Early Retirement Can Cost Plenty
QUESTION: I am considering retiring three years earlier than normal retirement age but I want to know if I am in danger of losing a lot of my Social Security benefits if I do. Also, if I do decide to quit my current job but do odd jobs after I start collecting Social Security, is there a limit on how much I can earn?--C. S.
ANSWER: If you retire at age 62, your basic Social Security benefit will be cut by 20%. That isn’t a 20% reduction until you reach age 65, either. It is a permanent benefits cut.
Assuming that you do start drawing Social Security benefits before you reach age 65, you will be charged a 50% tax for every dollar you earn above $5,760, excluding “passive” income such as company pensions. That is, for every $2 you earn above that amount, you will lose $1 in Social Security benefits.
Social Security recipients who are age 65 or older aren’t subject to lost benefits unless their income after they start collecting Social Security benefits exceeds $7,800, again excluding “passive” income.
Keep in mind, too, that people are living longer than ever before and, over a period of 10 or 15 years, the money you lose in Social Security benefits will add up. Insurance companies say a 65-year-old man can now expect to live another 14 years, while a 65-year-old woman will live another 19.
(Those numbers are significantly reduced, though, when retirees don’t keep working at something after they retire. Lloyd’s of London has found that the average retired man who did not take up other work after retiring from his job died within three years of retiring. Those who do continue to work, the insurer found, live at least 10 years beyond retiring.)
Q: During the past two weeks, I have heard on two occasions about something called nursing home insurance policies. Since it appears that my parents will soon need nursing home care, I’m curious whether such policies exist and why anyone needs them since, I believe, Medicare pays for nursing home care.--F. R.
A: First, to correct an error: Medicare policies don’t pick up the cost of nursing homes unless the home is a so-called skilled nursing facility. Most nursing homes are not.
Enter the insurance companies. Figuring that Medicare usually won’t pay the bill and the yearly cost of care in a nursing home is typically between $20,000 and $36,000 and rising, some insurers started offering nursing home insurance policies a few years ago.
You should do a lot of shopping around before buying because the policies are relatively new and their premiums and terms vary widely. You could pay anywhere from $600 to $1,200 a year in premiums, for example. And some companies won’t insure elderly people with pre-existing health conditions that could be expected to lead to a nursing home stay.
Among the large insurers offering such policies are Aetna, Prudential and Metropolitan Life. For a more complete list of companies licensed to sell nursing home policies, ask your state insurance commissioner’s office.
Q: Can you tell me what the difference is between the yield on a mutual fund and a fund’s total return? I see both quoted in prospectuses, and I want to make sure I’m comparing apples with apples.--E. T.
A: The yield is the income per share that is paid to an owner of mutual fund shares. This income comes from dividends and interest paid by the stocks and bonds and other securities in which the mutual fund invests. Yield is expressed as a percentage of the current per-share offering price.
As the term “total return” is usually used, it is a measure of the per-share change in the value of the mutual fund from the beginning to the end of a single year. This value includes income that a shareholder receives during the year from dividends, interest, capital gains distributions and any unrealized capital gains or losses.
