Calculating Your Own Social Security Benefits

Q: A reader recently asked how to verify whether he was getting the correct amount of Social Security. You referred him to Social Security, which wasn’t all that helpful to people who think the government has already made a mistake on their benefits. Isn’t there some other independent source of information we can use to check whether we are getting what we deserve? --R.J.A.

A: William M. Mercer, Inc., the world’s largest compensation and employees benefits consulting firm, annually publishes just the information you want. Titled “Guide to Social Security and Medicare,” the pamphlet details how Social Security benefits are computed and includes a work sheet for you to make those calculations for yourself.

But before tackling the calculations, which are quite complex, you should make sure that you have accurate records of your annual earnings. The Social Security Administration will gladly provide you with the income figures they have credited to your account. You should get these even before sending away for the Mercer pamphlet. Then you should check these records against your own tax records. If the Social Security Administration’s figures are wrong, notify them immediately. If your figures are wrong, modify them. There is no point for you to perform all the calculations on the Mercer work sheet if you are working with inaccurate income figures.

To get a list of your earnings, call the Social Security Administration at 1-800-772-1213 and ask for a Personal Earnings and Benefits Estimate Statement, form SSA-7004. You will be sent a questionnaire, and once you return it, you will receive a listing of your annual earnings and an estimate of the Social Security benefits you are entitled to receive.

To get a copy of the Mercer pamphlet, send a check for $4 to William M. Mercer Inc., 1500 Meidinger Tower, Louisville, Ky. 40202-3415. The company asks that you mark the envelope to the attention of its Social Security Division.

Factors on Whether to Sell or Keep House

Q: I will be entering graduate school out of California and selling my home here this year. The house is worth $200,000, and I owe $70,000 on the mortgage. I hope to return to California when I am out of school, but I cannot be sure that will happen. Meanwhile, what should I do with the house? Sell it? Rent it? If I sold it and bought a house at school with my profits, would I owe taxes? Please advise! --J.H.

A: This is one of those decisions that only you can make. But I can outline some of the issues that should influence that decision.

First, let’s consider the option of selling. Taxes are the obvious problem. If you sell your house for $200,000, you must purchase a replacement for at least that amount or face federal taxes on the portion of the gain not reinvested. Furthermore, because you are leaving California and reinvesting your profits out of this state, your entire gain--we’ll say it’s $130,000, based on the numbers you’ve given above--will be subject to California state taxes.

Let’s assume you opt to sell the house and, to avoid paying federal taxes, you purchase another for $200,000. Unless you have money in the bank to cover the California tax bite on your $130,000 profit, you are not likely to have enough cash to reinvest in the replacement house to keep your mortgage loan at its current $70,000 level. And unless the interest rate you are now paying is significantly higher than the one you can get on the replacement house, your monthly payments will likely rise.

But let’s look at these new house payments. An $85,000 loan at 9% interest for 30 years would generate monthly payments of $683.94. However, once your tax deduction is figured in, you might well find that a house payment is comparable to the prevailing rents in your new town. And if you figure in the fact that you will be building equity--and not putting money into a landlord’s pocket--selling might not seem so awful.

But once out of the California real estate market, you might find it economically difficult to return. If property values continue to rise as they have historically, being away for even five years could put you at a distinct disadvantage. So what happens if you hold on to the house to stay in the Southern California real estate market?

Your first problem would be finding tenants who would keep up what is probably your single most valuable asset. Can you be sure that you will get tenants who would treat the house as you have? Can you adequately oversee your property from out of state? Can you afford to have a local property management firm, which might charge up to 10% of the monthly rent, do it for you? Another potential problem to keeping your house, warns Paul Gordon Hoffman, a West Los Angeles attorney, is that the state of California might try to tax your earnings while you are out of state once you return to California. Of course, if you are a full-time student, your earnings won’t be very high, and the tax bite could be fairly minor.

Perhaps the biggest reason for holding on to your home is to keep your foot in California real estate. But given the current economic environment and demographic trends, there is no assurance that real estate in California will rise as it did in the 1970s and ‘80s. Some experts might urge you to take your profits now and take your chances on the future.