The end of Social Security loopholes: What now?

23 Dec 2015 | Author: | No comments yet »

Parents should save, not splurge, once college bills stop arriving.

For years, retirees have been able to squeeze tens of thousands of extra dollars from Social Security using two special tactics. It’s “The Twelve Sites of Social Security,” inspired by the popular traditional holiday song, “The Twelve Days of Christmas,” a holiday favorite since 1780. If you are like many parents, you’ve been promising yourself for years that you will start saving for retirement in earnest once the children-related expenses end. The very first question is “Am I ready to stop working and retire?” You should also ask “Is my significant other also ready to retire?” You don’t have to retire just because you are 65 years old. But even under the new rules, the basic tenet for when to claim Social Security remains: Healthy people nearing retirement should often wait as long as they can to collect, particularly if they are the higher-earning spouse.

Everything you could want — from online services and benefit screening tools to publications and frequently asked questions — you can find easily on this site. Though retirees can claim benefits starting at age 62, the payoff for waiting can be huge, especially if they consider the benefit as a way to hedge against outliving their money.

But instead of keeping promises to themselves, parents continue to let 401(k)s retirement savings plans lie fallow after the college bills stop, a new study by the Center for Retirement Research at Boston College shows. “Most households will not be able to maintain their pre-retirement standard of living,” said the center’s research economist Geoffrey Sanzenbacher. “People will be unhappy and uncomfortable.” “They won’t be in poverty because they will have Social Security,” said Sanzenbacher. Those who wait until they are 70 — and only 2.2 percent of beneficiaries did in 2014 — will end up with a monthly check that is 76 percent more than if they start the moment they became eligible. “The big game is being patient,” said Laurence Kotlikoff, co-author of a book on Social Security strategies and creator of MaximizeMySocialSecurity.com.

For the fourth site of Social Security, we give to you: an online application for retirement benefits that you can complete and submit in as little as 15 minutes at socialsecurity.gov/applytoretire. There is still an opportunity for some couples and divorced people to collect extra money under the old rules, so they may want to evaluate whether they are eligible before the final window closes. Determining where you are going to live and the costs associated with that location will be a key factor in establishing how to financially prepare for your retirement. The average Social Security check for retirees is $1,338 a month, according to the Social Security Administration. “This is concerning,” said Sanzenbacher. “There is a retirement crisis.

The strategies about to be eliminated generally allowed individuals to collect spousal benefits while their own benefits continued to grow 8 percent each year. But Sanzenbacher said his research disproves a common expectation among economists: That it doesn’t matter if parents didn’t save enough while raising children, because parents will pick up the pace of saving and make up for lost time when children are grown. One strategy allowed married retirees to file for benefits at their full retirement age, immediately suspend them, then begin collecting when they reached their highest value.

While the research doesn’t analyze specifically what parents buy after paying for college, Sanzenbacher said it appears that “after the kids are gone, people have a desire to splurge. They spend on themselves.” Not only do parents fail to increase savings in their 401(k)s, but they also devote little extra money to paying off their mortgages. A 50-year-old who has $100,000 saved for retirement could grow those savings to about $900,000 by retirement if he devoted $20,000 a year to a 401(k) and earned 7 percent on investments.

Test your savings at www.choosetosave.org/ballpark, Gail MarksJarvis is a personal finance columnist for the Chicago Tribune and author of “Saving for Retirement Without Living Like a Pauper or Winning the Lottery.” Readers may send her email at gmarksjarvis@tribune.com.

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