The Social Security Puzzle


For all that we complain about it, social security continues to be one of the single most important tools for a successful retirement in the United States. To make it work well for you, there are some basics you need to understand: First, don't get confused about the difference between the social security retirement program and social security disability (SSDI), an income assistance program available to people of non-retirement age. A lot of the internet "information" and advice out there pertains to SSDI but won't do you a bit of good when it comes to retirement benefit questions.

Now that we have that straight, let's see how the social security retirement program works. Congress passed the Social Security Act of 1935 to address some of the horrible poverty and suffering we saw throughout the country during the Great Depression. The part of the act that provided monthly retirement benefits took a few more years to get started and then expanded in the 1950's and the 1960's. Medicare, the health care insurance program, was added in 1965.

In one sense, social security looks like a  savings program—you put in a little bit from every payroll check over the course of your working life, and when you retire, you have money to start taking out. But social security is actually more like an insurance policy. The money you put in is going to a shared "pot." Some people will put in more than they take out in the end; others will collect more than they put in. Even though your benefits are based on your social security payment history, the trick to making out well or poorly is in when you take the money and how long you and your dependents live after that (check your estimated benefit here).

The difference between 65 and 70

Overwhelmingly, financial advisors recommend that clients wait until 70 to take their social security benefits. Why? We are assuming that you will live quite a bit past the age of 65, and we'd rather you get a larger payment every month for the rest of your life than start early with a low monthly amount. Those of you who start at 62 (the earliest age) will be penalized by permanently lower payments for the rest of your life—up to 30% less every month.

Things look better if you wait until "full" retirement age at 65, but the Social Security Department has added in some extra incentives to get you to wait a little longer. If you were born after 1943, the Social Security Program will add an extra 8% to your benefit for every year after age 65 that you delay retirement. This continues until you hit age 70, when you've maximized what you can get.

(*Note: even if you are going to delay you social security benefits, you need to apply online for Medicare within the 3 months before you turn 65 or face the possibility of higher premiums and delays when you need it later!)

Clever tricks

There are more than a few tricks to getting the most out of social security. Here are a few that get used a lot:

  • Your spouse and dependent children (and even a former spouse) can receive benefits (and Medicare) based on your social security history. This means that you are not just analyzing how much you receive when deciding when to take benefits—you need to add in the financial effect of getting payments for your spouse and dependents. For a look at how much a spouse or dependent child can receive at different ages, check the Social Security Spousal Benefits Page.
  • But... you can also claim your benefit at full retirement, start benefits for your spouse or dependent child, and then suspend your own benefits until you reach a later retirement age. Confusing, right? A fair number of people use this trick to start benefits to a member of the household while still delaying their own benefits (to get those nice increases I mentioned above). In effect, this means your spouse/child gets the benefits from your social security now while you are still in line to get the increased amounts after age 70.
  • If you think about it, everything I just wrote above means that if you are the spouse of someone who has retired or a widow, you might want to lean on those benefits and wait to file for your own social security benefits. Not only do you get a better rate on your social security when you get it, but if you are receiving both the program will adjust your spousal benefits to a lower amount (they become in social security terms "excess" benefits).
  • Suspending your application is one thing—withdrawing and reapplying is another story. As I mentioned in my last post, a piece of advice gets passed around the internet every few years that instructs everyone to apply for benefits at 65, take the benefits for a while and then repay the whole amount and reapply at 70. At the heart of this strategy is the fact that you don't have to repay the benefits to the Social Security Administration with interest. If you have the bank account and organizational skills to manage this, it means you get an interest free loan for a few years, which you could use to other great things. However, the Social Security Administration got tired of this one in 2010 and made it tougher. Now you can only repay within 12 months of your first filing. If you consider how much paperwork goes into the withdraw & reapply process, it probably isn't worth the pain!


It seems strange to many people, but you will probably pay taxes on your social security income. In fact, if your total income is more than $34,000 (if you file yourself)/$44,000 (if you file jointly with a spouse,) you could pay federal income taxes on up to 85% of your social security benefits. The rate of income tax you will pay still depends on your tax bracket, as usual. But this little tax fact may well play into your decisions about when to take social security benefits.

And a couple of tips...

If you are really wanting to delve deeper in to the mysteries of social security, start with Laurence Kotlikoff's Q&A's for  PBS and plan on getting comfortable with a lot of online calculators. Otherwise, it is probably a very good idea to pay a planner for a consultation or financial plan as you approach retirement.

Working In "Retirement"


What post could be better for a Friday afternoon that one on all the great things you could do in your "retirement"? Financial planning has built its reputation as an industry by selling people on that semi-mystical period after your "real work" ends. But because so many of our clients are under the age of 50, retirement planning tends to be the least of what I do. It turns out that's just as well. It seems that many of us in the post-Baby-Boomers generations aren't planning a traditional retirement anyway. And that makes sense for a number of reasons.

Back in 1940, shortly after social security was introduced, a man or woman who was retiring at the age of 65 could expect to live on average another 13 years to age 78. By 1990, men who were 65 years old lived, on average, to about 80 years old, but women were looking at almost 20 years worth of retirement—to the age of 85. And the life expectancy numbers have grown bigger since. Even if you can afford to sit around on a golf course in Arizona for a few decades, would you really want to?

But there are some important considerations if you are planning on a working retirement.

How realistic is your work plan?

Keeping part-time work sounds easier than it is. You might assume that your willingness to take less income will make it easier to maintain a consistent income. Too many older workers have found, too late, that starting a new business or maintaining an old one part-time can result in long periods without any earnings—and that might not have been part of your plan. If you will have plenty of money to live on and don't mind whether the income comes in or not, you're in great shape here. Otherwise, you need to think ahead.

Start forming partnerships early. Ideally, you should start talking to people a few years before you plan to cut back on work. If you plan to continue as an employee somewhere, make sure you discuss your future role and everyone's expectations. Moving from a full-time to a part-time position always means that some duties and relationships have to shift. And pay attention to the stability and plans of your employer—do you have a plan B if the company moves, closes or changes its role?

Planning ahead is even more important if you hope to continue on in "retirement" as a consultant or a small business owner. As the end of your current career approaches, you will want to spend more time, rather than less, networking. And if this is a brand new business, remember that new businesses typically take 5 years to return a profit even if things go well.

Use Social Security and retirement accounts in the right order

Even though you will be earning some income in "retirement," you are probably hoping to take at least some of financial pressure off of yourself by drawing on retirement savings. Choosing which retirement savings to take first can make a big difference. Most people figure they'll start with social security. In 9 out of 10 cases, this is the wrong way to go. Here's why:

Full retirement age for social security at this point is age 70.Taking benefits before then will mean that those monthly benefits are discounted for the rest of your life. The longer you live, the more money you have missed out on. But that's not the only loss. What most people forget is that you get even more in social security benefits if you add in the few years of extra work you did in your working "retirement" before age 70. That additional income, even if its small, will also count toward your lifetime benefits. In other words, if you plan to earn more income after you "retire" you can keep adding to your future social security take.

*Note that in telling you to wait to 70 years old, I am contradicting the latest internet pop-up craze in which you take benefits early, invest them until age 70, and then returning the all the original benefits to the Social Security Department so that you can start over. Does it work technically? Sure. Is it likely to work out that way for most people? Nope.


What are your other options? Before you start taking from social security, consider taking from your IRA's or 401k's, etc... You can start withdrawing from standard retirement accounts penalty-free (though not tax-free) at 59 1/2. If you are fortunate enough to have a pension fund from a former (or soon to be former) employer, ask the HR department to help you calculate the amount you will receive monthly under different scenarios. Even if the pension discounts your monthly amount for claiming early, the penalty probably won't be as much as it is for social security.

Or use your savings. Your emergency savings (about 6 months of expenses) is for emergencies. But if you have put aside a pot of savings beyond this amount, it may make sense to draw from this first. If you are past the age of 59 1/2, the big question is likely to be, "what about taxes?" The money you put in your 401k's and IRA's is tax-deferred. The deferral ends when you start to take it out. On the other hand, the money you put in your investment or savings account (and your Roth IRA) was added after you paid income taxes on it. That means your tax bill for these type accounts will be limited to capital gains—which is likely to be a lot lower.

You are always going to pay tax on income at some point—the smart tax payer tries to time those tax bills for period in life when her income tax rate is lower.

Account for the costs of work

Any financial planner will tell you that most people underestimate how much they are actually spending. But here is the pleasant surprise—most people overestimate how much they will spend in retirement. It turns out that a lot of the costs we associate with daily living decrease or go away completely in the later years of our lives. It might be mortgages or loans that get paid off, children who don't need anymore help, or clothing budgets that slowly shrink as work-wear ceases to be a concern. It could be simply that we no longer need to spend so much at dry cleaners, gas stations, and take-out restaurants when our careers are not snagging the best portion of our time.

If you are planning to continue working in "retirement" you need to add back in a few of those costs. And this is especially true if, as a small business owner or a consultant, you have business expenses. Make sure that whatever financial plans you make, you account for the costs of working.

Think daily

This advice applies whether you plan on working in retirement or not. During our hectic work lives, we develop all sorts of fantasies about what an alternative life could look like. And we often set these fantasies in "retirement." But the living in the hut on a Caribbean beach, running a French B&B, and founding that tech start-up are all going to look very different in daily life than they do in your work-induced fantasies. Before you commit to any plan for a new life, find opportunities to test out what that life would feel like if you actually lived it on a daily basis.


What if you live to 103?


This weekend Bloomberg News featured an article by Suzanne Woolley about the perils and conundrums of trying to plan your finances around our increasingly long life spans. For the article, Woolley interviewed David Little, Director of the Retirement Income Planning Program at the American College of Financial Services. Unlike the standard use-your-401k, retire-later advice articles, Woolley's piece delved into how Littell was personally wrestling with decisions about home, work and family. For the next two weeks, I want to use my posts to look more closely at some of the questions raised in Woolley's article—the real decisions that make up long-term planning.

According to the article, Littell faces some fairly standard challenges when it comes to his long-term finances. At 61 years old, he earns in the low six figures and has diligently put a way money regularly in 401k's and other tax deferred accounts,  but he has a partner whose recent retirement has him thinking about how he could cut back on work in a few years. More importantly, he's wondering how to account for the fact that his father, who retired at the ripe old age of 75 is now 103 years old.

Littell's father brings him (and us) face-to-face with a new reality. Most of us in GenX or the Millenial Generation have already decided that "retirement" is likely to be more of a stress-reduced continuation of our work lives, whether because we won't be able to afford a full retirement or because we simply dislike the idea of having nothing important to do for a few decades. But even as advisors like me push our client plans to the age of 99, and workers look to 70 or 75 as a more appropriate "retirement" age, life spans (and "retirements") seem to keep getting longer.

In thinking about how to address this challenge, I want to look at a short list of the tools, strategies and personal questions that will become increasingly important to all of us:

Not Real Work: The Low-Stress "Retirement" Career

Social Security's Strange Schemes

The Unpredictable World Of Health Care (and Long Term Care Insurance)

The Retirement Account Menu

Annuities: The Oldest (And Most Confusing?) Retirement Accounts

When Is A Home A Home?

Retiring Abroad

Have another topic you want to see on the list? Leave a comment or send me an email, and I'll throw that one in, too.