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Social Security

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.

 

Three ways to retire poor

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Will Work for FoodI hear from a lot of people who think they’re doing the right things with their money—little realizing that they’re impoverishing their future selves. Three behaviors you’re most likely to regret later:

Putting off saving for retirement. Some people spend every dime they make, while others delay saving while they pursue other goals that seem more worthy, like saving for a home or paying off debt. The reality is that retirement savings opportunities are “use it or lose it”—you can’t get back the company matches, tax breaks or (most important) the power of compounding if you don’t get those contributions into your account. Compounding is so powerful, in fact, that it gets harder and harder to catch up the older you get…until it gets impossible. The smarter solution: Start saving for retirement from your first job, and don’t stop.

Cashing out your retirement when you leave a job. The next most widespread and destructive behavior is tapping into what you do manage to save. About 42% of those who lost their jobs in 2010 cashed out their retirement plans, which is about the same percentage as before the recession, according to an Aon report. More than half of those in their 20s cashed out. Not only do you incur taxes and penalties that eat up 25% or more of your withdrawal, but you lose all the future tax-deferred compounding on that money—which means those in their 20s are hurt even more by cash-outs than those who do it later. (Figure every $1,000 you withdraw in your 20s will cost you $20,000 or more in lost future retirement income.) The smarter solution: Leave your retirement money for retirement. If you can’t or don’t want to leave your balance when you leave your job, roll it into your new employer’s plan or into an IRA.

Grabbing your Social Security benefit early. Social Security will be a big part of most people’s retirements, but too few people understand how much they’re hurting themselves—or their loved ones—when they apply early and lock in a permanently reduced check. It’s not just that you’re likely to live past the “breakeven point” when, mathematically, waiting until full retirement age pays off in terms of total benefits. More importantly, you may be cutting yourself off from strategies that would maximize your lifetime benefits and leaving your surviving spouse with a bigger check. Take a minute to read AARP’s excellent primer on the subject, “How to Maximize Your Social Security Benefits,” and use the free calculator at T. Rowe Price to help you understand the impact of different strategies. (If you want more freedom to customize a tool, www.maximizemysocialsecurity.com gives you that for $40.) The smarter solution: View Social Security as a kind of longevity insurance that helps protect you against the possibility of outliving your savings.