Q: I could be the person you described in your recent column about Social Security as an insurance program, not a pension program. I was married more than 30 years, left a career, raised children, and was left behind when my former spouse went to look for himself. He is currently one year from full retirement age. I’ve been a “surprise single” for more than four years. I will reach full retirement age in 4½ years. I have been unsuccessful in gaining employment — in part because of my lack of recent employment and my age. Should I begin to collect half of his Social Security now, or should I wait until he reaches full retirement next year? Would the amount I qualify for be more if I wait a year since he will have one year more of earning? Will the amount be different if I wait until I reach full retirement age (if I am able to wait)? I have enough funds to buy a small home (about $95,000, with no mortgage) and am currently renting. Should I purchase a home in order to have more control over my future living expenses and actually have an investment?
A: The benefit you can collect will increase in both circumstances you mention.
It will increase if you wait a year simply because the benefit your former husband is eligible for will increase for a year of delay. (It may also increase if his earnings during the year are large enough to displace credits from an earlier year because the benefit is determined by the 35 highest years of earnings.) It will also increase for each year you delay applying for benefits because you will be a year older as well.
While buying a home may give you some control over some future shelter expenses, it will also expose you to major repair bills. So sinking all of your money into a home is not a good idea. You will be better able to manage the uncertainties of expenses and events if you keep as large a reserve of investment funds as possible. So I would not suggest buying a traditional home.
If you feel you must own, you might explore age 55-plus manufactured-home communities. In many of these communities it is possible to buy an older unit for very little money. You’ll still have to pay land rent, but it is possible to reduce your total shelter bill. I have seen units available for less than $30,000. You can explore this by using the National Association of Realtors website, www.realtor.com. It allows you to select shelter types.
Q: I have read many of your articles advising us to delay taking Social Security. I am 62, retired, and have a small pension income. I am taking money out of my regular IRA account to support my living standard. Each year I receive a 1099-R form. My understanding is that regular IRA distribution is treated as ordinary income. My question regards the hidden tax on Social Security. Your article indicates that the income threshold for “married filing joint” is $34,000 — that is, if the combined earned income (if I decided to work), passive income (interest and dividend), pension income and Social Security payments is over $34,000, a certain percentage of the Social Security payment will be subject to tax. My two questions: First, is my statement above correct — that is, earned income, passive income and pension income are all included in the threshold amount calculation? Second, does my IRA distribution (1099-R) count as earned income, passive income or ordinary income? Is it included in the threshold amount calculation?
A: Your statement is correct except the threshold amount for a couple is $32,000, not $34,000, and the threshold amount for a single person is $25,000.
Because there are two levels of taxation for Social Security benefits, it is best to do the calculation using tax software or by consulting with a tax accountant. But if you’d like a quick estimate of how much of your Social Security benefits may become taxable, you can use an online calculator at www.calcxml.com/do/inc08. Yes, your IRA distribution is treated as ordinary income.
Questions about personal finance and investments may be sent by email to scott@scottburns.com.