Ask Liz Weston

Get smart with your money

Retirement

Q&A: Delaying Social Security benefits

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Dear Liz: I’d like to get something straightened out. Between things that you and other columnists have said, we laymen have been told that if we wait until we’re 70 to start taking Social Security, we’ll get 8% more for each year we delay, and a total of 40% more than if we start taking it at our retirement age.

But the retirement age is 66, not 65. So there’s a four-year difference, which would produce an increase of only 32%. Even if the yearly increase is exponential (compounded), the total increase after four years would be 36%. So where does that 40% figure come from?

Answer: It didn’t come from this column, so it probably came from someone who was writing when 65 was the full retirement age.

As you note, the full retirement age is now 66 and will move up to 67 for people born in 1960 and later.

Delayed Social Security benefits max out at age 70, so there are fewer years in which a benefit can earn a guaranteed 8% annual return for each year it’s put off. Delayed retirement credits aren’t compounded, but the return is still better than you could get guaranteed anywhere else.

That doesn’t mean delaying Social Security past full retirement age is always the right choice. Social Security claiming strategies are complex, with a lot of moving parts, particularly if you’re married.

Before filing your application, you should use at least one of the free calculators (AARP has a good one on its site) and consider using a paid version, such as MaximizeMySocialSecurity.com, if you want to tweak some of the assumptions or if you have a particularly complicated situation.

Q&A: File and suspend strategy for Social Security

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Dear Liz: You recently wrote an interesting piece regarding the “file and suspend” strategy for Social Security benefits. I liked the possibility of getting a lump sum if I should need the money downstream.

But when I checked with Social Security, I was told that the lump sum maximum was six months of suspended payments. Am I missing something? My understanding was that I could collect all the suspended payments if need be. Is there a specific code I could reference to our Social Security office to clear this matter up?

Answer: You’re not missing something. The Social Security representative you talked to is confusing retroactive benefits with the reinstatement of benefits that were voluntarily suspended.

When you file for benefits after your full retirement age (currently 66), the maximum lump sum you can get is six months’ of missed benefits.

When you “file and suspend” your application at or after full retirement age, however, you can end the suspension at any time and get a lump sum for all the benefits you missed.

Unfortunately, the misinformation you received isn’t unusual.

Financial planners around the country have reported running into Social Security reps who insist that only six months’ of benefits are available to people who file and suspend, which isn’t true.

The procedure is outlined in the Social Security Administration’s “Program Operations Manual System” under GN 02409.130 Voluntary Suspension Reinstatement

It’s also described in plain English on Social Security’s site: “If you change your mind and want the payments to start before age 70, just tell us when you want your benefits reinstated (orally or in writing). Your request may include benefits for any months when your payments were suspended.”

The ability to file and suspend, then change your mind, is an important protection for those who understand the important role Social Security plays as longevity insurance.

The smartest course is often to let your benefit grow to its maximum amount, taking advantage of the “delayed retirement credits” that increase your benefit 8% annually between your full retirement age (currently 66) and age 70.

If you should later find yourself in need of the money, you can get a lump sum payout for the missed benefits back to the day you filed and suspended, if you want.

But opting for the lump payment means you lose your delayed retirement credits for that period. In other words, if you ask for a lump sum dating back to your initial filing, your monthly benefit is reset to the smaller amount you would have gotten then.

Q&A: Social Security spousal benefits

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Dear Liz: I started my Social Security benefits at 66 and am now 70. I was married for 23 years and have not remarried.

When I ask about spousal benefits, I am told that my own monthly benefit is too high to get benefits based on my ex’s work record. My monthly benefit is only $1,509, my 401(k) has tanked, and I am surviving on less and less available part-time work.

I was told further that I can apply once my ex passes away and then it won’t matter how high my income is. Could that be correct? What is the exact cut-off amount to get spousal benefits?

Answer: Many people misunderstand the way spousal benefits work, and they think that they can get an additional check on top of their own retirement benefit. That’s not quite how it works.

Essentially, Social Security compares the amount of your retirement benefit with what you would get as a spouse or divorced spouse and gives you the larger of the two. Spousal benefits are up to half of what your spouse or ex receives.

If your ex’s benefit is $2,000 a month, for example, your spousal benefit could be $1,000, which is less than you’re getting now. If your ex dies, however, you can apply for a survivor benefit that equals what he or she received — in this example, $2,000 a month.

Q&A: Retirement savings for freelancers

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Dear Liz: I am a freelancer. I don’t consider myself a small-business owner, just someone who gets the work done on time and gets paid. I max out my IRA every year, but would like to save more in a tax-advantaged account.

I checked out SEP and SIMPLE IRAs, but they don’t have a Roth option. Am I eligible to start an Individual 401(k)? What administrative duties would be involved? I pay self-employment tax and my clients send me 1099s, not W2s.

Answer: You may not consider yourself a small-business owner, but that’s essentially what you are. And small-business owners should have tax pros to help them answer questions like this, since you have so many options.

As a sole proprietor, you should be able to set up a solo or individual 401(k) account. That would allow you to make either pre- or after-tax “employee” contributions of up to $18,000 in 2015 — plus an additional $6,000 if you’re 50 or older.

As your own employer, you can contribute an additional 25% of your net earnings (a contribution that would be deductible as a business expense). Your total contribution, employee plus employer, can’t exceed $53,000 in 2015.

Individual 401(k)s are somewhat more complicated to set up and administer than Simplified Employee Pensions (SEPs) or Savings Incentive Match Plan for Employees (SIMPLEs). But many discount brokerages are eager to help you with the paperwork and have low or no set-up costs.

You have many other ways as a self-employed person to reduce your taxes, but the rules can be complicated. A certified public accountant or an enrolled agent can help advise you of your options. You can get referrals to tax professionals from the American Assn. of CPAs at http://www.aicpa.org and the National Assn. of Enrolled Agents at http://www.naea.org.

Q&A: Breaking even with Social Security

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Dear Liz: This is in regard to the reader who created a spreadsheet that he thought showed the advantage of taking Social Security early. I retired at age 62 and am now 69 and have not yet started drawing my benefits. I have never done a spreadsheet to determine the relative advantage in waiting to draw on my personal benefits; I’ve simply assumed there is no advantage or disadvantage, actuarially. That is, whether I took benefits beginning at age 62 or waited, as I’m doing, the total amount I would receive would be the same if I lived an average life expectancy. Given the fact that my wife would be drawing my benefit if I die first, however, it’s clear that my waiting to age 70 to draw my benefits works to our joint advantage. Am I right?

Answer: In the past, the Social Security Administration advised people that they would receive roughly the same amount by starting reduced benefits early as they would by waiting to receive larger amounts, assuming they lived an average life expectancy.

These days, though, longer life expectancies at age 65 mean that most people will live past the “break even” point where waiting for enhanced benefits results in more money over a lifetime than starting early. The break-even point is in one’s late 70s. Men have a 60% chance of living to age 80 and women have a 71% chance, according to the Society of Actuaries.

When you’re married, you need to think in terms of two life expectancies, because the chances are even better that one of you will live past the break-even point — perhaps well beyond.

With married couples, there’s an 88% chance at least one of you will live to 80, a 72% chance of at least one spouse living to 85 and a 45% chance one will live to 90.

Because a surviving spouse will have to get by on just one Social Security check — either her own or one equal to what her spouse was getting — maximizing at least one benefit makes a lot of sense.

There’s also the idea that Social Security should be used as a kind of longevity insurance. The longer you live, the more likely you are to use up all your other assets, so a bigger check can mean a much better standard of living.

Q&A: Filing and Suspending Social Security

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Dear Liz: I was told by a staff person at our Social Security office that because I am seven years older than my husband (he is 58, I am 65), the “file and suspend” wouldn’t work for me and that because I am waiting until 70 to claim benefits, it was a non-issue.

Is that correct? How does the “lump sum” option figure into the equation? How quickly would I have to file and suspend not to be penalized for the process?

Answer: The “file and suspend” option allows you to file for your Social Security benefit and then immediately suspend that application.

The suspension means your benefit continues to earn delayed retirement credits that boost the amount of your checks 8% each year until age 70, when your benefit reaches its maximum. The file and suspend option is available only once you’ve reached your full retirement age (which is currently 66 but which is rising to 67 for those born in 1960 or later).

There are two main reasons to file and suspend. The first is to allow your spouse to claim spousal benefits based on your work record. The second is to give you the option to change your mind.

If you file and suspend, then discover you need the money, you can either start benefits at the larger amount you’ve earned with delayed retirement credits, or give up those credits and instead receive a lump sum payment of benefits back to the date you suspended your application.

There’s no reason for you to file and suspend for spousal benefits since your husband would have to be 62 before he could file for those checks. By that time, as the Social Security representative points out, you’ll be close to age 70, when you plan to start your benefit anyway.

You could still file and suspend as an insurance strategy — in case you need the money later. If that’s your plan, then doing so at your full retirement age of 66 would give you the option of requesting the largest possible lump sum if you do change your mind.

Decisions about when to start Social Security benefits and how to coordinate benefits when you’re married (or divorced, or widowed) can be extremely complex.

Please read the information the AARP provides on its site about maximizing Social Security benefits and consider using one of the available calculators to explore your options. AARP and T. Rowe Price have free calculators, and you can find more sophisticated options for $40 at sites including MaximizeMySocialSecurity.com and SocialSecurityChoices.com.