Click on the link to watch our interactive video to quickly and simply understand: How to Strategize for your Social Security Benefits.
Social Security serves as a foundational element in many retirement plans, and understanding how to strategize for maximum benefits is crucial. With increasing life expectancies, retirement can last between 20 to 30 years, making Social Security planning more critical than ever. This blog explores the strategies for optimizing Social Security benefits, helping ensure a financially secure retirement.
The Social Security system in the United States is designed to provide financial support to individuals in their retirement years. The amount of benefit one receives is based on their 35 highest-earning years of work. The full retirement age (FRA) – the age at which one is eligible for full benefits – varies from 66 to 67, depending on the birth year.
The age at which you start claiming Social Security benefits significantly impacts the amount received. Claiming benefits at the earliest age of 62 results in a reduction of at least 25% compared to waiting until the full retirement age. Conversely, delaying benefits past the FRA up to age 70 leads to an increase in benefits, with a maximum increase of 32% at age 70.
For example, if the retirement income at age 66 is $2,000 per month, retiring at this age versus waiting until age 70 can mean a difference of over $200,000 over a lifetime. This stark difference underscores the importance of timing in Social Security planning.
Couples have additional strategies available. Spouses can claim benefits based on their work record or receive up to 50% of their spouse’s benefit at full retirement age, whichever is higher. Coordinating the timing of benefit claims can maximize total household Social Security income. For example, the lower-earning spouse might start benefits earlier, while the higher-earning spouse delays benefits to increase the survivor benefit.
Working while receiving Social Security benefits before reaching the full retirement age can temporarily reduce your benefits. Understanding these rules is vital for those planning to work part-time in retirement. After reaching the full retirement age, however, earnings do not affect Social Security benefits.
Up to 85% of Social Security benefits can be taxable, depending on your total income. Planning for tax implications is essential. Strategies like Roth IRA conversions or timing the withdrawal of retirement accounts can impact the taxation of Social Security benefits and overall retirement income.
Repositioning assets to reduce taxable income can lead to more tax-efficient retirement income. This might involve shifting from taxable accounts to Roth IRAs or employing tax-loss harvesting strategies. This repositioning can influence the taxation of Social Security benefits, potentially leading to lower overall tax liabilities.
With over 500 possible combinations of factors affecting benefits, consulting a financial advisor who specializes in Social Security planning is highly recommended. An advisor can offer customized strategies based on individual circumstances and help navigate the complex rules of the Social Security system.
Social Security planning should be a personalized process, reflecting individual work histories, health status, family circumstances, and retirement goals. The decision on when to claim benefits is a pivotal one, with long-lasting financial implications.
Understanding the nuances of the Social Security system and employing strategic planning can make a significant difference in retirement income, ensuring a more secure and comfortable retirement phase.
As retirements grow longer, the importance of maximizing Social Security benefits cannot be overstated. It's not just about when to start claiming benefits but how to integrate them with other retirement income sources, tax planning, and spousal benefits. Informed decisions and strategic planning in this arena are invaluable for achieving a financially stable and fulfilling retirement.
Peer-to-peer lending isn’t as “alternative” as it used to be, and that’s been a boon to funds such as Direct Lending Investments, which specializes in buying high-interest, short-term small-business loans.
The downtown L.A. hedge fund last week made a three-year, $250 million commitment to provide capital for loans made through lending site Biz2Credit. The deal is Direct Lending’s largest commitment to date, and the latest sign of the firm’s growth.
Since launching in 2012, Direct Lending has grown to manage 2,000 loans, and it now has assets under management of $115 million – up from just $14 million a year ago. As new money comes in and loans turn over and self-liquidate, the firm is picking up loans at a rate of $25 million to $30 million a month.
President Brendan Ross declined to disclose Direct Lending’s return rate, but said a fund with a similar portfolio in the same asset class would generate annual returns of around 11 percent to 13 percent.
Direct Lending backs loans made through several online lenders. The hedge fund provides the capital while lenders handle underwriting and loan servicing. That’s also how Direct Lending’s deal with Biz2Credit, a New York firm, will work.
Ross, whose firm has previously funded loans through Biz2Credit, said the new deal creates a more direct line for his company – and his investors – to access top-quality loans. Biz2Credit’s track record of $1.2 billion in small-business funding and its default rate of 0.7 percent also made the partnership an obvious play.
Loan sizes will range from $25,000 to $500,000 for terms of six to 24 months. More than $60 million of Direct Lending’s capital has already been distributed across 700 to 800 loans, according to Biz2Credit President Ramit Arora.
Peer-to-peer lending has now become standard practice for investors looking to diversify their business portfolios, even though returns have fallen over the past few years.
But the once revolutionary online financial service is still a relatively safe bet that offers solid returns, Ross said.
“Peer-to-peer lending is nothing more than lending money and getting repaid,” Arora said. “It’s the oldest asset class, and it’s finally replacing overvalued stocks and low performing bonds.”
Lending platforms such as Prosper Marketplace Inc. and Lending Club Corp., which priced its initial public offering last month at $15 a share and raised $870 million, hit their stride during the economic downturn of the late 2000s when banks were forced to tighten credit terms. Borrowers, specifically small-business owners, turned to lending sites for short-term loans despite staggering interest rates that could be upwards of 40 percent.
What made peer-to-peer lending attractive for borrowers, though, was the offer of quick cash. Biz2Credit’s Arora said his company could process loans of up to $100,000 in just 48 hours, shaving off the days or weeks needed to wait for a bank loan approval.
And for investors, such as retired venture capitalist Brett Byers, such loans offer higher returns at lower risks than bonds and stocks.
Byers currently purchases loans through Direct Lending, Lending Club, Prosper as well as niche platforms StreetShares, Open Capital Exchange and ApplePie Capital. At one point, Byers said, he was Prosper’s largest investor, putting in $6 million to purchase loans through the San Francisco company’s website.
“I was in early to get higher returns,” he said. “But the returns have come down as peer-to-peer lending moves into the mainstream.”
Banks are starting to loosen their credit policies, and a growing number of peer-to-peer loan providers are competing to buy a limited supply of loans. Lending sites have been forced to drop their interest rates – meaning lower returns for investors – as they try to attract more borrowers. Byers said his average annual return rates have fallen from 20 percent in 2009 to around 12 percent today.
But those double-digit returns are still pretty attractive for investors given the high price of stocks and the low yield of bonds.
David Reyes, founder of San Diego wealth management firm Reyes Financial Architecture, said he wouldn’t be alarmed if 30 percent of a client’s portfolio was dedicated to peer-to-peer loans, as those are not subject to the same interest rate or inflation risk that comes with bonds.
“People are scared of both the stock market and the bond market,” he said. “It fills the void where I feel we can help to protect and diversify the portfolio, have yield and find an option that’s not correlative to the stock market.”
While peer-to-peer lending is still tiny compared with the lending business done by commercial banks, Direct Lending’s Ross said peer-to-peer lending will soon become synonymous with private credit, making it a core part of even a conservative portfolio.
“We didn’t even use the phrase ‘private credit’ 10 years ago,” he said. “It’s really peer-to-peer lending that’s putting it on the map.”