Why delaying Social Security is the smartest retirement game
Dear Liz: If someone delays their social security claim past full retirement age, their benefits are generally thought to increase by 8% per year until they reach the age of 70. They only accumulate if you keep working, right? I was unceremoniously fired during the pandemic and am waiting as long as possible before applying. I will be 67 at the end of this month. But because I’m not working, that 8% isn’t a reality, is it?
Reply: Wrong. the 8% deferred retirement allowance apply whether you are working or not. These credits will help you maximize the benefits you will receive for the rest of your life and potentially for the rest of your spouse’s life, if you are the highest income from a marriage. This effect is so powerful that many financial planners recommend their clients to use other resources, such as retirement funds, if it allows them to defer their Social Security claim.
It may be helpful to think of retirement as a separate event from social security claim. Many people combine the two, but you can work while on Social Security or retire but delay Social Security.
If you continued to work, your benefits could be increased somewhat by the additional income. This usually happens if you’ve had a low-income year included in the top 35 best-earning years Social Security uses to calculate your benefit. If you had earned more in 2020 than in any of those previous years, your 2020 earnings would replace the previous year’s earnings in the formula and increase your benefits.
The 8% deferred retirement credit will likely have a much bigger effect on what you end up getting, so don’t worry about missed opportunities. Just try to delay your request for as long as you can.
Different Roths, different rules
Dear Liz: I have a Roth 401 (k). Are withdrawals the same as from a Roth IRA? And how do you move it to a Roth IRA?
Reply: Roth 401 (k) are a type of workplace retirement plan that, like Roth IRAs, allows tax-free withdrawals. But the rules for Roth 401 (k) are somewhat different from those for Roth IRAs.
For example, a Roth IRA allows you to withdraw an amount equal to your contributions without taxes or penalties at any time, regardless of your age. Gains can be withdrawn from a Roth IRA tax-free and without penalty once you are 59.5 years old and the account is at least 5 years old. The clock starts on January 1 of the year you make your first contribution.
To withdraw money tax-free or penalty-free from a Roth 401 (k), you typically must be 59½ years of age or older and the account must be at least 5 years old.
Additionally, Roth 401 (k) – like regular 401 (k) and traditional IRAs – have minimum required distribution rules that require you to start withdrawing money at age 72. Roth IRAs are not subject to these rules.
Many people roll their Roth 401 (k) into Roth IRAs to avoid the minimum distribution rules required or to have more investment choices. Such a rollover resets the five-year clock that determines whether a withdrawal results in taxes and penalties, however. If you are waiting until you retire to renew your Roth 401 (k) and need access to the cash, this waiting period could be problematic.
You can renew your Roth 401 (k) after leaving the employer offering the plan. But you can also ask if your plan allows for “in-service” rotations, that is, rotations while you are still working for the employer. Some Roth 401 (k) allow them, although they may be limited to people 59 ½ and over.
Find a paid advisor
Dear Liz: I need help finding a fee-only financial advisor. My search only resulted in investment advisers.
Reply: What you mean by “investment advisers” is not clear. Some paid planners charge a percentage of the assets they manage and often require you to invest a minimum amount with them. Others charge a monthly retainer (check XY planning network) or by the hour (visit Garrett Planning Network).
If you are primarily looking for help with matters other than investing, such as budgeting or managing debt, you may want to consider hiring a financial advisor or certified financial coach. Visit the Assn. for training in financial consulting and planning. Another resource is the not-for-profit credit counseling agencies affiliated with the National Foundation for Credit Counseling at www.nfcc.org.
Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions can be sent to him at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.