New Retirement Income Benefits
by Stan Corey
There is new information about the timing of when someone should elect to begin receiving retirement benefits under the new Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was signed into law on December 20, 2019. Two of the most critical changes that came about as a result of the Act are the effects on estate planning and to how to take retirement benefits, including the timing of when to start Social Security retirement benefits. This article will focus on the timing of retirement benefits.
Under the Act, the required minimum distribution (RMD) beginning date for making withdrawals from an IRA has changed from age 70-½ to age 72. This affects anyone who was born after June 30, 1949. In addition, people who have reached age 70-½ may make contributions to a traditional IRA or a Roth IRA if they have eligible income. This may seem to be a minor change, but, for those eligible to delay to age 72, it can have a big impact on increasing the value of their IRA portfolios and reducing income taxes. A bigger effect is the treatment of the distributions to beneficiaries of an IRA. Starting in 2020, a beneficiary must take the distributions over a 10-year period after the death of the IRA owner, as opposed to a lifetime benefit period. This has major implications for estate planning and means you should immediately reevaluate your beneficiary designations and talk to your financial advisor.
The new rules do not affect the Social Security Retirement Benefits (SSRB) directly but may have an impact on a retiree’s overall income-tax and estate planning in the effort to coordinate various retirement benefits to maximize income. This involves the timing of when to start SSRB, making withdrawals from after-tax accounts, and taking distributions from pre-tax retirement accounts.
When to start receiving SSRB? The answer always starts with “It depends”!
The basics are that if someone is eligible for SSRB, they may start as early as age 62 at a reduced benefit. If you are the survivor of an eligible spouse, the starting date may be age 60. To obtain the maximum benefit at Full Retirement Age (FRA), an individual born before 1955 must wait until age 66. All will meet this requirement by end of 2020! If you were born between 1955 and 1960, the FRA is gradually increased until age 67. For those born after 1960, the FRA is currently age 67. Reaching the FRA just means that you are eligible for the maximum SSRB based upon your earnings history. However, if someone continues to work or just wishes to delay the start date past their FRA, the benefit amount will increase by 8 percent per year until they reach age 70. This offers an opportunity to substantially increase the amount of the benefit over your lifetime, but with one caveat: if you outlive your life expectancy! For most, the math indicates that delaying the start of SSRB from age 67 to age 70 requires the person to live, on average, to age 80 in order to have a break-even result. The variables in assumptions concerning rates of return and inflation may make the break-even calculation between age 78 and 82.
Most financial planners recommend delaying the start of receiving the SSRB. Why? Because most all of the models they use indicate that one receives a greater lifetime benefit by delaying, assuming the one lives to age 95. An old joke about planners is “I want to be your client because everyone lives to age 100!” However, there are many “what if?” scenarios that may indicate that delaying is not the right choice. One needs to take into account the other resources available to provide income during the delay period. Consider the following: Will withdrawing from after-tax portfolios or IRAs be required to allow the deferment? Will continued working be necessary? Are there factors that may restrict one’s ability to continue working past FRA? Did one’s parents live past age 80? Are there any existing medical conditions that may affect one’s life expectancy, such as heart disease, diabetes, cancer, or other incapacitating illness?
Note that delaying benefits does not increase the amount of the spousal benefit during one’s lifetime. However, it does provide a higher benefit as a survivor spouse.
Another issue to take into consideration is the income tax liability of receiving SSRB if you have other income. For single tax filers, if the combined income (earnings, non-taxable income, and 50 percent of Social Security benefits) is between $25,000 and $34,000 the taxable amount may be up to 50 percent of the SSRB received. If filing jointly, the combined income range is between $32,000 and $44,000, with the taxable amount up to 50 percent of SSRB received. If income exceeds the top amounts for each., the taxable amount is 85 percent of the SSRB.
The bottom line is that making these decisions may require the help of a professional advisor in order to maximize overall retirement income benefits to you, your family, and your beneficiaries.
You can find very useful information on the Social Security web site: www.ssa.gov.
Photo credit by: Sheri Hooley (Ohio) @sherihoo
Stan Corey has been a Certified Financial Planner Professional (CFP), Chartered Financial Consultant (ChFC), and Certified Private Wealth Advisor (CPWA) for almost 40 years. Though retired from the day-to-day activity of providing financial advisory services, he continues to consult in specialized areas as a financial fiduciary. Stan is a sought-after expert who regularly provides financial commentary at national conferences, in print and online publications, and on TV. He has a reputation for taking complex financial issues and making them understandable to the average person. He likes to say he is a “financial translator.” He has published two books: a novel, “The Divorce Dance,” in 2016, and a non-fiction work, “When Work Becomes Optional,” in 2018. Web site: www.stancorey.com.