Coffee heat rising

Social Security

Early Social Security: A way around the earnings limit

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Social Security allows you to start receiving benefits at one of three ages: at 62, at about 65, or at 70. The longer you delay the more you appear to be earning. This results from an actuarial calculation. A flat amount is designated for each American who reaches old age; the older you are when you start collecting, the more you receive monthly—the reasonable assumption being that the older you are, the fewer years you will have to receive your designated cache of dollars.

About three-fourths of Americans start their benefits “early,” at age 62. Many can do so because they have enough savings to live on, or are close enough that a small Social Security payment will get them out of the salt mine. Others are faced with life circumstances, such as layoffs or sickness, that force them to take the money early. And because the government has been slowly pushing back the age of so-called “full” retirement, for many of us that age comes well past the time we feel we should no longer have to work. In my case, “full” retirement doesn’t come until age 66.

If you take so-called “early” retirement—that is, you choose to start drawing benefits at 62—you get a reduced amount. If you wait until age 70, you get a significantly larger benefit. For example, in my case the difference between starting Social Security now and waiting until age 70 would amount to $1,029 a month. The difference if I waited until age 66 would be about $300 a month…enough to ensure that I wouldn’t have to teach one (count it, one) of six freshman comp courses a year to survive.

To discourage people from drawing their benefits at the earliest possible age, Social Security penalizes you for working. Until you reach “full” retirement age, every two dollars you earn above $14,160 results in a dollar confiscated from your benefits. A w4 estimator can help do the math for you. Since neither my $13,944 Social Security benefit (gross: after-tax would be around $11,400) or a gross of $14,160 is enough to live on, this represents a very big problem. Given the ambient ageism that infests American society plus the practical problems entailed in hiring older workers, the likelihood that I will get a full-time job at 64 is almost nil. So I’m faced with two years of poverty (or having to draw down 7 or 8 percent of savings!) before I can start earning enough to live on, and by then my sources of freelance income will have dried up..

As it develops, however, there’s a work-around for the self-employed. It’s called incorporation. The proceeds of an S-corporation do not register for Social Security purposes. This is not true for a C-corp. Here’s how my tax lawyer explains it:

An S corporation is a pass-through entity whose income is taxed directly to the shareholders. In that respect it is like a partnership. The difference, however, is that S corporation income is not subject to self-employment tax (as it would be in a partnership or Schedule C (sole proprietor)). Therefore, S corporation income is not considered to be “earnings” for Social Security purposes.

 

However, as a more-than-5% owner of an S corporation, if you are also an officer (which you would be), you are required to take “reasonable compensation” (W-2 wages) for your duties as an officer of the corporation. Right now, it is the only way IRS can assess FICA/Medicare in an S corporation. If you do not take reasonable salary, IRS will attempt to assess FICA/Medicare on your total withdrawals (and perhaps the total income) of the S corporation. They will assess whatever they can get away with. The reasonableness of the salary depends on the total income of the corporation.

In other words, you can have self-employed income flow into an S-corporation and then have the corporation pay you in salary and dividends. Not only do you get around the $14,600 earnings limitation, you don’t have to pay the usual double dose of FICA levied on self-employed workers.

So, the solution is to form an S-corp that will function as an umbrella for the several sources of freelance income that trickle into my bank account: The Copyeditor’s Desk, HW&E (my original freelance entity, separate from the partnership with Tina), and Funny about Money. None of these will earn much, but taken together the proceeds could at least cut down the number of freshman comp courses I’ll have to teach. That will improve the quality of my life by several orders of magnitude.

A person who runs a business that makes a decent income could profit nicely from this strategy.

Résumés on the wind!

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No grass grows under this old lady’s feet, that’s for sure. Just sent out a résumé for a sweet part-time job that would be a great hoot, and e-mailed my book-length curriculum vitae to the English department chair at a nearby community college.

Hey! We’ve only got nine months here to find a new job! Better get to work.

Truth to tell, I believe I could do either of these p/t jobs on the side, while wrapping up the deconstruction of our office. We know I’m capable of teaching the equivalent of four bloated sections of freshman comp for juniors and seniors while supervising an editorial crew; after that, two sections of real freshman comp whose size is limited to normal NCTE guidelines should be a piece of cake.

Far more appealing, though, is the prospect of serving as p/t gofer and sidekick for an editor (and friendly acquaintance) at my favorite local press. This is the outfit that pays me to read detective novels. Mirabilis! Some of the novels I’ve had the privilege to read have been pretty entertaining. If you enjoy detective fiction and thrillers, you should take a look at their booklist. I know I can do this job to a T, and it sure would be easier than teaching freshman comp. Not only that, but once I walk out the door, it probably would provide the income I’ll need to keep from starving.

Yesh. I scared the bejabbers out of myself, along about three in the morning (as you can imagine, I enjoyed about 2 1/2 hours of sleep last night, between 4:30 and 7:00 a.m.), by loading Excel and massaging some figures. Didn’t take long before I was asking myself the Great Dark-of-Night Ontological Question:
What on earth was I thinking when I imagined I could support myself on Social Security and investment proceeds?

Wait! I remember: at the time, we all actually had some investments.

I was horrified to find that what with the 12-fold increase in healthcare premiums that Medicare will represent plus the need to take my share of the Investment House mortgage out of cash flow, my expenses will exceed my present net income, in the highest-paying full-time job I’ve ever held!

To get by, I’ll need to earn an extra $19,000 to $21,000 a year, above and beyond investment returns and Social Security. This will be a trick, since you’re allowed to earn a grandiose $14,000 before Social Security starts docking your benefits.

Not having the mortgage payments wouldn’t help a lot: even without those, Social Security plus proceeds from my total savings (including the money set aside to pay off the Renovation Loan and the savings fund to buy the next car) will not cover my expenses, post-layoff. Check it out:

Projected Expenses

projectedexpenses3-27-09

Projected Net Income from Social Security and Investments

projectedincome3-27-09Oops!

And oops, indeed: take a close look at what it’s going to cost me to live in blissful bumhood. And consider that my net income today is $39,000. I live like an ascetic: don’t travel, don’t own a cell phone, don’t subscribe to cable, satellite, or any other pay-per-view TV, don’t play computer games, rarely eat out, never buy more than the basic clothes and shoes, drive a 10-year-old car, don’t run a tab on the credit card, don’t even go to a freaking picture show! And I use up all but about about $2,000 of that each year. We’re looking at a $4,560 increase in my expenses once I’m on Medicare! Meanwhile, my income drops into the poverty range.

Clearly, I’ll have to work: either get a job or cultivate several income streams. The candidates are part-time teaching, growing The Copyeditor’s Desk, and monetizing Funny about Money.

Community colleges around here pay part-timers about $2,000 a course. The universities now pay about $3,000. Typical income from a freelance business is about $10,000 a year; I would be surprised, rusticated as we are in the middle of the Sonoran Desert, if Tina and I could generate much more than that, apiece. And what would FaM earn? It’s anybody’s guess. So guessy as to be negligible.

Hiring out to teach two courses from the community college district and two from the Great Desert University each year and ramping up our freelance business so that it pays a consistent 10 grand a year will produce something that looks like this:

projectedincomestreamsTwenty thousand extra dollars would do the trick, in theory. But that exceeds the Social Security earnings limitation by $6,000. Have the temerity to earn more than $14,000 a year, and you get your Social Security benefits axed. So, I would have to earn significantly more than 20 grand to end up with enough income to cover the bloated expenses of retirement.

If I’d had the prescience to sell my investments in the spring of 2008, today I would have plenty of money to live on, between SS and investment income. Too bad we didn’t all have crystal balls, eh?

Well, I felt a lot better, anyway, having sent out a couple of job feelers. Even if they come to naught, just doing something other than hunkering in the headlight while waiting to be run down feels like a positive move.

Is the Layoff Boom about to Fall?

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Out at the Great Desert University, rumors float on the breeze like leaves in the autumn air. We our told that Our Leader will make a momentous announcement on the first day of the fall semester, in a week or so. Nothing anyone hears indicates the contents of this message will please the peons. Some expect to hear of massive layoffs. Others expect a hiring freeze. Still others predict we will be told the satellite campuses are to be deemed “teaching campuses” and the main campus will be the “research institution.” Paranoia rises. The facts support the general angst but confirm none of the dire predictions.

Factoid:

The university’s budget has been slashed to and peeled off the bone.

Factoid:

Our Leader’s elaborate building campaign, which could bankrupt a healthy institution in good times, continues apace.

Factoid:

Caps on class sizes have risen into the stratosphere. Lecturers and instructors — nontenurable faculty who teach four or five sections a semester — groan under obscene courseloads, with ten times more students than anyone could reasonably be expected to teach adequately. Tenure-track and tenured faculty also find themselves facing classrooms filled with more students than they can teach. Faculty are eliminating most or all writing assignments and assessing performance on the basis of a few machine-graded, computerized exams.

Factoid:

HR staff have been seen acting strangely. They refuse to meet your eyes, and at “benefits fairs” their responses to questions make it clear they’ve been told, on pain of dire consequences, to keep their tongues on a tight leash. One of them remarked to a colleague, semiprivately, “Oh…you don’t know what’s happening.”

Factoid:

Administrative staff who do know what’s up have leaked hints that something very grim is slouching toward Bethlehem.

What to Make of It?

Heaven only knows. I hesitate to assume the worst, although knowing that place, anything is possible. If we do indeed face layoffs, I would be high on the list of the expendable. My job is exempt, meaning my contract says I can be canned at any time, for no reason. Although one could argue that our office supports the university’s core mission of research and publication, others could say faculty could get by just fine without us. If the bad news is “only” a hiring freeze (unlikely: the last hiring freeze was not announced from the balcony with trumpets blaring fanfares), my job will still be at risk, since the director of the graduate program whose students staff our office walked with short notice this summer. A hiring freeze will mean he can’t be replaced, which will mean his program will die instantly, which will mean my office will quickly go away because my staff will disappear. In either event, I lose my job.

I’m now eligible to take early Social Security payments, although I would prefer not to. If I collect SS now, the amount will be peanuts. If I wait until I’m 66 (or even 65, when Medicare kicks in), my income will be slightly more generous. I’ll be 65 in 22 months; COBRA will cover me for 18 months, and so if I can hang onto my job for just four more months, I can at least keep myself insured if I’m laid off.

Being averse, as I am, to jumping off the high wire without a safety net, I reconnoitered the resources I could use to survive if I’m canned. Figuring 4% of my retirement savings as a drawdown and subtracting from that the 12 grand that’s going into the Investment House, investment income right now would be $10,254. Because I haven’t yet applied the Renovation Loan payoff fund toward principal but instead have stashed the money in low-risk mutual funds, I have $9,848 in cash that I could live on. The university has to pay me for 175 of my 275 hours of accrued vacation time at my regular pay rate; the figure on my paycheck seems to says that amount is $3,214, a little more than one month’s net pay (I believe they have to pay my gross rate for this, which would come to $5,280). Also, the state pays retiring employees who have accrued 1,000 hours of sick leave a kind of severance bonus in the amount of 50% of their hourly wage per sick-leave hour; for me this would come to $17,160. It’s not paid in one swell foop, however: they dole it out over three years. So, in the first year after severance I would get $5,714. Pretax Social Security, if I started taking it this year, would add $12,228 to the pot.

Amazingly, all these bits and pieces add up to something close to my net pay. Though the bottom line is pretax, few of the figures that go into it are earned income, and so my taxes might be relatively low.

COBRA will inflate my healthcare premiums from $30 to $473 per month, but even that would be affordable for a couple of years. It would be tight, but I might not be forced to move out of my home, especially if I could engineer a steady flowof freelance work.

Thank goodness I saved the Renovation Loan snowflakes to double as an emergency fund, instead of paying them directly to the loan principle!

Matter o’fact, the scenario above isso positive that I wondered what would happen if I delayed collecting Social Security. Could I get by until I can collect full Social Security payments? Well….

Foregoing Social Security for two more years, I’d have to come up with an extra $7,000 to make ends meet, just barely.

But that’s not unreasonable: I could pull it off with a part-time job — maybe greeting shoppers at the WalMart! Here, too, a steady flow of freelance work would do the trick. At The Copyeditor’s Desk we’re hoping to make $1,000 a month per person by the end of the year. If we meet that goal, next year’s $12,000 annual income would just about replace the amount of Social Security I’d get if I started drawing payments now.

So, if they can me, the world is not going to end. I may have to sell my home, but not right away. There will at least be time to see if I can get by, cobbling together a living from four to six different sources. A year or so hence, though, I’ll have to either cut my expenses drastically or find income to replace the one-time vacation pay reimbursement and the three years of sick leave payments. The slightly increased Social Security payments I would have by waiting to collect until I’m 65 will not substitute for those amounts.

I don’t like it. But I’ll survive.