Social Security - An Update

According to the Social Security Administration, nearly 62 million Americans are receiving some type of benefit from the program as of April 2012.  There is much speculation as to where the program is headed in the future.  Unfortunately, there’s little more to report on long term changes than mentioned in my July 2011 blog on just that topic.  The broken record remains the same.  If you’re over 55, you’re likely to see your full benefit.  How that benefit is taxed, whether or not it is means-tested in some fashion and what’s to come of the program for the rest of us remains to be seen.
 

That said, there are sufficient changes surrounding Social Security in the here and now that justified an update. 

Analytical Tools Multiplying

With 10,000 baby boomers reaching age 65 every day, it’s no surprise that a large number of tools have started to sprout up promising to help analyze how to maximize your benefit.  These tools vary in their level of sophistication, but most ultimately come down, as all financial planning does, to making educated guesses about a number of variables.  Despite much of what’s written out there, the decision as to when to draw social security is often much more than just picking age 62, 66 or 70.

The basic rule of thumb is simple.  If you expect to live past age 80 or so, depending on some other factors, it’s best to wait as long as you can to draw your benefit.  But, that comes with a number of caveats.  It’s impossible to touch on them all, but the biggest gap we see in these tools is the ability to translate what’s best purely from a Social Security standpoint to how the timing of your benefit impacts the overall portfolio.  

Does drawing later for a higher benefit cause too much strain on your portfolio in the early years of retirement?  Is giving in to the emotional pull of starting benefits sooner costing you potentially hundreds of thousands of dollars in benefits down the road?  We have the ability to look at these tools as they relate to your overall plan and help make that decision about when to turn on benefits as educated a choice as possible.

No More Statements

As you may have heard, an effort to reduce spending on postage, paper and impact to the environment has led the Administration to cease mailing out annual statements.  In response, they’ve added a new online offering called “My Social Security”.  The program allows you to create your own login and retrieve the same information reported on your annual statement at any time.  The website can be found here, or we’d be happy to walk you through the process in our next meeting.

No More Paybacks

Another slightly older bit of news that wasn’t very widely covered is the closing of the “payback” loophole.  In the past, you could elect to start your benefit early and then, at any time before age 70, “cancel” your election, payback what Social Security had paid you to that point and then restart your benefit at the new, higher rate.  This was essentially an uncollateralized, non-interest bearing loan from the government.  That option has since been removed and is no longer a tool to use in determining the best outcome for you and your benefit. 

Unintended Benefits 

Stories continue to emerge about various other Social Security “loopholes” that are likely to be closed as Congress continues to find every way they can of extending the program without upsetting the electorate.  One story that’s arguable an illustration of what’s wrong with the system was one I recently came across in Investment News.  Dependent children under a certain age are eligible for benefits of up to ½ the amount of the recipient.  This rule was largely intended for parents receiving Social Security for disability or widow/widowers’ benefits or for those having to care for dependent grandchildren.  The unintended consequence is that, in this day and age, more and more fathers in their sixties have young children.  Until the loophole is addressed, Mary Beth Franklin of Investment News recommends anyone eligible take the benefit and use it to fund the child’s 529 plan.  She coins the strategy “The Viagra College Fund.” 

We’ll continue to monitor this and all the topics we cover here that can have a meaningful impact on your life and financial goals.  If you have any questions or wish to discuss further, don’t hesitate to contact us via the links below.

Thanks and have a great week!

Chip Workman, CFP®

cworkman@taaginc.com

www.taaginc.com

When I'm 64

It wasn’t listening to Paul McCartney sing “When I’m 64” at his recent concert that inspired this week’s blog, but the fact that in 2011, another baby boomer turns 65 about every 10 seconds. Although age 66 is when you will reach Full Retirement Age for Social Security benefits, there are several decisions that need to be made regarding your Medicare coverage when you are 64.

• If you are already receiving Social Security, you do not need to apply for Medicare and will be automatically enrolled in Part A (hospital or inpatient care) and Part B (doctor’s visits or outpatient care). You will receive your Medicare card about three months before you turn 65. 
• If you are not collecting Social Security, you can apply for Medicare at age 64 and 8 months. The easiest way to do this is to apply online.
• If you have Part B coverage through an employer plan, your Medicare card will instruct you how to proceed. You should check with your former employer to see if your retiree coverage reverts to a Medicare supplement at age 65.

If your employer does not provide any coverage when you turn 65, you will need to decide whether to purchase a Medicare supplement (also known as Medigap) policy plus Part D (drug coverage) or whether a Medicare Advantage (Part C) policy makes more sense. This choice will be driven by your current health and the prescriptions you take.

When I helped my mother-in-law apply, it made more sense for her to buy a Medigap policy combined with Part D for her prescription coverage. The monthly cost was higher than Medicare Advantage, but her out- of-pocket exposure was significantly less. She had some health issues such as osteoporosis and high blood pressure and takes several medications on an on-going basis. When she had to have a Pacemaker put in the following year, she didn’t have any additional expenses associated with her operation.

It is very important to choose the proper plan because you can only change your Medicare coverage once a year. We can refer you to a specialist to help you decide what type of coverage is most appropriate for your situation.

The costs associated with Medicare coverage continue to change. Part A is subsidized through payroll taxes, but Part B and Part D premiums are based on your Modified Adjusted Gross Income from your tax return. The basic monthly premium for Part B starts at $115.40 and can be as high as $369.10. The Part D premium is $0 for couples making under $170,000 but increases to $69.10 for couples earning over $428,000.

Just like any other aspect of your financial plan, we are here to help you determine the most effective way to cover your healthcare costs in retirement.

Christine L. Carleton, CFP®
clcarleton@taaginc.com
http://www.taaginc.com/

Update from Washington

It was my hope this week to follow up my May blog on how changes in Social Security might impact you with an update on how the debt ceiling and budget agreement in Washington would do the same.

One small problem, I was relying on Washington to actually have a deal in place by today.  Serves me right, I suppose.  Here we sit Wednesday morning knowing just as little, if not less, than ever.  It’s still my humble opinion that some kind of deal will get done soon, but the details from there are anyone’s guess.

I’ll instead attempt to introduce some more of the latest proposals getting support in regards to this legislation.  I hesitate to add to the load of information (and misinformation) on this topic.  But, as these ideas get kicked around the floor of Congress, the nightly news and the internet, I think it’s important to provide a basic, centered background on what they might mean for you.

Social Security Cost of Living Adjustments

One targeted way to help slow the growing costs of Social Security is to change how it accounts for inflation.  Currently, annual adjustments are tied to the consumer price index, or CPI.  For example, with traditional CPI, if the cost of beef rises, the index rises accordingly.  The push is to change this in favor of what’s known as a “chained” consumer index.  In this case, if the price of beef rises, an adjustment is made to account for those that would simply buy cheaper cuts or choose another source of protein.  This would lower the average rise in social security benefits from year to year.  It is unclear how much support this has and it would not be sufficient to sustain Social Security for any length of time, but it is a term you might hear in the coming days and weeks. 

Social Security Payroll Tax

Employees have been enjoying a 2% cut in the Social Security payroll tax over the last year and a half.  While it seems counterintuitive when trying to determine how to get more money into the program, there is talk of maintaining that reduction and extending it to employers as a form of additional stimulus for the economy.  Of course, this would likely be tied into the other Bush era tax cuts that are currently extended through 2012, setting up another major clash on tax rules not too far down the road.

Medicare Adjustments

Medicare is an area where details are few and far between as politicians remain reticent to tackle Washington’s most challenging program.  The most commonly advocated tax reform measure tied to Medicare is limiting the current $1.1 million mortgage interest deduction ceiling to $500,000 and restricting the deduction solely to primary residences.  This would be another drop in the bucket, but seems to have a fair amount of support. 

In other words, the unknown continues to be the unknown.  The good news is that most of the changes being considered are slow moving and will take 10-20 years to fully come into play.  It will take much of the burden off anyone currently receiving benefits and give those who hope to in the future time to plan and adjust accordingly.

The best offense is still a good defense.  Having a broadly diversified portfolio capable of responding to different market pressures and providing for what you need in the short term, maintaining spending patterns that are within your means, and combating future health care costs by eating well and staying fit are the best tools to combat whatever comes down the pike.  The only other recommendations I have would be to ignore the noise as much as possible until firmer details present themselves and, if you feel strongly about it, put that venting to use by sending an e-mail to your representatives.

It is my sincere hope to have an actual update on what was passed rather than what might be passed in the near future and how the rising debt ceiling and budget agreement impact you. 

Have a great week!

Chip Workman, CFP®

cworkman@taaginc.com

www.taaginc.com

How Will Changes in Social Security Impact You?

With Secretary Geithner back in the news last week pressing Congress to take action on the growing concerns with Social Security, it’s likely we’ll soon see Congress return to the slew of proposals presented over the last few months.

In this world of non-stop information, it’s tough to discern between news and opinion, truth and fiction and everything in between. Many of our clients have asked for a basic breakdown of the primary issues and proposals floating around Capitol Hill and how it directly impacts them. A summary of some of the basics are below.

Increasing the retirement age

• An eventual increase in the retirement age for Social Security is likely to be a part of almost any proposal. This process is very likely to be gradual in nature, grandfathering anyone currently at or near retirement age. For those readers still in their working years, there’s potential for a wide range of impact based on what age is agreed to and when it goes into effect.

 Means Testing

• Since its inception in 1935, Social Security has always been paid based on an individual’s wages regardless of their other wealth or non-wage based income. The system’s current situation has shifted talk to proposals that could include means testing. Means testing refers to reducing or eliminating benefits based on a pre-determined formula for wealthier and/or higher income participants. This formula gets a little tricky depending on who gets their way in Washington based on a wide range of testing factors, such as…

          *   Income testing that may or may not include investment income or income from a business
          *   Asset-based testing that could be based on all assets a participant holds, or allow for
               omission of certain assets like residences or automobiles
          *   The tests could be assessed all at once when an individual’s benefits begin or over regular
               intervals
          *   The tests could either gradually phase out benefits, eliminate them altogether or a combination
               of both.

• It’s important to note that there does seem to be some growing support in Washington that, if means testing is determined to be necessary, that it be done against career earnings as opposed to retirement assets.

• Long story short, it’s still far too early to determine what the impact of means testing on a given individual could be, but it is an important piece of the puzzle to understand.

Where things stand

• There are multiple budget plans out there right now that all treat Social Security a little differently. It’s unlikely that any of these plans pass as-is, but much like means testing, it’s important to understand what is included in each at a basic level to understand how it might impact you.

          *   The Simpson/Bowles Deficit Commission
                -   This group recommends starting some loosely defined form of means testing in 2050 for middle
                     and upper income earners.
          *   Paul Ryan’s “Roadmap” Budget Plan
               -   This plan suggests preserving the current Social Security system as-is for all people age 55 or
                    older and doesn’t get into great detail as to what other action should be taken to help keep the
                    program solvent for those under 55.
          *   Lindsey Graham’s Social Security Solvency & Sustainability Act
               -   This plan suggests raising the retirement age to 70 by 2032 and starting means-testing for new
                    retirees in 2018, with benefits beginning to tier down for retirees with income starting at
                    $43,000. Anyone currently age 56 or older would maintain under the current rules.

Hopefully this summary has at least given you some idea of the issues at hand. Obviously, a lot is still up in the air, but it will be important to separate the details from the rhetoric as this issue starts to be bantered about again. It is an issue that, one way or another, will impact all of us.

Chip Workman, CFP®
cworkman@taaginc.com
http://www.taaginc.com/