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Dear Liz: If someone is currently receiving Social Security disability payments, does the monthly dollar benefit change when they reach age 62 or at full retirement age?
Answer: Social Security disability payments convert to a retirement benefit when the recipient reaches their full retirement age, which is currently 67. The dollar amount doesn’t change, although recipients continue to get cost-of-living adjustments.
Dear Liz: I want to apply for a benefit based on my spouse’s Social Security but how long do we have to have been married? I was not eligible until the Social Security Fairness Act changed the rules. We have been married for four years in May. I am not receiving Social Security benefits since I worked for over 30 years for the government and do not have enough credits to qualify based on my earnings.
Answer: You typically need to be married for “one continuous year” before applying for a spousal benefit, according to the Social Security Administration.
Had you divorced, the rules would be different. Divorced spousal benefits require the marriage to have lasted at least 10 years, and two years must have passed since the divorce.
For those who don’t know, the Social Security Fairness Act repealed the windfall elimination provision and the government pension offset that reduced or eliminated Social Security benefits for people who received pensions from jobs that didn’t pay into Social Security.
The Social Security Administration says most affected people will see their adjusted payments starting in April. Those who never applied for Social Security because of the old rules can do so now.
This week’s top story: Smart Money podcast on your Social Security benefits, and tax efficient retirement investing. In other news: Mortgage rates could slip lower in May, if a brokerage sweep account is a good place to earn interest or not, and inflation maybe starting to behave.
Smart Money Podcast: Your Social Security Benefits, and Tax Efficient Retirement Investing
This week’s episode starts with a discussion about Social Security.
Mortgage Rates Could Slip Lower in May
Rates on home loans could be on a gradual downward slope.
Is a Brokerage Sweep Account a Good Place to Earn Interest?
Interest rates are going up — including those paid by brokerage sweep accounts. Here’s what experts say about using a sweep account for savings.
Is Inflation Finally Starting to Behave? New Data Says Maybe
Data from the U.S. Bureau of Economic Analysis suggests inflation is still rising but may be starting to cool.
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.
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.
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.”