A Brighter Way
A Brighter Way
Baby Boomers: The Next Chapter is a four-part series intended to guide today’s largest generation as it heads toward retirement. The series also will provide practical guidance for employers as they plan to handle the growing number of retired workers. With topics such as Social Security, investment strategies and more, you’ll see why retirement is just the start of a whole new chapter in life. Part two discusses what you need to know about retirement investing, part three covers transitioning your company to a new leader and part four considers planning for work in semi-retirement.
With the “baby boomer” generation approaching retirement, Social Security has become an increasingly hot topic. This anecdote and accompanying Q & A will answer common questions about the fund, retirement planning, benefits and more.
John and Mary Doe are ages 60 and 58, respectively. They have been thinking about retirement and when it would be best to begin collecting Social Security. They got a late start on retirement planning, but have been putting the maximum contribution into their retirement plans annually for the past few years.
Because of this, they both expect to work full-time to at least age 62, and part-time until they reach full retirement at age 66. John’s earnings have exceeded the taxable Social Security limits each year, while Mary’s earnings have been at minimum wage.
Q: Should couples like John and Mary start their benefits early (age 62), at full retirement (65-67), or later (70)?
A: Several factors should be considered in deciding when to begin receiving Social Security benefits. The longer John and Mary expect to live, the more it pays to prolong receiving benefits. At their ages, benefits will be reduced by 25 percent if they elect to begin receiving them at age 62. They will receive 100 percent of their benefits if they retire at age 66. If they further delay taking benefits, the amount will increase for each year past full retirement age until age 70. While they can’t predict how long they are going to live, John and Mary should consider their general health and family history before deciding when to take benefits.
Q: Once John and Mary begin receiving Social Security benefits, can they return to work if they want to?
A: Yes. Work is another factor to consider in deciding when to collect benefits. If John and Mary earn additional income, it may be best to delay their benefits in order receive higher ones later in life. A few more years of work would actually make a big difference in their standard of living later in life. Also, until they reach age 66, the amount of excess earnings they receive from working over a certain limit ($12,480 in 2006) results in a $1 reduction in benefits for every $2 earned. Once they reach full retirement age, any employment earnings will not affect their benefits.
Q: What if John and Mary are earning income from pensions or other investments?
A: Pension payments, annuities and any interest or dividends earned from their savings and investments are not earnings considered for Social Security purposes. Only income earned from wages or self-employment count as income when it comes to a person’s Social Security record.
Q: Will John’s decisions affect Mary’s benefits?
A: Possibly. When Mary reaches retirement age, her benefit will be the higher of the amount she would earn based on her own wages, or one-half of John’s benefit. Because Mary has earned minimum wage during her career, it is likely that one-half of John’s benefit will be greater than her own. If John begins receiving benefits at age 62, it may well also reduce Mary’s benefit upon retirement. John and Mary should also think about their financial condition and what impact John’s death would have on the benefits Mary will receive. Upon John’s death, Mary will receive an amount lesser than what the two of them collected together. It may be beneficial for John to work longer in order to increase the amount Mary will receive if he dies before she does.
Q: Once John and Mary begin receiving Social Security benefits, will they still have to pay into it?
A: Yes, if they are working. John and Mary’s requirement to pay into the Social Security fund is a function of the earned income they receive each year regardless of their age. And, as one might expect, those earnings will always be subject to income taxes as well.
Obviously, retirement planning is a complex area that requires knowledgeable and careful planning. It is best to review and discuss your specific situation with a trusted Rea associate.
This article was originally published in The Rea Report, Winter 2006 issue.
Note: This content is accurate as of the published date above and is subject to change. Please seek professional advice before acting on any matter contained in this article.
