When Should You Take Social Security?

One of the first lessons of financial planning is that you shouldn’t base your retirement future on the prospects for the Social Security system, or for that matter, your work-related pension.


Independent planning is always necessary, and a team approach is a good idea, blending the skills of qualified financial planners, tax professionals and estate attorneys.

But if you’ve spent a lifetime paying into the system – or if you’ve merely started your working life -- it’s wise to check out Social Security projections so you can get a reality check on the size of that benefit.

The Social Security issue is particularly timely as the nation continues to pull out of its economic slump. Many people have watched their retirement portfolios shrink since 2008 after a decade that didn’t match the investment growth levels of the 80s and 90s. And in Washington, there continues to be discussion of raising the nation’s official retirement age to 70.

A good starting point is the Financial Planning Association’s new Social Security Predictor, a web tool that allows you to compute your benefits based on your age and current projections for the future funding of the system.

Once you’ve gotten an idea of the amount you’ll be getting from Uncle Sam, the next important question is how long can you wait to start drawing on the system. You need to explore this for three reasons:

1. You’ll have time to assess your career preferences – not everyone wants to retire at their first opportunity, particularly if they like their jobs.

2. The longer you wait to take Social Security, the greater your monthly benefit will be. For example, if you were born between 1943 and 1954, you can start tapping benefits at age 62, but you’ll get only 75 percent of your benefits based on the current projected retirement age of 66. And the reduction is permanent, so it won’t increase when you reach full retirement age. In addition, there are severe restrictions placed on how much you can earn if you continue to work (more on that below).

3. Simply looking at these facts will allow you to focus on whether your mixture of personal savings and investments, your work-related pension funds and the government’s money will be enough to live on.

Here are some critical things you should know before making your decision when to get benefits:

Start with advice: There is no standard, one-size-fits all answer to this question. A trained financial planner will be able to look at your overall situation with regard to the retirement you want to have and the goals you hope to meet and determine where the money should come from to support you and at what time. It’s also critical to meet with your tax advisor (Social Security payments CAN be taxable) and your estate planner or attorney.

Most of the decisions you’re considering will have tax ramifications and you want to make sure you can manage the taxes and not damage the estate you want to pass on to your spouse or children after your death.

Watch your earnings: If you start collecting benefits before your official retirement age – which may be a moving target in the future -- you’ll face restrictions on how much you can earn from a full- or part-time job if you continue working. For example, those turning 66 in 2010 but with a few months until their birthday will have earnings limited to $37,680. So for every $3 over the earnings limit, $1 is withheld from Social Security benefits until the exact month of their 66th birthday. Even more restrictive is that those who started drawing Social Security in 2010 at the age of 62 have an earnings limit of $14,160, and for every $2 earned over that limit, $1 will be withheld from their benefits.

When is it OK to take Social Security benefits early? Obviously, if you can’t make ends meet, you need to consider the option. It’s possible that it might make sense to draw benefits if you can allow tax-deferred investments to grow until the point you absolutely need to start drawing on them. Also, if you are in poor health and don’t expect to live until retirement age, Social Security benefits may help cover medical costs or other expenses. Or, if you are the lower-earning spouse, it might be advantageous to take benefits before your higher-earning spouse.


October 2010 — This column is provided by the Financial Planning Association® (FPA®) of Puget Sound, the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. Please credit FPA of Puget Sound if you use this column in whole or in part.

The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION. The marks may not be used without written permission from the Financial Planning Association.

529 Plans are Losing Enthusiasm Again: Time to Shop Around, Get Advice and Compare Because They’re Still a Good Deal

While college savers have been placing more assets in 529 college plans since the start of 2009, Boston-based Financial Research Corp. reported that as of the second quarter, 2010, 529 plan assets were down 5 percent. During the second quarter, investors placed $1.9 billion into 529 college savings plans, down from $3 billion during the first quarter.



Yet if investors are skittish about their 529 investments, most experts believe that 529 plans are still one of the best ways to save for college. If anything, it might be a good time to review your 529 investments and make sure your student’s future college funds are in the right place.


A financial planning professional is a good first stop to review your entire college savings strategy, which could be for your child or for yourself. Here’s some basic information on 529 plans and some guidelines on what you should be doing with these dollars now:


Start with a definition: 529 college savings plans – named for the part of the federal tax code that created them in 1996 – allow a parent to open a tax-deferred college savings plan with as little as $25 to start in some states. Any withdrawals are completely tax-free if used to pay for a beneficiary's college tuition, fees, books, supplies, and — for students enrolled at least half time — room and board. Investors are allowed to roll over funds from one state's 529 plan to another state's plan once every 12 months, though it’s possible to transfer funds to another 529 plan at any time if the beneficiary is changed. That means if one kid gets a huge scholarship, his 529 assets can be transferred to a sibling or you if you’re headed back to school.


Start with your goals: SavingforCollege.com has a series of online calculators to help investors determine how much they should put away for the portion of college costs they’re expected to provide out-of-pocket. The typical goal these days if 50 percent. It’s also important to consider time horizon and re-evaluate the performance of funds every year. 529 plans also use target funds – funds tied to the date your student will need the money – so you need to evaluate the providers of the funds and their records.

Changes in 2010: A qualified, nontaxable distribution from a 529 plan this year can be used to cover the cost of computers, peripherals and Internet access. The technology, equipment or services qualify if they are used by the beneficiary of the plan and the beneficiary's family during any of the years the beneficiary is enrolled at an eligible educational institution.

It’s still a good estate strategy: The IRS allows for an accelerated gift option that allows individuals to average gifts over contribute up to five times the annual gift tax exclusion amount ($13,000 per beneficiary, or $26,000 for married couples if they file a gift tax return to show gift splitting) over a five-year period without incurring federal gift tax. So an individual can contribute up to $65,000 per beneficiary in one year and a married couple up to $130,000 per beneficiary without incurring gift tax. (If you give the full amount, you will not be able to give any gifts to the same individual during the five-year period without incurring gift tax or using up a part of your lifetime exclusion.) That’s good news for grandparents or another close relative looking for a way to reduce the value of their estate right away with a larger gift.

What should you ask when evaluating a plan? Here are some basic questions to ask when you’re considering an initial investment or reviewing the investment you have:

Have there been particular criticisms of your state’s plan for any reason? Get on the Internet and start reading.

How is the plan’s money invested? What’s the available diversification?

How has the plan done since inception?

What are the plan’s fees and expenses, and how do their fees compare to the plans of other states you might be considering? Read closely for sales commission information.

Is there a state tax deduction or credit available?

Have plan managers changed over the history of the plan? How many times?


October 2010 — This column is provided by the Financial Planning Association® (FPA®) of Puget Sound, the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. Please credit FPA of Puget Sound if you use this column in whole or in part.

The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION. The marks may not be used without written permission from the Financial Planning Association.