Is Your Retirement Money Safe?

This week, readers continue to search for answers to their most pressing financial questions. Here are the ones that I felt could benefit a cross-section of our readers:

Question #1
My wife and I are both retired and have our retirement savings in the Alabama RSA1 and federal TSP programs, both of which claim to have low expense ratios. Is it safe to have our retirement tied up in government sponsored programs? J.L.
J.L. is referring to Retirement System of Alabama’s deferred compensation plan which is available to state employees and the federal thrift savings plan which is similar to a 401k plan but for federal employees. Thousands of Alabamian’s are participating in these plans and I suspect many folks have heightened concern about how safe their money is in the aftermath of Jefferson County’s $3 billion default on their sewer bonds. Both programs do a great job of keeping expenses low and both plans are a ‘safe’ place for your money if you are concerned about a default or bankruptcy of some sort. What you should be concerned about under either plan is the type of investments you have chosen. Both programs offer a range of investment options including stock, bond and fixed rate-oriented securities. Both bond and stock-oriented investments can fluctuate significantly so J.L. should review his allocation and make certain it’s appropriate under his and his wife’s retirement status.
Question #2
A few weeks ago I answered a reader’s question about whether, since he is retired, should he keep his 401k with his former employer or roll it over to an IRA? I suggested he could possibly cut expenses and certainly increase his investment options by doing the rollover. Another reader asked this follow up question:
“Are they equally protected legally?  I believe a 401-k is classified as a pension and hence not subject to legal suits.  Is an IRA? I am retired, and understand that only an active employee can get a loan from a 401-K, so that means no advantage over an IRA as to taking a loan out.” M.G.

M.G. does bring up a good point. Defined contribution plans such as 401k’s and 403b’s; Simplified Employee Pension Plans (SEP) and SIMPLE IRAs; defined benefit pensions and profit sharing plans all fall under the Employee Retirement Income Security Act (ERISA) of 1974 and are fully protected against legal judgments except the Internal Revenue Service or a judgment in a divorce (called a qualified domestic relations order or QDRO). Historically, traditional IRAs have fallen under state law for purposes of legal protection. In 2005, congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act which provides that up to $1 million of traditional IRA (or Roth IRA) funds are protected under federal law if you file bankruptcy and 100% of funds rolled over from an ERISA plan are protected as well. However, if you don’t file for bankruptcy, it appears that state law will determine the level of protection for your IRA. State laws can vary widely. For example, according to a bankruptcy attorney I spoke with, Alabama provides for protection for a traditional IRA but not for a Roth IRA (legislation is pending for Roth IRA protection). So, depending on your state laws, leaving your money in your 401k may offer better asset protection. One suggestion is to review your umbrella liability policy and consider increasing the amount of coverage.

If you’d like to have your financial question answered, email me at and place Bhm News in the subject line.

Social Security Tax Strategies

Last week I discussed several strategies for maximizing your social security benefits. This week I’ll examine some of the nuances of how your Social Security benefits are taxed and how you might be able to reduce those taxes.

To determine if your Social Security benefit is taxable then you have to calculate what is called your “combined income.” “Combined income” is defined as your adjusted gross income (commonly referred to as your AGI) plus nontaxable interest (for example, interest on muni bonds) plus half of your social security benefit. Note that only half of your social security benefit is used to calculate your “combined income.” Here are the categories:
  • No taxes on Social Security. For joint filers with combined income below $32,000 ($25,000 for single filers) there is no federal taxation of Social Security benefits.
  •  Taxes on up to 50% of Social Security. Joint filers with combined income between $32,000 and $44,000 ($25,000 to $34,000 for single filers) may have to pay income taxes on up to 50% of their Social Security benefits.
  • Taxes on up to 85% of Social Security. For joint filers with combined income above $44,000 ($34,000 for single filers) then you may pay taxes on up to 85% of your benefit. No one pays federal income tax on more than 85% of his or her Social Security benefits.
Are there strategies you can use to reduce taxes on your Social Security benefits?
Strategy #1: Draw retirement benefits; postpone Social Security benefits. Let’s say you are retired at age 62 and you have the option of taking your Social Security benefit now or deferring until age 70. This strategy involves you deferring your social security benefit until age 70 and taking your current income need from your 401k or IRA. Your Social Security benefit is increasing each year you delay. You will be required to take Required Minimum Distributions at age 70½ from your retirement accounts but typically the initial amount is only about 3%. The advantage is a much higher Social Security benefit for you (and your spouse should he/she outlives you). For example, if your age 62 benefit was $750 per month; by waiting until age 70 to claim benefits they would rise to $1,320 per month. Remember that if your spouse survives you, he/she can choose to take 100% of your benefit. The goal of this strategy is once you start taking social security to keep your combined income below the taxable social security thresholds therefore receiving social security at little or no tax. The risk of this strategy? If you (and your spouse) die before or shortly after age 70, you will have spent retirement plan assets that would have gone to heirs and you would have received little to no Social Security benefits. This strategy works best if you expect your spouse and/or you to live well into your eighties or beyond.
Strategy #2: Reduce your ‘combined income’ by paying off debt. One strategy is to reduce your income by paying off debt. Say you take savings that was producing taxable interest and pay off your home mortgage. Mortgage interest is not used in the ‘combined income’ calculation for Social Security taxes but you will have reduced your AGI. While your income has gone down, so have your expenses as well as potentially reducing taxes on your Social Security, especially if you are on the borderline of the 50% or 85% threshold discussed earlier.
Strategy #3: Convert to a Roth. Roth income or distributions are not part of the combined income calculation for Social Security income tax purposes. The year that you convert from a traditional IRA to a Roth will likely cause higher taxation on your Social Security benefits that year, but in the years that follow you may have substantially reduced taxes on your Social Security benefits. An alternative would be to do your Roth conversions over several tax years. It’s worth noting that the Roth conversion may also trigger a higher Medicare Part B premium for the year of conversion.
Your particular circumstances will dictate which of these strategies may be appropriate and I recommend that you seek the advice of your tax advisor.
If you’d like to have your financial question answered, email me at and place Bhm News in the subject line.

Best Social Security Strategies

Eighty million Baby Boomers are headed for retirement and for many, Social Security will be the centerpiece of their retirement income plan. Today, I’ll reveal three little-known strategies that just might put thousands of dollars in your pocket.

First, let’s begin with a few basics. If you were born between 1943 and 1954 you can claim a full Social Security benefit at age 66. Beginning at age 62, you can take a reduced benefit equal to 75% of your full benefit. If you choose to wait beyond your full benefit age, your benefit increases 8% per year until age 70 (called Delayed Retirement Credits). A spouse can choose to receive his or her own benefit based on his or her own work record or he or she can choose to receive a spousal benefit equal to one-half of his or her spouse’s benefit. It’s worth noting that a divorced spouse, who was married at least ten years, also retains both of these options. Finally, a widow or widower may receive his or her deceased spouses’ benefit or he or she may elect to receive his or her own benefit based on his or her own work record. This widow/widower benefit can be taken as early as age 60. It’s within these multiple choices that lay the secret strategies.
Strategy #1: The Widow/Widower Strategy. By way of an example, let’s assume we have a couple where the husband is age 62 and the wife is age 60 and both have worked and therefore each has Social Security benefits. Assume the husband dies at age 62. Should the wife claim a widow benefit or wait and claim benefits based on her own earnings? As a widow she is eligible for 100% of her husband’s benefit if she waits until his full retirement age (age 66). She could begin her widow benefit as early as age 60 but the benefits will be reduced.
She should consider taking her widow benefit, perhaps as early as age 60 and then switch to her own benefits once she turns age 70. This strategy allows her to begin receiving income early while delaying her own benefits thus allowing her own benefit to increase to the maximum amount. It also allows her to make use of both her husband’s benefit and her benefit verses just her benefit.
Strategy #2: The 62/70 Strategy. In this example, let’s assume that our couple is both age 62 and we anticipate that both will live until or beyond their normal life expectancy. Instead of each taking their own benefit early at age 62 or waiting until their age 66 full benefit, the wife takes her early benefit at age 62 and the husband takes a spousal benefit at age 66. Once he turns age 70, he switches to his full benefit and she switches to a spousal benefit equal to one-half of his age 66 full retirement benefit or she continues her benefit, whichever is higher. Remember that if the husband were to die first, the wife would then step-up to 100% of the husbands age 70 benefit! Under these case facts, the earliest the husband can take a spousal benefit is age 66.
Strategy #3: The File and Suspend Strategy. In this example, let’s assume only the husband worked while the wife stayed home to raise the children. Here, the husband could begin his full benefit at age 66 then immediately ‘suspend’ his benefit. The wife then begins a spousal benefit equal to one-half of his full (but suspended) benefit. At age 70, he ‘un-suspends’ his benefit which has now grown to the maximum benefit amount including the 8% per year ‘Delayed Retirement Credits’ from age 66 to age 70.
It’s important to note that in each case example, the individual facts are vital to choosing the best strategy. Particularly in strategies one and two, case facts might drive you to reverse the order of which spouse’s benefit you choose to begin first. You need to ‘run the numbers’ under various options or have your financial advisor assist you in making this decision. Making the right choice could mean tens of thousands of dollars of additional Social Security benefits.
If you’d like to have your financial question answered, email me at and place Bhm News in the subject line.

Retirement for the Ages – Part 2

Last week, I began a discussion about retirement planning for those of you in your twenties, thirties, forties and fifties. This week I’ll address the special challenges of those in their 60’s for whom retirement is just around the corner. If you fall into this category, it is vital that you clearly understand where you are now financially compared to where you need to be at retirement. Sticking your head in the proverbial sand is not considered a viable solution. Start by getting an estimate of how much money you’ll need to support your retirement years by visiting the Resource Center at; click on ‘Links’; then ‘Retirement Planning Calculator’. Once you have this number that represents your required capital need, you may discover that you’ll need to reduce it since it will likely be larger than you can realistically accumulate in the time you have left. Here are a few strategies to consider:

Keep on working. There’s an awful lot to be said for continuing to work beyond ‘normal’ retirement age. By the way, who decided what ‘normal’ retirement age was? In the days before pensions, families lived together and everyone contributed according to their ability for their entire lives. Being productive during your mature years keeps you mentally alert and physically active and can extend life by years or decades. My father, at age 91, continues to work five days a week. Financially, he could have quit decades ago but there is no doubt that his productive lifestyle has benefited him as well as whose he interacts with on a daily basis. If you like what you do, consider continuing to work as long as you are able and are enjoying yourself. I recently worked with a physician client who loved his medical practice but hated being on call several evenings a week. He worked out a deal with his fellow partners to reduce his income so the money could go to younger physicians who were happy to take his call for extra money. I have another client who certainly could retire right now but who I am encouraging to continue working on a consulting or project basis. Why? Because he loves the work; his bosses love him and he definitely wants to stay active. However, he would like to step down from the 40-plus hour requirement of his current circumstances. What arrangement might you work out with your employer? You might be surprised at their flexibility. You’ll never know unless you ask.
Downsize your lifestyle. Most of us have created a lifestyle way beyond what is needed for a comfortable retirement. Step back and take a fresh look at all the things you could do to reduce your lifestyle expenses. Could you sell your home and buy one that is smaller, newer, and had lower maintenance costs? Could you move to an area of town or region of the country where housing costs are lower? Look at all the ways you spend money and consider what is truly necessary for you to enjoy your retirement years. Stay tuned for an upcoming column on a concept I call, Zero-Based Budgeting…a strategy for re-framing your required lifestyle.

Next week, I’ll complete this discussion of retirement strategies for pre-retirees.