please contact us for an appointment.

 

Social Security Benefits-Widows and Widowers

Social Security Benefits for Widows and Widowers

When Should I Take My Benefits ?

 

OVERVIEW:  As a widow or widower you may be entitled to your individual benefits and survivor benefits.  We will review both sets to decide what decision you should make.

 

COLLECTING BENEFITS AT FULL RETIREMENT AGE

Your benefits, known as your Primary Insurance Amount (PIA) is the monthly benefit for which you are eligible at your full retirement age (FRA). FRA varies based on year of birth. Originally age 65, the federal government has increased FRA for anyone born after 1937 in recognition of longer life expectancies.  Life expectancy in 1937 was less than 65.  Today, it is about 78.  We expect our clients to live even longer.

TIPS

You must have worked for 40 Quarters to be eligible to receive benefits.

 

Planning Tip:  Social Security aims to encourage you to collect your benefits at Full Retirement Age, known as FRA in Social Security Language.

 

Your monthly benefit, known as your Primary Insurance Amount (PIA), is calculated based on your highest 35 years of employment.

The Social Security Administration (SSA) uses your highest 35 years of employment to arrive at your Average Indexed Monthly Earnings (AIME).  For more information, please visit www.ssa.gov to get your Social Security statement. If you continue working after reaching FRA, the SSA will automatically recalculate your benefits each year you continue to work. If your current income is greater than any of your previously calculated “highest 35 years”, your benefits will be adjusted upward. The increase generally will be made in October of the following year, but will be retroactive to January 1.  In addition, Social Security retirement benefits are automatically modified each year for inflation, known as Cost-Of-Living Adjustments (COLAs).

 

TIP

COLAs have averaged between 1% and 2% over the past 10 years.  Over the last 90 years inflation has averaged about 3% per year.

TIP

Benefits are reduced by about 6% per year for each year you receive benefits prior to your full retirement age (FRA).

COLLECTING BENEFITS EARLIER THEN FRA

While your full benefit, your PIA, is payable at your FRA, you are entitled to  collect benefits as early as age 62. However, if you choose to collect early, you will permanently reduce the size of your benefits. Your benefits will not be adjusted upward when you attain FRA. The amount of your reduction will depend on two factors—your FRA and the number of months before it that you start collecting. If you begin taking benefits on your 62nd birthday, you are subject to the maximum reduction. That reduction will be smaller for each month you delay benefits after age 62 but prior to reaching FRA.

COLLECTION AGE IMPACTS BENEFIT AMOUNT

WORKING WHILE COLLECTING BENEFITS PRIOR TO FULL RETIREMENT AGE

 

Social Security benefits are intended to supplement retirement income.  There are consequences to collecting your benefits early if you are not retired and are still receiving wages. If you choose to collect benefits prior to FRA, you are subject to an Earnings Test every year until you reach FRA.

 

If your earnings exceed certain thresholds, the SSA will Withhold part or all of your benefits. The earnings test for individual and survivor benefits looks only at the salary or wages of the individual collecting early benefits. It does not consider any other type of income, nor does it

 

consider the salary or wages of a spouse. However, the test on spousal benefits (see memo on Married Couples) may take into account both spouses' wages if both are under age 62.

 

TIP

Withheld benefits are different and in addition to reduced benefits.

 

The Withholding on Social Security before FRA eliminates Benefits for many Employees.

WITHHELD BENEFITS

Benefits withheld by the SSA due to early collection will not be refunded. However, your benefits will be adjusted at FRA to account for the benefits that were withheld.  For example, if your FRA was 66 and you began collecting benefits at age 62, the SSA would have reduced your benefit by 25%. Assuming you returned to work at age 64; the SSA may have withheld two years’ worth of benefits by the time you reached FRA. The SSA would then lessen your 25% reduction to give you credit for the two years of lost benefits. Your new reduction would be as if you started collecting benefits at age 64 (13.3% reduction) rather than age 62.

2019 RETIREMENT EARNINGS LIMIT

Under FRA

  • $1 of benefits withheld for every $2 in earnings above $17,640
  • Earned $27,640 – $17,640 = $10,000 over x 1/2 = $5,000 withheld

                                                                                                                                                                                                                                               

Year individual reaches FRA

  • $1 of benefits withheld for every $3 in earnings above $46,920 for months prior to attaining FRA
  • Earned $56,920 – $46,920 = $10,000 over x 1/3 = $3,333 withheld

                                                                                                                                                                                                                                               

Month individual reaches FRA

  • Unlimited

                                                                                                                                                                                                                                               

 

 

WAITING TO COLLECT BENEFITS

If you elect to defer collecting benefits beyond your FRA, the SSA will give you a delayed retirement credit (DRC) for every month you defer between FRA and age 70, the age at which

your benefits max out. This increase will be in addition to the annual COLA, if applicable. Depending on your year of birth, your increase will amount to 7% to 8% annually.

TIP

When collecting before FRA, always consider the net (after-tax) benefits you will receive. A working spouse may cause more of your benefits to be taxed, and at potentially higher tax rates.

TAXATION OF BENEFITS

You should plan on income taxes on Social Security Benefits.  Individuals with high total incomes must include up to 85% of their benefits as income for federal income tax purposes. Special step-rate “thresholds” on Provisional Income determine the amount which you may be taxed. We should plan as if you will pay income tax on your benefits when making the decision.

COLLECTING SURVIVOR BENEFITS

If you have been married for at least nine months and your spouse passes away, you may be entitled to survivor benefits. If you remarry before age 60, survivor benefits will not be paid unless the subsequent marriage ends.  Remarriage after age 60 does not prevent or stop entitlement to benefits. The amount of your survivor benefits depends on when your spouse began taking benefits. If the death occurs prior to your spouse collecting benefits, your survivor benefits will equal 100% of your spouse’s PIA when you attain FRA. If your spouse was collecting benefits at the time of his or her death, your survivor benefits will equal his or her actual benefits, assuming you have attained FRA.  The only exception is if he or she was collecting benefits that were reduced more than 17.5%. In that case, your survivor benefits will be 82.5% of your spouse’s PIA. The survivor benefits, if higher, will replace your other benefits.

 

COLLECTING SURVIVOR BENEFITS EARLY

You can collect survivor benefits as young as age 60. If you collect at age 60, your survivor benefits will be reduced by up to 28.5% .

 

CHOOSING BETWEEN BENEFITS

If you are entitled to both individual and survivor benefits, you can choose to begin collecting one and then switch to the other at a later date. It is possible to collect reduced survivor benefits at age 60, and then convert to your own unreduced benefits at FRA or later. You also have the

option to collect individual benefits and then switch to survivor benefits.

 

What decision should you make ? Please contact us for an appointment.

 

Social Security Benefits-Singles

Social Security Benefits for Singles

When Should I Take My Benefits ?

 

Individual Collection Decision

COLLECTING BENEFITS AT FULL RETIREMENT AGE

Your benefits, known as your Primary Insurance Amount (PIA) is the monthly benefit for which you are eligible at your full retirement age (FRA). FRA varies based on year of birth. Originally age 65, the federal government has increased FRA for anyone born after 1937 in recognition of longer life expectancies.  Life expectancy in 1937 was less than 65.  Today, it is about 78.  We expect our clients to live even longer.

TIPS

You must have worked for 40 Quarters to be eligible to receive benefits.

 

Social Security aims to encourage you to collect your benefits at Full Retirement Age, known as FRA in Social Security Language.

 

Your monthly benefit, known as your Primary Insurance Amount (PIA), is calculated based on your highest 35 years of employment.

 

The Social Security Administration (SSA) uses your highest 35 years of employment to arrive at your Average Indexed Monthly Earnings (AIME).  For more information, please visit www.ssa.gov to get your Social Security statement. If you continue working after reaching FRA, the SSA will automatically recalculate your benefits each year you continue to work. If your current income is greater than any of your previously calculated “highest 35 years”, your benefits will be adjusted upward. The increase generally will be made in October of the following year, but will be retroactive to January 1.  In addition, Social Security retirement benefits are automatically modified each year for inflation, known as Cost-Of-Living Adjustments (COLAs).

TIP

COLAs have averaged between 1% and 2% over the past 10 years.  Over the last 90 years inflation has averaged about 3% per year.

TIP

Benefits are reduced by about 6% per year for each year you receive benefits prior to your full retirement age (FRA).

COLLECTING BENEFITS EARLIER THEN FRA

While your full benefit, your PIA, is payable at your FRA, you are entitled to  collect benefits as early as age 62. However, if you choose to collect early, you will permanently reduce the size of your benefits. Your benefits will not be adjusted upward when you attain FRA. The amount of your reduction will depend on two factors—your FRA and the number of months before it that you start collecting. If you begin taking benefits on your 62nd birthday, you are subject to the maximum reduction. That reduction will be smaller for each month you delay benefits after age 62 but prior to reaching FRA.

COLLECTION AGE IMPACTS BENEFIT AMOUNT

WORKING WHILE COLLECTING BENEFITS PRIOR TO FULL RETIREMENT AGE

 

Social Security benefits are intended to supplement retirement income.  There are consequences to collecting your benefits early if you are not retired and are still receiving wages. If you choose to collect benefits prior to FRA, you are subject to an Earnings Test every year until you reach FRA.

 

If your earnings exceed certain thresholds, the SSA will Withhold part or all of your benefits. The earnings test for individual and survivor benefits looks only at the salary or wages of the individual collecting early benefits. It does not consider any other type of income, nor does it consider the salary or wages of a spouse. However, the test on spousal benefits (see memo on Married Couples) may take into account both spouses' wages if both are under age 62.

 

 

 

TIP

Withheld benefits are different and in addition to reduced benefits.

 

The Withholding on Social Security before FRA eliminates Benefits for many Employees.

WITHHELD BENEFITS

Benefits withheld by the SSA due to early collection will not be refunded. However, your benefits will be adjusted at FRA to account for the benefits that were withheld.  For example, if your FRA was 66 and you began collecting benefits at age 62, the SSA would have reduced your benefit by 25%. Assuming you returned to work at age 64; the SSA may have withheld two years’ worth of benefits by the time you reached FRA. The SSA would then lessen your 25% reduction to give you credit for the two years of lost benefits. Your new reduction would be as if you started collecting benefits at age 64 (13.3% reduction) rather than age 62.

 

2019 RETIREMENT EARNINGS LIMIT

Under FRA

  • $1 of benefits withheld for every $2 in earnings above $17,640
  • Earned $27,640 – $17,640 = $10,000 over x 1/2 = $5,000 withheld

                                                                                                                                                                                                                                               

Year individual reaches FRA

  • $1 of benefits withheld for every $3 in earnings above $46,920 for months prior to attaining FRA
  • Earned $56,920 – $46,920 = $10,000 over x 1/3 = $3,333 withheld

                                                                                                                                                                                                                                               

Month individual reaches FRA

  • Unlimited

                                                                                                                                                                                                                                               

 

 

WAITING TO COLLECT BENEFITS

If you elect to defer collecting benefits beyond your FRA, the SSA will give you a delayed retirement credit (DRC) for every month you defer between FRA and age 70, the age at which

your benefits max out. This increase will be in addition to the annual COLA, if applicable. Depending on your year of birth, your increase will amount to 7% to 8% annually.

TIP

The 8% per year increase is greater than the expected return from most investments.  In addition, increase applies to Survivor Benefits.

TIP

When collecting before FRA, always consider the net (after-tax) benefits you will receive. A working spouse may cause more of your benefits to be taxed, and at potentially higher tax rates.

TAXATION OF BENEFITS

You should plan on income taxes on Social Security Benefits.  Individuals with high total incomes must include up to 85% of their benefits as income for federal income tax purposes. Special step-rate “thresholds” on Provisional Income determine the amount which you may be taxed. We should plan as if you will pay income tax on your benefits when making the decision.

Social Security Benefit-Married

Social Security Benefits for Married Couples

When Should We Take Our Benefits ?

 

OVERVIEW:  Each spouse is entitled to their individual benefits and spousal benefits.  We have to review your individual benefits first.

 

Individual Collection Decision

COLLECTING BENEFITS AT FULL RETIREMENT AGE

Your benefits, known as your Primary Insurance Amount (PIA) is the monthly benefit for which you are eligible at your full retirement age (FRA). FRA varies based on year of birth. Originally age 65, the federal government has increased FRA for anyone born after 1937 in recognition of longer life expectancies.  Life expectancy in 1937 was less than 65.  Today, it is about 78.  We expect our clients to live even longer.

TIPS

You must have worked for 40 Quarters to be eligible to receive benefits.

 

Social Security aims to encourage you to collect your benefits at Full Retirement Age, known as FRA in Social Security Language.

 

Your monthly benefit, known as your Primary Insurance Amount (PIA), is calculated based on your highest 35 years ofemployment

 

The Social Security Administration (SSA) uses your highest 35 years of employment to arrive at your Average Indexed Monthly Earnings (AIME).  For more information, please visit www.ssa.gov to get your Social Security statement. If you continue working after reaching FRA, the SSA will automatically recalculate your benefits each year you continue to work. If your current income is greater than any of your previously calculated “highest 35 years”, your benefits will be adjusted upward. The increase generally will be made in October of the following year, but will be retroactive to January 1.  In addition, Social Security retirement benefits are automatically modified each year for inflation, known as Cost-Of-Living Adjustments (COLAs).

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COLAs have averaged between 1% and 2% over the past 10 years.  Over the last 90 years inflation has averaged about 3% per year.

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Benefits are reduced by about 6% per year for each year you receive benefits prior to your full retirement age (FRA).

COLLECTING BENEFITS EARLIER THEN FRA

While your full benefit, your PIA, is payable at your FRA, you are entitled to  collect benefits as early as age 62. However, if you choose to collect early, you will permanently reduce the size of your benefits. Your benefits will not be adjusted upward when you attain FRA. The amount of your reduction will depend on two factors—your FRA and the number of months before it that you start collecting. If you begin taking benefits on your 62nd birthday, you are subject to the maximum reduction. That reduction will be smaller for each month you delay benefits after age 62 but prior to reaching FRA.

 

COLLECTION AGE IMPACTS BENEFIT AMOUNT

WORKING WHILE COLLECTING BENEFITS PRIOR TO FULL RETIREMENT AGE

 

Social Security benefits are intended to supplement retirement income.  There are consequences to collecting your benefits early if you are not retired and are still receiving wages. If you choose to collect benefits prior to FRA, you are subject to an Earnings Test every year until you reach FRA.

 

If your earnings exceed certain thresholds, the SSA will Withhold part or all of your benefits. The earnings test for individual and survivor benefits looks only at the salary or wages of the individual collecting early benefits. It does not consider any other type of income, nor does it consider the salary or wages of a spouse. However, the test on spousal benefits (see memo on Married Couples) may take into account both spouses' wages if both are under age 62.

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Withheld benefits are different and in addition to reduced benefits.

 

The Withholding on Social Security before FRA eliminates Benefits for many Employees.

 

WITHHELD BENEFITS

Benefits withheld by the SSA due to early collection will not be refunded. However, your benefits will be adjusted at FRA to account for the benefits that were withheld.  For example, if your FRA was 66 and you began collecting benefits at age 62, the SSA would have reduced your benefit by 25%. Assuming you returned to work at age 64; the SSA may have withheld two years’ worth of benefits by the time you reached FRA. The SSA would then lessen your 25% reduction to give you credit for the two years of lost benefits. Your new reduction would be as if you started collecting benefits at age 64 (13.3% reduction) rather than age 62.

2019 RETIREMENT EARNINGS LIMIT

Under FRA

  • $1 of benefits withheld for every $2 in earnings above $17,640
  • Earned $27,640 – $17,640 = $10,000 over x 1/2 = $5,000 withheld

                                                                                                                                                                                                                                               

Year individual reaches FRA

  • $1 of benefits withheld for every $3 in earnings above $46,920 for months prior to attaining FRA
  • Earned $56,920 – $46,920 = $10,000 over x 1/3 = $3,333 withheld

                                                                                                                                                                                                                                               

Month individual reaches FRA

  • Unlimited

                                                                                                                                                                                                                                               

WAITING TO COLLECT BENEFITS

If you elect to defer collecting benefits beyond your FRA, the SSA will give you a delayed retirement credit (DRC) for every month you defer between FRA and age 70, the age at which

your benefits max out. This increase will be in addition to the annual COLA, if applicable. Depending on your year of birth, your increase will amount to 7% to 8% annually.

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The 8% per year increase is greater than the expected return from most investments.  In addition, increase applies to Survivor Benefits.

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When collecting before FRA, always consider the net (after-tax) benefits you will receive. A working spouse may cause more of your benefits to be taxed, and at potentially higher tax rates.

TAXATION OF BENEFITS

You should plan on income taxes on Social Security Benefits.  Individuals with high total incomes must include up to 85% of their benefits as income for federal income tax purposes. Special step-rate “thresholds” on Provisional Income determine the amount which you may be taxed. We should plan as if you will pay income tax on your benefits when making the decision.

 

Spousal Collection Decision

COLLECTING SPOUSAL BENEFITS

If you are married to an individual who is collecting Social Security retirement benefits and you are at least age 62, you may be entitled to collect spousal benefits.  Spousal benefits will be equal to 50% of your spouse’s PIA if you collect benefits at FRA or later. If you are entitled to your own benefits and your PIA is less than 50% of your spouse’s PIA, spousal benefits will be paid in addition to your own. These combined benefits will equal 50% of your spouse’s PIA, assuming you start collecting both benefits at FRA or later.

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Consider collecting your individual benefits first, then spousal benefits once your spouse starts collecting benefits.

COLLECT  MORE INCOME BY COMBINING SPOUSAL

AND INDIVIDUAL BENEFITS

COLLECTING SPOUSAL BENEFITS EARLY

If you collect spousal benefits prior to your FRA, your adjusted spousal benefits (amounts in addition to your own benefits) will be reduced. Your spouse’s collection age has no impact on your spousal benefits.

 

 

WAITING TO COLLECT SPOUSAL BENEFITS

Unlike your own benefits, spousal benefits are not subject to guaranteed annual increases if you defer collecting them beyond FRA. Spousal benefits are at their maximum when you reach FRA, so there is no advantage to be gained by deferring collection.

COLLECTING SURVIVOR BENEFITS

If you have been married for at least nine months and your spouse passes away, you may be entitled to survivor benefits. If you remarry before age 60, survivor benefits will not be paid unless the subsequent marriage ends. Remarriage after age 60 does not prevent or stop entitlement to benefits. The amount of your survivor benefits depends on when  your spouse began taking benefits. If the death occurs prior to your spouse collecting benefits, your survivor benefits will equal 100% of your spouse’s PIA when you attain FRA. If your spouse was collecting benefits at the time of his or her death, your survivor benefits will equal his or her actual benefits, assuming you have attained FRA. The only exception is if he or she was collecting benefits that were reduced more than 17.5%. In that case, your survivor benefits will be 82.5% of your spouse’s PIA. The survivor benefits, if higher, will replace your other benefits

 

COLLECTING SURVIVOR BENEFITS EARLY

You can collect survivor benefits as young as age 60. If you collect at age 60, your survivor benefits will be reduced by up to 28.5%.

 

CHOOSING BETWEEN BENEFITS

If you are entitled to both individual and survivor benefits, you can choose to begin collecting one and then switch to the other at a later date. It is possible to collect reduced survivor benefits at age 60, and then convert to your own unreduced benefits at FRA or later. You also have the option to collect individual benefits and then switch to survivor benefits.