MONEY Social Security

How to Choose the Social Security Claiming Age That’s Right for You

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More people are catching on to the benefits of delaying Social Security. But the real issue isn't when everyone else claims—it's finding the strategy that fits your goals.

Retirement experts have been pounding the drums for years about deferring Social Security benefits and allowing them to grow until claimed at age 66 or even as late as 70. Yet average retirement ages have moved little—most people continue to file at or near age 62, the earliest that standard retirement benefits can be claimed, Social Security data show.

Now, thanks to some new research by the Center for Retirement Research at Boston College, this puzzling contradiction has been solved. It turns out that people are aware of the benefits of delayed filing and, in fact, have been claiming later for many years.

Why the discrepancy in these numbers? In its analysis, Social Security looks at when people file for retirement benefits and does a year-by-year calculation of average claiming ages. This approach works fine during periods of stable population growth, but not so much today.

Social Security’s method fails to account for the soaring numbers of Baby Boomers reaching retirement age. For example, nearly 900,000 men turned 62 in the year 1997, while in 2013, roughly 1.4 million men did so. Even so, a smaller percentage of 62-year-old men filed for Social Security in 2013 than in earlier years. But because the number of 62-year-old retirees make up such a big share of all claims, the average age has remained largely unchanged.

To get a better picture of claiming trends, the Center also used a lifecycle analysis. Instead of tracking the ages of everyone who began benefits in a certain year, such as 2013, it calculated the claiming ages of everyone by the year in which they were born. Looking at this so-called “cohort” data, it became clear that average claiming ages actually had increased far more than people thought.

In 2013, for example, 42% of men and nearly 48% who claimed that year were 62 years old. But only 36% of men and nearly 40% of women who turned 62 in 2013 actually filed for Social Security. “The cohort data reveal that the claiming picture has really changed,” the Center said.

I am cheered by these new findings. People should consider deferring their Social Security benefits and see how doing so would affect their retirement plan. But the key word in that sentence is “plan.” You need one, and it should include figuring out the best Social Security strategy for you, not what’s best for other retirees. Here are the steps to get there:

  • Compare the tax benefits. Our hearts tell us that preserving 401(k) dollars in our nest eggs is essential. But when it comes to spending down those assets in order to delay claiming Social Security, the deferral strategy looks very good. Between the ages of 62 and 70, Social Security retirement benefits rise 7% to 8% a year. They are adjusted upward each year to account for inflation. They are guaranteed by Uncle Sam. Federal taxes are never levied on more than 85 cents of each dollar of Social Security benefits, and most states don’t tax them at all. Compare these terms with 401(k) gains and taxation, and then decide which dollars are most worth preserving.
  • Assess the cost of early claiming. Social Security benefits claimed before Full Retirement Age (66 for people now nearing retirement) are hit with early claiming reductions and, if you are still working, subject to at least temporary benefit reductions caused by the Earnings Test.
  • Weigh the Medicare impact. If you have a health savings account (HSA) through employer group insurance and are eligible for Medicare, filing for Social Security will force you to take Part A of Medicare. It’s normally free but the consequences are not: the filing will force you to drop out of your HSA.
  • Consider longevity risk. Review your family health history, complete an online longevity survey, and estimate your probable lifespan. What does this number say about how long your retirement funds need to last and when you should begin taking Social Security?
  • Think about your family. Will you still have school-age children at home when you turn 62? If so, filing early for Social Security may allow your kids to claim benefits based on your earnings record. This is one case when filing early may put more money in your pocket.
  • Plan for your spouse. Survivor’s benefits are keyed to the Social Security benefits received by the deceased spouse. So, the longer a spouse waits to claim, the higher their partner’s survivor benefit will be. This is a real issue for millions of women who survive their husbands and whose own retirement benefits are smaller than their husbands because they have earned less money in their lives.

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and is working on a companion book about Medicare. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: How the Social Security Earnings Test Could Wipe Out Your Income

MONEY retirement planning

The 5 Best Free Online Retirement Calculators

Calculator
Charlie Surbey—Gallery Stock

To be sure you'll reach your retirement goals, you've got to run some numbers. These 5 tools can help you get started.

If you want to be serious about retirement, you’ve got to crunch some numbers. Otherwise, you can’t really tell amidst the ups and downs of the economy and the market whether you’re on track toward an acceptable post-career lifestyle. These five tools, all free, can help improve your planning and your prospects. You’ll find links to all five in RDR’s Retirement Toolbox.

1. Retirement Income Calculator This T. Rowe Price tool allows you to provide detailed information about your finances—how your savings are invested, pension and Social Security payments, income from part-time work, if any, etc.—so you can come away with a nuanced sense of your retirement readiness. Once you know where you stand, you can then run alternative scenarios to see how you might improve your prospects. If you’ve already retired, this tool will help you determine whether your current level of spending is sustainable throughout retirement or whether you need to tighten your belt.

Rather than estimating the size nest egg you’ll need in retirement as many calculators do, this tool focuses on sustainable income. Specifically, you enter the amount of income you expect you’ll need in retirement (say, 80% of pre-retirement salary) and the tool uses Monte Carlo simulations to estimate the likelihood that the resources you’re projected to accumulate (or have already accumulated if you’re retired) will generate sufficient income throughout retirement. Generally, you want to see a success rate of at least 80%. If you fall short of that level, you can see how changing different aspects of your finances—saving more, spending less, cutting investment fees, etc.—might improve your chances of success. Revving up this calculator every year or so and making small tweaks as needed can prevent you from falling behind in your planning and help you avoid having to make dramatic and painful adjustments to your lifestyle later in life.

2. Risk Questionnaire—Allocation Tool One of the most important aspects of setting an investing strategy is choosing a stocks-bonds mix that jibes with your appetite for risk. Invest too aggressively, and you may end up selling stocks in a panic when the market dives. Invest too conservatively, and you may not earn the returns you need to achieve your goals. This questionnaire from Vanguard can guide you to an appropriate stocks-bonds allocation. Just answer 11 questions designed to probe, among other things, your investing habits and how you might react to major market setbacks, and you’ll receive a suggested mix of stocks and bonds (and, in some cases, cash). Click on the “other allocations link,” and you’ll get stats showing how your recommended portfolio as well as ones more aggressive and conservative have performed on average and in good and bad markets since 1926.

3. Retirement Income Planner (and Retirement Budget Worksheet) Estimating that you’ll need 80% or so your pre-retirement income after you retire may be okay for establishing a savings target during your career. But once you’re within 10 or so years of retiring, you want to get a better handle on what your actual retirement expenses might be. This interactive retirement budget sheet, which you’ll find within Fidelity’s Retirement Income Planner tool, will help you do just that. It not only has slots for 49 different expense items, ranging from cable and internet fees to health care and travel; it also allows you to check a box next to each expense designating whether it’s essential. The tool then provides a tally of all your expenses, plus a breakdown of essential vs discretionary ones. This can give you a sense of how much wiggle room you have to pare expenses if necessary, plus show you which areas are prime candidates for cuts. Of course, no level of detail will be able to sure 100% accuracy. But that’s not the goal. The point is to make the best estimate you can and then refine your budget (and your actual spending) as needed as you go along.

4. Financial Engines’ Social Security Calculator One of the single most important decisions retirees face is when to claim Social Security. Unfortunately, many retirees don’t give this issue the serious thought it deserves, and just take benefits as soon as they can (age 62) or soon thereafter. That can be a costly mistake. Each year you postpone benefits between age 62 and 70, your payment increases about 7% to 8%, dramatically boosting the amount you may collect during your lifetime. By taking advantage of a number of different claiming strategies, married couples may be able to boost their potential lifetime benefit several hundred thousand dollars.

Which is why in the years leading up to retirement, it’s a good idea to check out Financial Engines’ Social Security calculator. You just enter such information as your age, current income, the age at which you expect to begin collecting Social Security. The tool will then estimate the amount you’ll collect in today’s dollars over your lifetime if you claim benefits as planned—and show how much more you might collect by claiming at a different age. If you’re married, the tool will show how you and your spouse might maximize lifetime benefits by better coordinating when each of you claims. Another nifty feature: you can see how the projections changed depending on whether your life expectancy exceeds or falls short of average.

While this tool is a good way to start thinking about how and when you might claim Social Security benefits, the amount of money at stake is large enough that you may want to hire an adviser to help you with this decision or go to a Social Security claiming service, such as Maximize My Social Security or Social Security Solutions, that, for a fee, will help you devise a strategy.

5. Will You Have Enough To Retire? I know that no matter what I or anyone else says, some people simply aren’t going to spend more than a minute with any tool. If you’re one of those people—or you just want a quick update to see if you’re on the path to a secure retirement—this tool is for you.

Just enter your age, the age you expect to exit your job, the amount, if any, you have saved so far, the percentage of income you’re saving each year and the tool will immediately estimate the amount you’ll need at retirement and the amount you’re projected to have. At a glance, you can quickly see whether you’re likely to have an adequate nest egg if you continue on your current path. If it appears you’re falling short, you can see how your chances improve by, say, saving a higher percentage of pay or delaying retirement a few years (or both). My only gripe about this tool: I wish it couched its estimates in sustainable annual income in retirement rather than giving you your retirement “number.”

Are there other worthwhile free tools that can help you better plan for retirement? Sure, you’ll find at least a dozen more listed in RDR’s Retirement Toolbox, including one that will show you how much guaranteed lifetime income a specific sum of savings might generate, another that can help you decide between a traditional and Roth IRA and one that can help you compare the cost of living in different cities.

But to create an overall retirement strategy and monitor it to make sure you stay on track, you can start with these five.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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TIME

This Is a Horrible Realization About Retirement

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This might make you lose hope entirely

Retire at 65? Yeah, right.

Multiple surveys reveal that Americans are getting increasingly jaded about their prospects for enjoying a relaxing retirement, so much so that many are throwing in the towel and not even bothering to plan for it at all.

According to a survey of 2,000 Americans conducted for Allianz Life, 84% of them characterize the idea of a retirement where they can do what they want as a “fantasy.”

A second study, this one from the TransAmerica Center for Retirement Studies, also finds that one in five Americans thinks they’ll have to keep punching the clock until they literally can’t work anymore, and 37% expect wages earned from working to be part of their “retirement” income. More than 80% of workers who have already hit the 60-year milestone expect to work past 65, already are or don’t plan to retire at all.

“Retirement has become a transition,” Catherine Collinson, president of the TransAmerica Center, said in a statement.

About two-thirds of Gen X’ers and half of Baby Boomers responding to the Allianz survey think the amount they’re expected to save will be impossible to reach.

Of the two groups, Generation X is the more cynical by far, even though they’re the ones with more time to plan for their retirements. (They’re also the group likely to have higher expenses, though, with obligations like mortgages like kids’ college funds and mortgages that aren’t on Boomers’ radar anymore.)

Only 10% of TransAmerica survey respondents who are in their 40s are “very” confident in their ability to live comfortably in retirement, and more than half of those in their 50s admitted to just guessing how much money they’ll need in retirement. More than two-thirds of Gen X’ers responding to the Allianz survey say they’ll never have enough money to retire, and more than 40% say it’s “useless to plan for retirement when everything is so uncertain.” More than half say they “just don’t think about putting money away for the future”

“Their hands-off approach to planning and preparation is alarming,” Allianz Life vice president of Consumer Insights Katie Libbe said in a statement accompanying the release of the survey.

That’s bad news. Gen X’s reputation for pessimism and angst is on full display in this survey, Libbe points out, and these character traits threaten to undermine their financial future.

Generation Y is more engaged, but they’re not doing so hot, either. The TransAmerica survey finds that young adults don’t have great expectations for retirement, either. More than 80% are worried that Social Security might not be there for them, and more than half aren’t counting on it to provide retirement income for them at all.

The good news is about two-thirds of twenty-somethings are already saving for retirement, but they might not be going about it in the most effective way, given that 37% say they know “nothing” about how they should be allocating their assets.

Still, their longer time horizon gives millennials the best shot at saving for a comfortable retirement, Collinson points out. “They can grow their nest eggs over four to five decades and enjoy the compounding of their investments over time,” she points out.

 

 

MONEY Ask the Expert

How the Social Security Earnings Test Could Wipe Out Your Income

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: My wife and I had an appointment with Social Security today—she is 72, and I just turned 62. I know my benefits will be reduced by filing early at 62 but doing so would enable my wife to collect spousal benefits. She didn’t work enough to qualify for her own benefits, so I figured this would be the best way to maximize our benefits. But it turns out that I earn too much to get any benefits myself and, because of this, my wife can’t get any benefits, either! Everything I researched indicated that I would only be hit with a reduction while she would receive the spousal benefits. This whole system is just too complicated to really understand. —Lou

A: Lou has run into Social Security’s Earnings Test. These rules may seem benign, but as he found out, there are hidden snags that can seriously derail your retirement dreams.

The Earnings Test applies to people who take benefits before what’s called Full Retirement Age. This is 66 for most people now and gradually rises to age 67 for people born in 1960 and later years.

If you take benefits before your FRA, they will be reduced if you continue to work and your wage earnings are above two thresholds in 2015—$15,720 or, in the year you reach FRA, $41,880. These amounts are adjusted upward each year as average wages rise.

If you earn more than $15,720, your Social Security retirement benefits are reduced by $1 for every $2 your wage income exceeds that limit. For the higher income test, the reduction is $1 in benefits for every $3 you earn above $41,880.

As Lou found out, his income is so far above $15,720 that he cannot receive any Social Security benefits whatsoever. In its consumer notices, Social Security emphasizes that benefits forfeited by the Earnings Test are not truly lost. When a person who takes early retirement benefits reaches FRA, the agency will automatically restore the lost income by permanently increasing his or her monthly payment to make up the difference.

Well, that’s better than nothing. And perhaps Lou would have settled for a lower, postponed benefit – claiming at 62 reduces your payout by 25% vs filing at FRA—if it meant his wife could begin receiving spousal benefits.

But she won’t.

There’s no mention of this in the agency’s online explanation of the effects of the Earnings Test. But the agency brochure, How Work Affects Your Benefits, includes this eye-opener:

“If other family members get benefits based on your work, your earnings from work you do after you start getting retirement benefits could reduce their benefits, too.”

So, not only does Lou earn too much money to get any benefits for himself, he also he earns too much money for his wife to qualify to receive any spousal benefits at all, as he discovered.

Lou doesn’t have any school-age children at home. But if he did, their benefits based on his earnings record would also be wiped out by the Earnings Test.

Here’s a sample provided by a Social Security spokesman that shows how the Earnings Test can affect family-member benefits.

“Mr. Doe is entitled to a Social Security retirement benefit of $378 [a month]. His wife and child are each entitled to a benefit of $160. Mr. Doe worked and had excess earnings of $2,094. These earnings are charged against the total monthly family benefit of $698 ($378 plus (2 x $160)). Therefore, no benefits are payable to the family for January through March (3 x $698 = $2,094).”

Got that? In this example, the test cancels out benefits for part of the year. In Lou’s case, of course, the benefits are wiped out for the entire year.

Under the rules, Lou’s lost benefits would be restored when he reaches his FRA in four years, as I mentioned earlier. And his wife’s lost spousal benefits would be restored as well, when she is 76.

But Lou and his wife are better off waiting four years to file, or at least until his earnings no longer cancel out their benefits. At 66, he can file and suspend his benefits. This will entitle his wife to a full spousal benefit equal to half his retirement benefit. He then can defer his own benefit for up to four years, allowing it to increase by an inflation-adjusted 8% a year.

I feel for Lou, and I fully agree with him that the system is too complex for the vast majority of Americans to understand. At the very least, the family-wide impact of the Earnings Test should be prominently featured in all Social Security materials mentioning this rule.

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and is working on a companion book about Medicare. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: This Little-Known Pension Rule May Slash Your Social Security Benefit

 

MONEY retirement planning

1 out of 3 of Workers Expect Their Living Standard to Fall in Retirement

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But you don't have to be among the disappointed. Here's how to get retirement saving right.

One third of workers expect their standard of living to decline in retirement—and the closer you are to retiring, the more likely you are to feel that way, new research shows.

That’s not too surprising, given the relatively modest amounts savers have stashed away. The median household savings for workers of all ages is just $63,000, according to the 16th Annual Transamerica Retirement Survey of Workers. The savings breakdown by age looks like this: for workers in their 20s, a median $16,000; 30s, $45,000; 40s, $63,000; 50s, $117,000; and 60s, $172,000.

Those on the cusp of retirement, workers ages 50 and older, have the most reason to feel dour—after all, they took the biggest hits to their account balances and have less time to make up for it. If you managed to hang on, you probably at least recovered your losses. But many had to sell, or were scared into doing so, while asset prices were depressed. And even you did not sell, you gave up half a decade of growth at a critical moment.

Despite holding student loans and having the least amount of faith in Social Security, workers under 40 are most optimistic, according to the survey. That’s probably because they began saving early. Among those in their 20s, 67% have begun saving—at a median age of 22. Among those in their 30s, 76% have begun saving at a median age of 25. Nearly a third are saving more than 10% of their income.

Workers in their 50s and 60s are also saving aggressively, the survey found. But they started later—at age 35. And with such a short period before retiring they are also more likely to say they will rely on Social Security and expect to work past age 65 or never stop working.

Interestingly, the younger you are the more likely you are to believe that you will need to support a family member (other than your spouse) in retirement. You are also more likely to believe you will require such financial support yourself. Some 40% of workers in their 20s expect to provide such support.

By contrast, that expectation was shared by only 34% of those in their 30s, 21% of those in their 40s, 16% of those in their 50s and 14% of those in their 60s. A similar pattern exists for those who expect to need support themselves—19% of workers in their 20s, but only 5% of those in their 60s.

Workers are also looking beyond the traditional three-legged stool of retirement security, which was based on the combination of Social Security, pension and personal savings. Those three resources are still ranked as the most important sources of retirement income, but workers now are also counting on continued employment (37%), home equity (13%), and an inheritance (11%), the survey found.

Asked how much they need save to retire comfortably, the median response was $1 million—a goal that’s out of reach for most, given current savings levels. Strikingly, though, more than half said that $1 million figure was just a guess. About a third said they’d need $2 million. Just one in 10 said they used a retirement calculator to come up with their number.

As those answers suggest, most workers (67%) say they don’t know as much as they should about investing. Indeed, only 26% have a basic understanding and 30% have no understanding of asset allocation principles—the right mix of stocks and bonds that will give you diversification across countries and industry sectors. Meanwhile, the youngest workers are the most likely to invest in conservative securities like bonds and money market accounts, even though they have the most time to ride out the bumps of the stock market and capture better long-term gains.

Across age groups, the most frequently cited retirement aspiration by a wide margin is travel, followed by spending time with family and pursuing hobbies. Among older workers, one in 10 say they love their work so much that their dream is to be able stay with it even in their retirement years. That’s twice the rate of younger workers who feel that way. Among workers of all ages, the most frequently cited fear is outliving savings, followed closely by declining health that requires expensive long-term care.

To boost your chances of retiring comfortably and achieving your goals, Transamerica suggests:

  • Start saving as early as possible and save consistently over time. Avoid taking loans and early withdrawals from retirement accounts.
  • In choosing a job, consider retirement benefits as part of total compensation.
  • Enroll in your employer-sponsored retirement plan. Take full advantage of the match and defer as much as possible.
  • Calculate retirement savings needs. Factor in living expenses, healthcare, government benefits and long-term care.
  • Make catch-up contributions to your 401(k) or IRA if you are past 50

Read next: Answer These 10 Questions to See If You’re on Track for Retirement

MONEY Social Security

This Little-Known Pension Rule May Slash Your Social Security Benefit

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If you are covered by a public sector pension, you may not get the Social Security payout you're expecting.

Some U.S. workers who have paid into the Social Security system are in for a rude awakening when the checks start coming: Their benefits could be chopped up to $413 per month.

That is the maximum potential cut for 2015 stemming from the Windfall Elimination Provision (WEP), a little-understood rule that was signed into law in 1983 to prevent double-dipping from both Social Security and public sector pensions. A sister rule called the Government Pension Offset (GPO) can result in even sharper cuts to spousal and survivor benefits.

WEP affected about 1.5 million Social Security beneficiaries in 2012, and another 568,000 were hit by the GPO, according to the U.S. Social Security Administration (SSA). Most of those affected are teachers and employees of state and local government.

These two safeguards often come as big news to retirees. Until 2005, no law required that affected employees be informed by their employers. Even now, the law only requires employers to inform new workers of the possible impact on Social Security benefits earned in other jobs.

The Social Security Administration’s statement of benefits has included a generic description of the possible impact of WEP and GPO since 2007; for workers who are affected, the statement includes a link is included to an online tool where the impact on the individual can be calculated. People who have worked only in jobs not covered by Social Security get a letter indicating that they are not eligible.

Many retirees perceive the two rules as grossly unfair. Opponents have been pushing for repeal, so far to no effect.

Why WEP?

To understand the issue, you need to understand how Social Security benefits are distributed across the wealth spectrum of wage-earners.

The program uses a progressive formula that aims to return the highest amount to the lowest-earning workers—the same idea that drives our system of income tax brackets.

It is a complex formula, but here is the upshot: Without the WEP, a worker who had just 20 years of employment covered by Social Security, rather than 30, would be in position to get a much higher return because of those brackets.

Where is the double dip? The years in a job covered by a pension instead of Social Security.

“If you had worked in non-covered employment for a significant portion of your career, there should be a shared burden between the pension you receive from that period of your employment and from Social Security in providing your benefit,” says SSA Chief Actuary Stephen C. Goss. “Just because a person worked only a portion of their career with Social Security-covered employment, they should not be benefiting by getting a higher rate of return.”

If you are already receiving a qualifying pension when you file for Social Security, then the WEP formula kicks in immediately. The SSA asks a question about non-covered pensions when you file for benefits, and it also has access to the Internal Revenue Service Form 1099-R, which shows income from pensions and other retirement income.

If your pension payments start after you file, the adjustment will occur then.

If you have 30 years of Social Security-covered employment, no WEP is applied. From 30 to 20 years, a sliding WEP scale is applied. Below 20 years, your benefit would drop even more. (For more information, click here.)

How does this affect your checks? The SSA offers this example: A person whose annual Social Security statement projects a $1,400 monthly benefit could get just $1,000, due to the WEP.

Your maximum loss is set at 50% of whatever you receive from your separate pension, so if that is relatively small, the WEP effect will be minimal.

You can still earn credits for delayed filing, and you will still get Social Security’s annual cost-of-living adjustment for inflation, but the WEP will still affect your initial benefit.

The WEP formula also affects spousal and dependent benefits during your lifetime. However, if your spouse receives a survivor benefit after your death, it is reset to the original amount.

Can you do anything to avoid getting whacked by WEP? Working longer in a Social Security-covered job before retiring might help. Remember, you are immune to the provision if you have 30 years of what Social Security defines as “substantial earnings” in covered work. That amounts to $22,050 for 2015.

So if you have 25 years, try to work another five, says Jim Blankenship, a financial planner who specializes in Social Security benefits. “That’s money in your pocket.”

Read next: The Pitfalls of Claiming Social Security in a Common-Law Marriage

Update: This story was updated to reflect that Social Security Administration gives little advance warning to beneficiaries, instead of no advance warning, and a description of Social Security benefits statements was added.

MONEY Ask the Expert

The Pitfalls of Claiming Social Security in a Common-Law Marriage

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q. I lost my WWII husband on January 14, 2014. It was a common-law marriage. I worked for over 50 years in the fields of education and medicine. However, many of the places where I worked did not have Social Security. I have turned in all the evidence required to prove that we presented ourselves as husband and wife. Texas recognizes common-law marriages. I am confined to a wheelchair. I served our country, as a civilian commissioned as a 2nd Lt., in the Air Force and Army overseas. Please help me as I am going to be homeless. – Joan

A. In the six weeks since Joan wrote me this note, she found a place to live. But she is no closer to resolving her problems with Social Security. It is easy to paint the agency as a heartless bureaucracy preventing an impoverished, 80-year-old veteran from getting her widow’s benefit. But there’s nothing about Joan’s story that is easy, and her problem is one that is becoming all too common.

Today more and more couples are living together without getting married, especially Millennials and Gen Xers. And many of them are having children and raising families. More than 3.3 million persons aged 50 and older were in such households in 2013, according to the U.S. Census Bureau.

There can be sound reasons for avoiding legal marriage. But when it comes to Social Security, you and your family may pay a high price by opting for a common-law union. Quite simply, it may be difficult, if not impossible, to claim benefits. And that can damage the financial security of your partner, children and other dependents. If you are in a common-law marriage, here are the three basic requirements for claiming benefits:

1. Your state recognizes common-law marriage. And yours may not. Only 11 states plus the District of Columbia recognize these marriages—among them, Colorado, New Hampshire, and Texas, which is Joan’s state of residence.

For your partnership to qualify, these states generally require that you both agree that you are married, live together and present yourselves in public as husband and wife. But the specifics of these rules are different in many states and usually complicated.

Social Security rules follow state laws when determining eligibility for spousal and survivor benefits. (The same policy applies to same-sex marriage.) If you do qualify, you will be able to receive the same benefits as you would with a traditional marriage, including spousal or survivor benefits.

2. You’ve got plenty of documentation. Social Security requirements for claiming survivor benefits call for detailed proof of the union. For an 80-year old, wheelchair-bound person like Joan, that’s a challenge to provide, especially in the case of a deceased spouse. Among other documents, she must complete a special form, plus get similar forms filled out by one of her blood relatives and two blood relatives of her late partner, John.

3. You’re prepared to fight bureaucratic gridlock. Joan has had multiple meetings with Social Security postponed for reasons she does not understand. She has been told she does not qualify as a common-law spouse under Texas laws. But the reasons she has been given may be incorrect. She says, for example, a Social Security rep told her that she and John needed to own a home to qualify. This is not true. She needs only to document that they lived as husband and wife and held themselves out to be married. Beginning in 2003, Texas made it harder for couples to qualify as common-law spouses, which could complicate Joan’s case.

Making matters even more difficult, Social Security has other convoluted rules that can change or even invalidate her benefits. Joan, it turns out, took a lump-sum payment from her government pension decades ago. That triggers something called the Government Pension Offset rule, which may prevent her from receiving a survivor’s benefit based on John’s earnings record. (For more on that rule, click here.)

Clearly, older Americans need more help than we’re giving them to navigate Social Security, Medicare, Medicaid and other highly regulated and complicated safety-net programs. This is hard stuff even for experts. It is not possible for the rest of us to understand without more knowledgeable assistance.

Meanwhile, for those in common-law marriages it’s important to plan ahead now. If you can’t qualify for Social Security benefits, you will need to save more while you’re still working. If your state does recognize common-law marriage, find out what documentation you’ll need, so you’ll have it when you file your claim. The last thing you’ll want to do in retirement is struggle with the Social Security bureaucracy.

“I am pushing 80 and this has been going on now for two years,” said Joan, a former special-needs educator, in a recent email. “I hope my health holds up as I have no life. What a way to treat an American citizen in a wheelchair who can teach the deaf to talk, the dyslexic to read and the stuttering to talk. I am just useless living in a room.”

Joan has another Social Security appointment scheduled this week.

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and a research fellow at the Center for Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

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MONEY retirement income

Why Are States Leaving Billions in Retiree Income on the Table?

Many elderly can afford to pay more in taxes. And with a growing number of needy seniors to support, states can't afford to pass up that revenue.

Illinois is the national poster child for state budget messes. My home state faces a $7.4 billion general fund deficit and a $12 billion revenue shortfall. One proposed idea for plugging at least part of the horrific shortfall: tax retirement income. But our new governor, Republican Bruce Rauner, has rejected the idea.

Illinois exempts all retirement income from state taxes—Social Security, private and public pensions, and annuities. We’re leaving $2 billion on the table annually, according to the state’s estimates. And we’re hardly alone: 36 states that have an income tax allow some exemption for private or public pension benefits, and 32 exempt all Social Security benefits from tax, according to the Institute on Taxation and Economic Policy (ITEP). States currently considering wider income tax exemptions for seniors include Rhode Island and Maryland.

With the April 15 tax day just around the corner, it’s a timely moment to ask: What are these politicians thinking?

Income tax exemptions date back to a time when elderly poverty rates were much higher than they are today (federal taxation of Social Security began in the 1980s). As recently as 1970, almost 25% of Americans older than 65 lived in poverty, according to the Census Bureau; now it’s around 9%. Today, it still makes sense to tread lightly on vulnerable lower-income seniors, many of whom live hand to mouth trying to meet basic expenses. And the number of vulnerable seniors is on the rise.

MORE SENIORS

But much of the benefit of state retirement income exemptions goes to affluent elderly households. The cost of these exemptions is high, and it’s going to get higher as our population ages. In llinois, the number of senior citizens is projected to grow from 1.7 million in 2010 to 2.7 million by 2030. That points to a demographic shift that will mean a shrinking pool of workers will be funding tax breaks for a growing group of retirees.

So there’s a real need for states to target these tax breaks to seniors who really need them. Yet one of the plans floated in Rhode Island would exempt all state, local and federal retirement income, including Social Security benefits—from the state’s personal income tax. The Social Security proposal is an especially good example of a poorly targeted break.

Currently, Rhode Island uses the federal formula for taxing Social Security, which already protects low-income seniors from taxes. Under the federal formula, beneficiaries with income lower than $25,000 ($32,000 for couples) are exempt from any tax (income here is defined as adjusted gross plus half of your Social Security benefit). Up to 50% of benefits are taxed for beneficiaries with income from $25,000 to $34,000 ($32,000 to $44,000 for married couples). For seniors with incomes above those levels, up to 85% of benefits are taxed.

If Rhode Island decides to exempt all Social Security income from taxation, more than half of the benefit will flow to the wealthiest 20 percent of taxpayers, according to an ITEP analysis.

“The poorest seniors in Rhode Island wouldn’t get a dime from this change, because they already don’t pay state taxes on Social Security,” says Meg Wiehe, ITEP’s state tax policy director.

WORKING LONGER

Another tax fairness issue is inequitable treatment of older workers and retirees. The percentage of older workers staying in the labor force beyond traditional retirement age is rising—and many of them are sticking around just to make ends meet. Those workers are bearing the full state income tax burden, effectively subsidizing more affluent retired counterparts.

Some tax-cut advocates might argue that breaks for seniors will help retain or attract residents to their states. But numerous studies show that few seniors move around the country for any reason at all. Just 50% of Americans age 50 to 64 say they hope to retire in a different location, according to a recent survey by Bankrate.com, and the rate drops to 20% for people over 65.

For those who do move, taxes are a consideration—but not the only one.

“A lot of factors go into the decision,” says Rocky Mengle, senior state analyst at Wolters Kluwer, Tax & Accounting US. “Climate, proximity to family and friends are all very important, along with the overall cost of living. But I’d certainly throw taxes into the mix as a consideration.”

Smart tax policy makers and politicians should take all these factors into consideration—especially in states that are facing crushing deficits and debt burdens. Targeted exemptions for vulnerable seniors make sense, but the breaks should be affluence-tested.

“The scales would vary state to state,” says Wiehe. “But a test that makes sure taxation isn’t a blanket giveaway with most of it going to the most affluent households.”

Indeed. In the golden years, not all the gold needs to go to the rich.

Read next: 1 in 3 Older Workers Likely to Be Poor, or Near Poor, in Retirement

MONEY Ask the Expert

How to Max Out Social Security Benefits for Your Family

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q. Does the family maximum benefit (FMB) apply only to one spouse’s individual’s work history or to both spouses in a family? That is, assume two high-earning spouses both delay claiming a benefit till, say, 70. Would the FMB rules limit their overall family benefits? Or does the FMB include just the overall family benefits derived from the earnings record of one particular worker? —Steve

A: Kudos to Steve for not only knowing about the family maximum benefit but having the savvy to ask how it applies to two-earner households. The short answer here is that Social Security tends to favor, not penalize, two-earner households in terms of their FMBs.

To get everyone else up to speed, the FMB limits the amount of Social Security benefits that can be paid on a person’s earnings record to family members—a spouse, survivors, children, even parents. (Benefits paid to a divorced spouse do not fall under the FMB rules.) The amount may include your individual retirement benefit plus any auxiliary benefits (payouts to those family members) that are based on that earnings record.

Fair warning: the FMB is far from user-friendly. Few Social Security rules are as mind-bendingly complex as the FMB and its cousin, the combined family maximum (CFM). And Social Security has a lot of complex rules. Unfortunately, you need to do your homework to claim all the family benefits you are entitled to receive.

To address Steve’s question, these FMB calculations may be based on the combined earnings records of both spouses. More about this in a bit, but first, here are the basics for an individual beneficiary.

The ABCs of the FMB

The FMB usually ranges from 150% to 187% of what’s called the worker’s primary insurance amount (PIA). This is the retirement benefit a person would be entitled to receive at his or her full retirement age. Even if you wait until 70 to claim your benefit, it won’t increase the FMB based on your earnings record.

Now, I try to explain Social Security’s rules as simply as possible—but there are times when the system’s complexity needs to be seen to be believed. So, here is the four-part formula used in 2015 to determine the FMB for an individual worker:

(a) 150% of the first $1,056 of the worker’s PIA, plus

(b) 272% of the worker’s PIA over $1,056 through $1,524, plus

(c) 134% of the worker’s PIA over $1,524 through $1,987, plus

(d) 175% of the worker’s PIA over $1,987.

Let’s use these rules for determining the FMB of a worker with a PIA of $2,000. It will be $3,500, which equals (a) $1,584 plus (b) $1,273 plus (c) $620 plus (d) $23. The difference between $3,500 and $2,000 is $1,500—that’s the amount of auxiliary benefits that can go to your family. Got that?

And here’s a key point that trips up many people: Even if the worker claimed Social Security early, which means his benefits were lower than the value of his PIA, it would not change the $1,500 limit on auxiliary benefits. However, when the worker dies, the entire $3,500, which includes the PIA amount, becomes available in auxiliary benefits.

It’s quite common for family claims to exceed the FMB cap. When this happens, anyone claiming on his record (except the worker) would see their benefits proportionately reduced until the total no longer exceeded the FMB. If, say, those claimed auxiliary benefits actually totaled $3,000, or double the allowable $1,500, all auxiliary beneficiaries would see their benefits cut in half.

How CFM Can Boosts Benefits

Enter the combined family maximum (CFM). This formula can substantially increase auxiliary benefits to dependents of married couples who both have work records—typically multiple children of retired or deceased beneficiaries.

The children can be up to 19 years old if they are still in elementary or secondary school (and older if they are disabled and became so before age 22). Because each child is eligible for a benefit of 50% or even 75% percent of a parent’s work PIA, even having only two qualifying auxiliary beneficiaries—say a spouse and a child, or two children—can bring the FMB into play.

But with the CFM, the FMBs of each earner in the household can be combined to effectively raise the benefits to children that might otherwise would be limited by the FMB of just one parent. Under its rules, Social Security is charged with determining the claiming situation that produces the most cumulative benefits to all auxiliary beneficiaries.

Using our earlier example, let’s assume we now have two workers, each with PIAs of $2,000 and FMB’s of $3,500. A qualifying child would still be limited to a benefit linked to the FMB of a single parent. But the CFM used to determine the size of the family’s benefits “pool” has now doubled to $7,000 a month, permitting total auxiliary benefits of up to $3,000.

Well, they would have totaled this much—except there’s another Social Security rule that puts a cap on the CFM. For 2015, that cap is $4,912. Subtracting one of the $2,000 PIAs from this amount leaves us with up to $2,912 in auxiliary benefits for this family. That’s not $3,000 but almost.

So it’s quite possible that three, four, or possibly more children would get their full child benefits in this household. Even if they totaled 200% of one parent’s FMB, they would add up to a smaller percentage of the household’s CFM, and either wouldn’t trigger benefit reductions, or at least much small ones.

And if eligible children live in a household where one or both of their parents also has a divorced or deceased spouse, even more work records can come into play. This is complicated stuff, as borne out in some thought-twisting illustrations provided by the agency.

Before moving ahead with family benefit claims, I recommend making a face-to-face appointment at your local Social Security office. Bring printouts of your own earnings records, which you can obtain by opening an online account for each person whose earnings record is involved. I’d also print out the contents of the Social Security rules, which are linked in today’s answer, or at the very least, write down their web addresses so the Social Security representative can access them.

Good luck!

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and a research fellow at the Center for Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: Why Social Security Rules Are Making Inequality Worse

MONEY Ask the Expert

The Surefire Way Not to Lose Money on Your Bond Investments

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: I am leaning toward buying individual bonds and creating a bond ladder instead of a bond fund for my retirement portfolio. What are the pros and cons?—Roy Johnson, Troy, N.Y.

A: If you’re worried about interest rates rising—and many people are—buying individual bonds instead of putting some of your retirement money into a bond fund has some definite advantages, says Ryan Wibberley, CEO of CIC Wealth in Gaithersburg, Maryland. There are also some drawbacks, which we’ll get to in a moment.

First, some bond background. Rising interest rates are bad for fixed-income investments. That’s because when rates rise, the prices of bonds fall. That can cause short-term damage to bond funds. If rates spike and investors start pulling their money out of the fund, the manager may need to sell bonds at lower prices to raise cash. That would cause the net asset value of the fund to drop and erode returns.

By contrast, if you buy individual bonds and hold them to maturity, you won’t see those daily price moves. And you’ll collect your interest payments and get the bond’s face value when it comes due (assuming no credit problems), even if rates go up. So you never lose your principal. “You are guaranteed to get your money back,” says Wibberley. But with individual bonds, you will need to figure out how to reinvest that money.

One solution is to create a laddered portfolio. With this strategy, you simply buy bonds of different maturities. As each one matures, you can reinvest in a bond with a similar maturity and capture the higher yield if interest rates are rising (or accept lower yield if rates fall). All in all, it’s a sound option for retirees who seek steady income and want to protect their bond investments from higher rates.

The simplest and cheapest way to create a bond ladder is through government bonds. You can buy Treasury securities for free at TreasuryDirect.gov. You can also buy Treasuries through your bank or broker, but you’ll likely be charged fees for the transaction.

Now for the downside of bond ladders: To get the diversification you need, you should hold a mix of not only Treasuries but corporate bonds, which can be more costly to buy as a retail investor. Generally you must purchase bonds in minimum denominations, often $1,000. So to make this strategy cost-effective, you should have a portfolio of $100,000 or more.

With corporates, however, you’ll find higher yields than Treasuries offer. For safety, stick with corporate bonds that carry the highest ratings. And don’t chase yields. “Bonds with very high yields are often a sign of trouble,” says Jay Sommariva, senior portfolio manager at Fort Pitt Capital Group in Pittsburgh.

An easier option, and one that requires less cash, may be to build a bond ladder with exchange-traded bond funds. Two big ETF providers, Guggenheim and BlackRock’s iShares, now offer so-called defined-maturity or target-maturity ETFs that can be used to build a bond ladder using Treasury, corporate, high-yield or municipal bonds.

Of course, bond funds have advantages too. You don’t need a big sum to invest. And a bond fund gives you professional management and instant diversification, since it holds hundreds of different securities that mature at different dates.

Funds also provide liquidity because you can redeem shares at any time. With individual bonds, you also can sell when you want, but if you do it before maturity, you may get not get back the full value of your original investment.

There’s no one-size-fits all strategy for bond investing in retirement. A low-cost bond fund is a good option for those who prefer to avoid the hassle of managing individual bonds and who may not have a large sum to invest. “But if you want a predictable income stream and protection from rising rates, a bond ladder is a more prudent choice,” Sommariva says.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

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