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Bucks: When You Want to Collect Social Security vs. When You Should

Review

Evaluating new financial products and services.

Last week, we reviewed AARP’s new Social Security calculator, which helps you figure out when to begin collecting benefits. This week, we’re reviewing some more tools that will help you make this decision. Below, we take a look at the second one.

When you want to start collecting Social Security isn’t necessarily when you should begin to collect Social Security. Another new calculator, called MaximizeMySocialSecurity, helps you compare those two options.

This tool, which costs $40 a year, was developed by Laurence J. Kotlikoff, an economics professor at Boston University, who also created the more comprehensive ESPlanner financial planning software.

His latest calculator generates two big numbers: the present value of your Social Security benefits based on when you think you’d like to file, and how that compares with the maximum amount you would collect if you filed at the best possible time — all based on a specific life expectancy.

This calculator accounts for several things that some of the others do not. It works for widows and those who have been divorced, for instance. It also factors in the effects of working and collecting benefits before your full retirement age, since that could cause a portion of your monthly benefits to be withheld and recalculated later. The program also considers whether your children may be eligible for benefits. (Some children are eligible if they meet certain conditions, like having a disabled or retired parent who is entitled to benefits.)

Meanwhile, certain government employees and other workers whose employers did not withhold Social Security taxes but provided pensions may be affected by the so-called Windfall Elimination Provision and Government Pension Offset. Those could reduce their Social Security benefits. The calculator factors that in, too.

Do you believe that politicians will ultimately prevail in cutting benefits in some way? If so, you can factor that in as well — say, a 2 percent benefit reduction beginning in 2025. Users can also set their own life expectancy.

The results aren’t quite as simple to read when compared with some of the other calculators, though Professor Kotlikoff says he is working on improvements.

Getting the results is also going to require a little more work on your part. Be prepared to manually enter what you expect to earn in the future, and what you earned each year for your entire career thus far (you can use your annual Social Security statement, if you have one; to save money, the government didn’t mail them out this year and will send them only to people 60 and older starting next year). Professor Kotlikoff said that using your past and projected earnings would make it possible to generate a result even more accurate than relying on the Social Security Administration’s retirement estimator.

Married people are also asked if they want to consider the “file and suspend” strategy, which allows one spouse to file for benefits, and then immediately suspend them so that the benefits continue accruing — while allowing their significant other to collect spousal benefits. The Web site explains how it all works; the rules can be confusing. That’s why it encourages you to test various assumptions, which will ultimately be compared against the optimal strategy, which the program will calculate on its own.

You’ll also be asked to plug in some economic assumptions, like a projected inflation rate and a safe rate of return that you would expect to receive if you collected benefits early and invested them (if you’re unsure, you can rely on the default values). This information is used to formulate the “present value” of your benefits, which is a fancy way of saying that the benefit amounts you see account for the time value of money, or the fact that receiving $100 today is more valuable than receiving the same amount at some point in the future, since you could have invested it or spent it today.

I tested the calculator using two different possibilities: a single woman and a married couple. The results show how much you could conceivably leave on the table if you don’t file for benefits at the optimal time, though it doesn’t list all the various less-than-perfect possibilities, like the SocialSecurityChoices calculator does.

The results also don’t spell out what steps you need to take to follow a particular strategy, though you can figure it out by reading the chart that’s generated on the results page. (Professor Kotlikoff says he’s working on making those results more specific.) For instance, if there is a number in the “spousal benefits” box, that means you would take those benefits until the year that “retirement benefits” show up. There’s some helpful commentary on the last page, too.

What do you think of this calculator?

Article source: http://feeds.nytimes.com/click.phdo?i=ed90e5674f1e401157f6020ff7d75d75

Bucks: AARP’s New Social Security Calculator

With all the chatter about making potential changes to Social Security, many people are probably thinking that they should start collecting benefits as soon as they can.

But that would be unwise, at least for many people. And a new calculator from AARP attempts to illustrate why you should wait — if you can afford to, of course. Figuring out the optimal time to collect benefits is impossible because nobody can predict how long they’ll live. Most people follow the bird in the hand philosophy and begin collecting as soon as they’re eligible.

AARP’s calculator, however, shows what you lose by collecting before your full retirement age, or the point at which you’re eligible to receive your full benefits without penalty. And while it’s helpful to see what you stand to gain by waiting, waiting won’t necessarily make sense for everybody.

The calculator, which happens to be very user-friendly, will be helpful for married people who are on the cusp of retirement because it shows an easy strategy couples can use to maximize their benefits. And it will also help pre-retirees better visualize the complex rules around working while collecting benefits before their full retirement age. (If you earn money above a certain amount, at least a portion of your benefits may be withheld.)

But there are also many things that the calculator does not do, like take into account any outside assets like retirement savings or a pension. In a previous article, I found that some singles in certain situations might be better off taking their benefits sooner rather than later. If they waited too long, they would have consumed too much of their savings to offset the loss with higher Social Security payments later.

Widows, widowers and the disabled won’t find the tool particularly helpful because it does not calculate survivor or disability benefits. Serial divorcees will also be limited: You can only calculate benefits based on one your ex-spouses, and it doesn’t take into account if you’ve remarried. AARP said it might add some of these features in future versions of the calculator.

It doesn’t require much time to get started. After entering some basic demographic information, the hardest decision you’ll need to make is whether to visit the Social Security Web site (do it) to get an accurate projection of your Social Security benefits (You can also use the number on your paper statement that arrives in the mail). The AARP calculator is capable of making an estimate for you, but it could be off because it’s not factoring in any years you may have left the work force, or some other aberration.

I based my first calculation on a 62-year-old married woman (we’ll call her Betty) earning $60,000 a year. Her husband, also 62, earns $85,000. His and her monthly benefits were estimated to be $1,996 and $1,609, respectively.

After clicking the ‘When should I claim Social Security?’ button, you land on a page that shows how much more you would receive — on a monthly basis — for every year you wait. You also have the option to see how much that translates to over the course of your lifetime (based on how old you are now and the average life expectancy for the United States population). Betty could collect her full benefit of $1,609 at age 66, but would take a significant hair cut if she started collecting at age 62 ($1,126). If she waited until 70, she’d get $2,123.

But because Betty is married, she probably wants to factor her husband’s benefits into her decision. Once she clicks on the “Does it Matter if I’m Married?” button, she’s told that when her husband is 66, he should apply for Social Security and request to have his payments suspended (known as “file and suspend,” this allows his benefits to continue accruing). Then, she should apply for spousal benefits on her husband’s record, which provides about $998 a month. When he turns 70, he should resume his own benefits (about $2,634 a month). And then when she turns 70, she should apply for her own benefits (or $2,123 a month).

The calculator also has another page that allows you to enter your basic monthly expenses, like food, shelter, and health care, and use a little slider that will tell you what percentage of those costs will be covered depending on when you start collecting.

Finally, it also shows you what you can collect if you keep working. If you haven’t reached your full retirement age and are still working, earning money above a certain threshold will reduce your benefits (though your checks will increase once you hit your full retirement age to account for the time your benefits were withheld).

You can play around with the age you claim benefits and how much you expect to earn. So if Betty decides to claim benefits at 62, but still wants to continue working, it shows her that about $13,500 in benefits will be withheld until her full retirement age of 66.

The calculator is a helpful educational tool, but don’t confuse it for comprehensive planning. It’s not. It doesn’t factor in taxes, for instance. I’m going to test-drive some more complex tools later this week, so stay tuned.

Try out the calculator and let us know what you think and what improvements you’d like to see.

Article source: http://feeds.nytimes.com/click.phdo?i=1a34f5606a14f4ca8bb18b7d2df23aaf

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