If you are over 66 (and under 70) and not yet getting Social Security you can easily get a $15 – $25,000 loan from Social Security. It’s actually very easy to do and there is no penalty whatsoever. You just have to completely pay it back within exactly 12 months and no longer. It is best done at the very start of the year so that your 1099-SA (Social Security tax form) will show a full repayment in the same year. Just file form SSA-521.
I actually did this in 2014. I filed and received my Social Security benefits effective January 2014 and stopped my benefits, repaying it all in December 2014. Each month I received my $2,600 benefit (the maximum payment allowed in 2014). Separately I paid my $104/mo Medicare payment and did not have any Federal Tax withheld. The net effect was that this money was invested in the market, I didn’t calculate exactly how much I made off of this loan but my overall investments were up double digits for the year. This was probably the easiest $2,000 or so I ever made.
Unfortunately you can only do this one time!
As you probably know from reading my other articles, I have no intentions of taking my Social Security benefits until I’m 70 years old since they grow tax free at 8%/year plus a cost of living increase compounded.
American College of Financial Services in Bryn Mawr, Pa. released a poll this week based on online interviews of 1,019 people 60 to 75 years old with at least $100,000 in household assets. They asked 38 retirement literacy questions on basics, such as Social Security, life expectancy, IRAs, life insurance and investments, and how bonds work. Only 2 in 10 had passing grades! What a shame. Everyone needs to take responsibility for their own financial health, especially retirees. American College hasn’t published the actual questions they used, so I developed a few questions to help you test your retirement understanding.
Here is a Word document containing the questions and answers:
In Part 2 we discussed some actionable items that can help you prepare for your retirement. In this post we’ll discuss how to determine how much money you’ll need or have in retirement.
Now that you are planning to retire and you understand there are no more “paychecks”, you need to determine how either how much money you’ll need in retirement. Of course we’ll also examine how much money you will actually have access to based upon your current savings, investments, pensions and Social Security.
How much will I need?
- First of all the common recommendation is that you will need about 80% of your pre-retirement income in order to retire without a major life style change. Therefore if you (your household) were making $100,000/yr. you should be able to live on $80,000/yr. in retirement. However, this may not meet your needs, for example if you currently make $100,000/yr. but carry significant debt or have other financial responsibilities you may need a lot more than 80%.
- The very best way to determine how much you’ll need is to develop a start from scratch, realistic expense budget. Be sure to include the cost of future healthcare insurance costs of buying cars, replacing appliances, vacations, etc. Also set aside a healthy emergency fund.
- You can now search on line for retirement planning calculators to help you determine how much money you’ll need to actually retire. I found that T. Rowe Price recommended 11x your retirement income, Fidelity 12x, and so forth. All of these have varying assumptions. Here is another examples:
BTN Research estimates that, assuming 5% average annual investment returns, for every $1,000 of monthly income you want over a 30-year retirement, you need $269,000 in the bank. Let’s consider that same household making $75,000 a year. To replace the commonly recommended 80% of income in retirement — or $60,000 in this case — the household would need $5,000 a month. In this calculation, this household’s number is $1.35 million, or 18 times final pay. A higher investment return would bring the numbers down.
Dallas Salisbury, president of the Employee Benefit Research Institute offers: You need 33 times what you expect to spend in your first year of retirement—after subtracting Social Security benefits. Let’s take that same household, which spends every penny of its $60,000 income in retirement. Say this household collects $20,000 a year in Social Security. That leaves it spending $40,000 from other sources. So this household still needs a nest egg of $1.32 million, or just shy of 18 times final pay
In summary, you need to use on-line tools to start building retirement plans that cover both your expenses and available income.
In our next post we’ll discuss how some investments will help you grow your portfolio to meet your retirement needs.
In Part 1 we discussed some of the financial challenges many people face as they prepare to retire. In this post we’ll discuss some actionable items that can help you prepare for your retirement
One of the biggest shocks in your life will be the 1st day you retire and realize that you will no longer get a pay check next week. There will be no more “pay checks”. If you have a good plan in place you’ll be celebrating instead of fretting.
Here are some things you can do when you are within a few years or so of retiring.
- Accelerate your investments. We assume that as you are getting closer to retirement you’ll be in your peak earning years, and hopefully not peak spending years. Now is the time to max out all possible avenues of investments. Take full advantage of both employer 401K contributions and the maximum contributions you can make including all “catch-up” amounts. If you qualify contribute a maximum to your IRA or even better a Roth IRA. If you have the option of a healthcare HSA account, take it and fund it to the max. Unless you are a great stock-picker put this money into low fee S&P Index Funds or ETF for now.
- Substantially reduce then eliminate debt. Many people can’t afford to retire not because of their core daily survival expenses but their payment on debt. Parents might still owe on college education for their children. Some carry massive credit card debt, car loans, home equity loans, etc. You just can’t afford to retire with this debt overhang. Why, because the interest expense say 8 – 20% far exceeds any investment growth one can count on. What to do: develop a plan to completely eliminate all debt ASAP. Stop spending on all non-critical items until all debt is paid off.
- House mortgage payments need some discussion. The best situation is to retire with no house payments. Typically mortgage payments are your largest monthly expense. If you are carrying a large mortgage seriously consider downsizing to reduce or eliminate your mortgage. Consider moving to a much lesser cost of living location that will allow you to get much more value and maybe a meet your retirement dreams. For example, we moved from Philadelphia area to Tampa which eliminated our local and state income tax, substantially reduced our property tax and meet our retirement dreams.
- Build substantial cash reserves. Once debt is gone you’ll need to build cash, completely separate from your accelerated investments. You should have one full year of expenses in cash at the time you retire. You need an emergency fund and really don’t want to start withdrawals from your investments immediately upon retirement.
- Start building a retirement budget that considers you no longer have a “pay check”. The old adage is that you’ll need 80% of your former annual income to live on in retirement. However you may not have this money available to you for the next 30 years.
In summary, in the years leading up to retirement it is time to eliminate debt, accelerate investments and build cash.
In our next post we’ll discuss how much you’ll need in investments, pensions and Social Security to retire.
you’ll need in investments, pensions and Social Security to retire.
Many of us are looking for great investments, opportunities where we can make money while minimizing risks. In an environment where US Treasury’s are yielding 1-3% and CD’s about 1% where can you get a risk-free, tax-free 8% yield along with an annual cost of living increase that is guaranteed by the US Gov’t?
It’s real simple, just delay getting Social Security from age 66 to age 70. That’s right, here is how it works. If you haven’t set up an on-line Social Security (and Medicare) account yet and over 62 years old you should do so immediately. You’ll have to at least have your account set up 3 months before reaching 65 to sign up for Medicare, even if you are employed and don’t need benefits.
If you were born between 1943 and 1954 your Full Retirement age is 66. If you start Social Security at age 62 you’ll get 76% of your monthly benefit, if you start at age 65 you’ll get 93% of your benefit. However, if you start at age 66 you’ll get 100% of your benefit.
So how do you get the 8% yield, tax free, simple, just delay Social Security payments until you are age 70. You will get an additional 8% a year for those 4 years on top of your normal monthly benefit. Another benefit is that if you wait till age 70, in general survivor benefits will also be based upon this higher amount. Spousal Benefits however will be capped at your Full Retirement age 65 amount.
If you just started getting Social Security within the last year you can stop payments, pay back the amount you’ve been paid and then wait until you are age 70.
Where else can you get this kind of guaranteed return?