You might remember the “gap year”. That was when you or some of your friends took off after college to travel for a while or “find yourself”. Personally, I did not get to take much time off after college because Uncle Sam had me in his clutches and wanted me to report for active duty. I did have, however, quite a number of friends who took a gap year.
So what is a Senior Gap Year you might ask? It’s a way to plan for and fund retirement that can pay huge benefits in the long run. In a recent issue of Investment News, author Mary Beth Franklin made the case for optimizing retirement claiming strategies. 1 Adding validity to research we have conducted, we came up with the Senior Gap Year(s) – it can be plural as long as you’re having fun!
Too often we meet someone who has taken social security early, at age 62. While this might seem smart to take social security while you can and before it “runs out”, it can be very costly in later years. Taking social security early means you may have monthly benefits about 28% less than waiting until full retirement age (FRA). Think of receiving $728 per month instead of $1,000. Additionally, you might lose spousal benefits by taking your pension early, negating what some consider “free money”?. 2 To compound matters, a surviving spouse may receive a lower pension due to the death of the primary social security recipient, and this can be a pay cut for the rest of one’s life. If someone delays taking social security retirement until age 70, the benefit increases about 32% of what they would have had at FRA (here again, think of a monthly check of $1,320 versus $1,000 at FRA or $728 for filing early) and the survivor amount can often change to this higher amount! This can be a huge difference. There are other horror stories due to social security integration in pension plans, but that’s for another article.
So how does one account for and plan for the delay in this social security income? This can be accomplished through careful planning and by including asset location planning. How does this planning work? We examine a client’s income sources, tax situation, assets, asset location and combine this into their overall financial plan. Analysis can determine your best sources for income during your Senior Gap Year. This can include starting some pensions, Roth IRA or Traditional IRA withdrawals or removing funds from a qualified plan earlier than originally anticipated. You pay attention to income tax brackets, avoid for bracket creep (not now due to low inflation, but maybe around the corner) and provisional income calculations. 3 Furthermore, you examine other assets that can be utilized such as life insurance cash values or annuities that have the ability to provide an exclusion ratio for minimizing taxation. With all factors taken into account, you determine if you can push your social security forward another year or so and thereby ratchet up your pension income. This allows you to avoid a number of the pitfalls mentioned above.
The end result is time to travel, have fun, spend more time with the one you love, work less and reduce stress. Just what a gap year should be.
Mark Nabell
Managing Partner
1 Investment News, March 3, 2015– Social Security’s Negative Returns by Mary Beth Franklin – look us up on Facebook for a link to her article.
2 File and suspend, Social Security administration, http://www.ssa.gov/retire2/suspend.htm
3 AARP, Social Security and Taxes, http://www.aarp.org/content/dam/aarp/work/social_security/2011-10/Social- Security-and-Taxes.pdf