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This is an article in an occasional series on personal finance. Each article will address a different aspect of personal finances and provide some tips for you. However, always consult your own financial adviser or tax professional for your specific situation.
I was reading the business news recently and couldn’t help noticing the headline about seniors and bankruptcy tax filings. The article was based on a research report published by the Social Science Research Network.
The images in my mind, as I was reading this article, were of those old black and white Depression era photos of people standing in line at the soup kitchen. And images of bag ladies all covered in dirt while wearing those hats with a flower on top.
Though seniors represented a small percentage of people filing for bankruptcy, it was by far the fastest growing demographic. In fact, those over age 75 subset had the highest rate of increase overall.
Reasons for filing? Probably no surprise to anyone: large unexpected expenses.
I would suggest another, indirect, reason that was given brief mention in the research report – loss of income. It’s not hard to think that loss of income can occur due to loss of employment, loss of hours, or even the death of a spouse, especially in light of the fact that ages 75 and over represented the fast growing segment overall. It’s not unreasonable to think that as we age, we’ll work less, if at all, due to failing health or due to a simple lack of opportunity in the job market.
And as we get older, it’s likely that whatever savings we had in retirement accounts may be depleted.
Regarding Social Security, many pre-retirees I speak with assume that the surviving spouse will collect both their own Social Security benefit as well as that of their deceased spouse. That is simply not true.
At the same time, both retirees and pre-retirees assume that they can easily cut back on expenses to manage around any loss or reduction in income. That is true to a certain extent and according to studies on retiree finances, it’s how people typically “make the numbers work.” Though the premise of the report – seniors filing for bankruptcy – somewhat refutes this assumption. After all, large medical expenses, co-pays, deductibles, and prescriptions can easily overwhelm what you may save on eating out, for example.
One category of expenses that surprises people is income taxes. My own mother complains to me about this all of the time. There’s no more dependents on her tax return and her mortgage is paid off, so no interest deduction. That means two of the larger deductions on taxes aren’t there anymore. As a result, she went from getting a small refund to having to pay each year.
It’s still a surprise to many that Social Security benefits can be taxable if your other income is over certain thresholds. In fact, just going over a threshold by one dollar – yes, $1, can trigger thousands of dollars in extra taxes.
How to avoid being the next bankruptcy statistic?
Well, I can’t predict when you might get sick or how many prescriptions you may need, but I can share tips on making sure you are maximizing your income.
First, know how much Social Security may pay you
Do you know your estimated benefit amount? Or your full retirement age? This and other information can be found on your Social Security statement. You can get statements in the mail or online at https://www.ssa.gov/myaccount/.
Second, maximize your Social Security benefits
Each year you delay collecting benefits past your full retirement age, your benefits grow 8 percent per year until age 70. But that’s not the only thing. For a married couple, there are major questions such as who should file first, when to file, and what type of filing should be made. There are thousands of different combinations for a married couple. In one instance of working with a nearly retired couple, optimizing their claiming strategy meant more than $100k in additional lifetime benefits.
Third, use all of your tools
Often, people think of retirement money as the 401k. But that’s not the only tool you can use. IRAs, home equity, life insurance, pensions and work full or part-time all can help build retirement income.
Don’t have a pension? There are ways you can create your own.
The key benefit of pensions is that they pay for life due to something called a “mortality credit.” Essentially, it is a pooled risk where you benefit from others passing away before you. In some ways, a mortality credit is similar to you having your friends and co-workers all name you as beneficiaries of their retirement accounts instead of their own families. You could give that a try, but it’s unlikely to happen. Alternatively, pensions have mortality credits “built in” and can pay you for life, even if you live well past age 100.
Get a spending permission slip
Life insurance at an older age? Yes, the premiums may be higher but it can be a valuable retirement planning tool. And more importantly, it can provide tax free income to you or your beneficiary, such as your spouse. This would allow you to spend down your retirement funds knowing that the money will be “refilled” for your spouse when you pass away.
Lastly, know when to use each tool – or get help with them.
If we really were talking about home hardware tools, most people would know what to use and when. You know to use a screwdriver to turn a screw, but financial problems aren’t so obvious. After all, to get money for expenses, you could use any of the financial tools but using them at the wrong time or in the wrong order could lead to higher costs such as taxes.
Jack Wang lives in Westford with his wife. They have four combined children. He’s also has his own practice, Longhorn Financial, which helps regular working families get out of debt, save/pay for college and maximize financial aid, and save/pay for retirement. His show, Personal Finance Playbook, can been seen on WestfordCAT. You can also follow him on Facebook at www.facebook.com/longhornfin