Stephen L. Williams, CFP® CIMA®
Vice President, Financial Planning Strategy
Let’s look at some of the more common issues, concerns and life scenarios that could have a direct impact on an individual’s social security income. This is by no means an exhaustive list of relevant topics, but intended as a good starting point to formulating a social security game plan that makes sense for you.
Also, I think it’s worth taking a brief moment to understand social security in its historical context before trying to determine how it best fits into your life. Old Age, Survivors and Disability Insurance Program – OASDI – is the official name for Social Security in the United States. The OASDI is a comprehensive federal benefits program that provides benefits to retirees, disabled people and their survivors. This was and remains the OASDI mission.
1. Taking benefits early for disability
While it’s generally not advisable to elect to receive Social Security benefits early as it reduces the maximum monthly benefit over the course of a lifetime, disability is a different story. For those who are unable to work due to medical reasons, typically long-term disabilities, Social Security will pay disability benefits under a program that is separate from the core OASDI retirement benefits’ program.
To qualify for disability benefits, the disability has to be one that is medically considered to last longer than one year or that will likely result in death. Those who qualify can get up to 12 months of retroactive benefits, assuming they have not worked for at least 17 months due to the disability. That is because of a five-month waiting period for disability claims. Like retirement benefits, you can only receive disability benefits if you have paid into the Social Security system. In other words, your monthly disability benefit is also based on your Social Security earnings record.
In addition, disability benefits, like retirement benefits, are subject to tax based on overall income:
Provisional income = AGI + ½ Social Security benefit + tax exempt interest
For married filing jointly, if that income is between $32,000 and $44,000 then up to 50% of the benefit is taxable. If the provisional income is more than $44,000 then up to 85% of the benefit is taxable.
When the worker reaches Full Retirement Age (FRA), which is age 66 for those retiring today, their disability benefits will automatically be converted to retirement benefits.
2. Benefits for children under age 18
Most people are aware that a surviving spouse gets a widow or survivor benefit of up to 100% of their deceased spouse’s remaining benefit due. However, less commonly known is the fact that unmarried children under the age of 18 are also eligible for survivor benefits. The child calculation, again subject to certain rules, is typically 75%. Be aware that there is a maximum limit for each family that generally ranges from 150% to 180% of the basic benefit rate.
In addition, for those who had children later in life, once they are qualified for retirement benefits, any of their children who are unmarried and under age 18, can also receive retirement benefits. The benefit is up to 50% of the retirement benefit amount, and the same family maximum amount above applies.
3. Restrictions for public employees, teachers and government workers:
Windfall Elimination Provision and Government Pension Offset
Social Security has built in certain benefit reductions for public sector employees based on their individual pension qualifications.
The Windfall Elimination Provision (WEP) was created for people who receive pensions from jobs in which they were not required to pay Social Security taxes — for instance, police officers, firefighters, teachers and state and local government workers whose employers were not part of the national Social Security system. If these public employees were also eligible for Social Security retirement or disability benefits based on other work they did over the course of their careers for which Social Security taxes were paid, this is when the WEP would kick in. For example, if someone worked under the Civil Service Retirement System (CSRS), and didn’t have social security taxes withheld, but earned Social Security benefits through a different job later on, then their benefit calculation would be based on a different formula which would reduce what they would have otherwise received. By how much? That depends on their work history. But one rule that generally applies is that the reduction in Social Security benefit cannot exceed 50% of their pension.
Similarly, the Government Pension Offset (GPO) reduces the Social Security survivor benefits by up to 2/3 of their public pension. For example, a spouse who worked in a government role, qualifying for a pension, and whose husband had paid into Social Security his entire career, would have their spousal or widow benefit reduced by 2/3 of their pension.
Often the greatest source of confusion as it relates to Social Security is the aftermath of divorce. In surveys we’ve run at BMO Private Bank, less than half of participants are aware of their rights as a divorced spouse. To put it simply, subject to three basic rules a divorced spouse is eligible for the same benefits as a current spouse. The rules are as follows: a) the marriage lasted for at least 10 years; b) you have not remarried; and c) you are age 62 or older. Subject to these conditions a divorced spouse can earn up to 50% of their former spouse’s benefit. If they have their own work record, they can also restrict their claim to just the divorced spouse benefit and accumulate delayed retirement benefits which they can switch to at a later date (not past age 70) to maximize their overall benefits.
Surviving spouse benefits depend on two things – when the deceased spouse originally claimed their benefit, and the age at which the widow claims their benefit. The easiest example is where they were both at Full Retirement Age (FRA) – today, 66. At this point, the surviving spouse is eligible to receive 100% of the deceased spouse’s retirement benefit, assuming that is higher than their own. The more complex example is when both are taken early. There is an automatic floor of the higher of the deceased spouse’s benefit or 82.5% of the PIA (Primary Insurance Amount – the full monthly Social Security retirement benefit to which you become entitled at FRA). This would get further reduced if the surviving spouse takes early benefit (as early as age 60). For instance, Joe files early at age 62 and only receives 75% of his $2000 benefit or $1500. Julie is the surviving spouse and she would get the higher of $1500 or $1650 (82.5% of $2000), in this case $1650. However, if she is younger and claims at age 60, she would only get 71.5% of $1650, or $1180. The survivor benefit could have been much higher if Joe had waited until at least FRA, and he could have even received delayed retirement credits of 8% per year by waiting past FRA up to age 70. For divorced spouses, they can receive the same survivor benefits as a spouse, as long as the marriage lasted at least 10 years.
While consulting with a tax advisor is paramount, one of the keys with taxation as it relates to Social Security is to be aware that the ranges are not indexed for inflation – and have stayed the same since the 1980s. Know these ranges. A small amount of income in today’s standards means that up to 80% of Social Security is taxed at your rate, and may impact when or how much income you take from Roth IRAs and/or Traditional IRAs. For single filers, annual provisional income (defined above) between $25,000 and $34,000 means that up to 50% of Social Security is subject to tax, and over $34,000 in provisional income means that up to 85% is subject to tax at your tax rate.
These Social Security-related topics are merely a starting point to a more concerted retirement planning self-examination with your financial adviser. Take the time to fully understand your needs and objectives so that Social Security can play a positive role in your financial future.
BMO Private Bank is a brand name used in the United States by BMO Harris Bank N.A. Member FDIC. Not all products and services are available in every state and/or location.
The information and opinions expressed herein are obtained from sources believed to be reliable and up-to-date, however their accuracy and completeness cannot be guaranteed. Opinions expressed reflect judgment current as of the date of this publication and are subject to change.
Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations
White Paper Sees Increase in Managers Outsourcing Middle and Front Office Functions to Achieve Optimal Business Structures
According to a white paper published today by Northern Trust (Nasdaq: NTRS), investment managers of all sizes and strategies have been prompted to undertake a comprehensive review of their operating models as a result of the Covid-19 pandemic which has accelerated existing trends that are compounding cost pressures. This has led increasing numbers of managers to outsource in-house dealing and other functions, such as foreign exchange and transition management, hitherto seen as core.
While cost savings remain a core driver, and indeed are one outcome of outsourcing, costs are no longer the only focus. Far from being solely a defensive reaction to increased pressure on margins, the white paper (‘From Niche to Norm’) describes outsourcing as part of the target operating model, or moving toward the ‘Optimal State’ for many investment managers, and explains how the focus “has expanded to the variety of other potential benefits offered – enhanced capabilities, improved governance and operational resilience.”
Gary Paulin, global head of Integrated Trading Solutions at Northern Trust Capital Markets said: “The pandemic has challenged a range of operational assumptions. Working from home has, for example, questioned the need for a portfolio manager to be in close proximity with the dealing desk. Previously considered essential, the pandemic has effectively forced firms to ‘outsource‘ their trading desks to remote working setups and the effectiveness of this process has disproved the requirement for proximity, in turn, easing the path to third-party outsourcing. Many investment managers are actively considering outsourcing to a hyper-scale, expert provider as a potential, cost efficient solution – one that maintains service quality and, hopefully, improves it whilst adding resiliency.”
Northern Trust’s white paper compares outsourced trading to software-as-a-service stating: “instead of carrying the cost and complexity of running an in-house solution, firms move to an outsourced one, free up capital to invest in strategic growth and move costs from a fixed to a variable basis in line with the direction of travel for revenues.”
Guy Gibson, global head of Institutional Brokerage at Northern Trust Capital Markets said: “The opportunity to deploy capital to build new fund structures, develop new offerings, focus on distribution and enhance in-house research has been taken up by several of our clients to the benefit of their investment approach, and to the benefit of their investors. Additionally, in the last two months alone, many firms have recognized that outsourcing to a well-capitalized, global platform has enabled them to take advantage of cost-contained growth opportunities in new markets.”
A further development, which has echoes of the journey the technology industry has already undertaken, is the move towards ‘whole office’ solutions, which represent the next potential wave in outsourcing.
According to Paulin; “recently we have observed a growing number of managers wanting to outsource to a single, hyper-scale professional service provider who can do everything, everywhere. This aligns with Northern Trust’s strategy to deliver platform solutions for the whole office, serving our clients’ needs across the entire investment lifecycle.”
Integrated Trading Solutions is Northern Trust’s outsourced trading capability that combines worldwide locations and trading expertise in equities and fixed income and derivatives with access to global markets, high-quality liquidity and an integrated middle and back office service as well as other services, such as FX. It helps asset owners and asset managers to meaningfully lower costs, reduce risk, manage regulatory compliance and enhance transparency and operational efficiency.
How are investors traversing the UK’s transition out of lockdown?
By Giles Coghlan, Chief Currency Analyst, HYCM
Just when we thought we had overcome the initial health challenges posed by COVID-19, the UK Government has once again introduced lockdown measures in certain regions to curb a rise in new cases. This is happening at a time when the government is trying to bring about the country’s post-pandemic recovery and prevent a prolonged economic downturn.
This is the reality of the “new normal” – a constant battle to both contain the spread of the virus but also avoid extended economic stagnation.
Of course, no matter how many policies are introduced to spur on investment, traders and investors are likely to act with caution for the foreseeable future. There are simply too many unknowns to content with at the moment.
To try and measure investor sentiment towards different asset classes at present, HYCM recently commissioned research to uncover which assets investors are planning to invest in over the coming 12 months. After surveying over 900 UK-based investors, our figures show just how COVID-19 has affected different investor portfolios. I have analysed the key findings below.
At present, it seems that by far the most common asset class for investors is cash savings, with 78% of investors identifying as having some form of savings in a bank account. Other popular assets were stocks and shares (48%) and property (38%). While not surprising, when viewed in the context of investor’s future plans for investment, it becomes evident that security, above all else, is what investors are currently seeking.
A third of those surveyed (32%) said that they intended to put more of their wealth into their savings account, the most common strategy by far among those surveyed. This was followed by stocks and shares (21%), property (17%), and fixed interest securities (17%).
When asked about what impact COVID-19 has had on their portfolios throughout 2020, 43% stated that their portfolio had decreased in value as a consequence of the pandemic. This has evidently had an effect on investors’ mindsets, with 73% stating that they were not planning on making any major investment decisions for the rest of the year.
Looking at the road ahead
So, it seems that many investors are adopting a wait-and-see approach; hoping that the promise of a V-shaped recovery comes to fruition. The issue, however, is that this exact type of hesitancy when it comes to investing may well slow the pace of economic recovery. Financial markets need stimulus in order to help facilitate a post-pandemic economic resurgence, but if said financial stimulation only arrives once the recovery has already begun, the economy risks extended stagnation.
It seems, then, that there are two possible set outcomes on the path ahead. The first is a steady decline in COVID-19 cases, then an economic downturn as the markets correct themselves, followed by a return to relative economic stability. The second potential outcome is a second spike of COVID-19 cases which incurs a second nationwide lockdown – delaying an economic revival for the foreseeable future. At present, the former of these two scenarios is seemingly playing out with economic growth and GDP steadily increasing; but recent COVID-19 case upticks show that it’s still too soon to be certain of either scenario.
A cautious approach, therefore, will evidently remain the most common investment strategy looking ahead. But investors must remember that, even in the most uncertain times, there are always opportunities for returns on investment. Merely transforming a varied portfolio into cash savings risks a long-term decline in value.
High Risk Investment Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. For more information please refer to HYCM’s Risk Disclosure.
Hatton Gardens 5 top tips for investing in Diamonds
By Ben Stinson, Head of eCommerce at Diamonds Factory
Investing in diamonds can be extremely rewarding, but only if you know what to look for. For investors who lack experience, finding your diamond in the rough can be quite daunting.
For even the most beginner of diamond investors, the essentials are fairly obvious. For instance, you need to ask yourself will the diamond hold its value over time? What’s the overall condition of the stone and the jewellery? Is there history behind the item in question?
Although common sense plays a big part in investing, people often need insider tips and tricks to go from beginner to expert. Tony French, the in-house Diamond Consultant, at Diamonds Factory shares his professional knowledge on the 5 most important things to look for when investing in diamonds.
1: Using cut, weight and colour to determine value
Firstly, consider the shape, colour, and weight of your diamond, as this can play a pivotal role in guaranteeing growth in the value of your item. Granted, investing trends change with time, but a round cut of your diamond will almost always be the most sought after. The cut of your diamond is incredibly important, as it can influence the sparkle and therefore, the overall value. It’s a similar story for the intensity of some colours, such as Pink, Red, Blue, Green etc. Concerning weight, the heavier (bigger) stones will generally increase in value by a bigger percentage. Collectively these factors also contribute to the supply and demand aspect, which will determine their high price, and will ensure your item is re-sellable.
Looking for significant value? Well, aim to own jewellery or diamonds that come from an important public figure. If you’re lucky enough to own a piece that has significant history, or was owned by a celebrity or person of interest, it’s an absolute must to have concrete evidence of this. Immediately, this proof will increase an item’s overall value, and there’s a good chance the stardom of your item might drum up interest amongst diehard fans, increasing the value even further…
Equally, it’s possible to proactively bring provenance to unique diamonds of yours. For instance, you can offer to loan bespoke, or unusual pieces for film, theatre, or TV performances – then it can be advertised as worn by xyz.
3: Find the source
Establishing your diamond’s source is one of the most important things you can do when investing in diamonds. If you’re starting out, try to purchase diamonds that have NOT been owned by too many people, as the overall value of the diamond will reflect multiple ownership. Alternatively, I’d always recommend buying from suppliers like ourselves or other suppliers and retailers, who buy directly from the people who have had them certified.
Primarily, this will allow you to have a greater degree of transparency, which is crucial when buying such a valuable item. Next, you should immediately see an increase in value of your diamonds, as identifying a source will allow traceability and therefore, market context.
Linked closely with my previous point, is the requirement to ensure that your diamonds are certified by a credible lab, and you have the evidence to prove so (a written document with specific grading details about your diamonds) – this will remove any doubts of impropriety.
It’s essential to remember that not all labs are the same, and many labs are better than others. Both the AGS (American Gem Society) and GIA (Gemological Institute of America) have great reputations and are world renowned. I’d recommend doing your own research into the labs, and when you’ve found the pieces that you’d like to invest in, then make an informed decision based upon your findings. Ultimately, proving certification will make your stones easier to insure, and deep down, you can have peace of mind knowing you have got what you have paid for.
Don’t forget to keep this paperwork in a safe location as well – you’d be surprised how many people we’ve met who have lost, or forget where they’ve placed it.
5: Patience is a virtue…
If the market is strong, it might be tempting to look for an immediate sale once you’ve purchased a high value item. However, I suggest holding onto your diamonds for some time before even thinking about selling. More often than not, an item is more likely to increase in value over a few years than a few days – try and wait a little longer!
Equally, I would encourage having your diamonds, or jewellery professionally valued regularly. If you don’t have the knowledge to make a rough judgement on how much your pieces are worth, a consultant or expert can provide both a valuation, and contextualise that amount in the wider market. From there, you should be empowered with the knowledge to decide whether to keep or sell.
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