When to Take Social Security (vanguard)

Taking Social Security: Sooner might not be better
April 24, 2012

The thought of receiving Social Security benefits early can be enticing. If you can start getting payments as soon as age 62, why wait until you reach full retirement age at 66 or 67?

The answer is simple: Waiting could mean putting more money in your pocket over the long term. If you start collecting Social Security before full retirement, you could get less each month than if you wait just a few years.

How much less will you get?
The amount of the reduction depends on how many months before your full retirement age you start taking benefits. The earlier you start, the bigger the cut.

Your birth year determines your full retirement age. If you were born between 1943 and 1954, it's age 66—increasing incrementally until it reaches the maximum age of 67 for people born in 1960 and after.

For more information
Visit ssa.gov or call the Social Security Administration at 800-772-1213.

According to the Social Security Administration, older baby boomers who started taking benefits at age 62 will see a lifelong reduction of 25% in monthly payments compared with what they would have gotten by waiting until full retirement age. The percentage increases to 30% if your birth year is after 1959. Spouses also will see at least a 30% drop in the benefit amount they receive, and those born after 1959 face a 35% drop.

While you can collect benefits before full retirement age and continue working, you might get hit with an earned-income penalty. The Social Security Administration deducts $1 from your payments for every $2 you earn above an income threshold ($14,640 for 2012). The year you reach full retirement age, the deduction changes to $1 for every $3 you earn (up to $38,880 in 2012) until you reach your birth month—after that, the earned-income penalty no longer applies.

Your actual benefit amount is based on the income you earned during your working life. If you're under age 60, you won't get an earned income estimate from Social Security mailed to you; however, you can check this information—and confirm it's correct—at ssa.gov.

Consider waiting to file for benefits
Given the downsides of taking benefits early, you may want to think about waiting until you reach your full retirement age, suggests John Ameriks of Vanguard Investment Counseling & Research.

"If you don't have an immediate need for Social Security, it may be best to delay taking the benefit," Mr. Ameriks said.

For example, if you were born in 1946 and put off taking benefits until age 70 (in 2016), you'd see a 32% increase in monthly payment amounts over what you would have received by starting this year. That's because you get an increase (two-thirds of 1%) for each month you delay beyond full retirement age.

Monthly payment by age you choose to receive benefits


The sample benefits used in this chart are based on Social Security Administration estimates for a person who qualifies to receive a starting monthly benefit payment of $1,000 at the full retirement age of 66. All amounts are in today's dollars and don't include potential earnings from reinvestment. Actual income will include any increases in benefits based on inflation.

Of course, if you need to take Social Security to help meet your current spending needs, you should feel free to do so, Mr. Ameriks added. And because there's no advantage to waiting past age 70 to apply for benefits, don't hold out any longer than that.

A method to maximize benefits when you're married
If your spouse also qualifies to receive benefits based on his or her employment history, there's a strategy generally called restricted application that could help you maximize how much your household gets from Social Security.

Here's how it works: The lower-earning spouse applies for benefits at age 62 and receives the reduced amount. The higher-earning spouse files for spousal benefits only at age 66, collecting half of the lower-earning spouse's full benefit while postponing his or her own full benefits until age 70—so that they'll continue to increase.

While the dollar amounts will vary based on your situation, here's an example: The lower-earning spouse qualifies for a $1,000 full benefit but takes a lower benefit of $750 at age 62. The higher-earning spouse gets $500 when filing for spousal benefits only. The addition of the spousal benefit can give you $6,000 more in Social Security income each year.

Another advantage of this method: The lower-earning spouse will get a higher survivor benefit if he or she survives the higher earner.

It's a good idea to discuss any approach with a financial advisor.

Plan for a longer life expectancy

Your expected longevity is another important factor to consider in this decision, Mr. Ameriks said. Americans' life expectancy is on the rise, with a quarter of today's 65-year-olds projected to live past age 90—and 1 out of 10 to live past age 95—according to the Social Security Administration.

Of course, you can't predict exactly how long you'll live, but your health status and family history can give an indication. If you're concerned your life span will be shorter, you may want to start collecting benefits at age 62. Your monthly payments will be reduced, but you could receive a higher lifetime amount because you started taking benefits sooner.

However, if you expect to be one of those longer-living people—or you're concerned about the risk of outliving your assets—you might consider waiting to receive benefits until age 70 to boost your future monthly payments.

No matter when you decide to start receiving Social Security benefits, it's helpful to consider—before you need to act—how your timing could affect your long-term financial situation.

Money for College - Dos and Don'ts (Morningstar)

Dos and Don'ts of College Savings

Knowing financial aid rules is key given the rising cost of higher education.

Morningstar, 04/27/2012


Investor Question: I'm worried about how we're ever going to afford college for our children. What can we do to increase their odds of getting financial aid in case we can't save enough?

Answer: For many families, the cost of college has become daunting. Tuition, fees, room, and board at a public four-year school currently run $17,131 per year on average (in-state), and $38,589 per year for a private four-year school, according to the College Board. During the past decade, in-state tuition and fees at public universities have increased on average 5.6 percentage points per year beyond the rate of inflation. No wonder, then, that many parents are losing sleep worrying about how they will be able to pay for their children's college education and how much help they can expect from financial aid.

But whether college is just around the corner or years down the road for the student, there are many steps parents can take to improve their odds of making it affordable, including qualifying for financial aid. Below are some ideas to help get them started. Keep in mind that some financial aid is need-based while some is not and that aid includes not just grants and scholarships, but also work-study programs and loans.

Do: Start Saving as Soon as Possible
Some parents worry that saving for college will negatively affect their student's chances for financial aid. But that's misguided, says college planning expert Mark Kantrowitz, publisher of FinAid, an online guide to college funding. "There's this perception that you'd be better off not saving anything," Kantrowitz says, "but the reality is most of the financial aid you're likely to get is going to be in the form of loans, which you're better off not having to pay."

Kantrowitz estimates that every dollar saved for college potentially reduces a student's borrowing costs by two. He suggests parents and students start saving for college as early as possible, noting that he started saving for his children to go to college before they were even born.

Kantrowitz likes 529 accounts as college-savings vehicles in part because of their tax deductibility (in some states), which he likens to "getting a discount on college costs." (You can visit Morningstar.com's 529 Plan Center here.)

Do: Apply for Any Scholarships for Which the Student Might Be Eligible

Applying for scholarships costs nothing but time, and the payoff could make a big difference in reducing out-of-pocket college costs. An obvious place for parents to start is by filling out the Free Application for Federal Student Aid, or FAFSA, the federal government's form for need-based grants, loans (both need-based and non-need-based), and work-study opportunities. Good online resources for scholarship searches include Fastweb and Scholarships.com. Kantrowitz says about one out of eight incoming freshmen at four-year colleges are on some kind of scholarship, with the average amount around $2,800 per student. "The students who win a lot of money are the ones who apply for every scholarship for which they are eligible," he says. One important tip when applying for scholarships: The more optional information provided, the better the odds of matching. For example, if a student or parent has had cancer, including that in the student's profile helps improve his or her chances of matching one of the many scholarships related to the disease.

Do: Have Kids Close Together in Age

Financial aid formulas are weighted heavily on parental income, and having multiple kids in college at the same time actually improves financial aid eligibility because it reduces the amount parents are expected to pay for each. This helps ease the burden on families having to pay two or more tuitions simultaneously. "Someone who has twins is going to get more aid than someone who has single children separated by four years," Kantrowitz says. Of course, it may be a little late to put this plan into action for most parents, but it also works if, say, a parent attends college at the same time as their child or children. Having an older child delay college to attend at the same time as a younger sibling also works.

Don't: Put Assets in the Student's Name

In financial aid calculations, assets belonging to parents have less of a negative impact than those belonging to students. So money in a 529 plan, which is considered the parents' property, counts less against financial aid than, say, money held in a custodial account such as a UGMA/UTMA, which is legally considered the student's property. One way around this problem is to spend down the student's assets before applying for aid. UGMA/UTMA funds can be used for a wide variety of qualifying expenses, so long as they are for the minor's benefit. Incidentally, money in a 529 opened by a grandparent on behalf of a student does not count against financial aid.

Don't: Count on the Student Getting a Full-Ride Scholarship

Expecting a child's academic or athletic brilliance to bail the parents out from having to pay for college? Think again. Fewer than 0.3% of students win full-ride scholarships or need-based full-ride grants, says Kantrowitz, whereas about two thirds of all undergraduates receive some kind of financial aid, including student loans.

Don't: Sell Assets the Year Before Applying for Aid

A common mistake parents make, Kantrowitz says, is to sell a large chunk of taxable investments to help pay for college the year before applying for aid. This might trigger capital gains that add to parental income and thus reduce financial aid eligibility. (Converting traditional IRA assets to a Roth can also add to taxable income, thereby hurting financial aid eligibility.) Keep in mind that students usually must reapply for financial aid each year, so holding off and waiting a year to sell might not help. It's best to plan ahead if possible by putting funds for college in a 529, where their impact on financial aid is reduced.


Other Financing Methods, With Caveats

Some parents opt to use their retirement accounts to help fund college costs. This has its advantages and disadvantages. The biggest advantage to this approach is that the 10% penalty for early withdrawals is waived if the money is used for qualified college expenses. Also, Roth IRA contributions might be withdrawn tax-free, though any earnings on those contributions are subject to regular income tax rates. All withdrawals from traditional IRAs are subject to regular income tax rates. The problem with this approach is that all IRA withdrawals, whether taxed or not, count as total parental income in financial aid calculations. So even though parents might save on taxes or penalties by doing this, they might also make it more difficult for the student to obtain need-based financial aid.

Borrowing from work-based retirement accounts, such as a 401(k) or 403(b) plan, is another option and does not affect need-based financial aid. However, the loan must be repaid within five years, and possibly immediately in the case of job loss. Parents might be eligible for hardship withdrawals, but those are subject to income taxes and penalties.

Estate Planning Checklist (Investors Business Daily, Investopedia.com)

Personal Finance

Estate Planning: 16 Things To Do Before You Die

By INVESTOPEDIA, investopedia.com Posted 04/13/2012 02:43 PM ET



STEVEN MERKEL

While many of us like to think that we're immortal, the old joke is that only two things in life are for sure: death and taxes. Not only is it important that you have a plan in place in the unlikely event of your death, but you must also implement your plan and make sure others know about it and understand your wishes - as Benjamin Franklin's famous quote goes, "by failing to prepare, you are preparing to fail". If you've procrastinated on your estate planning, this article will help you get going in the right direction.

Must Do No.1: Physical Items Inventory

To start things out, go through the inside and outside of your home and make a list of all items worth $100 or more. Examples include the home itself, television sets, jewelry, collectibles, vehicles, guns, computers/laptops, lawn mower, power tools and so on.

Must Do No. 2: Non-Physical Items Inventory

Next, start adding up your non-physical assets. These include things you own on paper or other entitlements that are predicated on your death. Items listed here would include: brokerage accounts, 401k plans, IRA assets, bank accounts, life insurance policies, and ALL other existing insurance policies such as long-term care, homeowners, auto, disability, health and so on.

Must Do No. 3: Credit Cards & Debts List

Here you'll make a separate list for open credit cards and other debts. This should include everything such as auto loans, existing mortgages, home equity lines of credit, open credit cards with and without balances, and any other debts you might owe.

Must Do No. 4: Organization & Charitable Memberships List

If you belong to certain organizations such as the AARP, The American Legion, Veteran's associations, AAA Auto Club, College Alumni, etc, you should make a list of these. Include any other charitable organizations that you proudly support or make donations to. In some cases, several of these organizations have accidental life insurance benefits (at no cost) on their members and your beneficiaries may be eligible. It's also a good idea to let your beneficiaries know what charitable organizations are close to your heart.

Must Do No. 5: Send a Copy of your Assets List to Your Estate Administrator

When your lists are completed, you should date and sign them and make at least three copies. The original should be given to your estate administrator (we'll talk about him or her later in the article), the second copy should be given to your spouse and placed in a safe deposit box, and the last copy you should keep for yourself in a safe place.

Must Do No. 6: Review IRA, 401(k) and Other Retirement Accounts

Accounts and policies where you list beneficiary designations pass via "contract" to that person or entity listed at your death. No matter how you list these accounts/policies in your will or trust, it doesn't matter because the beneficiary listing will take precedence. Contact the customer service team or plan administrator for a current listing of your beneficiary selection for each account. Review each of these accounts to make sure the beneficiaries are listed exactly as you like.

Must Do No. 7: Update Life Insurance & Annuities

Life insurance and annuities will pass by contract as well, so it's just as important that you contact all life insurance companies where you maintain policies to ensure that your beneficiaries are listed correctly.

Must Do No. 8: Assign TOD Designations

Many accounts such as bank savings, CD accounts and individual brokerage accounts are unnecessarily probated every day. Probate is an avoidable court process where assets are distributed per court instruction, which can be costly. Many of the accounts listed above can be set up with a transfer-on-death feature to avoid the probate process. Contact your custodian or bank to set this up on your accounts.

Must Do No. 9: Select a Responsible Estate Administrator

Your estate administrator will be responsible for following the rules of your will in the event of your death. It is important that you select an individual who is responsible and in a good mental state to make decisions. Don't immediately assume that your spouse is the best choice. Think about all qualified individuals and how emotions related to your death will affect this person's decision-making ability.

Must Do No. 10: Create a Will

Everyone over the age of 18 should have a will. It is the rule book for distribution of your assets and it could prevent havoc among your heirs. Wills are fairly inexpensive estate planning documents to draft. Most attorneys can help you with this for less than $1,000. If that's too rich for your blood, there are several good will-making software packages available online for home computer use. Just make sure that you always sign and date your will, have two witnesses sign it, and obtain a notarization on the final draft.

Must Do No. 11: Review & Update Your Documents

You should review your will for updates at least once every two years and after any major life-changing events (marriage, divorce, birth of child, and so on). Life is constantly changing and your inventory list is likely to change from year to year too.

Must Do No. 12: Send Copies of Your Will to Your Estate Administrator

Once your will is finalized, signed, witnessed and notarized, you'll want to make sure that your estate administrator get a copy. You should also keep a copy in a safe-deposit box and in a safe place at home.

Must Do No. 13: Visit a Financial Planner or Estate Attorney

While you may think that you've covered all avenues, it's always a good idea to have a full investment and insurance plan done at least once every five years. If you're not looking to spend the money for professional help, there are several good books out there on getting your financial plan and estate in check. As you get older, life throws new curve balls at you such as considerations for long-term care insurance and protecting your estate from a large tax bill or lengthy court processes. Tips like having an emergency medical contact card in your purse or wallet are little things that many people never think of.

Must Do No. 14: Initiate Important Estate Plan Documents

Procrastination is the biggest enemy to estate planning. While none of us likes to think about dying, the fact of the matter is that improper or no planning can lead to family disputes, assets going into the wrong hands, long court litigations and huge amounts of dollars in federal tax. At minimum, you should create a will, power of attorney, healthcare surrogate, trusts, living will, and assign guardianship for your kids and pets. Also make sure that all the concerned individuals have copies of these documents.

Must Do No. 15: Simplify Your Life

If you've changed jobs over the years, it's quite likely that you might have several different 401(k)-type retirement plans still open with past employers or maybe even several different IRA accounts. While this normally won't create a big problem while you're alive (except lots of additional paperwork and account management), you may want to consider consolidating these accounts into one individual IRA account to take advantage of better investment choices, lower costs, a larger selection of investments, more control and less paperwork/easier management when assets are consolidated.

Must Do No. 16: Take Advantage of College Funding Accounts

The 529 plan is a unique tax-advantaged investment account for college savings. In addition, most universities do not consider 529 plans in the financial aid/scholarship calculation if a grandparent is listed as the custodian. The really nice feature is that growth and withdrawals from the account (if used for "qualified" education expenses) are tax-free.

The Bottom Line

Now you have the ammunition to get a pretty good jump-start on reviewing your overall financial and estate picture; the rest is up to you. While you're sitting around the house watching your favorite sports team or television show, pull out a tablet or laptop and start making your lists. You'll be surprised how much "stuff" you've accumulated over the years. You'll also find that your inventory and debts lists will come in handy for other things such as homeowners insurance and getting a firm grip on your expenses.

What States Have the Lowest Taxes on Retirees (Marketwatch)

Most tax-friendly states for retirees

BY ROBERT POWELL, MarketWatch — 03/29/12

BOSTON -- There's plenty to consider when you contemplate where to live in retirement. Will family and friends be nearby? Does the weather suit you? What sort of activities are there? And especially high on the list of factors to consider are taxes -- one of life's two certainties and one of the largest expenses people face in retirement.

Is the state that you have designs on retiring to tax friendly or not? And the basic questions to answer are these: How does the state tax your income? How does it tax your property and your consumption? And what's the overall tax burden?

As some know, older Americans tend to generate income from several sources in retirement, including income from wages or self-employment; Social Security; pensions; and personal assets, including taxable and tax-deferred accounts. Taxes on those sources of income, in essence, mean less money in your pocket for your golden years. So before moving to this or that state, you'll need to figure out whether and how the state taxes your various sources of income.

You will also need to consider taxes on the other side of the ledger, including state and local property taxes, state and local sales and use taxes. If you live large, you might pay plenty in property taxes and sales taxes.

And, then you'll need to calculate what your overall personal tax burden will be. It's a taxing exercise to be sure.

Thankfully, CCH, a Wolters Kluwer company, has created several charts and tables that look at how states tax income, sales and other transactions, including retirement income. We've culled from that list -- with the help of Kathleen Thies, a state tax analyst for CCH -- the top income-tax friendly states for retirees, states that don't tax income, including Social Security and pension income. And then we added some commentary from the Tax Foundation about other taxes, such as property and sales, and the overall tax burden, in those income-tax friendly states.

Of course, before moving to one of these income-tax friendly states, be sure to calculate your personal overall tax burden given all your actual and likely sources of income, given your spending patterns, and given your actual or desired standard of living.

Remember, what you save on income taxes in one state you might pay in property taxes or sales taxes. And vice versa. What you save on property and sales taxes in one state you might pay in income taxes. "There are no free lunches so you need to be savvy about what your particular needs are in retirement," said Thies.

One more note, for those who itemize deductions, there are five types of deductible non-business taxes, including state, local and foreign income taxes; state, local and foreign real estate taxes; state, and local personal property taxes; state and local sales taxes, and qualified motor vehicle taxes.

In other words, to calculate your overall personal tax burden, you'll have to figure out whether you can take advantage of these deductions.

That said, here's a closer look at the states that are -- if nothing else -- the friendliest for income tax purposes, and, in some cases, fairly friendly from an overall tax burden, based on CCH and the Tax Foundation research. The states are listed in order of tax friendliness from an overall tax burden point of view, as measured by the Tax Foundation.

1. Alaska:Alaska might not seem like a retirement haven based on the usual factors considered such as, say, weather. But it might be the perfect place for one's golden years if taxes are a big concern. Alaska doesn't tax personal income, including Social Security benefits and pension income. And, there's no state-imposed sales tax. This is not to say that you won't pay any taxes in Alaska. Instead, it means that you'll pay other types of taxes, such as property taxes.
2. Nevada: Many retirees rely on income from several sources to make ends meet these days. If you fall into that camp, Nevada might be the place for you. This state doesn't tax income, Social Security benefits or pension income. And its property taxes are reasonable, too. Its sales tax, however, is higher than the national average.
3. South Dakota: It might not be the first or even the second state that you think of when contemplating where to live in retirement. But South Dakota is nothing if not a tax friendly state. The state doesn't tax individual income, Social Security benefits or pension income. And the overall tax burden is among the lowest in the nation.
4. Wyoming: There's no individual income tax on Social Security benefits or pension income in Wyoming, according to CCH. But that's not to say you won't have to pay any taxes in Wyoming. Property taxes and sales taxes tend to be higher than the national average.
5. Texas: In Texas, there's no individual income tax. But property and sales taxes tend to be higher than the rest of the nation.
6. Florida: There are plenty of reasons why people choose to retire to the Sunshine state, the low tax burden being among those reasons. There's no individual income tax on Social Security benefits or pension income. There are pipers to pay, however, in the forms of property and sales taxes.
7. Washington: Another state not generally viewed as a traditional retirement haven is, however, income tax friendly for retirees. There's no individual income tax on Social Security benefits or pension income. But if you plan on spending lots money while in retirement, Washington might not be your first choice. It has a relatively high sales tax.


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