Q&A: Social Security isn’t going broke

Dear Liz: You have addressed Social Security in your column recently and detailed the benefits to waiting until age 70 to take payments. I read that Social Security funds are expected to run out around 2035. At that time I’ll be 76 and would only get six years of benefits versus 13 years if I start at age 62. Do you still think it is wise to wait on benefits as Social Security may go away?

Answer: Social Security isn’t going anywhere. What’s being depleted is its trust fund, which is used to supplement the taxes Social Security collects to pay benefits. This trust fund is scheduled to be out of money in 2031, according to a new Congressional Budget Office estimate that takes into account the effects of the pandemic. Even if the fund is depleted, however, the system will still collect enough in taxes to pay 76% of promised benefits.

So benefits won’t stop, and it’s highly unlikely Congress would allow benefits to be cut for retirees and near retirees. Social Security is a hugely popular program, and such cuts would be politically unpopular, to say the least, which is why most experts predict that lawmakers will fix the system before that happens.

If you allow yourself to be panicked into starting benefits early, on the other hand, you’re permanently reducing your benefit by 30%. If you’re married and are the higher earner, you’d also be locking in a lower survivor benefit. A lower Social Security benefit can have a huge effect on your standard of living in retirement, so make sure you understand the facts about the system before making a decision you may live to regret.

Q&A: A felony doesn’t preclude you from Social Security benefits

Dear Liz: If someone has a felony, is it true they cannot claim Social Security retirement benefits? If so, what is the best option: a Roth IRA or a brokerage account? How do they get started without a lot of money?

Answer: A felony does not prevent you from claiming Social Security in the future if you work enough years to qualify for benefits. If you were already receiving retirement benefits when you were convicted, your payments would typically be suspended while you were incarcerated but resumed when you got out.

That said, Social Security usually isn’t enough to live on, so you’ll want to have money in retirement accounts as well. An IRA or a Roth IRA are both good options. The IRA reduces your taxes upfront while Roth IRAs reduce your taxes in the future. Low- and moderate-income taxpayers also can get a tax credit, called the Savers Credit, for retirement contributions.

If you don’t have a lot of money to invest, look for brokerages that have low fees and no account minimums, such as Fidelity, ETrade, TD Ameritrade and Charles Schwab, among others.

Once you open the account, you’ll need to figure out how to invest.

If you’re new to investing, consider using target date funds. These investments are labeled by year, and you pick the year that’s closest to your future retirement. The fund does the rest of the work such as picking the stocks and bonds, rebalancing the mix and getting more conservative as the retirement date approaches.

Robo-advisors such as Betterment or SoFi are another low-cost solution that does most of the work for you.

Q&A: Why it makes sense to play the Social Security waiting game

Dear Liz: I’m concerned that you don’t make it clear that in order for a Social Security benefit to grow, a person needs to keep working and earning the same income that they’ve been making. I’ve retired recently and am lucky enough to have a pension to live on. I talked to someone at the Social Security office recently. She recommended that I go ahead and start drawing my benefits now because there will be minimal growth for the next seven years if I’m not working. She says lots of people think that they should wait, no matter what. However, she says it doesn’t make sense if you’re not working. Even my personal financial advisor was recommending that I wait, but the person at the Social Security office convinced me otherwise. When you go on Social Security’s website to check your benefits, all the estimates are based on continued employment at your current salary. There’s no way to check and see what your estimates are if you are working less or not at all. I think it’s important to give the whole story.

Answer: Yes, it is, and you didn’t get the whole story — or even correct information — from the Social Security employee who convinced you to ignore your financial advisor.

Benefits grow by 5% to 7% each year you delay starting between age 62 and your full retirement age, which is between 66 and 67, depending on the year you were born. After your full retirement age, your benefit grows by 8% each year you delay until age 70, when it maxes out. That guaranteed growth happens regardless of whether you continue working or not.

You are correct that Social Security’s estimates of the dollar amount you’ll receive assume you will continue working until you apply, so it’s possible that your benefit will be somewhat lower when the agency actually calculates your first check. But that doesn’t mean you won’t benefit from the delay — you just won’t benefit quite as much as they’re estimating.

If you want to get a better idea of what your benefit will look like without additional earnings, you can use an online tool like Social Security Solutions or MaximizeMySocialSecurity.

Your financial advisor probably has access to similar tools, as well as a wealth of research about the best claiming strategies that make it clear most people are better off delaying. Plus, your advisor knows the details of your personal financial situation.

The woman at the Social Security office did not. Even if she had her facts straight, she should not have been giving you advice about maximizing your benefits.

You may still have time to rectify this mistake. You can withdraw your application within 12 months and pay back the money you received to reset the clock on your benefits. If it’s been longer than 12 months, you can suspend your benefit once you reach your full retirement age and at least get the 8% delayed retirement credits for a few years.

Q&A: Social Security ‘child benefit’ math

Dear Liz: I just turned 62 and I have 3 children, ages 11, 13 and 15. I understand that starting Social Security now means my benefit is permanently reduced. Should I delay or take it now, since my children could get benefits?

Answer: The so-called “child benefit” complicates the math that usually favors delaying the start of Social Security.

Each of your children could get a monthly check equal to half your benefit because they’re under 18 and presumably unmarried. (Unmarried children who are under 19 but still in high school, or 18 or older with a disability that began before age 22, also can qualify.) There’s a family maximum that limits the total that can be paid to any household, which ranges from 150% to 180% of the parent’s full benefit amount.

Your kids can’t receive these benefits unless you’re receiving yours, however. Applying before your own full retirement age, which is 66 years and 8 months, permanently shrinks your check and subjects the family benefits to the earnings test if you’re still working. The earnings test reduces your benefit by $1 for every $2 you make over a certain limit, which this year is $18,240. The earnings test goes away after you reach full retirement age.

If you’re married, your claiming strategy also needs to consider your spouse. A reduced benefit could affect the survivor benefit one of you will have to live on when the other dies.

With so many variables to consider, you’d be smart to consult a Social Security claiming strategy site such as MaximizeMySocialSecurity or Social Security Solutions. These services aren’t free, but an investment of $20 to $50 could result in thousands more over your lifetime.

Friday’s need-to-know money news

Today’s top story: Why taking Social Security early costs too much. Also in the news: Student loans still cover living costs with classes online, why you should renew your passport right now, and how millennials and Gen Z are using TikTok to learn about personal finance.

Why Taking Social Security Early Costs Too Much
Longer lifetimes make the penalty for taking Social Security early, and the reward for delaying, too high.

College Going Online? Student Loans Still Cover Living Costs
Your cost of attendance might be different if you’re learning remotely due to COVID-19.

Why you should renew your passport right now
Try to beat the long lines.

How millennials and Gen Z are using TikTok to learn about personal finance
Sharing tips they didn’t learn in school.

Why taking Social Security early costs too much

Starting Social Security early typically means getting a smaller benefit for the rest of your life. The penalty is steep: Someone who applies this year at age 62 would see their monthly benefit check reduced by nearly 30%.

Many Americans have little choice but to accept the diminished payments. Even before the pandemic, about half of retirees said they quit working earlier than they’d planned, often due to job loss or health issues. Some have enough retirement savings to delay claiming Social Security, but many don’t. And now, with unemployment approaching Depression-era levels, claiming early may be the best of bad options for older people who can’t find a job. In my latest for the Associated Press, why it pays to wait with Social Security.

Q&A: The benefits of delaying Social Security

Dear Liz: I retired and started collecting Social Security at 62. My husband is currently 68 and plans to retire next year. I called Social Security before I retired and they told me that I could collect Social Security at 62 and when my husband retired, I could collect my own Social Security or half of my husband’s, whichever was greater. Is this accurate? I should have done more research before taking my benefit as I’m not sure this is true.

Answer: It’s true. There’s a substantial penalty for starting early, and most people are stuck with a permanently reduced payment, but your situation is one of the potential exceptions.

You weren’t eligible for a spousal benefit at 62 because your husband hadn’t started his benefit. When your husband does start, the spousal benefit will be half of what he would have received had he applied at his full retirement age of 66. If you’re younger than your own full retirement age, the spousal benefit will be reduced to reflect the early start. If all those calculations result in an amount that’s more than what you collect, you’ll get the larger amount.

By waiting to start benefits, your husband gets delayed retirement credits equal to 8% for each year he has waited past his full retirement age. Spousal benefits don’t qualify to share those credits, but survivor benefits do. When one of you dies, the smaller of the two checks you receive as a couple goes away and the survivor receives the larger of the two benefits. The survivor’s check will be larger because your husband waited to apply.

This is why it’s so important for the larger earner in a married couple to delay filing for as long as possible. The higher earner’s benefit determines what the survivor will have to live on, often for years and sometimes for decades, after the first spouse dies.

Q&A: Balancing disability and survivor benefits

Dear Liz: My 70-year-old husband is retiring at the end of the month. I’m 64 and collecting Social Security disability. If he should pass away before me, which is not likely considering my medical conditions, will I still get at least half of his Social Security income instead of my own, if it’s more than what I’m already collecting? I do understand that my disability benefit will stop at 65. I will then be collecting a regular Social Security benefit at my retirement age of 67. We are totally confused and trying to decide whether to forgo getting a retirement annuity benefit for me from his employer pension if he should pass before me.

Answer: Your disability benefit doesn’t stop at 65. It continues until you reach your full retirement age of 67, and then converts to a retirement benefit. The name for the benefit changes but the amount doesn’t.

If the amount you’re receiving is less than what your husband gets, and your husband dies first, you will get a survivor’s benefit equal to what he was getting. Survivors don’t get their own benefit plus their spouse’s; they just get the larger of the two benefits.

With pensions, it would be smart to get expert advice before you sign away your right to a survivor benefit. The default payout option for a married person is typically “joint and survivor,” which means the survivor would continue to receive the checks after the person dies. Opting for a “single life” payout instead increases the monthly check, but the money stops when he dies. While it may seem more likely you’ll die first, there are no guarantees and waiving your right to a survivor benefit could lead to a steep drop in your income.

The pension may offer different joint and survivor options, such as 100%, 75% and 50%. With the 100% option, the payments continue to be the same if he dies first. The 75% and 50% options reduce the payment after his death to 75% or 50% of the previous amount. Choosing 75% or 50% could be a decent compromise that allows you to get more money now but still get payments should he die first.

Q&A: Social Security spousal benefits count as yours

Dear Liz: My husband is 69 and taking his Social Security benefit. I will be 62 in November and would like to ask if I can take half of his amount when I turn 62 and let mine grow until my full retirement age of 66 and 8 months? Or am I only able to collect mine at 62?

Answer: You can’t take a spousal benefit and let your own retirement benefit grow. When you apply for Social Security, you will be “deemed” to be applying for both benefits and you’ll get the larger of the two. You won’t be able to switch later. Applying at 62 means accepting a permanently reduced benefit. Some people don’t have much choice, but if you can continue working or tap other retirement funds, waiting is usually the better option.

Q&A: Spousal benefits go to spouse, not partner

Dear Liz: I’ve been separated from my husband for 50 years but there’s been no legal divorce. If he dies, do I receive his Social Security benefit or does his common-law wife of 20 years?

Answer: You do.

Social Security recognizes common law marriage if a couple lives in a state that recognizes such unions, or lived in one when the marriage began. No state, however, recognizes common-law bigamy. As long as he’s still married to you, he can’t be legally married to someone else.

If the two of you divorced and he re-married, his spouse could qualify for benefits on his work record — but so could you. Since your marriage lasted more than 10 years, you could qualify for divorced spousal benefits (a percentage of his benefit while he was alive) as well as divorced survivor benefits (100% of his benefit when he dies). Your divorced spousal benefits would end if you remarry. If he dies and you get divorced survivor benefits, you would be able to keep those if you’re 60 or older when you remarry.