Advice for Savvy Retirement Planning

Quick Tip: How the Consumer Price Index (CPI) is Calculated

CPI BasketHow the Consumer Price Index (CPI) is Calculated

In calculating the Consumer Price Index (CPI), the government measures the change in prices of roughly 95,000 goods and services nationwide. The goods and services are divided into 8 major categories, which are:


  1. Housing (41%)
  2. Transportation (17%)
  3. Food and beverages (15%)
  4. Medical care (7%)
  5. Education and communication (6%)
  6. Recreation (6%)
  7. Apparel (4%)
  8. Other (4%)


About Robert Henderson and Lansdowne Wealth Management

Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or You can also view his personal finance blog, The Retirement Workshop at and the firm’s website at

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your Fidelity 401K or Hewitt 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at Your 401K

See my Google+ Profile

What is the Social Security Leveling Option?

Social Security Leveling Option

A Social Security Leveling Option on your pension may help you afford early retirement

The Social Security Leveling Option

The Social Security Leveling Option is a pension plan payout option offered by pension plans to level out the income of someone who retires early. The leveling applies to the amount of pension payments and not to the amount of Social Security you will receive. If your employer offers a Social Security level option as a Pension Plan Payout Option, it may be easier to take an early retirement.

How Social Security Income Works

If you were born after 1942, Social Security retirement age is between 66 and 67 to collect full retirement benefits, depending on year of birth, . You can begin receiving reduced Social Security checks as early as age 62, but these benefits are reduced forever. However, there is no option (for non-disabled individuals and non-widowed spouses) to receive Social Security benefits prior to age 62. If you decide to retire prior to age 62, you will need other sources of income. Social Security is indexed to inflation, so every year the Social Security Administration will determine by how much (if at all) they will increase Social Security benefits.

READ: 401K Contribution Limits

How Social Security Level-Up Options Work

The idea behind the Social Security Leveling Option is to provide an increased pension benefit to early retirees while they wait for Social Security Benefits to kick in. Once SS benefits commence (or generally speaking, at age 65), the pension stream would be lowered, thus keeping the retirees total retirement income stable both before and after Social Security begins. It should be noted that the pension leveling option is independent of any Social Security decisions. In other words, you could elect the pension leveling option and then take Social Security benefits as early as 62, or as late as 70.

For example, let’s assume you opted to retire at age 60, and your initial pension payment would be $1,500 per month. In a couple of years when you turn 62, you will start receiving $1,000 per month from Social Security for a total retirement income of $2,500 at that time. If you elected the level pension option, your initial pension amount would be increased to $2,000 and then reduced to $1,000 when you start receiving $1,000 from Social Security. The level pension plan keeps your retirement income at a steady $2,000 per month throughout retirement instead of starting your retirement earning $1,500 and then jumping to $2,500 per month when you start to receive Social Security.

READ: Pension Plan Payout Options – Lump Sum or Other Annuity Options (including Social Security Leveling)

Considerations as a Pension Plan Option

Social Security Leveling has two main requirements: you must be eligible to receive benefits from your employer’s pension plan and you must provide your employer with a written estimate of your Social Security benefit. Although the estimate is usually based on benefits available at age 62, some plans will accept an estimate of benefits available at full retirement age (66), or age 65.

Whether leveling is a pension plan option that makes sense depends on how early you are retiring compared to how much money you give up in long-term pension payments. Social Security has cost-of-living increases, and your pension may also, which could also affect the long term results. But most private company pensions (versus municipal) do not have inflation adjustments. It is best to map out your various income options over time to determine which might work best for your circumstances.

READ: Desired Replacement Rate


About Robert Henderson and Lansdowne Wealth Management

Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or You can also view his personal finance blog, The Retirement Workshop at and the firm’s website at

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your Fidelity 401K or Hewitt 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at Your 401K

See my Google+ Profile


Pension Plan Options – Lump Sum or Annuity?

Pension OptionsPension Plan Payout Options

Most corporate pension systems offer a range of payout options when choosing how to receive benefits. It is extremely important to choose wisely, as in virtually all cases, once an election has been made, it cannot be “undone”. Make the wrong choice, and you must live with it for the rest of your life.

Read: 401K Contribution Limits

Typically, a pension will offer several different pension payout options, and possibly a single lump-sum payout option or leveling options. An “annuity payout” option is essentially a monthly benefit that is paid to you for life (and possibly the life of a spouse). Some pension plans may offer a “period certain” payout option as well. Below is a summary of some of the typical annuity options:

Annuity Options for Pension:


Annuity Payout

In addition to the basic options above, some pension plans will offer some unique strategies such as Social Security income-leveling or “pop-up” provisions that are great in certain situations. The Social Security Leveling options will typically offer higher benefits in the beginning, and then be reduced once you are eligible for social security income (thus “leveling” your income across all years). The “pop-up” provision would provide for a higher monthly benefit if your beneficiary should pre-decease you.

READ: Social Security Leveling Options

Joint Survivor Pension Payout Options

In most cases, the pension managers know that a spouse will require continued financial income after the pensioner passes away. Of the pensions I have seen, they generally require the spouse to sign away their right to survivor benefits if the pensioner elects the single life annuity option.

One strategy for couples where this might make sense is commonly referred to as pension maximization or “pension-max”. This involves the pensioner electing the single-life annuity option, which offers the highest payout. At the same time, the couple purchases a permanent life insurance policy on the pensioner, which will be used to replace the annuity upon their death. The strategy here only makes sense if the cost of insurance premiums is significantly less than the reduction on lifetime annuity payments if the couple were to elect the joint survivor option.

Annuity or Lump Sum?

If your pension plan offers a lump-sum pension payout option, you are fortunate. While there are differing professional opinions on whether to take the annuity or the lump-sum, simply having that feature available to you is a nice added benefit.

There are a lot of things to consider when deciding between the pension annuity or lump-sum. We will look at some of the pros and cons of each option, which will better guide you to the best decision for you and/or your spouse.

Annuity Pension Payout Option


  • Guaranteed payout. Assuming the pension plan stays solvent, you are guaranteed the income promised to you for the rest of your lifetime (and possibly your spouse’s lifetime).
  • No need to manage the money. Because you don’t control the money, you have no “investment” risk.


  • Most pension incomes do not rise with inflation. So the amount you receive now may be the same amount you and your spouse receive for the rest of your lifetimes (and possibly a reduction to your spouse if you select a reduced joint survivor option). And considering interest rates are at an all-time low, with predictions of increased inflation in the years ahead, pensioners may be locking themselves into artificially low pension streams for their lifetime.
  • No control over the money. If you need a large sum of money for a particular reason (buy a car, home renovations, etc.) there is no way to access the principal.
  • Once you and/or your spouse dies, the money is gone. There is no way to pass on a legacy to your heirs.
  • If you leave your company prior to your retirement age (prior to starting pension benefits), the base value of your pension may only rise moderately. For example, right now because interest rates are so low, pension values may only be rising between 2-3% per year until the date that the pension begins. Typical interest factors utilize the U.S. Treasury or Corporate Bond index.
  • If you don’t need the money right away (or don’t need all of it), you would still receive the pension payments and be required to pay income taxes on it.
  • Potential that corporate mismanagement could result in a reduced pension payment. Most pensions participate in a pension insurance system (PBGC), but that insurance will not always cover 100% of the original pension (benefits are capped), and the rules may not necessarily fit your expectations.

Lump Sum Pension Payout Option


  • Have control over the money. Whether you want to spend it today or never, you can control when and how much spend.
  • Opportunity to create legacy for heirs. Since the money will now be under your control, with proper planning, you may be able to pass on significant assets to heirs.
  • Potential for significantly more income over time. If properly managed, your investment returns may outpace the income generated from the pension annuity.
  • Potential for income that will keep pace (or exceed) with inflation. This will help maintain your purchasing power as the years go by.
  • Ability to better manage taxes. Depending on how much income you require, if you defer (or reduce) withdrawals from your pension balance (which would typically now be within an IRA account), you may be able to defer taxes until a later date (or eliminate the income taxes on the unused portion that is eventually passed on to heirs at your death).
  • If you change your mind, you still have the opportunity to buy a “personal pension” buy buying an annuity from an insurance company. In some cases, the private annuity may end up offering better payout options than the corporate pension plan. The best part is that this can be done at virtually any time after receiving the lump sum.
  • You are now free to manage your beneficiaries based on your own desires and the needs of your family and heirs.


  • You are now required to manage the money. While you could hire a talented advisor, there is still no guarantee that investment returns will match your needs or expectations.
  • If you lack financial self-control, you may risk depleting assets too early in your retirement years and be left without sufficient assets in your later years.

Making a decision on pension payout options is not easy. Careful thought and analysis should be done before making your decision. It may also be wise to invest in the services of a financial planner to help you make this important decision, and present various scenarios for you to consider.

Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or You can also view his personal finance blog, The Retirement Workshop at and the firm’s website at

See my Google+ Profile

Class Offered: Building Your Retirement Income

Retirement WorkshopIf you or someone you know in the Mystic, CT area is getting ready to retire, or is already retired, and wants to learn more about how to structure their retirement income, this class may be helpful.

Education is the foundation of personal financial empowerment. Without the necessary comprehension, most feel ill-equipped to make the significant financial decisions we face today.

Lansdowne Wealth Management hosts classes to build the necessary framework for a successful retirement financial plan. On an ongoing basis our classes are focused on the areas we see most relevant and timely to your personal finances.

Consistent with our lifetime commitment: Classes are free of sales-pitches and commitments, and anyone is free to attend unless stated otherwise in the description. Since we are a fee-only registered investment advisory firm, we do not sell products.

To see the current classes offered and sign up to attend, you can go to our Retirement Workshop site here.

See the class description here.

Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or You can also view his personal finance blog, The Retirement Workshop at and the firm’s website at

Social Security Cost of Living Adjustment 2018

Social Security COLA** 2018 Social Security Cost of Living (COLA) Update **
In it’s first substantial raise in years, the Social Security Administration has announced that there will be a 2.0% Cost of Living Adjustment (COLA) for 2018. The primary force behind this is rising health care costs, which is one of the largest cost drivers for seniors.

The 2% COLA announcement from the Social Security Administration, which had been widely expected, affects 70 million people, about 60 million retirees plus disabled workers and spouses and children who receive benefits.

The SSA also released a Social Security COLA Fact Sheet with additional details.

READ: When To Take Social Security Benefits

There is also considerable debate surrounding the COLA inflation measurements the government uses to calculate the annual adjustment. Some advocates believe that the calculation artificially lowers the “real” impact of inflation, especially on retirees that have been hit hard by a combination of lower real estate values, steep losses in retirement savings due to multiple market corrections that past 10 years, as well as staggering increases in health care and prescription drug costs. Meanwhile, certain lawmakers feel the government data actually overstates the actual inflation numbers.

Below is a table of historical SS COLA adjustments:

Automatic Social Security Cost-Of-Living Adjustments

July 1975 — 8.0%
July 1976 — 6.4%
July 1977 — 5.9%
July 1978 — 6.5%
July 1979 — 9.9%
July 1980 — 14.3%
July 1981 — 11.2%
July 1982 — 7.4%
January 1984 — 3.5%
January 1985 — 3.5%
January 1986 — 3.1%
January 1987 — 1.3%
January 1988 — 4.2%
January 1989 — 4.0%
January 1990 — 4.7%
January 1991 — 5.4%
January 1992 — 3.7%
January 1993 — 3.0%
January 1994 — 2.6%
January 1995 — 2.8%
January 1996 — 2.6%
January 1997 — 2.9%
January 1998 — 2.1%
January 1999 — 1.3%
January 2000 — 2.5%(1)
January 2001 — 3.5%
January 2002 — 2.6%
January 2003 — 1.4%
January 2004 — 2.1%
January 2005 — 2.7%
January 2006 — 4.1%
January 2007 — 3.3%
January 2008 — 2.3%
January 2009 — 5.8%
January 2010 — 0.0%
January 2011 — 0.0%
January 2012 — 3.6%
January 2013 — 1.7%
January 2014 — 1.5%
January 2015 — 1.7%
January 2016 — 0.0%
January 2017 — 0.3%
January 2018 — 2.0%
(1) The COLA for December 1999 was originally determined as 2.4 percent based on CPIs published by the Bureau of Labor Statistics. Pursuant to Public Law 106-554, however, this COLA is effectively now 2.5 percent.

READ: Social Security Leveling Option

Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or You can also view his personal finance blog,The Retirement Workshop at and the firm’s website at

When to Take Social Security Benefits

Question MarkEach week, readers pose various questions related to personal finance. To submit your personal finance question, please send an e-mail to This week we answer one question from a local reader.

Q. I am turning 62 this January, and I am confused about when the best time is to start taking Social Security Benefits.  Most of my friends have told me to take it as early as possible (62 I believe), but I have also read many places to defer taking benefits as long as possible. – D.W. from Ledyard, CT

A. This is one of the most frequently asked questions I get from people. The question has been around almost as long as the Social Security system itself. However, it’s become a much bigger issue as people live longer and longer.

The short answer is that it depends on several things. Here’s the long answer: You mentioned in your original e-mail that you are married and you were the primary breadwinner. This is not uncommon, so let’s look at it from this perspective first.

A lot of people are of the same opinion that they should take the benefit now and enjoy the money and security of knowing you won’t die without having claimed much of the benefit. The fundamental problem with this attitude is that, assuming you have other benefits to draw from as well, you would end up dying with other assets in your estate along with the balance of your social security benefits. But, the single, biggest financial threat to any retiree is outlasting your money. Deferring your social security benefit helps reduce this risk by significantly increasing your benefit each year from age 62 to 70. In fact, if you were born after 1943, your benefit will compound by 8% per year, each year until age 70. And this is in addition to the normal cost-of-living adjustments (COLA) added to all recipient benefits each year.

Social Security BenefitsI did a quick calculation to compare someone that would have a normal retirement benefit of $1,500/mo. (at FRA, or Full Retirement Age of age 66). If they opted to receive benefits at age 62, their benefit would be $1,140/mo. for life (plus COLA’s). By deferring to age 70, their benefit would be $1,980/mo. for life (plus COLA’s). Ignoring time value of money, taxes, and investment income, the break-even period by deferring to age 70 would be approximately 12.5 years. So theoretically, if you lived to age 83, you would have collected the same amount of money over your lifetime under either scenario.

But let’s not forget that the average male (all races) has an average life expectancy of 17.5 years if they live to age 65. For a married couple, the average life expectancy of one spouse is 29 years. That’s average life expectancy. So chances are, at least one of you will live to age 94. On top of that, if the primary breadwinner is male, and more than likely dies first, the surviving spouse is left with a benefit that will be 32% higher than if he had opted to take the age 62 early benefit. This is where we get to the heart of the issue.

While I generally advocate that a healthy married couple defer benefits as long as possible, there may also be circumstances where this is not the right answer (such as illness, poor family history, financial burden, etc.).

READ: Social Security Leveling Options

To submit your personal finance question, please send an e-mail to

Robert C. Henderson is the President of Lansdowne Wealth Management in Mystic, CT. His firm specializes in financial planning and investment management for individuals approaching retirement or already in retirement, with a focus on the particular needs of women that are divorced or widowed. Mr. Henderson can be reached at 860-245-5078 or You can also view his personal finance blog at and the firm’s website at

The 10 Most Difficult Retirement Decisions

See Robert Henderson of Lansdowne Wealth Management quoted in this article by Emily Brandon of U.S. News and World Report’s Money & Retirement section:

Before leaving your job, you’ll need to make these tough choices

August 29, 2011 RSS Feed Print

The decision to retire can be sparked by a number of factors: reaching a specific age, hitting a savings goal, or being laid off in a tumultuous job market. To support yourself without income from a job, you’ll have to make a series of choices about Social Security, health coverage, and your investments. Here are 10 of the toughest decisions you will make before you retire.

[See One Move That Could Boost Your Retirement Security.]

When to retire. For some people, it’s a financial calculation. You know you’re financially ready when the combination of your Social Security, traditional pension, and investment income produces enough cash flow to cover all of your anticipated expenses for the rest of your life. “Working two or three more years can make an incredible difference to your long-term plan if you continue to save in your 401(k) or 403(b) and continue to pay into Social Security,” says Mary Alpers, a certified financial planner and founder of Alpers and Associates in Colorado Springs, Colo. But retirement also often involves an identity shift from your former job title to a free agent. Sometimes this decision is made for you because of a layoff or buyout. Many people also like to coordinate their retirement with a spouse.

When to claim Social Security. You can sign up for Social Security beginning at age 62, but payouts increase for each year you delay claiming until age 70. “Wait as long as you possibly can, because the additional percentages that are added on are enormous,” says Jane Nowak, a certified financial planner for Kring Financial Management in Smyrna, Ga. “Since we are living longer, you certainly want your paycheck from Social Security to be as fat as possible.”

Health coverage. It’s essential to find affordable health insurance if you want to retire before age 65. “If you are not entitled to retiree medical benefits or if they are deferred to a later date, make absolutely certain you have access to and can qualify for individual coverage,” says Robert Henderson, president of Lansdowne Wealth Management in Mystic, Conn. “Also verify the costs. Health insurance can be prohibitively expensive in some cases.” Even after you qualify for Medicare, the decisions don’t end. You have to choose whether to purchase a supplemental policy and shop around for the Medicare Part D plan that best meets your prescription drug needs each year in retirement.

How much you can safely spend each year. If your nest egg isn’t sizeable enough to finance your retirement completely, you’ll need to calculate how much you can safely spend each year without depleting your savings too quickly. “Three to 4 percent is my comfort zone, and I hope less,” says Alpers. An annual draw-down rate of 4 percent on an investment portfolio with 35 percent in U.S. stocks and 65 percent in corporate bonds has an 89 percent likelihood of lasting 35 years or more, according to Congressional Research Service estimates.

[See Why Your Retirement May Not Be Permanent.]

How much investment risk. Retirees need to balance their investment needs for safety and continued growth. “Hold as little equities and higher-risk assets as possible, while still enough to meet your long-term goals,” says Henderson. “Most retirees need no more than 50 to 60 percent in equity and equity-like investments.” You’ll also need an emergency fund and several years’ worth of living expenses set aside in a safe place. “Always make sure that you have your first three to five years of withdrawals invested in very conservative investments. Good choices are CDs, money market accounts, short-term treasuries or mutual funds that invest in them, and fixed-immediate annuities,” says Henderson. “This way, regardless of what the stock market is doing today, you don’t have to worry about withdrawing assets that have dropped in value.”

When to pay taxes. After decades of deferring taxes on your retirement savings using 401(k)s and IRAs, the tax bill becomes due upon withdrawal in retirement. The timing of these withdrawals could affect how much you pay in taxes. “Try to balance out your withdrawals from taxable and nontaxable accounts each year so you are not kicking yourself into a higher tax bracket at some point,” says Henderson. Taking a large IRA withdrawal in a single year could result in an oversized tax bill. Withdrawals from traditional retirement accounts become required after age 70½.

Where to live. Once you are no longer tethered to a job, you can live anywhere that suits your tastes and budget. Moving to a place that costs less than where you live now can boost your standard of living and help stretch your nest egg. You could also test out a place with better weather, more opportunities for recreation, or move closer to family.

[Find Your Best Place to Retire.]

Whether your home should help finance retirement. A paid-off mortgage can help finance your retirement because it eliminates one of your biggest monthly expenses. In some cases, downsizing to a smaller home or moving to a place where the cost of living is significantly lower can even give a significant boost to your nest egg. “Especially if you live on the East or West coast, where housing can be extremely expensive, you may have an opportunity to downsize and realize quite a bit of the appreciation you had in your real estate,” says Henderson.

[See 10 Places to Buy a Retirement Home for Under $100,000.]

Whether to keep working. A part-time job is increasingly becoming common in the retirement years. Many people downshift to a job with shorter hours and less responsibility before retiring completely, while other people return to work after a break. The income, and sometimes benefits, a part-time job provides allows you to withdraw less of your retirement savings each year. Some people also find jobs they enjoy that allow them to interact with former colleagues, consult on the occasional project, or learn a new skill.

What you will do. Retirement isn’t only about quitting your job. It’s an opportunity to have complete control over how you spend your time. Make sure you have a few ideas about how you will fill the eight or more hours per day you previously spent working and commuting. Some people miss the sense of purpose and friends that their job provided for them, while others finally have the time for hobbies and projects they have been waiting years to tackle.

How to hike your Social Security benefits

By Robert Powell, MarketWatch

BOSTON (MarketWatch) — The Social Security Administration recently put the kibosh on a technique some retirees were using to boost their monthly benefits. But even though that loophole is essentially closed, experts say there are still plenty of ways households can legally maximize the amount of income they receive from Social Security.

In December, the SSA said retirees essentially can no longer do what are called do-overs, or the free-loan strategy. Here’s how it worked: You claim benefits at a given age and then years later repay what you received, pay no interest, and then file for benefits again, getting a higher monthly amount because you delayed filing until a later age. Read MarketWatch’s story on Social Security do-overs, from 2008.

“This strategy is equivalent to a ‘no interest’ loan from Social Security,” said Boston College’s Center for Retirement Research.

Social Security do-overs are basically gone, but there are a number of ways to make sure your monthly benefit is as high as it can be. 

Not many folks used this strategy, but the Center estimated the do-over tactic could cost Social Security an estimated $6 billion to $11 billion per year. Under the new rules, you can suspend and re-apply for your benefit only within the first 12 months of applying for Social Security, and you can only do it once in your lifetime. Read the Social Security Administration’s new regulations on 2009 report “Strange but True: Free Loan From Social Security” at the Center for Retirement Research site.

Now truth be told, many experts didn’t like this tactic. “I was never a fan of the repay-and-reapply method anyway,” said Elaine Floyd, certified financial planner and director of retirement and life planning at Horsesmouth LLC. “To take a permanently reduced benefit with the hope of cancelling it and raising it later was just too risky in my opinion, especially after the Center for Retirement Research at Boston College estimated the cost to the system if everybody did it. It was a loophole just waiting to be closed.”

Others agreed, including Jason Fichtner. He is now a senior research fellow at the Mercatus Center at Georgetown University but while he was acting deputy commissioner for the SSA, Fichtner started the push to remove the do-over option. “It was never meant to be a financial strategy for the wealthy to game the Social Security trust funds,” Fichtner said.

The do-over approach had its origins in the case of a woman “who initially claimed benefits in 1957 and later requested that she be allowed to re-file in 1964 in order to obtain a higher monthly benefit based on her more recent work history and older filing age,” according to the Center for Retirement Research. “The SSA granted this request on the grounds that it was in the best interest of the claimant to rescind the original claim. It was not specifically intended to allow zero-interest loans, but instead to allow for the possibility that changes in an individual’s circumstances could cause her to reconsider an earlier claiming decision.”

So, if you can’t use the do-over tactic any longer, what’s left? There are a few options, said Dennis Heywood of Social Security Solutions, but the choices available depend on whether a married couple includes one wage earner or two, the ages of each spouse, and the when one reaches full retirement age.

“And most importantly, how an option fits into a person’s financial portfolio,” Heywood said. “My experience is that many people are taking their Social Security at an early age to preserve investments as they age. Social Security replaces what they would take out of investments to live on.”

Said Fichtner: We don’t know the best age for you to claim Social Security. Only you do.”

Work longer, earn more

Your earnings record for Social Security continues to be updated as long as you work and pay into Social Security, Floyd said. “If you keep working at a relatively high salary, it can cause one of your lower-earning years to drop off the 35-year earnings record and serve to boost your primary insurance amount or what’s called your PIA.”

This advice, she said, is especially important for people who do not have 35 years of high earnings; for example, women who have stayed home with their children. “It even applies to high-earners in their 50s and 60s; although the earnings in their early years are indexed for inflation, the indexed amount is likely lower than their current salary,” said Floyd.

Delay applying

Most people claim Social Security as soon as they become eligible, at age 62. But the benefits of waiting to apply for benefits cannot be underestimated. Consider it this way: If you claim early, age 62, your benefit is reduced by 25% for your lifetime. But if you wait until age 70, you’ll get a 32% increase in your benefit, said Fichtner.

“In today’s low-return environment, those 8% annual delayed credits that an unclaimed benefit earns between the ages of 66 and 70 end up being extremely valuable,” Floyd said. “Most people consider their ‘break-even age,’ or the age at which the cumulative total under the later-claiming scenario catches up to the earlier-claiming scenario. But this usually leads to earlier claiming behavior because people don’t want to start out ‘behind.’”

READ: Social Security Leveling Options


4 Social Security Changes Coming in 2011

From Emily Brandon at U.S. News & World Report

The Social Security program will be tweaked in several important ways in 2011. Workers will get a temporary tax break on the amount they pay into the entitlement program, and several claiming options for retirees will be eliminated. Here’s a look at how the Social Security program will change this year. 

Lower Social Security taxes. The amount workers pay into the Social Security trust fund will temporarily drop from 6.2 percent of taxable wages up to $106,800 annually to 4.2 percent in 2011 only. For self-employed workers, the Social Security tax rate will drop from 12.4 percent to 10.4 percent next year, due to provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, signed by President Obama on December 17. Employers will continue to pay 6.2 percent of wages into the entitlement program.

The Social Security system’s finances are not expected to be harmed because the trust fund will be reimbursed for the full amount of the tax break from the general fund of the Treasury. However, this change also means that the Social Security trust fund will no longer be completely funded directly by citizen contributions. “This pretty much ends the claim that Social Security is self-financing or that it doesn’t contribute to the budget deficit,” says Andrew Biggs, a resident scholar at the American Enterprise Institute and a former deputy commissioner of the Social Security Administration.

Free loan option eliminated. Retirees will no longer be able to get an interest-free loan from the Social Security trust fund this year. The Social Security Administration announced in December 2010 that individuals will not be able to begin payments at age 62, pay back all the benefits received at age 70 without interest, and then reclaim at a higher rate due to delayed claiming. Under the new rules, Social Security beneficiaries may withdraw an application for retirement benefits only within 12 months of their first Social Security payment and are limited to one withdrawal per lifetime. “This free loan costs the Social Security trust fund the use of money during the period the beneficiary is receiving benefits with the intent of later withdrawing the application and the interest earned on these funds,” says the Social Security Administration in a statement about the rule change. The Center for Retirement Research at Boston College calculated that mass utilization of this claiming strategy could cost the system between $5.5 billion and $11 billion, primarily going to high-income households with enough liquid assets to pay back the benefits.

Retroactive benefit suspensions discontinued. Retirees will still be allowed to temporarily suspend their benefits and restart them later, which can result in bigger Social Security checks to account for the months or years in which payment was not received. However, beneficiaries will not be able to retroactively suspend benefits and pay back money already received in exchange for higher payments going forward. Retirees will be allowed to voluntarily suspend benefits only for months in which they did not receive payments or future benefits beginning the month after the request is made.

Paper checks retired. Retirees who apply for Social Security benefits on or after May 1, 2011, will no longer have the option of receiving a paper check in the mail. Seniors can have their entitlement payments directly deposited into a bank or credit union account or loaded onto a prepaid Direct Express Debit MasterCard. “This important change will provide significant savings to American taxpayers who will no longer incur the annual $120 million price tag associated with paper checks and will save Social Security $1 billion over the next 10 years,” says Richard Gregg, Treasury Fiscal Assistant Secretary. Retirees already receiving paper checks will need to switch to direct deposit or the prepaid debit card by March 1, 2013.

Social Security Trust Fund Shortfall…Why You Need Not Worry

OK, OK, OK, the Social Security Trust Fund is insolvent. Or…it’s going to be insolvent…or maybe not…but not until 2037. Enough already! On any given day you can scour the Internet for horror stories of how Social Security “isn’t going to be there” when I retire. And often times, current retirees have the mistaken belief that the benefit will be taken from them.

Let’s review the facts:

1.“Full Retirement Age” (when one can claim full benefits) is being slowly increased from age 65 to 67. This shift began in 2000, and is happening over a 22 year period.

2.Most benefits are subject to income tax.

3.High-income earners receive the largest dollar payments, but low income earners receive a larger percentage of their income. In other words, low income earners have earned a greater return on their Social Security tax payments than higher earners.

4.For most Americans, the Social Security tax is the single largest tax that they pay. Currently, it’s a flat tax on the first $106,800 of income that you earn.

5.Social Security is “funded” by a 12.4% tax on earnings (paid half by the employer and half by the employee). The current administration imposed a temporary reduction of 2% (hlaf by the employer, half by the employee).

6.For years (essentially since the program was incepted in 1937), we have been collecting more than we’ve paid out. So each year, some of that revenue goes to pay benefits and the excess receipts go into the “Social Security Trust Fund.”

7.The Trust Fund as basically an account which invests its money in US Treasury bonds.

8.Starting in or around 2016, the 12.4% current tax revenues will not be enough to pay 100% of current benefits. They will need to start using the interest income from the bonds to pay benefits (in addition to current receipts).

9.In 2024, benefit costs will exceed Social Security’s tax revenues (the 12.4%) plus Trust Fund income (the bond interest). As a result, the program will need to begin selling some of its investments (the Treasury Bonds) to pay benefits.

10.In 2037, all the bonds (the current “surplus”) will be gone. (The lockbox will be empty…) Social Security will be depleted. At that point we will only be able to pay 78 cents on the dollar (using the 12.4% tax income each year) and it will become worse as we go.

Finally, most people view the Trust Fund, and it’s investment in “Special Purpose” Treasuries as being “worthless”. That’s a half-truth. The fact is, the government spends every dime that the Trust Fund loans to it, so anytime the Trust Fund needs to redeem funds, the government must issues an equal amount of marketable Treasuries to cover that redemption. So, in essence, regular income taxes and federal borrowing goes towards funding the Trust Fund. It’s a confusing accounting gimmick that will essentially result in further government borrowing as time goes on.

There you go. The big ticking time-bomb. So then, one might ask, “what do we do to fix it?”

This is where it gets really interesting (if you want to use that term). And I say “interesting”, because, like most major issues in America, politics enters the picture, and common sense is (proverbially speaking) thrown out the window. There have been plenty of solutions proposed over the years, and as we all witness day after day, politicians banter these ideas back and forth, punting (to use a football analogy) to the next Administration or the forthcoming Congressional delegation.

In reality, like most economic and financial issues, the answer comes down to two simple, yet complex solutions: increase revenues or reduce expenditures. This budgetary scene is played out every day across the world; inside corporations and small businesses, among non-profit agencies, and within individual households. A simple mathematical equation…greater inflows, or smaller outflows. Sounds easy.

Well, it involves many different moving parts, but to simplify things, here are some of the many options Congress could choose in order to ensure the ongoing funding of our current system:

Reduction of Benefits:

1. Increase the mandatory retirement age even further. This would essentially delay the collection of benefits for future retirees.

2. Summarily reduce benefits by a stated percentage, either to future retirees, or current AND future retirees.

3. Reduce/change/eliminate cost-of-living-adjustments on benefits. Although increases would need to be made for future retirees, once you are retired, Congress could opt to increase benefits by some number less than the level of inflation (as is current practice). The current rate of CPI (inflation) and its impact on the retired is also debatable, but that’s a story for another time…

4. Do nothing now, and cut benefits drastically when the Trust Fund is depleted, down to the level of (then current) tax receipts.

Increase Revenues:

1. Increase the Employee and Employer Payroll Tax (or one, or the other).

2. Increase the Income threshold that is taxed, which currently stands at the first $106,800 of earnings.

3. Increase the return on investment in the Trust Fund (essentially, invest in riskier assets).

4. Transfer the legacy startup shortfall to the general government budget. What does this mean? The original recipients of Social Security paid little or (virtually) nothing into the system, but began collecting benefits in 1940 (tax receipts began in 1937). This created in initial shortfall in the system. In other words, those original recipients did not pay their fair share.

5. Do nothing today, and raise taxes in 2037.

Obviously, all of these options come with a bit of pain involved. In my humble opinion, the answer lies somewhere among a mix of the options outlined above…raise taxes slightly, increase the income threshold slightly, raise retirement age slightly, and reduce benefits slightly. Any drastic measures would only serve to alienate and financially impact one particular segment of the population. But the bottom line is that Social Security benefits as we know them, albeit slightly reduced benefits, are here to stay, at least until our government comes up with a better solution (please don’t hold your breath). So the next time you think “I’ll never see my benefits”, think about these facts.