Divorced? You may qualify for half of ex’s Social Security

Dear Liz: Many years ago I read about spousal benefits based on an ex-spouse’s Social Security earnings record. Is there a minimum length of time of the marriage to qualify? How do I apply for this benefit? I am within nine months of retirement.

Answer: You can qualify for Social Security spousal benefits based on an ex’s work record as long as:

•The marriage lasted 10 years or more.

•You are 62 or older and unmarried.

•Your ex-spouse is eligible to begin receiving his or her own Social Security benefit (even if he or she hasn’t applied yet).

•Your own benefit is less than the spousal benefit you would get based on his or her work record.

Any benefits you receive based on his or her record won’t affect what your ex receives, or what his or her current or other former spouses receive.

As with regular spousal benefits, the amount you get will be permanently discounted if you apply before you’ve reached your own full retirement age (which is currently 66 and will climb to 67 in a few years).

Gay marriage: more taxes, more benefits

Champagne glassesThe Supreme Court’s decision to invalidate the Defense of Marriage Act means that gay married couples will have access to the federal benefits now enjoyed by other marrieds.

These benefits include tax breaks, Social Security benefits and estate planning advantages that until now were denied gay couples, even if their marriages were recognized under state law.

Among other things, gay marrieds will now be able to:

  • claim Social Security benefits based on a spouse’s working record and qualify for survivor benefits.
  • fund an IRA or Roth IRA for a nonworking spouse.
  • split a retirement fund or other assets without triggering tax bills if they divorce.
  • exempt health care benefits for a spouse from their federal income.
  • bequeath their estate to a spouse without triggering potential federal estate taxes.

These gains may come with a cost: as NerdWallet puts it, “federal income tax brackets are in fact easier on high-income individuals than they are on most high-income married couples.” NerdWallet figured that same-sex couples earning more than $146,000 may see their tax bill go up by over $1,000.

One of my gay friends, a financial planner, just posted to her Facebook page that her taxes are likely to go up by several thousand dollars. But she was happy, as she put it, to “take one for the team.”

 

How to claim SS now, and claim more later

Dear Liz: You recently wrote that people who start Social Security benefits before their full retirement age are locked in and can’t switch to a higher benefit later. You are indeed locked in to that reduced benefit, but by switching to a spousal benefit at age 66, for example, it is possible to receive a higher benefit. Getting correct information about this is tough. I’m a certified financial planner and I received three different answers from Social Security personnel. Search the FAQ on the ssa.gov site for “receiving full and reduced benefits.”

Answer: Thanks for that important clarification. The original letter referenced a technique that some married couples can use to significantly boost their overall benefit. The technique allows people to start spousal benefits — Social Security payments based on the work record of a husband or wife — while letting their own benefit grow, to be claimed later. But the option of switching from the spousal benefit to your own benefit is available only if you start spousal benefits at your own full retirement age (which is currently 66). People who start spousal benefits before full retirement age can’t later switch to their own benefit.

As you note, however, people who start with their own benefit may be able to switch to a spousal benefit later. Both their own benefit and their spousal benefit would be reduced because of the early start. Here’s how Social Security explains it:

“When you apply for reduced retirement benefits, we will check to see if you are eligible for both your own retirement benefits and for benefits as a spouse. If you are eligible for both, we always pay your own benefits first. If you are due additional benefits, you will get a combination of benefits equaling the higher spouse’s benefit. If you are not eligible for both because your spouse is not yet entitled, but you are due a higher amount when he or she starts receiving Social Security benefits, then the higher spouse’s benefit is payable to you when your spouse applies for retirement benefits. Remember, you cannot receive spouse’s benefits until your spouse files for retirement.”

Social Security claiming strategies can be complicated. The AARP has an excellent guide at http://bit.ly/153Quvh.

Early Social Security start precludes switching later

Dear Liz: In a recent column, you noted that someone who chooses to obtain Social Security at age 62 on her own account is unable to switch to her spouse’s account at age 66. Is this true for a spouse who is older than the husband? My husband is one year younger than me. If I chose to start Social Security at age 62 on my own benefits, would I be able to switch to his when he retires at age 66 (and I would be age 67 at the time)?

Answer: You’ve actually got it a bit backward. Someone who waits until her full retirement age to apply for Social Security has the choice of starting with a spousal benefit (typically half of what the spouse gets) and then switching to her own benefit later, usually at age 70 when it’s reached its maximum level.

This is often a recommended strategy with two high earners, since the one receiving spousal benefits can “graduate” to her own, higher benefit later. If the spouse receiving spousal benefits was a lower earner, her benefit might not be as big as her spousal benefit at age 70, so there would be no reason to switch.

If you start spousal benefits before your own full retirement age, however, you’re locked in. You can’t let your own benefit grow and switch to it later.

For a program meant to benefit ordinary Americans, Social Security can be mind-numbingly complex. Fortunately, you can find good calculators at the AARP and T. Rowe Price websites to help you sort through your options.

How couples can maximize Social Security

Dear Liz: I will be 68 this summer and plan on working two more years. My wife retired in 2011 after turning 60. We would like to maximize our Social Security and are planning on having her take spousal benefits when I retire. When she turns 70, she can switch to her own benefit. How much of my benefit will she receive if she starts receiving it when she is 64 and I’m 70?

Answer: If your goal is to maximize your Social Security benefits as a couple, you should rethink having her apply before her full retirement age.

If she applies before she turns 66, she won’t have the choice of switching benefits later. The Social Security Administration will compare the benefit she has earned with her spousal benefit (basically half of your benefit, reduced by the fact that she is applying early). If her spousal benefit is larger, she will get her own benefit plus an amount of money to make up the difference between the two. What she won’t get is the option to let her benefit continue to grow so that she can switch to that larger check later. The option to switch is available only if she waits until her full retirement age to apply.

There are several good online calculators to help you compare your Social Security options, including ones at AARP and T. Rowe Price.

Social Security curtails “do over”

Dear Liz: In a recent column, you answered a question from someone who had started receiving Social Security benefits at 62. You mentioned the many advantages of delaying the start of Social Security checks until full retirement age but then said, “In your case, it’s too late for second thoughts anyway.”

Why didn’t you mention the option of repaying all the Social Security checks you’ve received and then restarting your benefit at a higher amount, based on your age? I first learned about that option from one of your columns a few years ago, and actually did it. It sure worked out great for me. Viewed as purchasing a fixed annuity in the amount I paid back, I’ve been getting about a 9.5% annual return. Thanks so much for alerting me to that option!

Answer: The payback option was indeed a good one for people who regretted starting their benefits early and who had the means to pay back everything they’d received from the program. This “do over” allowed them to lock in a higher benefit amount for themselves and for their surviving spouses. In essence, they were able to “invest” the money they paid back and get a higher return than they could get from any other safe investment.

Unfortunately, after the payback option started receiving a lot of publicity, the Social Security Administration decided in 2010 to end it. So it’s no longer possible to correct the mistake if you start benefits too early unless you do so within the first year after applying.

This just underscores why it’s so important to research and understand your options before you apply for Social Security. Good resources include the AARP website, which has an easy-to-use retirement planner, and the book “Social Security for Dummies” by Jonathan Peterson. Another resource is the “Maximize My Social Security” calculator developed by economist Laurence Kotlikoff at www.maximizemysocialsecurity.com. For $40, the calculator will allow you to play with different scenarios and show you which options will increase your lifetime benefits.

Why delaying Social Security can make sense

Dear Liz: Your comments about the benefits of delaying Social Security misled readers. While a cost-of-living increase was standard for many years, it no longer is. You might want to check back over the last 10 years to get details. In addition, a reader might interpret your points about the increased benefit at full retirement age versus the benefit amount at 62 as a promise for the future. Factors such as health and family longevity are also involved. Depending solely on one’s Social Security check for living expenses will most likely bring derisive laughs for those who unfortunately have to do just that.

Answer: Your comments are a good example of why it’s important to get a second opinion on Social Security benefits, because what we think we know about the program may not be true.

One of the best reasons for delaying Social Security is to claim a bigger benefit down the road, a benefit that has nothing to do with cost-of-living increases. “Retirement benefits increase by 6 2/3% each full year an individual waits between age 62 and 65,” said Patricia Raymond, regional communications director for the Social Security Administration. “For each additional year an individual delays benefits from age 65 until full retirement age, the benefit increases 5%.”

The full retirement age is now 66 and will increase to 67. Even if Social Security is restructured sometime in the future, it’s highly unlikely that the system would stop rewarding people for delaying retirement or that cost-of-living increases would be discontinued (although they may be reduced).

By the way, there have been only two years in the last 10 when there was no cost-of-living increase, as you can see at http://www.ssa.gov/cola/automatic-cola.htm. Increases have ranged from 1.7% this year to 5.8% in 2009. The average for the last decade was 2.56%. Whether these increases truly keep up with inflation is questionable, especially with increasing Medicare costs, but to say cost-of-living adjustments are no longer “standard” simply isn’t true.

Trying to decide when to take Social Security based on your current health or your family history of longevity is tricky, at best. Taking Social Security early might turn out to be a good decision if you die relatively early, or it could be a big mistake if you live longer than expected or you have a surviving spouse who may depend on your benefit. (Starting your retirement early would reduce not only your check but also the check a survivor would receive.)

The AARP website has a Social Security calculator that can help you understand the ramifications.

Obviously, some people have little choice but to apply for Social Security as soon as they’re eligible because they need the money. But delaying Social Security for a bigger benefit can be seen as a kind of longevity insurance for those who can afford to do so. Even people in poor health or who lack a family history of longevity might want to hedge against the possibility of outliving other assets, either for themselves or their spouses.

Ideally, no one would rely solely on Social Security benefits, but unfortunately many do. Social Security constitutes 90% or more of income for nearly half of single retirees and more than 1 in 5 married couples. For most people who receive Social Security, the checks represent half or more of their income. So it makes sense to learn how to maximize your benefits using information from reliable sources. In addition to the Social Security and AARP websites, you can learn more from the excellent primer “Social Security for Dummies” by Jonathan Peterson.

Waiting to take Social Security has hidden benefits

Dear Liz: When I was 62, I started Social Security and I’m currently saving half of my monthly benefit after taxes (about $750). My decision to take my benefits early was influenced by a financial columnist who suggested that if I started at 62 and invested half or more of it until I reached full retirement age, the lower early benefits would be matched by the investment returns by the time I’m 85. Is this advice still reasonable?

Answer: In today’s investing environment, it’s hard to match the guaranteed annual return you get from delaying Social Security benefits. You may do better investing in the stock market, but there isn’t an investment that can guarantee 6% returns right now, which is the approximate amount Social Security benefits increase annually between the earliest age you can take benefits (62) and your full retirement age (currently 66). The higher benefit you get by waiting is then increased by inflation adjustments each year, making it an even harder target to beat.

That’s not to say it can’t be done. In your case, it’s too late for second thoughts anyway. But most people are better off waiting, if they can afford to do so.

There are other good reasons to delay, even if you’re an investing genius. If you’re married, your spouse would be eligible for a survivor’s benefit should you die first. That benefit is equal to the Social Security check you’ve been getting. A bigger check could make it easier for him or her to make ends meet down the road.

Spouses who wait until full retirement age also have the option of taking spousal benefits first, and then switching to their own benefits later, after those benefits have had a few more years to grow. When you take benefits early, you lose the option to switch.

Even if you’re not married, you can look at Social Security as a form of longevity insurance. A larger benefit could be a big help if you live a long time and spend down your other assets.

Hopefully you understood all this before you put your retirement plan into motion. If you didn’t, then your situation could serve as a cautionary tale for anyone who’s trying to make decisions about retirement based solely on his or her own research. It’s vitally important to get a second opinion from a fee-only comprehensive financial planner. Even the most ardent do-it-yourselfer can miss important nuances when it comes to retirement, and those nuances can have a dramatic effect on your future quality of life.

Are too many people on disability?

DisabledThe number of people getting disability checks from the government has skyrocketed in the past three decades. The federal government spends more on cash payments to disabled workers than on food stamps and welfare combined.

This trend has drawn some media scrutiny lately. You may not have time to read everything that’s been written, so here’s an overview:

As jobs for people without college degrees have disappeared, many people who lose their jobs wind up on disability. Planet Money reporter Chana Joffe-Walt says in the NPR piece “Unfit for Work” that “disability has also become a de facto welfare program for people without a lot of education or job skills.” Qualifying for Social Security disability means you get about $13,000 a year, plus you qualify for Medicare, the government health insurance program for the elderly. For many who qualify, that may beat a minimum wage job with no benefits. “Going on disability means, assuming you rely only on those disability payments, you will be poor for the rest of your life. That’s the deal. And it’s a deal 14 million Americans have signed up for.”

The rise in people on disability, however, isn’t unexpected or solely the result of the lousy economy, according to a response to the NPR report by a group of former commissioners of the Social Security Administration, which oversees the disability programs. “The growth that we’ve seen was predicted by actuaries as early as 1994 and is mostly the result of two factors: baby boomers entering their high- disability years, and women entering the workforce in large numbers in the 1970s and 1980s so that more are now ‘insured’ for DI based on their own prior contributions,” the commissioners wrote. The commissioners point out that it’s not easy to get government disability and that most people who apply are denied. “The statutory standard for approval is very strict, and was made even more so in 1996,” the commissioners wrote.

Few people on government disability ever go back to work. Private disability insurers do a better job than the government programs of returning people to the workforce, according to this story in the Wall Street Journal. That shouldn’t be surprising, since qualifying for government disability is typically a lot tougher than the standards you have to meet to trigger private disability insurance payments. That means the folks getting government disability checks are often a lot sicker (in fact, one in five men and one in seven women die within 5 years of being approved for government disability). Private insurers are also, shall we say, eager to get people back to work (or at least off their benefits). Yet the discrepancy seems to offend the Journal, which also decided to blame people on government disability for at least some of our current economic malaise in “Workers stuck on disability stunt economy.”

As a taxpayer, I don’t want to foot the bill for someone who could work but doesn’t. But I’m also leary of attempts to paint government disability programs as a refuge for loafers.

Clearly, this is a complicated–and emotional–issue. You’ll be hearing more about it as Congress struggles with the budget and social safety net programs, so it would be worth spending a little time researching the facts.

 

 

Can’t afford to save for retirement?

Dear Liz: Is it reasonable for a 50-year-old single man helping with support of a teenage child and earning a steady $35,000 a year to save for his retirement? Rent alone takes $800 a month; food, car and health costs leave little discretionary money.

Answer: Can you reasonably expect to live on Social Security alone? If making ends meet now is a strain, imagine trying to get by on about $1,230 a month (which was the average Social Security check in 2012). Your check could be higher or lower; you can get an estimate at http://www.ssa.gov/estimator.

If you can’t scrape by with whatever Social Security offers, then you need to find a way to save. You should be able to increase your savings once your child support ends, but you should get started now.