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.

Thursday’s need-to-know money news

Today’s top story: If you need to find tax help, try DIY first. Also in the news: Can you still buy a used rental car at a bargain, the mortgage outlook for April, and when to expect your delayed stimulus check if you’re a Social Security recipient.

If You Need to Find Tax Help, Try DIY First
These resources and answers to common questions may help this tax season, as the IRS continues to be overwhelmed.

Can You Still Buy a Used Rental Car at a Bargain?
What to consider if you’re looking to purchase a former rental car.

Mortgage Outlook: April Rates Begin to Grow
Rates will rise on immunity euphoria.

When to Expect Your Delayed Stimulus Check, If You’re a Social Security Recipient
Expect payments by April 7 for most programs.

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: 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.

Q&A: Her dead ex’s kids can’t dictate benefits

Dear Liz: My husband and I were living apart but not legally separated when he passed away. He was receiving disability benefits. His children, who are grown, tell me I am not eligible for widow or survivor benefits and that only they can collect his benefits. I am disabled myself and 51. Do their claims hold any weight? Could he have removed me as a recipient?

Answer: No and no. The children are wrong, not just about your eligibility for benefits but also about their own. Social Security survivor benefits typically aren’t available to children over 18, but they are available to widows and widowers starting at age 60, or starting at 50 if the spouse is disabled.

As long as you weren’t divorced, you would be eligible for survivor benefits. And if you had divorced, you could still be eligible for survivor benefits if the marriage lasted at least 10 years.

You can call the Social Security toll-free number at (800) 772-1213 for more information.

Q&A: A young widow seeks help with Social Security survivor benefits

Dear Liz: My husband died at 30, making me a widow at 29. I did receive Social Security survivor benefits for our underage children, but what, if anything, am I entitled to as his wife? At the time of his death, we were living separately, although we were still legally married.

Answer: The earliest a widow or widower can get survivor benefits is typically age 60, unless they are disabled, when survivor benefits can begin at 50. Starting benefits before their own full retirement age of 66 to 67 means accepting a reduced payment, but widows and widowers have the option of switching to their own retirement benefit later. (Retirement benefits begin at a reduced amount at age 62 and reach their maximum at age 70.)

Like other Social Security benefits, survivor benefits also are subject to the earnings test if you start them before full retirement age. The earnings test reduces your benefit by $1 for every $2 you earn over a certain amount, which in 2020 is $18,240.

You mentioned receiving survivor benefits for your children, but you probably also received benefits then. A spouse caring for the children of a deceased worker is entitled to survivor benefits until the youngest of those children turns 16. (A child’s survivor benefits can continue until age 18, or 19 if the child is still in high school, or indefinitely if they are disabled and the disability began before age 22.) Each family member can receive up to 75% of the deceased worker’s benefit, but there’s a maximum any household can receive based on one worker’s earnings record. The limit varies but is generally 150% to 180% of the worker’s benefit.

If you had been divorced rather than separated when he died, you would still have been entitled to survivor benefits as the caretaker of underage children, no matter how long the marriage lasted. You would only receive regular survivor benefits at 60, however, if your marriage had lasted at least 10 years.

Q&A: His new job won’t hurt future Social Security benefits

Dear Liz: I am 67 and currently receiving a Social Security survivor’s benefit based on my deceased spouse’s work record. At 70, I plan to switch to my own Social Security retirement benefit. I’ve been offered a part-time position with a charity that I’d like to accept. However, I am concerned about how it will affect my Social Security. If I show earned income this year, it will knock off one of my 35 highest-earning years. If I stay in this position for many years, as I hope to do, each year could knock off a high-earning year. I’ve offered to do the job for free, but that is not an option for them. My high-earning years are in the $55,000 range, while this job pays maybe $6,000 a year. Am I wrong? Is not working reducing my benefit, and should I switch to my Social Security now?

Answer: Social Security can be surprisingly complicated, which is why it’s so easy to get the facts wrong and make unfortunate choices.

“Highest earning” means just that. A current year can’t “knock off” a previous year unless you make more than you did in that prior year. Only if you make more than one of those prior years will the older year be dropped from the formula. And if that happens, your benefit would go up, not down.

So take the job, enjoy giving back to your community, and allow your own benefit to continue growing by 8% each year until it maxes out at age 70.

Q&A: Older parents and retirement: What about child benefits?

Dear Liz: I am trying to decide whether to take Social Security at my full retirement age (66 years and four months) or wait and take it at 70. I am 64 and have two children, 13 and 11. My older child could get the child benefit for 24 months while my younger one would receive it for 41 months. Currently I am scheduled to receive about $2,600 a month at full retirement age or $3,500 at 70. My family maximum is $4,668 per month. I am having a hard time finding out what each dependent would earn monthly. Also, when my older child turns 18, does my younger child’s payment increase?

Answer: Starting Social Security earlier than age 70 means giving up the delayed retirement credits that otherwise would boost your checks for the rest of your life, and potentially those of a surviving spouse. As mentioned in an earlier column, though, child benefits complicate the math that typically favors waiting to claim Social Security.

Once you start your own Social Security benefit, each eligible child could get an amount up to 50% of your benefit. Eligible children are those who are unmarried and younger than 18, or under 19 if they’re still in high school, or 18 or older with a disability that began before age 22.

There’s a maximum a family can receive based on one worker’s earning record, however. The family maximum is 150% to 180% of the worker’s benefit. If your family’s total benefit would exceed that maximum, the children’s checks would be reduced, but yours would stay the same.

If you were receiving $2,600 a month, and your family maximum is $4,668, your children would split the remaining $2,068 and get $1,034 apiece. Once your older child is no longer eligible, your younger child’s benefit would increase to equal 50% of what you receive ($1,300, plus any cost of living adjustments).

If you were to start your benefit now, before your full retirement age, these checks would be subject to the earnings test that reduces the benefit by $1 for every $2 earned over a certain limit, which is $18,240 in 2020. The earnings test doesn’t apply after full retirement age.

Free Social Security claiming calculators typically don’t include child benefits as a variable, so you’d be wise to invest $20 to $50 in a more sophisticated calculator, such as Maximize My Social Security or Social Security Solutions.