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.