Daily Archives: February 12, 2018

Things to know about retirement, USA, married couples.


#1  Can one spouse can retire with the other spouse’s social security benefit?

Yes, a surviving spouse can choose to use their own Social Security Insurance* (SSI) benefit OR their deceased spouse’s SSI benefit – whichever is larger. But not both. SSI was created when a many (but not all) women’s jobs were in the home, and many (but not all) men’s jobs were outside the home. The spouse working outside had an employer and cash wages, the spouse keeping the home had neither.  So a non-working spouse who had no SSI benefits on their own could continue to collect the benefit their spouse had retired on, if the spouse died.

Here’s the clever bit: If both spouses had SSI benefits, each started drawing them when they retired. If one spouse died, the survivor could switch to whichever benefit amount was larger. Say, for example, Pat and Kim both worked and both earned maximum SSI benefits. If Pat starts drawing at age 62, the amount they get is substantially less (30% in my case) than if they hung on to “Full Retirement Age” – (66 2/3 years, in my case).  If Kim keeps working, or can otherwise hold-off starting SSI benefits, Kim’s monthly benefit will be larger, even if both have at least 40 quarters of paid employment and contributed the full amount required by law, every year. Thus, Pat and Kim have different monthly benefits from SSI and always will for the rest of their lives.

IF Kim dies before Pat, Pat can change to drawing Kim’s higher monthly benefit, but can’t keep their own benefit. Pat’s old benefit simply vanishes. If Pat doesn’t want Kim’s higher benefit, they keep their own and Kim’s vanishes. If Pat dies before Kim, Kim already has the larger benefit.

So the SSI monthly payment is a benefit for a living person, but it is not an asset which can be conveyed to a person that the original recipient chooses. This is a key difference between SSI, and employee pension plans, and 401Ks and the like. 401Ks, etc., etc., are assets. There are rules about how they are used, and rules about when and what taxes are paid on them. But they are as real as any other account at an investment firm.

 

#2 Is there a minimum amount you must withdraw from a 401K, every year?

Yes. Starting when you turn 70 1/2 years old. In one example I found, its 1/26 of the value of the account, a bit less than 4%. But it is complicated and Morgan Stanley’s retirement fund people say to come talk it through with them on the way to picking a number.

See topic 4, in:

http://fa.morganstanley.com/jteam/retirement_planning_mistakes.htm

There are retirement calculators that cover this as well, with their own lore, sacrifices and mod-cons:

http://www.choosetosave.org/ballpark/webapp/#/estimate

So if you’re 61 and haven’t retired yet, you don’t have to do anything. Yet. If you are working and can pack more money into the 401K, it’s probably wise to do so. If you wonder how much your 401K is worth to you as income, now, today, and you’re less than 70 and 1/2, its likely you can take out less than 4% each year. If you take out more than it makes every year, its a “decreasing asset” and you’ll have to judge your rate of consumption vs. expected lifespan. You can look up your life expectancy, for starters:

http://www.ssa.gov/planners/lifeexpectancy.html

If your 401K is with a different investment firm, they’re who you should speak with.

 

More as I get it. I’ve foot-noted “Insurance” below.

*”Insurance” as in “Social Security Insurance” is misleading.

Conventional insurance products are based on shared risk and supposedly conservative investments. Every week, month or year, you send in your pennies, along with everyone else. All the pennies get invested wisely enough to cover whatever payouts are made over the lifetime of the product. Automobile and home products typically last 1 year, “Term” life insurance lasts for a fixed period, ending at a birthdate or some other agreed point in the future. Payments can be spread out over the term the insurance covers, or be one-time at the beginning.

“Whole” life insurance stays in force as long as the insured person is alive and the regular payments are made. The payout becomes an asset for survivors.

SSI is none of these things. If you want to start a fight, call it a modified Ponzi scheme. The money it pays out comes directly from the regular contributions collected immediately before the payout. Sort of. There need not be a pooled asset which yields profits which support payments. The term of art for this is “Pay as you go”, which is more attractive than “Ponzi Scheme”.

The details, where the devils lurk, are that a pay as you go scheme such as SSI starts with lots of contributors and no recipients. So the first funds collected did, actually, go into some investment, likely US Treasury Bonds, the most boring, safe asset. You’ll note this has the effect of retirees-to-be investing in the National Debt. Then the Baby Boom arrives and goes to work and the number of workers contributing is vastly larger than number of recipients. So the surplus continues going into bonds where it props up the National Debt.  Hiring new devils every year.

One wild-eyed argument against SSI is that NONE of the Treasury bonds will ever be sold, because actual tax dollars would have to pay them out. On the other hand, the Treasury pays bond dividends regularly, and returns the principle at the end of the bond’s life, to all the other bond holders inside and outside the USA. Does SSI surplus go into conventional “T-notes” similar to what anyone can buy, or are there conspiracy-special T-notes that pay no interest and don’t return the principle, because they exist only to suck up SSI surplus? I don’t know and I’m too busy to look it up, today.

A more plausible SSI disaster scenario is that the number of contributors won’t keep up with the number of recipients. This is the “SSI will go bankrupt” trope, and if nobody does anything about it, it will happen. Increasing the payments made by contributors or decreasing the benefits going to recipients seem like logical steps, but logic isn’t universally popular. It *could* happen. If nobody does anything about it.

So the payroll deduction is called “SSI” and it’s a gift to us from history, outdated and misleading marketing language. If we imagined we were as adult as other developed nations, we might make “SSI” part of taxes, in general, and make the payout an expense that must be paid, like our Congressperson’s retirement, medical and dental coverage.