MANAGING YOUR MONEY : THE RIGHT PATH : Contemplating the Good Life : Planning for your leisure years can generate many perplexing questions.
Perhaps one of the biggest myths in our society is that your retirement years are easy. Sure, quitting your job may not require much effort, but the rest of it--such as knowing how to manage and invest savings wisely and how to negotiate the maze of Social Security regulations--is hard. Doubts and uncertainity persist. And answers are hard to come by.
Here are five retirement questions most often raised by readers of “Money Talk,” a question-and-answer column regularly appearing in the Sunday edition of The Times’ Business section.
Q. I will be retiring in a few months and have opted to take a lump sum pension payment of about $200,000. What steps can be taken to shelter this distribution from immediate taxation? This is a sizable portion of what I will be depending on for income during my retirement. --R.T.
A. Basically, you have two alternatives. You may put your entire pension distribution into a tax-deferred individual retirement account or you may pay taxes on it now and probably take advantage of a special income averaging benefit available to many in this age bracket.
Which is the better choice? Torrance financial planner Thomas Gau believes that you would be far better off rolling the pension account into an IRA. But let’s walk through the situation and explain why.
If you turned age 50 before Jan. 1, 1986, you are eligible to take advantage of a special 10-year income averaging, a tax benefit that essentially treats the $200,000 lump sum distribution as though it had been received over 10 years. Gau estimates that even using this tax break, you would be liable for about $50,000 in state and federal taxes for the year, leaving you with about $150,000 to invest for retirement. Remember too that earnings from this investment are still taxable; it is just the principal on which the tax has been paid.
Gau argues that if you rolled his pension distribution into an IRA and invested it wisely, you could withdraw whatever you needed from the account and pay taxes only on that amount. Gau notes that many retirees are in a low tax bracket, which means that less of their pension distribution goes to taxes.
As a rule of thumb, Gau says that pension distributions in excess of $100,000 should not be subjected to the special 10-year income averaging, but rather should be rolled into IRAs. “Unless you need the money right away for some reason, the 10-year averaging doesn’t make sense for distributions over $100,000,” he says. “Why pay the taxes right away when you can defer it and probably pay less.”
Q. If a woman has been married more than 10 years to two different husbands, does she have a choice of which man’s benefits to claim for ex-spouse Social Security payments? If she were married to the second husband for less than 10 years, may she still claim benefits from the first marriage if it lasted more than 10 years? What are the payment levels: Are her benefits based on a percentage of the taxes paid during the marriage, or are the benefits based on the total amount of taxes paid by the former spouse into Social Security? --A.R.
A. A divorced person who was married at least 10 years to the same spouse is entitled to claim Social Security benefits on the ex-spouse’s account. This applies equally to men and women, although most ex-spouses claiming the benefit have been women.
If the ex-spouse is alive, the claimant must be at least 62. At 62, the ex-spouse is entitled to 37.5% of the wage earner’s benefits. If the ex-spouse waits until 65 to claim benefits, the payment is 50% of the wage earner’s benefits. The wage earner need not be receiving benefits in order for the ex-spouse to claim his or hers--so long as the couple has been divorced at least two years. (This last point varies substantially from the qualification criteria for married couples, which do require that the primary wage earner be receiving benefits in order for the spouse to receive spousal benefits.)
If the wage earner is dead, the ex-spouse is considered equivalent to a widow or widower. He or she may claim benefits at 60, and, at this age, is entitled to receive 71.5% of what the wage earner would have received. The percentage increases until reaching the full 100% if the ex-spouse is age 65 when benefits begin.
By the way, the ex-spouse and the current spouse are both treated as the widow or widower, and both receive a full 100% of the wage earner’s benefits; they do not split the benefit.
Ex-spouse benefits are based on the total contributions made by the wage earner during his or her working career, not just those made throughout the duration of the marriage. People who have been married more than once, for longer than 10 years, may claim benefits against the ex-spouse with the largest Social Security account. And a divorced person who was remarried for less than 10 years may claim benefits on the account of the first spouse. However, as long as a person remains remarried, he or she may not claim benefits on the account of the ex-spouse.
Finally, one point that bears repeating: Benefits paid to an ex-spouse in no way reduce the amount available for the primary wage earner and his or her current family. They are entirely separate payments.
Q. I have recently heard of something called a reverse mortgage. I own my home free and clear, and I would like to tap into my equity so I can have more money to enjoy my life. --N.I.
A. Reverse annuity mortgages were created in the late 1970s to help senior citizens who have substantial equities in their homes but need additional cash to meet their living expenses. Basically, these mortgages allow owners to tap into their equity without selling their homes.
Here’s how they work. Typically a lending institution makes the homeowner a loan for up to 80% of its appraised value. After taking its loan fees and points up front, the institution then pays the homeowner the balance of the loan in equal monthly installments, minus accruing interest on the already dispersed funds, for as long as he continues living in the home. The loan--actually the amount dispersed plus interest--is repaid when the house is sold by the owner or his heirs.
These open-ended loans are complicated because it’s impossible to know how long the homeowner will continue to live in the house. If he stays just a brief time, the reverse mortgage proves a costly way for the elderly homeowner to pull equity out of the house, since loan fees and points on the full potential loan amount is assessed at the outset. However, if he stays a very long time, the lending institution stands to pay out more than the home may be worth. Because of this latter issue, several institutions offering reverse mortgages require that they share in any appreciation of the the borrower’s home during the course of the loan.
According to the American Assn. of Retired Persons, three private lenders currently offer reverse mortgages to California homeowners. They are: American Homestead in New Jersey, (800) 233-4762; Providential Home Income Plan in San Francisco, (800) 441-4428, and Capital Holding Co. in Kentucky, (800) 942-6550. Each lender offers a slightly different loan package, explains Bronwin Belling, a housing counselor for the AARP, so it is important for borrowers to carefully evaluate their choices before making a commitment. For example, Belling explained that with a $200,000 loan at 10%, monthly payments from the three lenders previously mentioned would range from $903 to $1,124, with substantially varying requirements and restrictions.
For more information about reverse mortgages, send a self-addressed, stamped envelope to the Independent Living Resource Center, 70 Tenth St., San Francisco, Calif. 94103. Another source is the American Assn. of Retired Persons. Send a self-addressed, stamped envelop and ask for Home-Made Money, AARP Fulfillment D-12894, 1909 K St. N.W., Washington, D.C. 20049.
Q. My friend’s husband a few years ago died after retiring, and my friend was shocked to discover that his pension stopped with his death. Now my husband, who is also retired, is ill and is not recovering. How can I find out whether his pension ends with his death? Shouldn’t there be laws to protect women like me? --M.Y.
A. First of all, there is a law now that provides just the sort of spousal protection that you are talking about. Under the Retirement Equity Act, which became effective in 1985, a spouse must consent to the type and terms of the pension plan a worker elects to receive at retirement. The law was designed to prevent just the type of horror your friend undoubtedly experienced when she learned that her husband’s pension did not continue, even at a reduced rate, after his death.
Is is entirely possible that this law became effective after your husband elected the terms of his pension. But you can still find out what those terms are. Simply contact the pension plan administrator at his former company. Also, our experts advise that it may be possible for your husband--if he is not incompetent or completely incapacitated--to change the terms of his pension payment. Again, you can check this through the company.
Even if you’re not at or near retirement, this is probably as good a time as any to check how your pension plan is structured. Do payments continue when you die? If so, at what level? Are you satisfied with the choices you made years ago, when retirement seemed as remote as the moon? If not, can you change them? Should you? This is not just an issue for older folks.
