Ask Liz Weston

Get smart with your money

Social Security

Dragging debt? You’re not ready to retire

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Dear Liz: I just turned 65 and had planned to wait until 70 to retire. I love the actual work I do but my boss is very challenging. I’m starting to question whether working here another five years is really how I want to spend my days at this point in my life. I have about $175,000 in my 401(k), about $35,000 in an IRA and $1,500 in a single stock that’s not in a retirement account. I have two years left on my primary mortgage and a $17,000 balance on my second mortgage, plus I owe $3,500 on a line of credit and $2,000 on credit cards. I was starting to take money out of my IRA to pay down my mortgage early but the taxes at the end of the year were so much that I stopped that distribution. (I still owe $500 to the state tax agency.) I have also had trouble keeping up with my property taxes and owe about $3,500. I live in a 900-square-foot home which I love and live a fairly simple life. I’m wondering about cashing in the stock and some of my IRA to pay down my debt, then using my 401(k) for living expenses until I actually draw from Social Security. As I’m typing this out I’m thinking, “Are you crazy?” I’d love your thoughts.

Answer: One definition of insanity is doing the same thing over and over again, expecting different results.

Tapping your IRA incurred a big tax bill that you’ve yet to fully repay. You also lost all the future tax-deferred gains that money could have earned. Why would you consider doing that again?

You may long for retirement, but it’s pretty clear you aren’t ready. You don’t have a lot of savings, given how long retirement can last, and you’re dragging a lot of debt. The type of debt you have — second mortgages, credit lines, credit cards — is an indicator you’re regularly spending beyond your means. If you can’t live within your income now, you’ll have a terrible time when it drops in retirement.

So instead of bailing on work, take retirement for a test drive instead. Figure out how much you’d get from Social Security at your full retirement age next year (you can get an estimate at http://www.ssa.gov.) Add $700 a month to that figure, since that’s what you could withdraw from your current retirement account balances without too great a risk of running out of money. Once you figure out how to live on that amount, you can put the rest of your income toward paying off debt (starting with your overdue taxes), building up your retirement accounts and creating an emergency fund. It’s OK to cash out the stock to pay off debt, since it’s not in a retirement account, but make sure you set aside enough of the proceeds to cover the resulting tax bill.

Don’t forget to budget for medical expenses, including Medicare premiums and out-of-pocket costs. Fidelity estimates a typical couple retiring in 2013 should have $220,000 to pay out-of-pocket medical expenses that aren’t covered by Medicare. That doesn’t include long-term-care costs. Your costs may be lower, but you’ll want to budget conservatively. Spend some time with the Nolo Press book “Social Security, Medicare & Government Pensions: Get the Most out of Your Retirement & Medical Benefits.”

You’ll be ready to retire when you’re debt-free and able to live on your expected income without leaning on credit.

Maximizing Social Security benefits requires some patience

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Dear Liz: I am 65 and recently visited our local Social Security office to apply for spousal benefits. (My wife, who is also 65, applied for her own benefit last year.) I wanted to get the spousal benefit, even if the amount is discounted, so I can let my own Social Security benefit grow. The Social Security office manager advised us that I cannot claim spousal benefits until my full retirement age. You said in a recent column that I can. Who is correct?

Answer: You can apply for spousal benefits before your own full retirement age. But doing so means you’re giving up the option of switching later to your own benefit. The office manager gave you correct information, based on your goal. If you want the choice of letting your own benefit grow, you must wait until your full retirement age (66) to apply for spousal benefits.

Divorced retiree entitled to spousal Social Security benefits

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Dear Liz: My daughter, 63, has been recently amicably divorced and receives a small alimony ($1,000). Her ex-husband of 30 years is a doctor who just retired. Is she entitled to part of his Social Security? Neither has remarried.

Answer: Because they were married for more than 10 years, your daughter should qualify for spousal benefits, which can equal up to half of her ex’s benefit at his full retirement age. That amount would be permanently discounted if she applies before her own full retirement age (which is 66).

The ex’s marital status doesn’t matter, although your daughter’s does. If she remarries, she will lose access to spousal benefits as a divorced spouse. This is just one of the ways that spousal benefits differ from survivor’s benefits, which are based on 100% of the earner’s benefit and which widows and widowers can receive even if they remarry after age 60.

Spousal vs. survivor benefits: a primer

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Dollar mazeJudging from emails and comments, plenty of people are confused about how Social Security benefits for spouses and ex-spouses are supposed to work. That’s unfortunate, since these benefits can help many people get larger checks than what their own earnings record will give them. If you are or ever have been married to someone whose earnings are substantially greater than your own, you need to know how this works.

First, some basics. Spousal and survivor benefits are based on the work record of what I’m calling the “earner” (the other spouse). You can’t get both your own benefit (based on your work record) AND a full spousal or survivor benefits on top of that. You typically get the largest benefit for which you qualify. (In some cases, you’ll get your own benefit plus an amount that together equals the largest benefit for which you qualify.)

Here are a few key points:

Spousal benefits (for current and former spouses) are based on 50% of the earner’s benefit at the earner’s full retirement age. Full retirement age is currently 66 and will be 67 for people born after 1960. If the spouse applies for benefits before the spouse’s own full retirement age, the benefit will be permanently discounted.

  • If you’re currently married, the earner must have already applied for Social Security benefits for you to apply for spousal benefits. The earner does have the option to “file and suspend,” where the earner applies for benefits and then immediately suspends the application. That allows the spouse to apply for spousal benefits while the earner’s benefit can be left alone to grow.
  • If you’re divorced (but were married at least 10 years and haven’t remarried), the earner needn’t have applied to start Social Security benefits but the earner needs to be at least 62. If you remarry, you can’t apply for benefits as a divorced spouse unless that subsequent marriage ends.

Spousal benefits don’t reduce what the earner receives (or what other current and former spouses may receive).

If you wait until your own full retirement age to apply, you can start receiving spousal benefits and then switch to your own benefit when it maxes out at age 70. For high earners, this “claim now, claim more later” can add tens of thousands of dollars to the lifetime amounts you receive from Social Security. If you start benefits early, however, that option isn’t available to you.

Survivors benefits (for current and former spouses) can be up to 100% of the earner’s Social Security benefit. If the earner hadn’t begun receiving Social Security checks, the survivor’s benefit is based on what the earner would receive at full retirement age. If the earner was receiving Social Security when he or she died, the survivor’s benefit is based on that amount the earner was actually receiving. (This is why it’s often smart for the bigger earner to delay starting Social Security at least until full retirement age, if not longer, especially if the earner’s survivor will depend on that benefit.)

As with other Social Security benefits, applying for survivor benefits before you reach your own full retirement age will result in a reduced check. However, with survivor’s benefits, you can receive a reduced check as early as age 60. (The earliest you can get spousal benefits is 62.) The starting age is even earlier—50—if you are disabled and the disability started before or within 7 years of the worker’s death, or at any age if you take care of the deceased earner’s child who is under age 16 or is disabled and receives benefits on the worker’s record.

Unlike spousal benefits, a late remarriage won’t cut off your checks. If you remarry after you reach age 60 (or age 50 if you’re disabled), that marriage will not affect your eligibility for survivors benefits.

AARP has a primer about how to maximize your Social Security benefits that’s well worth reading. T. Rowe Price has a free calculator to help you determine the best time to take benefits. If you want a more robust tool, check out www.MaximizeMySocialSecurity.com for a $40 version that allows you to play with more

How divorced people can get spousal benefits

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Dear Liz: I’ve been reading with interest your answers to questions about Social Security spousal benefits, particularly those available to divorced spouses. What if the former spouse is now remarried for more than 10 years, and the current spouse is receiving benefits? Are spousal benefits still available and how are they calculated?

Answer: The answer depends on whose earnings record we’re talking about, so a few pronouns might have helped clarify your question.

Let’s say you’re the earner. If your former spouse has remarried, then he is no longer eligible to receive spousal benefits based on your earnings record. Only divorced people whose marriages lasted 10 years and who are not married can get spousal benefits based on an ex’s earnings record.

If you’re the one hoping for spousal benefits, however, it doesn’t matter that your ex has remarried as long as you’re unmarried. Your ex’s current spouse and any previous spouses who qualify can receive spousal benefits. The amounts they get don’t affect any other spouse’s checks or the checks received by the earner (your ex).

Spousal benefits can be up to half the earner’s “primary insurance amount,” which is the check the earner would get if she started Social Security at full retirement age. The benefits are permanently discounted if the spouse or ex-spouse begins receiving them before his own full retirement age.

All my exes and Social Security taxes: a quiz

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PolygamyThe questions I get about Social Security have made it clear how incredibly complicated this benefits system can be. So here’s a little story to illustrate one important facet of Social Security: spousal benefits.

Jack was a charming guy—maybe too charming. He enjoyed the ladies and the ladies enjoyed him, at least until they discovered they weren’t the only ladies in his life. This led to more than a little drama, and a few divorces.

Jack first married at 20, to Mary. Their marriage lasted 10 years and produced two children before breaking up. Mary went on to marry again and had a happy 30 years until her second husband died.

Jack’s second marriage was to Anne. That lasted five years. Anne never remarried.

After a few years playing the field, Jack married a third time, to Jo Beth. They separated after nine years and divorced a couple years later. Jo Beth remarried and had kids with her second husband. This marriage also ended in divorce after thirteen years.

For the past decade, Jack has been happily married to Dianne. Both are 62, but Jack has decided not to retire for a few years (all those divorces took their financial toll).

Now for the question: which of Jack’s wives qualify for Social Security spousal benefits based on Jack’s earnings record?

The answer: Mary and Jo Beth. Both were married to Jack for at least 10 years, and neither is currently married. Mary and Jo Beth also would be eligible for benefits based on their second husbands’ records (Mary as a survivor, Jo Beth as a divorced spouse) but they wouldn’t be able to claim more than one benefit. They would typically get whatever benefit is largest: the one based on Jack’s earning record, the one based on the second spouse’s earnings record, or the one based on her own earnings record.

Why wouldn’t Dianne qualify for spousal benefits, since she’s the current spouse? Because Jack hasn’t applied for his own benefits. That doesn’t matter to the former wives, since the ex’s cooperation isn’t required for them to start getting spousal benefits. The ex merely has to be old enough to qualify for retirement benefits (which you typically are at age 62.). If you’re currently married, though, you can’t start spousal benefits unless your “earner” has applied.

Jack could allow Dianne to start benefits with a technique called “file and suspend,” in which he would file for benefits and then immediately suspend his application. That would allow his own benefit to continue to grow while allowing her to get checks based on his earnings record.

So conceivably, three women and Jack himself eventually could be earning benefits based solely on Jack’s earnings records. The amounts the women get wouldn’t affect or reduce each other’s benefit, or his.

Most people can’t squeeze quite that much mileage out of the Social Security taxes they pay. But since spousal benefits could result in a bigger check than you might get on your own, they’re worth knowing about.