MONEY Social Security

Here’s a Smart Strategy for Reducing Social Security Taxes

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

Q. If I delay filing for Social Security until age 66, can I receive the benefit and continue to work? I’d like to draw Social Security benefits yet keep working until age 75. What are the tax implications of my strategy? —Steven

A. First off, you can always continue to work and draw Social Security benefits. Benefits are reduced temporarily if your outside income exceeds certain levels. But these reductions do not apply for benefits received at age 66 or later, which will be the case with you.

If you work and collect benefits, however, your increased income may push you into a higher tax bracket, which may mean your Social Security income may be taxed. If you haven’t already done so, go online to my Social Security and create an account. You will then be able to see your projected benefits at age 66.

To make an accurate estimate of your federal income taxes, keep in mind that not all of your Social Security income is taxable at the federal level. Social Security uses a measure it calls “combined income” to determine how much of your benefit is taxable, and it’s not intuitively obvious. So work through the numbers carefully—you may need to refer to your most recent tax return to make the calculation.

To determine your combined income, take your adjusted gross income (from your tax return), add any non-taxable interest income you’ve received in the past year, and then add half of your Social Security benefit.

If the total is less than $25,000 ($32,000 on joint tax returns), you will pay no income taxes on your Social Security benefits. If the total is between $25,000 and $34,000 ($32,000 to $44,000 on joint returns), you may have to pay taxes on half your Social Security benefits. People with higher combined incomes may have to pay taxes on 85% of their Social Security benefits, which is the maximum rate.

You also should consider if you can afford to live just on your salary and defer your own Social Security benefits until age 70. This will have two positive impacts:

First, delayed retirement credits will increase your monthly Social Security payments by 8% a year (plus annual inflation adjustments). If you defer for four years, your benefits will rise by 32% compared with their level at age 66.

Second, your tax rate likely will be reduced if you’re only receiving wage income from age 66 to 70. When you do stop working and rely more heavily on Social Security payments, your reduced income may translate into lower taxes on your Social Security benefits as well as a lower overall federal tax rate.

Lastly, if you are single and plan to stay so, you should consider filing and suspending your Social Security benefit at age 66. By doing so, you will have the option of going back to Social Security anytime before age 70 and requesting a lump-sum payment for all the benefits that were suspended. That could come in handy if you face an emergency cash crunch. But there’s a downside: if you request a lump-sum payment, Social Security will erase all your delayed retirement credits. Your lump sum will be valued as if you took benefits at 66, and this also will be the level of your regular monthly benefit going forward.

Even the best of plans could change if you run into financial or health problems, so preserving the right to get a lump-sum payment is a good idea for single persons. For someone who is or has been married, however, spousal benefits can be knocked for a loop if you file and suspend, so think twice about using this option.

Philip Moeller is an expert on retirement, aging, and health. His book, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” will be published in February by Simon & Schuster. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: How to Max Out Social Security Spousal Benefits

MONEY Second Career

How to Build a Second-Act Business with Your Millennial Kid

Combining complementary skills of two generations can be a recipe for success

It’s awesome working with my dad,” says Case Bloom, 30. The feeling is mutual, says his father, David, 58: “We are good complements to one another.”

Among the more striking developments I’ve learned researching my new book, Unretirement, is the rise in boomer parents going into business with their adult children, like the Blooms—co-owners of Tucker & Bloom, a Nashville, Tenn. luggage business.

In the past few years, setting up a multigenerational enterprise has been a mutually savvy way for boomers and their kids to deal with tough economic times. The parents typically have capital and plenty of experience, while their adult children burst with energy and tech skills.

From ‘You’ to ‘We’

The Blooms, and their business manufacturing highly-crafted messenger bags targeted at the DJ market, are a prime example. Before opening shop, David had spent his career in bag design and was director of travel products for Coach in New York City before he lost that job. When Case was in college in Nashville, studying business, he’d offer pointers to help his dad’s venture. “His logo was so bad. Horrible,” laughs Case. “I’d tell him, ‘You’re doing it wrong. Do it like this.’”

Eventually, Case says, it became “We should do it this way. The business happened organically.” Today, father and son each own half of the company, which has seven employees. David handles design and product development; Case is in charge of anything to do with the brand image and online sales. He’s also the one making frequent runs to Home Depot for the business’s factory and to the Post Office for shipments. “I have a different set of skills than my father,” says Case, who is also a part-time DJ.

When Kinship Is Friendship

One reason for the growing second-act-plus-child trend: surveys repeatedly show that today’s young adults generally get along well with their parents—and vice versa. “The key is an attitudinal shift in the relations between generations,” says Steve King, founder of Emergent Research, a consulting firm focused on the small business economy. “Boomers are close to their kids and the kids are close to their parents.”

Take Amanda Bates, a Gen X’er, and her mother Kit Seay, co-owners of Tiny Pies in Austin, Texas. “We’ve always had a close relationship, feeding off one another, finishing each other’s sentences,” says Kit, 73. They’d long wanted to do something together.

Several years ago, Amanda got the idea for making handheld pies from her son’s desire to take pie to school. So she and her mother began selling small pies, based on family recipes, in local farmers markets. They now sell them throughout the state, mostly through specialty stores, and opened a retail storefront at their wholesale facility in March 2014. Kit focuses on the creative and catering side of the business; Amanda’s in charge of the basics of running an enterprise. “The trust is there,” says Kit. Amanda agrees. “Yes, the trust is there. If she says something will get done, it will.”

Teaching Your Child Trust

Trust and complementary skills are also themes for Lee Lipton, 59, and his son Max, 25, and their Benny’s On the Beach restaurant in Lake Worth, Fla.

Lee, the restaurant’s principal owner, came out of the clothing manufacturing business, moving to Florida after the Calvin Klein outerwear line he ran with a few partners was sold. He bought Benny’s a year ago. Max, who’d wanted to get into the food business, is one partner; the other is chef Jeremy Hanlon. Lee’s the deal maker, Max manages the restaurant and executive chef Hanlon handles the kitchen. “The three of us trust each other incredibly and when one person feels strongly about something we tend to do it that way,” Lee says. “Very rarely after talking do we disagree, and that format was identical to my past partners. I want to teach Max and Jeremy that closeness.”

For second-act family businesses, creating boundaries between work and home is advisable, but easier to say than do. Speaking about her current relationship with her mom, Amanda Bates says: “We used to go out together and have fun, go to garage sales, that kind of thing. Now, when we get together, the business always come up. Even at family dinners, we end up talking business.”

The Win-Win of Multigenerational Businesses

But in the end, it’s family that makes these businesses succeed.

Bianca Alicea, 26, and her mom Alana, 46, started tchotchke-maker Chubby Chico Charms. in North Providence, R.I. with $500 and less than 100 charm designs at their dining room table in 2005. They now have roughly 25 full-time employees and sell several thousand handmade charms. Alana is the designer; Bianca deals more with payroll and other aspects of the business. “It’s important to remember you are family,” says Bianca. “Things don’t always go according to plan, but at the end of the day you have to see one another as family.”

Intergenerational entrepreneurship, it turns out, can be a win-win for boomers and their kids. For the parents, it’s the answer to the question: What will I do in my Unretirement? For their adult children, working with mom and dad provides them with greater meaning than just picking up a paycheck.

Chris Farrell is senior economics contributor for American Public Media’s Marketplace and author of the new book Unretirement: How Baby Boomers Are Changing the Way We Think About Work, Community, and The Good Life. He writes twice a month about the personal finance and entrepreneurial start-up implications of Unretirement, and the lessons people learn as they search for meaning and income. Send your queries to him at cfarrell@mpr.org or @cfarrellecon on Twitter.

More from Next Avenue:

Businesses Mixing Older and Younger Partners

Hiring Your Parent

Older Entrepreneurs Are Better Than Younger Ones

MONEY Social Security

The Right Way to Claim Social Security Lump-Sum Benefits

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

Q. I have a question regarding collecting half of my Social Security benefit in a lump sum when filing a claim for the first time. Is this an option that you are aware of? If so, how does it work? I am not at retirement age yet, but would like to be prepared with all options when the time comes. — Mary

A. There are two types of lump-sum options available to you, but neither involves collecting half of your Social Security benefit. And both options are only available to those who have reached full retirement age, as defined by Social Security. That age is now 66 for people born between 1943 and 1954, and it will rise for people born later, eventually settling at 67 for anyone born in 1960 or after.

The first lump-run option applies to someone who delays filing for Social Security past full retirement age. In this scenario, you can decide to receive up to six months of your delayed benefits in a lump sum. Here’s how this works: If your full retirement age was 66 but you did not file for benefits until you were 66 years and six months of age, you could get your “missed” six months of benefits paid to you as a lump sum. If you filed later than this, however, you’d still only be able to get a maximum of six months of payments. And if you filed earlier—say, when you were 66 years and four months of age—you’d get a lump-sum payment that equaled only four months of missed benefits.

Keep in mind, collecting the lump sum may not be the best way to maximize your benefits. Because of delayed retirement credits, your monthly Social Security benefit rises by 8% a year (plus the rate of inflation) should you elect not to begin benefits at age 66. Deferred benefits will keep rising until you turn 70, when they will be 32% larger than if you began them at 66. So, while you could collect a six-month lump sum payment if you delayed filing until age 66-and-a-half, you also could simply file at that age for a monthly benefit that would be 4% larger for the rest of your life.

The second lump-sum option involves what’s called “filing and suspending” your benefits at age 66. This is usually done if you seek to preserve your full retirement benefit while making a spousal claim based on the earnings record of your husband or wife. But it’s also an appropriate strategy for single people who will only claim their individual retirement benefit.

When you file and suspend, you retain the right to collect a lump-sum payment for all the months during which your benefit is suspended. Say you plan to defer your Social Security until age 70, when your benefit reaches its highest value. If you file and suspend at age 66, you would be entitled to receive up to four years of suspended benefits in a lump-sum payment. Now, even if you never intended to collect Social Security until you turn 70, you might run into a health or financial emergency where the lump-sum payment makes a lot of sense. But if you had never filed and suspended, you would not be entitled to a lump-sum payment. The agency would just begin payments in whatever month you filed.

But this strategy has a downside: if you file and suspend and then later ask for a lump-sum payment of suspended benefits, you will lose your delayed retirement credits. That means your payments will be calculated based on the level of benefits you are entitled to at 66, not at the age when you ask for the lump-sum payment. And your future Social Security benefits will also be calculated as if you had claimed at 66, not later.

I know this is complicated. Please let me know if you have any other questions about lump-sum payments for Social Security.

Best of luck.

Philip Moeller is an expert on retirement, aging, and health. His book, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” will be published in February by Simon & Schuster. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: How Social Security Calculates Your Benefits

MONEY retirement planning

Forget Feel-Good Resolutions! Just Do These 3 Retirement Tasks in 2015

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Getty Images

Resolutions are just a ritual. If you really want to reach your retirement goals, these three steps will help you get there.

Fidelity Investments reports that the number of people making New Year’s financial resolutions is down 28% from last year. Excuse me if I don’t see this as cause for alarm. In fact, I think we should ditch the whole resolution thing and just focus on achieving a few key retirement-planning goals.

I wouldn’t go so far as to say New Year’s resolutions are a waste of time. Indeed, Fidelity’s sixth annual New Year Financial Resolutions Study suggests that people who make them might be better off than those who don’t.

But let’s be honest. The resolution ritual is often more about letting us feel that we’re improving our finances rather than a realistic way to set concrete goals and track our progress toward meeting them.

If you feel the need to make some resolutions, fine. But if you really want to make headway toward a secure retirement, I suggest you also identify a few specific tasks that are challenging but doable and that can definitely improve your retirement prospects.

Here are my three candidates.

Task #1: Save at least 15% next year. Saving more is the most common financial resolution. Some people even put a number on their resolve: an extra $200 a month on average in Fidelity’s survey. But as admirable as the intention to save more may be, you’ll be much better off if you set a savings target that’s actually based on achieving some larger goal, like a comfortable retirement.

That’s where the 15% figure comes in. While it’s impossible to know exactly how much you should save to have a decent shot at maintaining an acceptable standard of living throughout retirement, a recent study from the Boston College Center for Retirement cites 15% as the percentage of salary the typical American household should be putting away each year.

There are plenty of good ways to save, but you’ll increase your chances of socking away this amount each year if you put your savings effort on autopilot. The easiest way to do that: sign up for your 401(k) plan. If your plan, like most, offers employer matching funds, you’ll find it easier to reach 15%. If you don’t have access to a 401(k), open an automatic investing plan with a mutual fund company and have 1.25% of salary (15% divided by 12) transferred each month from your checking account to your fund account.

Task #2: Do a rigorous portfolio review. Lots of people give their retirement portfolio the once-over this time of year. Some may even go to the trouble of rebalancing it. But I’m talking about taking a much more in-depth look at your retirement investment holdings.

Start by completing a risk tolerance questionnaire. That will give you a good sense of how your portfolio should be allocated between stocks and bonds. By then plugging your investments into a tool like Morningstar’s Portfolio Review, you can see whether your holdings jibe with your appetite for risk. Over the course of a long bull market like we’ve had the past five years, many investors end up with a higher stock stake than they should have—something they often don’t realize until the market crashes.

Next, go for an even deeper dive to see how your portfolio is allocated among different types of stocks and bonds. Are you dangerously over weighted in risky small-cap stocks? Have you loaded up too heavily on low-quality bonds in search of fatter yields? Your portfolio’s stock and bond allocations don’t have to match the make-up of the overall stock and bonds exactly. But if they get too far off, you may be taking on outsize risk.

And don’t forget fees. It’s pretty easy to assemble a portfolio of stock and bond funds or ETFs with annual expenses less than 0.5%. You may even be able to have your portfolio professionally managed for roughly that amount, if not less. High costs drag down performance, so go over your holdings to see if there’s a way you can scale back what you’re paying in fees.

Task #3: Give Yourself a Retirement Check Up. Unless you actually crunch the numbers, it’s impossible to know whether you’re on track for a comfortable retirement. Fortunately, running the numbers isn’t very time consuming or difficult these days. Just go to a retirement income calculator that uses Monte Carlo simulations, plug in such info as the amount you have saved, how much you’re putting away annually (or spending, if you’re already retired), how your money is invested and how long you need your savings to last, and you’ll come away with an estimate of the probability that your savings will be able to sustain you throughout retirement.

If that probability is uncomfortably low—say, 70% or less—then repeat the exercise to see what adjustments will improve the odds. Typically, going to a higher savings rate or postponing retirement a few years (or both) will trigger the biggest improvement. If you don’t like doing this sort of analysis on your own, you can always hire an adviser to do it for you.

Feel free to make a longer list of goals and resolutions for the New Year. But if you complete just these three tasks, you’ll know you’ve taken meaningful steps that to boost your shot at a secure retirement in the coming year and beyond.

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.

More from RealDealRetirement.com:

How To Invest In Today’s Topsy-Turvy Market—And In The Year Ahead

The Smart Way To Double Your Nest Egg in 10 Years

How To Make Sure Your Retirement Savings Last a Lifetime

MONEY Social Security

How Social Security Calculates Your Benefits

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

Q. Is it possible to obtain the inflation index that Social Security uses to adjust each year’s earning such that I could attempt to perform the overall calculation myself? I’m interested in knowing whether any of my earnings prior to 35 years ago are being counted in the index rather than the most recent 35 years’ worth. — Bob

A. Bob, you must have a masochistic streak! You can do what you suggest but it may wear out your calculator.

Social Security has a different index for every year! It is based not on prices but on wages. Basically, the agency adds up all the wages earned in the nation each year (there’s a two-year lag to get this data), divides them by the number of workers, and looks at how much wages per person have risen from year to year. The actual mathematical process is, of course, much more complicated.

These annual wage changes produce a set of indexing factors. The way these factors affect your own benefits is keyed to the year in which you first become eligible for benefits. For retirement benefits, this is 62. Entering this calendar year in an online tool will give you the annual indexing factors you can apply to your own earnings. Take your annual covered earnings (the earnings on which you pay Social Security payroll taxes), multiply it by that year’s index factor and you will obtain your indexed wage for each year you have worked.

Next, add up all these indexed wages and divide them by 35 to determine your average wage. If you’ve not worked 35 years, use zeroes for any missing year until you have 35 numbers. Finally, you need to find out what’s called your Average Indexed Monthly Earnings. So, multiply your 35 years of highest indexed earnings by 12 and then divide this total by 420 (the number of months in 35 years).

Your Average Indexed Monthly Earnings is the figure on which your retirement benefits are based. And it will change to reflect a new “top 35″ earnings year. If interested, the way the AIME determines your benefits is explained here.

If you have not given up by now, you also need to know that Social Security only indexes your wages until you are 60. For later years, it simply uses the actual amount of your covered earnings. For this reason, people who keep working in their later years will often see their benefits automatically recomputed upward to reflect a new top-35 year.

Clear as mud, right?

Anyway, that’s how it works. Or at least I think it is. Honestly, it is so confusing that even experts, including me, make mistakes.

Best of luck!

Philip Moeller is an expert on retirement, aging, and health. His book, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” will be published in February by Simon & Schuster. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: How Your Earnings Record Affects Your Social Security

MONEY Pensions

What Retirees Need to Know about the New Federal Pension Rules

Only a small percentage of retirees are directly affected by the new rule. But future legislation may lead to more pension cutbacks.

The last-minute deal to allow retiree pension benefit cuts as part of the federal spending bill for 2015 passed by Congress last week has set off shock waves in the U.S. retirement system.

Buried in the $1.1 trillion “Cromnibus” legislation signed this week by President Barack Obama was a provision that aims to head off a looming implosion of multiemployer pension plans—traditional defined benefit plans jointly funded by groups of employers. The pension reforms affect only retirees in struggling multiemployer pension plans, but any retiree living on a defined benefit pension could rightly wonder: Am I next?

“Even people who aren’t impacted directly by this would have to ask themselves: If they’re doing that, what’s to stop them from doing it to me?” says Jeff Snyder, vice president of Cammack Retirement Group, a consulting and investment advisory firm that works with retirement plans.

The answer: plenty. Private sector pensions are governed by the Employee Retirement Income Security Act (ERISA), which prevents cuts for retirees in most cases. The new legislation doesn’t affect private sector workers in single-employer plans. Workers and retirees in public sector pension plans also are not affected by the law.

Here are answers to some of the key questions workers and retirees should be asking in the legislation’s wake.

Q: Cutting benefits for people who already are retired seems unfair. Why was this done?

A: Proponents argue it was better to preserve some pension benefit for workers in the most troubled plans rather than letting plans collapse. The multiemployer plans are backstopped by the Pension Benefit Guaranty Corp (PBGC), the federally sponsored agency that insures private sector pensions. The multiemployer fund was on track to run out of money within 10 years—a date that could be hastened if healthy companies withdraw from their plans. If the multiemployer backup system had been allowed to collapse, pensioners would have been left with no benefit.

Opponents, including AARP and the Pension Rights Center, argued that cutting benefits for current retirees was draconian and established a bad precedent.

Q: Who will be affected by the new law? If I have a traditional pension, should I worry?

A: Only pensioners in multiemployer plans are at risk, and even there, the risk is limited to retirees in “red zone” plans—those that are severely underfunded. Of the 10 million participants in multiemployer plans, perhaps 1 million will see some cuts. The new law also prohibits any cuts for beneficiaries over age 80, or who receive a disability pension.

Q: What will be the size of the cuts?

A: That is up to plan trustees. However, the maximum cuts permitted under the law are dramatic. Many retirees in these troubled plans were well-paid union workers who receive substantial pension benefits. For a retiree with 25 years of service and a $25,000 annual benefit, the maximum annual cut permitted under the law is $13,200, according to a cutback calculator at the Pension Rights Center’s website.

The cuts must be approved by a majority of all the active and retired workers in a plan (not just a majority of those who vote).

Q: How do I determine if I’m at risk?

A: Plan sponsors are required to send out an annual funding notice indicating the funding status of your program. Plans in the red zone must send workers a “critical status alert.” If you’re in doubt, Snyder suggests, “just call your retirement plan administrator,” Snyder says. “Simply ask, if you have cause for concern. Is your plan underfunded?”

The U.S. Department of Labor’s website maintains a list of plans on the critical list.

Q: How quickly would the cuts be made?

A: If a plan’s trustees decide to make cuts, a notice would be sent to workers. Snyder says implementation would take at least six months, and might require “a year or more.”

Q: Am I safe if I am in a single employer pension plan?

A: When the PBGC takes over a private sector single employer plan, about 85% of beneficiaries receive the full amount of their promised benefit. The maximum benefit paid by PBGC this year is $59,320.

Q: Does this law make it more likely that we’ll see efforts to cut other retiree benefits?

A: That will depend on the political climate in Washington, and in statehouses across the country. In a previous column I argued that the midterm elections results boost the odds of attacks on public sector pensions, Social Security and Medicare.

Sadly, the Cromnibus deal should serve as a warning that full pension benefits aren’t a sure thing anymore. So having a Plan B makes sense. “If you have a defined benefit pension, great,” Snyder says. “But you should still be putting money away to make sure you have something to rely on in the future.”

Read next: This Is the Toughest Threat to Boomers’ Retirement Plans

MONEY Social Security

The Right Way to Claim Social Security Widow’s Benefits

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

Q. I am 61 and was divorced from my husband two years ago after more than 16 years of marriage. He died a few months ago at 72 and had been receiving Social Security benefits of $1,663 a month. I am working part-time, earning $13,000 a year, and want to continue doing so. According to the Social Security calculator, my own retirement benefit would be $1,028 a month if I claim at age 62, $1,364 at age 66 (my full retirement age), or $1,800 at age 70. If I claim a (reduced) widow’s survivor benefit before age 66, I expect to receive $1,314 a month if I file now at age 61½ or $1,347 at age 62.

Can I apply just for my survivor’s benefits now, continue to work, apply for Medicare at age 65, and at age 70 file for my own benefits? Also, while receiving survivor’s benefits, would I need to apply for my own benefits at age 66 and suspend it until age 70; or can I continue to collect survivor’s benefits, with no need to apply and suspend at 66, and change to my own benefits at 70? — Elizabeth

A. This is an incredibly well-informed query, so, first off, kudos to Elizabeth for doing her homework and doing such a good job looking out for herself. The details she provides are essential for figuring out her best Social Security claiming choice.

The simple answer to her question—whether to claim survivor’s benefits now—is “Yes.” The reasons for this illustrate the complexity of individual retirement benefits, as well as the way benefits interact, which can increase or reduce your Social Security income. This is a key issue for women, who tend to outlive their spouses and file the lion’s share of survivor claims.

The rules for widow’s (or survivor’s) benefits are different from spousal benefits, which involve claims on a current or divorced spouse. Survivor’s benefits may be taken as early as age 60, while spousal benefits normally can’t begin until age 62. Both benefits are lowered if you claim early, but the percentage reductions differ. That’s because survivors can claim up to six years before reaching their full retirement age (FRA), which is 66 for current claimants, compared with just four years for early spousal claims.

Another key difference is that survivor benefits do not trigger deeming when taken prior to full retirement age, which can be a real headache. If you are eligible to file for a spousal benefit and do so before age 66, Social Security will deem you to be also filing for your own retirement benefit. It does not pay two benefits at the same time but will give you an amount roughly equal to the greater of the two benefits. Further, once your retirement benefit has been triggered early, it will be permanently reduced.

The good news is that deeming does not apply to survivor benefits. So Elizabeth can file for a widow’s benefit right away and not trigger a claim for her own retirement benefit. Because it’s likely her retirement benefit will be higher at age 70 than her widow’s benefit, she should plan on taking the widow’s benefit as soon as possible. At age 70, she can switch to her retirement benefit .

She is correct that she will be hit with an early filing reduction. But given the small increases she would receive if she waited, the benefit of deferring is outweighed by the gains of claiming now. That’s because she will get more years of benefits, so the cumulative amount of income will be greater.

The modest earnings she receives won’t be a factor either. “Since her earnings are below the 2014 annual earning limits, she could qualify for widows benefits beginning this month with no loss of benefits due to the earnings test,” says James Nesbitt, a Social Security claims representative for nearly 40 years who now provides benefits counseling for High Falls Advisors in Rochester, NY.

“Depending on her past work history, her continued contributions into the Social Security system by working may have the effect of increasing her monthly benefit amount,” he adds. “The online retirement calculator on Social Security’s website will allow for future earnings to be used in estimating benefits.”

Elizabeth should set up an appointment now at a local Social Security office in order to begin receiving benefits as soon as possible, Nesbitt adds. If she files for her survivor benefit before age 65, Social Security should automatically enroll her in Medicare.

Further, Nesbitt notes, the precise amount of her survivor’s benefit depends on when her late husband filed early for his retirement benefit. This, like much else about Social Security, can be very complicated. But if his $1,663 benefit was the result of an early retirement filing, her actual survivor’s benefit could end up being much higher than she estimates. She should review this possibility when she meets with the agency to file her claim.

Lastly, she should not file and suspend her own retirement benefit but simply collect her survivor’s benefit and then claim her own retirement benefit at age 70. “Once a retirement claim has been filed at 66, albeit suspended, the amount of the widow’s benefit will be calculated as if she is [also] receiving the retirement benefit,” Bennett notes. “A ‘file and suspend’ would reduce or possibly eliminate the widow’s benefit.”

Philip Moeller is an expert on retirement, aging, and health. His book, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” will be published in February by Simon & Schuster. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: The Best Way to Tap Your IRA in Retirement

MONEY retirement income

Junk Bond Selloff Is a Warning for Retirees Who Reached for Yield

Risky assets have paid off well the past few years. But tremors in the junk bond market signal time for a gut check.

In July, Federal Reserve Chief Janet Yellen warned of the “stretched” values of junk bonds. Few seemed to care, and among the unconcerned were millions of retirees who had reached for these bonds’ higher yields in order to maintain their lifestyle. Now, a reckoning may be at hand.

Yellen’s mid-summer warning on asset prices was reminiscent of the former Fed chief Alan Greenspan’s “irrational exuberance” comment regarding stock prices in 1996. Few listened then, either. It turns out that the Greenspan warning was way early. But the dotcom collapse hit later with devastating results.

Yellen’s remarks may be timelier. High-risk, high-yield corporate bond prices have been falling amid the strongest selling in 18 months. Since June, investors have pulled $22 billion out of the market and prices have dropped 8%. The pace of the decline has quickened since October.

The junk bond selloff began in the energy sector, where oil prices recently hitting a five-year low set off alarms about the future profits—and ability to make bond payments—of some energy companies. In the past month, the selling has spread throughout the junk-bond universe, as mutual fund managers have had to sell to meet redemptions and as worries about further losses in a possibly stalling global economy have gathered steam.

The broad decline means that junk bond investors have little or no gain to show for the risks they have been taking this year. Investors may have collected generous interest payments, and so not really felt the sting of the selloff. But the value of their bonds has fallen from, say, $1,000 to $920. The risk is that prices fall further and, in a period of global economic weakness, that issuers default on their interest payments.

Retirees have been reaching for yield in junk bonds and other relatively risky assets since the financial crisis, which presumably is partly what prompted Yellen’s warning last summer. It’s hard to place blame with retirees. The 10-year Treasury bond yield fell below 2% for a while and remains deeply depressed by historical standards. By stepping up to the higher risks of junk bonds, retirees could get 5% or more and live like it was 10 years ago. Many also flocked to dividend-paying stocks.

So far, taking these risks has generally worked out. Junk bonds returned 7.44% last year and 15.8% in 2012, according to Barclays, as reported in The Wall Street Journal. Meanwhile, stocks have been on a tear. But the backup in junk bond prices this fall should serve as a warning: Companies that pay a high yield on their bonds—and many that pay a fat stock dividend—do so because they are at greater risk of defaulting or going bust. That’s the downside of reaching for yield, and it doesn’t go away even in a diversified mutual fund.

 

MONEY retirement income

Why Workers Undervalue Traditional Pension Plans

Gold egg in nest in dark
Simon Katzer—Getty Images

Lifetime income is the hottest button in the retirement industry. So why do workers prefer a 401(k) to a traditional pension?

Despite many drawbacks, the 401(k) plan is our most prized employee benefit other than health care, new research shows. More than half of workers value this savings plan even above a traditional pension that guarantees income for life.

Some 61% of workers with at least $10,000 in investments say that, after health care, an employer-sponsored savings plan is their most important benefit, according to a Wells Fargo/Gallup Investor poll. This is followed by 23% of workers naming paid time off, 5% naming life insurance, and 4% naming stock options. Some 52% say they prefer a 401(k) plan to a traditional pension.

These findings come as new flaws in our 401(k)-based retirement system surface on a regular basis. Plans are still riddled with expenses and hidden fees, though in general expenses have been going down. Too many workers don’t contribute enough and lose out by borrowing from their plans or taking early distributions. Most people don’t know how to make a lump sum last through 20 or 30 years of retirement. And the common rule of withdrawing 4% a year is an imperfect strategy.

The biggest flaw of all may be that most 401(k) plans do not provide a guaranteed lifetime income stream. This issue has gotten loads of attention since the financial crisis, which laid waste to the dreams of millions of folks that had planned to retire at just the wrong moment. Many were forced to sell shares when the market was hitting bottom and suffered permanent, devastating losses.

Policymakers are now feverishly looking for seamless and cost-effective ways for retirees to convert part of their 401(k) plan to an insurance product like an immediate annuity, which would provide guaranteed lifetime income in addition to Social Security and give retirees a stable base to meet monthly expenses for as long as they live. Such a conversion feature would fill the income hole left by employers that have been all but eliminating traditional pensions since the 1980s.

With growing acknowledgement that lifetime income is critical, and largely missing from most workers’ plans, it seems odd that so many workers would value a 401(k) over a traditional pension. This may be because guaranteed income doesn’t seem so important while you are still at work or, as has lately been the case, the stock market is rising at a rapid pace. It may also be that the 401(k) is the only savings plan many young workers have ever known, and they value having control over their assets.

Seven in 10 workers have access to a 401(k) plan and 96% of those contribute regularly, the poll found. Some 86% enjoy an employer match and 81% say the match is very important in helping to save for retirement. The 401(k) is now so ingrained that 77% in the poll favor automatic enrollment and 66% favor automatic escalation of contributions. Four in 10 even want their employer to make age-appropriate investments for them, which speaks to the soaring popularity of automatically adjusting target-date mutual funds.

Read next: How Your Earnings Record Affects Your Social Security

MONEY Pensions

Congress’ No-Bailout Pension Plan Is No Solution for Retirees

The cuts to promised benefits for current retirees would roll back a landmark law protecting pensions—and opens the door to further cutbacks.

Wall Street banks, automakers and insurance giants got bailouts during the economic meltdown that started in 2008. But when it comes to the pensions of retired truck drivers, construction workers and mine workers, it seems that enough is enough.

The $1.1 trillion omnibus spending bill moving through Congress this week adopts “Solutions Not Bailouts,” a plan to shore up struggling multiemployer pension funds—traditional defined benefit plans jointly funded by groups of employers in industries like construction, trucking, mining and food retailing.

A bailout, it is not. The centerpiece is a provision that would open the door to cutting current beneficiaries’ benefits, a retirement policy taboo and a potential disaster for retirees on fixed incomes.

Developed by the National Coordinating Committee for Multiemployer Plans (NCCMP), a coalition of multiemployer pension plan sponsors and some major unions, the plan addresses a looming implosion of multiemployer pension plans. Ten million workers are covered by these plans, with 1.5 million of them in roughly 200 plans that are in danger of failing over the next two decades. Two large plans are believed to be much closer to failure—the Teamsters’ Central States fund and the United Mine Workers of America fund.

The central premise is that Congress won’t—and shouldn’t—prop up the multiemployer system.

“The bottom line is, we’ve been told since the start of this process that there isn’t going to be a bailout—Congress is tired of bailouts,” says Randy DeFrehn, executive director of the National Coordinating Committee for Multiemployer Plans (NCCMP).

The problem is partly structural. Multiemployer pension plans were thought to be safer than single employer plans, owing to the pooling of risk. As a result, the level of Pension Benefit Guaranty Corporation (PBGC) insurance protection behind the multiemployer plans is lower. But many industries in the system have seen declining employment and have a growing proportion of retirees to workers paying into the pension funds. And many of the pension funds still have not fully recovered from the hits they took in the 2008-2009 market meltdown.

These problems pose a major threat to the PBGC. The agency reported recently that the deficit in its multiemployer program rose to $42.2 billion in the fiscal year ending Sept. 30, up from $8.3 billion the previous year. If big plans fail, the entire multiemployer system would be at risk of collapse.

The fix moving through Congress would revise the Employee Retirement Income Security Act (ERISA) to grant plan trustees broad powers to cut retired workers’ benefits if they can show that would prolong the life of the plan. That would mark a major change from current law, which calls for retirees to be paid full benefits unless plan assets are exhausted; then, the PBGC steps in to pay benefits, albeit at a much lower level. The bill also would increase PBGC premiums paid by sponsors, from $13 to $26 per year.

The legislation does prohibit benefit cuts for vested retirees over 80, and limited protections for retirees over 75—but that leaves plenty of younger retirees vulnerable to cuts. And although workers and retirees would get to vote on the changes, pension advocates worry that the interests of workers would overwhelm those of retirees. (Active workers rightly worry about the future of their plans, and many already are sacrificing through higher contributions and benefit cuts.)

The big problem here is that the plan fails to put retirees at the head of the line for protection. When changes of this type must be made, they should be phased in over a long period of time, giving workers time to adjust their plans before retirement. For example, the Social Security benefit cuts eneacted in 1983 were phased in over 20 years and didn’t start kicking in until 1990.

“It’s a cruel irony that in the year we’re celebrating the 40th anniversary year of ERISA, Congress is trying to reverse its most significant protections,” said Karen Friedman, executive vice president of the Pension Rights Center (PRC), an advocacy group that has been battling with NCCMP on some of the proposed changes to retired workers’ benefits.

Friedman’s organization, AARP and other advocates reject the idea that solvency problems 10 to 15 years away require such severe measures. They have pushed alternative approaches to the problem; one that is included in the deal, DeFrehn says, is an increase in PBGC premiums paid by sponsors, from $13 to $26 per year. Advocates also have called for other new revenue sources, such as low-interest loans to PBGC by the once-bailed-out big banks and investment firms.

There are no easy answers here. But cutting the benefits of today’s retirees should be the last solution we try—not the first.

Read next: 401(k)s Are Still a Problem, But They’re Getting Better

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