Q&A: When to start Social Security

Dear Liz: I’m confused by your answer to the question about starting Social Security too early. You wrote that someone who decides they made a mistake can suspend the benefit once they reach full retirement age. From the description, it sounds like there is no penalty for this option, so everyone should do it! This sounds too good to be true, so I (and maybe others) might be misinterpreting this. It sounds like you get early benefits from 62 to full retirement age, then the full delayed benefit at 70.

Answer: Keep in mind that your Social Security benefit is permanently reduced when you start it early. The earlier you start, the bigger the reduction.

Social Security allows you to suspend your benefit once you’ve reached full retirement age (currently between age 66 to 67). While it’s suspended, your benefit will receive delayed retirement credits that will increase your checks by 8% each year until age 70. Your benefit also continues to receive cost of living adjustments, whether you’re currently receiving it or not.

A suspension can help you offset some of the reduction you incurred by starting early, but you’ll never get as much as if you’d waited until age 70 to apply.

Q&A: Delaying Social Security benefits

Dear Liz: I reached my full Social Security age (66) in December 2020. I’ve been waiting until age 70 to start benefits so I can get the 8% annual delayed retirement credits and maximize my benefit. However, if the 2023 cost of living increase will be 10.5%, should I go ahead and start benefits this year, at age 68? Does someone need to be on Social Security for a full year before being eligible for the COLA, or would one month be enough?

Answer: Your benefit will get the cost of living increase whether you’ve started receiving checks or not. In fact, it’s been getting those increases since you turned 62 and became eligible. So applying now just means giving up two years’ worth of delayed retirement credits.

Q&A: Don’t rush to collect Social Security

Dear Liz: I would like you to explain to us retirees why we should delay taking Social Security.

I have two tax preparers — and other people — who say delaying is a terrible idea. I’m in my 20th year of collecting Social Security, and I can assure you that people who delay are making a dreadful mistake. Please check this out!

Answer: Your tax preparers may have had a point 20 years ago, but a lot has changed since then, including life expectancies and prevailing interest rates. It’s unfortunate if your advisors haven’t kept up with copious research showing that delaying Social Security makes sense for most recipients.

One issue of particular interest to tax pros is the “tax torpedo.” That’s a sharp rise and then fall in the marginal tax rate caused by taxation of Social Security benefits. Researchers found the tax torpedo could nearly double the marginal tax rate for many middle-income families. People in the 22% federal tax bracket, for example, could see their marginal tax rate jump to 40% on a portion of their income.

Two decades ago, this would have been an issue for fewer taxpayers because most did not owe income tax on their Social Security benefits. Now more than half pay taxes on their benefits because Congress hasn’t updated certain income limits to reflect inflation.

The researchers found that delaying the start of benefits until age 70 and tapping retirement funds instead could reduce the tax torpedo’s effect. This approach not only maximizes Social Security benefits but also reduces the minimum amounts that must be distributed starting at age 70½. For more details, you can point your tax advisors to the July 2018 issue of the Journal of Financial Planning.

The National Bureau of Economic Research also has numerous papers on Social Security-claiming strategies, including “Recent Changes in the Gains from Delaying Social Security,” “Leaving Big Money on the Table: Arbitrage Opportunities in Delaying Social Security,” “The Power of Working Longer” and “The Decision to Delay Social Security Benefits: Theory and Evidence.”

Q&A: Social Security benefits for spouses can pump up household income

Dear Liz: I have a friend who has a selfish, controlling husband. When talking with her recently, she told me she got only $300 a month from Social Security based on her work history while her husband gets $1,800. I told her she should be getting $900, half of his monthly amount, as a spousal benefit. I guess he thought if she got more it would reduce his check. I told her the $900 would be in addition to the $1,800 he gets.

She has been collecting her smaller benefit for seven or eight years. Does she have any recourse? I doubt he would take her to the Social Security office but maybe her daughter would.

Answer: It sounds like the husband’s greed has cost this household tens of thousands of dollars in lost benefits.

Spousal benefits (and divorced spousal benefits) do not reduce the primary worker’s check. This benefit, as you correctly told your friend, is available in addition to what her husband gets. Spousal and divorced spousal benefits can be up to half of the primary worker’s benefit. The amount that spouses and divorced spouses get is reduced if they start benefits before their own full retirement ages.

Your friend can’t get back the years of benefits she missed out on, but she should ask the Social Security Administration to switch her to the larger benefit. She can contact the administration at 1-800-772-1213.

The death of a student loan co-signer could have financial ramifications for the borrower. (Colleen Riemer / For The Times)

Q&A: Understanding Social Security benefits

Dear Liz: I am 62. My friend (also 62) is considering when to take Social Security. She understands, from reading a finance book, that Social Security payments change only at 62, 66 and 70. She thinks if you don’t start at 62 when your benefit is, for example, $1,000, that it will stay $1,000 until age 66 when it bumps up to $1,400, or whatever. I thought that each month you delay would increase the payment you would receive. So if you get $1,000 at 62, you would get $1,005 at 62 and one month, $1,011 at 62 and two months, and so on. The Social Security site seems to support me. Can you clear this up for us?

Answer: You are correct. Your friend either misunderstood what she read or was unfortunate enough to find an author who didn’t know how Social Security works.

There are three important ages with Social Security: 62, the earliest you can begin retirement or spousal benefits; your full retirement age, which is currently 66 and rising to 67 for people born in 1960 and later; and 70, when your benefit maxes out.

Full retirement age is an important inflection point. Instead of having your checks reduced for an early start, you can begin earning delayed retirement credits that can boost your benefit by two-thirds of 1% each month, or 8% per year.

Full retirement age also marks the point at which Social Security benefits no longer are reduced if a recipient continues to work. Prior to full retirement age, benefits are reduced by $1 for every $2 earned over a certain limit ($16,920 in 2017). Also, those who started Social Security early have the option of suspending their benefits at full retirement age to allow them to begin growing again by earning delayed retirement credits. Those who suspend benefits can restart them at any time. Otherwise, suspended benefits will automatically restart at age 70.

Q&A: Social Security benefits for children

Dear Liz: My husband was 51 when our last child was born, meaning that our son was only 15 when my husband turned 66. Because I was working full time and we had sufficient income, we adhered to the traditional advice of delaying my husband’s Social Security payment. However, when he filed this past year at age 69, we learned that our son is eligible to receive a considerable monthly amount. Fortunately, the Social Security office was able to backdate my husband’s application for six months, but nevertheless we lost out on several thousand dollars by not filing when my husband was 66. Although his monthly payout would have been lower, the accumulated difference would have been considerable with our son’s payment. Therefore, although most retiring people do not have minor children, I believe that all financial advisors should be aware of this option and that those parents should plan carefully to maximize their payout.

Answer: More than 4 million children receive Social Security benefits because their parents are disabled or deceased or have reached retirement age. A child can receive up to half the parent’s disability or retirement check. If the parent dies, a child’s survivor benefit can be up to 75% of the parent’s basic benefit. (There’s a limit to how much a family can receive, though, which ranges from 150% to 180% of the parent’s check.) Benefits typically stop at age 18, although they can continue until two months past the child’s 19th birthday if the child is still in high school. Benefits can continue indefinitely if the child is disabled.

Children’s benefits can be subject to the same earnings test that reduces Social Security retirement checks if the parent claims early and continues working. So it often makes sense to wait to start benefits until the parent is full retirement age, currently 66, when the earnings test no longer applies. You’re right that delaying beyond that age may not make sense when the child is young enough to receive benefits, since they can considerably boost a family’s total benefit.

Having minor children at retirement age definitely complicates the calculation of when to take benefits. Many free Social Security claiming calculators don’t let you include minor children in your calculation, so if you’re in this situation it can be worth paying $40 to get a customized claiming strategy from calculators such as MaximizeMySocialSecurity.com.

Q&A: Social Security benefits

Dear Liz: My husband and I will be retiring at the end of 2016. He will be 70 and will start taking his Social Security; I will be 65 soon after.

Thanks to your advice, I plan to sign up to get 50% of his Social Security benefit when I’m 66 (my full retirement age) and switch to my own benefit later.

But will my own Social Security be less because I won’t be earning any money between age 66 and 70? If so, would I be just as well off taking my own benefit at 66 or should I still wait until I’m 70? Money needs will not be an issue.

Answer: Your benefit will grow 8% every year you put off filing for your own retirement checks between age 66 and age 70. That’s a powerful incentive to delay, especially when you can get spousal benefits in the meantime.

If you did work after age 66, your benefit might increase a bit more depending on how much you earned.

Your Social Security benefit is based on your 35 highest-earning years, so a higher-earning year late in life could replace a lower-earning year earlier in life.

Your continued employment would have the biggest effect if those lower-earning years showed no or very little income.

Tuesday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: How to negotiate your medical bills. Also in the news: How to file a financial aid appeal, gifts to set graduates off on the right financial foot, and ways to maximize Social Security benefits.

7 Tips for Negotiating Medical Bills
You don’t have to pay $7.00 for that aspirin.

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Don’t take no for an answer.

5 Gifts to Set Graduates Off on the Right Financial Foot
It’s graduation gift season!

3 Ways to Maximize Social Security Benefits
Getting the most from your earnings.

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Making up for lost time.

Q&A: Social Security and marriage

Dear Liz: Each year, I track my estimated Social Security benefit on the SSA.gov website. At full retirement age of 67, my estimated benefit is $1,504. Is it true that my actual benefit may be reduced by 50% since I am married?

Answer: Good heavens, no.

If you’re married, your spouse may be entitled to a benefit that equals up to half of your check. But your check is not reduced to provide this spousal benefit. Instead, the Social Security Administration typically would calculate the benefit your spouse earned on his own, compare that to his spousal benefit, and then give him the larger of the two amounts.

If you have ex-spouses from marriages that lasted at least 10 years, they too could be entitled to spousal benefits. But those benefits wouldn’t reduce your check or your husband’s.

Two out of five regret taking Social Security early

Sad lonely pensive old senior womanA substantial number of people file for Social Security benefits as soon as they’re eligible. Many live to regret their decision.

Two out of five early retirees wish they had waited, according to a recent survey by the Nationwide Financial Retirement Institute, an arm of Nationwide Mutual Insurance. Here’s why, according to an article in the AARP Bulletin:

When you look at the differences in their monthly payout, you can understand their remorse. Those who took their benefit early report an average monthly payment of $1,190. Those who collected it at their full retirement age have an average $1,506 monthly payment. And those who delayed collecting their benefit report an average monthly payment of $1,924 (or $734 more than the early payout). The difference between the lowest and the highest monthly checks over 20 years comes to a whopping $176,160.

I suspect the longer folks live, the more they’re likely to regret rushing to grab their benefits. And this is an especially critical issue for women, since we tend to live longer and often have smaller Social Security benefits than men.

Financial advisors typically understand the huge potential benefits of waiting a few years to start Social Security checks, and many recommending tapping other resources, including retirement funds, if that’s the only way to delay. But many people apply for Social Security without ever checking in with an advisor. Many rely on friends and family for advice–not the best course with something as complicated as Social Security claiming strategies. The worst reason for starting early? The unfounded fear that Social Security will “go away” if they don’t grab their checks now. That can be a costly misconception.

I have a lot of posts on this blog that can help you make better claiming decisions; just type “Social Security” into the search box above. Here’s a link to one post that has important information, as well as links to recent research that underscores the importance of waiting to claim.