Q&A: Why delaying Social Security is the smartest retirement play

Dear Liz: If someone delays applying for Social Security after their full retirement age, the common thought is that their benefit grows by 8% a year until the age of 70. It accrues by that much only if you continue to work, right? I was unceremoniously laid off during the pandemic and I am holding off as long as I can before applying. I will be 67 at the end of this month. But because I am not working, that 8% is not a reality, right?

Answer: Wrong. The 8% delayed retirement credits apply whether you’re working or not. Those credits will help you maximize the benefit you receive for the rest of your life and potentially the rest of your spouse’s life, if you are the higher earner in a marriage. This effect is so powerful that many financial planners recommend their clients tap other resources, such as retirement funds, if it allows them to put off claiming Social Security.

It may help to think of retiring as a separate event from claiming Social Security. Many people link the two, but you can work while claiming Social Security or retire but delay Social Security.

If you did continue to work, your benefit might be increased somewhat by the additional earnings. This typically happens if you had a low-earning year included in the 35 highest-earning years that Social Security uses to calculate your benefit. If you had earned more in 2020 than in one of those previous years, then your 2020 earnings would replace that past year’s earnings in the formula and boost your benefit.

The 8% delayed retirement credit probably will have a much bigger effect on what you ultimately get, though, so don’t fret about any missed opportunities. Just try to delay your application as long as you can.

Q&A: When to claim Social Security

Dear Liz: The common assumption seems to be that, in most cases, it’s a good idea to delay collecting Social Security because the longer you wait, the higher your monthly benefits will be. I will reach my full retirement age of 66 years and 2 months in July. According to the Social Security Administration website, my monthly benefit would get bumped up if I waited to start collecting until 66 years and 8 months, next February. The next bump wouldn’t be for another full year, at 67 years and 8 months. My current plan is to retire in March or April of next year. Is there any reason I shouldn’t start collecting my benefit as soon as I get to the 66 years and 2 months threshold?

Answer: It’s not clear what you were looking at, but your Social Security benefit earns delayed retirement credits every month you put off your application after your full retirement age. Those credits add up to 8% annually and increase your checks for the rest of your life.

Social Security can be complicated, and making the right claiming decision isn’t always easy, but your choice can have a huge impact on your future financial security. Please consult a fee-only, fiduciary financial planner before you retire so you can be confident you’re doing the right thing.

Q&A: Social Security and spousal benefits

Dear Liz: My wife and I are both 66 and have not yet filed for Social Security. I don’t plan on filing until I am 70. Is my wife able to file for her own retirement benefit now, which is much lower than mine? And then when I file at 70 years, can she switch to the spousal benefit rate, without any type of penalty?

Answer: Yes and yes. This is one of the few instances in which people can still switch from one benefit to the other.

If you had already applied, your wife’s retirement benefit would be compared to her spousal benefit and she would get the larger of the two amounts. Since you haven’t applied, however, no spousal benefit is available. Your wife could receive her own benefit and then switch to the larger spousal amount once you apply at 70, when your own benefit has maxed out.

Also, as long as your wife has reached her full retirement age (66 years and two months, if she was born in 1955), she won’t face the earnings test if she continues to work. That test otherwise reduces benefits by $1 for each $2 earned over a certain amount, which in 2021 is $18,960.

Q&A: Don’t rush to start collecting Social Security

Dear Liz: Having read your advice on Social Security numerous times, I’m having a heck of a time encouraging a friend who reached full retirement age last year to start collecting her benefits. She said her Social Security isn’t enough to live on and she needs to work two more years before collecting. She said if she waits to apply that it would increase her Social Security by $400 a month. I’ve informed her that she can both collect and continue to work without penalty because she has reached full retirement age. She also would still get an annual increase based on her earnings, in addition to the annual cost-of-living increase. She won’t let me know how much her Social Security would be now, and I haven’t asked, but I’ve told her this is extra money she could invest.

Answer: Are you sure you were reading this column?

Copious research shows that most people are better off waiting as long as possible to file for Social Security. Given life expectancies at 65, most who make it that far will live beyond the break-even age where the larger checks they’ll get will more than offset the smaller ones they pass up.

Waiting is particularly important for the higher earner in a couple, since that determines what the survivor gets to live on. Waiting is also important for single people, since they don’t have a partner’s income to help. Single women have an especially high risk of finishing their days in poverty, which means maximizing their Social Security is usually the right call.

Besides, there’s no risk-free investment that would guarantee her an 8% annual return. That’s what she’s getting by waiting to start her Social Security benefit (at least until age 70, when the benefit maxes out). She might be able to generate similar returns with stock market investments, but she also could lose her shirt.

Something else to consider: Benefits are based on our 35 highest-earning years. If she’s making more now than she did in one of those previous years, she could be boosting her benefit even more by continuing to work. People who took time off to raise families or who had a history of low wages or part-time work often see a bigger benefit by continuing to work as well as waiting to apply.

Q&A: A young mother died in a car accident. Can her widower get survivor benefits?

Dear Liz: My grandson’s wife, 22, was killed in a motor vehicle accident just after her birthday. My grandson, 26, was left with a 2-year-old and 9-month-old. Due to COVID-19, he was staying home with the children, and she was working at a fast-food restaurant. We thought there would be Social Security survivor benefits, but he has been denied because she did not have 10 quarters of payroll. Is there an appeal for this denial? She was too young to have the required quarters.

Answer: Given her age, the family could be out of luck if she only recently started working. But there is a special rule that applies if she was working at jobs that paid into Social Security for at least a year and a half before her death.

With survivor benefits, the length of time someone needs to work typically varies according to age. To generate survivor benefits, the number of years you need to work at a job that pays into Social Security is — at most — 10 years. Each quarter of work typically generates one credit, and no more than 40 credits are needed. The younger someone is when they die, the fewer credits are needed. People, however, generally need at least six credits, and only credits earned after someone turns 22 count toward the total.

But there’s an exception. Survivor benefits can be paid if the worker earned at least six credits in the three years before death. So if your grandson’s wife worked at least 18 months before her terribly premature death, survivor benefits could be paid to her minor children and to the surviving spouse who is caring for them, said William Meyer, chief executive of Social Security Solutions, a claiming strategy site.

The benefits would be based on her earnings history, so the amounts are unlikely to be substantial, Meyer noted. Still, something would be better than nothing.

All Social Security decisions can be appealed. If your grandson already filed an application and was denied, the denial letter would explain his appeal rights, Meyer said. If he just received a verbal denial, he should go ahead and file a formal application to start the process. If his wife had earnings that might not yet have been reported, he can provide her last pay stubs or W-2 forms when filing the application.

“With there being a concern about her having enough qualifying quarters, as well as low earnings, that could be pretty important,” Meyer said.

Q&A: Age minimum for survivor benefits

Dear Liz: I am 53 and Social Security is giving me a hold time for my widow support. What should I do?

Answer: The only thing you probably can do is wait.

Survivor benefits are normally only available once you turn 60. You can start as early as age 50 if you are disabled or at any age if you are caring for the deceased worker’s minor children.

Q&A: More about spousal benefits

Dear Liz: You recently wrote that a wife could apply for Social Security at 62 and then switch later to her spousal benefit. I do not believe this is accurate. Once the wife starts drawing, she is committed.

Answer: Typically, that’s true. When someone applies for Social Security, their retirement benefit is compared with their potential spousal benefit and they would get the larger of the two amounts. If the spousal benefit is larger, they would technically get their own benefit plus a supplemental amount.

Because they had already started getting their own benefit either way, they couldn’t switch later — there’s nothing else to switch to. (In the past, someone could start a spousal benefit and leave their own benefit to grow, but that’s no longer an option.)

For a spousal benefit to be available, however, the husband must have already started his retirement benefit. In this case, he would not have done so. That means the only benefit the wife could qualify for when she applies is her own. Once he applies at age 70, a spousal benefit would be triggered. If that amount is larger than what she was getting, she would get a supplement on top of her retirement benefit, as described above.

Q&A: Survivor vs. retirement benefits

Dear Liz: I was 21 and my husband was 69 when we got married. He died in 1992 after 13 years of marriage. Our young son and I received survivor benefits for years. I got remarried in 2000 and divorced in 2008. When I reach my full retirement age of 66 years and 8 months, could I still claim survivor benefits from my first husband?

Answer: Yes, although you may want to start them sooner.

If your second marriage had lasted, you wouldn’t have been eligible for survivor benefits based on your first husband’s earnings record. Widows and widowers who remarry before age 60 aren’t eligible for survivor benefits.

Since that marriage ended, though, you were eligible to begin benefits at age 60. You are also free to remarry at 60 or later without losing those benefits.

Starting before your full retirement age for survivor benefits, however, means your check would be reduced and also subject to the earnings test, which reduces your benefit by $1 for every $2 you earn over a certain amount ($18,960 in 2021).

As mentioned in a previous column, your full retirement age for survivor benefits is different from your full retirement age for retirement benefits. Since you were born in 1958, your full retirement age for survivor benefits is four months earlier, or 66 years and 4 months.

In most cases, starting a Social Security benefit early locks you into a smaller check permanently. With survivor benefits, though, you also have the option of switching to your own retirement benefit later, if it’s larger. The ability to switch benefits is severely limited with Social Security, but survivor benefits remain the exception.

Being eligible for survivor benefits complicates claiming decisions, so consider using a more sophisticated claiming calculator such as Maximize My Social Security or Social Security Solutions to determine how best to file.

Q&A: For Social Security benefits, playing a waiting game really pays off

Dear Liz: My wife and I are both 63. She recently applied for Social Security. I will apply for mine when I am 70, at which time she will apply for a spousal payment, which will be half of mine. Last night as I was in bed I thought, “What if I die before 70?” Can she still wait until what would be my 70th year to collect my maximum benefit?

Answer: Your wife will get a larger survivor benefit because you delayed. If you die after she reaches 66 years and two months, however, she won’t get a larger check by waiting.

Social Security rules can be mind-numbingly complicated, and they’re different for different types of benefits, so this will take some explaining.

The three types of benefits that matter for this discussion are retirement benefits, which are based on your own earnings record; spousal benefits, which are based on a spouse’s earnings record while both partners are alive; and survivor benefits, which are based on a spouse’s earnings record after his or her death.

These benefits may be reduced if you start them before your “full retirement age,” which is different for survivor benefits than for retirement and spousal benefits, said William Meyer, founder of Social Security Solutions, a claiming-strategies site.

If your wife was born in 1957, then her full retirement age for retirement or spousal benefits is 66 years and 6 months. For survivor benefits, it’s 66 years and 2 months.

The full retirement age for retirement and spousal benefits is 66 for those born between 1943 and 1954. People born between 1955 and 1959 have full retirement ages ranging from 66 and 2 months to 66 and 10 months. Those born in 1960 and later have a full retirement age for retirement benefits of 67.

With survivor benefits, the schedule is pushed back two years. Survivors born between 1945 and 1956 have a full retirement age of 66. Survivors born from 1957 to 1961 have full retirement ages ranging from 66 and 2 months to 66 and 10 months. Survivors born in 1962 and later have full retirement ages of 67.

The reason you’re waiting to start retirement benefits until 70 is probably because you know your benefit will increase 8% for each year you delay between your own full retirement age and 70, when retirement benefits max out. The 8% per year increases are called delayed retirement credits. As you likely know, delaying is particularly important for the higher earner in a couple because that benefit determines what the survivor gets.

If you start retirement benefits before your full retirement age, your wife’s survivor benefit will be based on what you would have gotten at your full retirement age. If you delay your retirement benefits beyond your full retirement age, your wife’s survivor benefit will reflect any delayed retirement credits you have earned.

Your retirement benefit doesn’t earn delayed retirement credits after you’re dead, however. And your wife won’t earn delayed retirement credits on her survivor benefit. Once she reaches her full retirement age for survivor benefits, there’s no point in further delaying her switch from her retirement benefit to her survivor benefit.

Delayed retirement credits also don’t apply to spousal benefits. Her maximum spousal benefit would be half of your benefit amount as of your full retirement age. Because she started her own benefit early, however, her spousal benefit would be reduced.

The penalties for starting early are significant enough that it’s usually best to wait, and your wife may still have a “do over” option. If it’s been less than 12 months since she applied for benefits, she can repay any benefits she received and withdraw her application. That will undo her previous claiming decision and allow her benefit to keep growing. The claiming calculators and experts at Social Security Solutions and Maximize My Social Security can help you determine if that might be the best course.

Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.

Q&A: The perils of procrastination can be huge where finances are concerned

Dear Liz: My husband was killed in 2016 and was self-employed for the last three years of his life. I hadn’t gotten around to filing his taxes until earlier this year in June. At first the Social Security rep told me we were approved for survivor benefits but within the hour changed her decision. She said that since it’s been more than three years, the IRS won’t report his credits to Social Security and that is what ultimately disqualifies my children and me. I’m so confused and feel like my stomach just dropped to the floor.

Answer: Understandably. This appears to be one of those awful cases where putting something off has profound, irreversible consequences.

Survivor benefits are monthly checks paid to a worker’s minor children, typically until they turn 18. Surviving spouses normally can start benefits at age 60, but they can start at any age if they’re caring for the worker’s minor children. In that case, the caretaking spouse qualifies for benefits until the youngest child turns 16.

Limits vary, but what a family can receive is generally equal to between 150% and 180% of the worker’s basic benefit. The average survivor benefit for children is more than $800 a month, and the average for a caretaking mother or father is over $900 a month.

No worker needs more than 40 credits, which requires 10 years of work, to qualify a family for survivor benefits. The number of credits varies by age, so younger people need fewer credits.

Even if your husband didn’t have the required number of credits for his age, survivor benefits could have been paid if he had worked for at least 18 months in the previous three years.

But there is a deadline for self-employed taxpayers to have their incomes counted toward Social Security credits, which they do by filing their federal tax returns. The deadline is three years, three months and 15 days after the end of the calendar year in which the income is earned, said economist and Social Security expert Laurence Kotlikoff of MaximizeMySocialSecurity.com.

The deadline for reporting your husband’s 2016 income passed in March, while the deadlines for his 2014 and 2015 income passed in March 2018 and March 2019, respectively.

Appeal the decision because it’s possible that your husband earned enough other credits to qualify your family for benefits even without his last few years of work. But steel yourself for the likelihood that you’ve lost thousands and perhaps tens of thousands of dollars of potential benefits.