Ask Liz Weston

Get smart with your money

Social Security

How Social Security calculates your check

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Dear Liz: I have been told over the years that your Social Security monthly benefit amount is computed using years closest to retirement. I have now been told benefits are calculated from your highest earning year in your working life. Which is true? I am 61 and unable to work more than part time for physical reasons, so now my income has gone down while I’m still contributing to Social Security from my earnings. Are my lower yearly earnings for the next couple of years going to lower my overall benefit when I do start drawing my benefit?

Answer: Your Social Security benefit is not based on either your earnings close to retirement or your highest-earning year. Your checks will be based on your 35 highest-earning years. That long period helps keep you from being too badly penalized if your earnings drop toward the end of your working career. You can find out more at http://www.ssa.gov/pubs/10070.html. You can estimate your future benefits with this calculator: http://www.ssa.gov/estimator.

Delaying Social Security increases your options

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Dear Liz: I’m confused by your answer about the “file and suspend” strategy for boosting Social Security benefits. You wrote that the higher-earning, younger spouse in this case had to wait until her full retirement age if she wanted to use this strategy to let her husband claim a spousal benefit while her own benefit continued to grow.

I was told by a financial planner and thought I had confirmed on the Social Security website that once I am 62 and my spouse is 66 (his full retirement age), I can file for and suspend my benefits, allowing him to claim my spousal benefit.

Answer: You’re confusing two different strategies. If your husband waits until his full retirement age to apply for benefits, he has the option of receiving a spousal benefit and allowing his own benefit to continue growing. But he can receive the spousal benefit only if you’ve applied to receive your own benefits.

If you’re younger than your full retirement age, you don’t have the option to “file and suspend” — in other words, to apply for your benefit and then suspend your claim so your husband can get benefits while yours continue to grow.

“The strategy of filing for retirement and suspending the retirement benefits to allow your spouse to collect is only available after full retirement age,” Social Security Administration spokesman Lowell Kepke said.

“File and suspend” can boost Social Security benefits

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Dear Liz: I am 63 and not nearly ready to collect Social Security. In fact I probably won’t be ready for quite a few years. My husband, who is 64, wants to collect on my Social Security as it is higher than his. Is there a way for him to do this that would not hurt me? I have called the Social Security office five times and have received five different answers. My husband went into the local office and they told him to have me apply for benefits and then after a short time send them a letter rescinding my application. That would allow him to collect on my work record and wouldn’t hurt my eventual benefit. I am not comfortable doing this. What do you suggest?

Answer: At your current age, you must start your own benefits for your husband to get a check based on your work record. The so-called spousal benefit is basically half your retirement benefit, and it will be somewhat reduced because your husband hasn’t achieved “full retirement age” (which is 66 for both of you). When he applies for spousal benefits, the Social Security Administration will compare that benefit with the one based on his own record and give him the larger of the two.

Starting benefits now, however, would lock you into a lower payment for the rest of your life. Your checks could be further reduced based on your earnings, if you continue to work.

If you can wait three years, you have another option called “file and suspend” that would allow your husband to collect a spousal benefit without reducing your eventual checks. Once you reach your full retirement age of 66, you can go to your local office to file for your benefit and then immediately suspend your application. That would allow your husband to collect a spousal benefit while your own uncollected benefit could continue to grow.

Another advantage for your hubby if you wait: He will have achieved his full retirement age when he starts receiving spousal benefits, so he would be allowed to switch to his own benefit later, if it’s larger. If he starts receiving spousal benefits before his full retirement age, he loses the option to switch.

You can learn more about the file-and-suspend strategy on the Social Security site at www.ssa.gov/retire2/yourspouse.htm. You may want to bring a printout of that page with you to the Social Security office. File and suspend is not an obscure strategy, but it doesn’t appear that your local office is quite aware of all the details.

Will your pension hurt your Social Security benefit?

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Dear Liz: Could you please address the issue of Social Security for those with pensions? I understand that if you have a pension, you won’t get 100% of the standard monthly Social Security benefit. I believe that this happens even if you only have a defined contribution account. But I’ve never seen this discussed in news reports. Many people are surprised when I tell them this.

Answer: Perhaps they’re surprised because what you’re saying isn’t true.

Defined contribution plans, such as 401(k)s, don’t affect your Social Security benefit at all. Neither do most pensions. The time that a pension might affect your benefit is if you didn’t pay into Social Security while you were earning the pension.

Here’s how the Social Security website puts it: “A pension based on work that is not covered by Social Security (for example, federal civil service and some state or local government agencies, such as police officers and some teachers) may cause the amount of your Social Security benefit to be reduced.”

The reduction can come under one of two provisions. The first, called government pension offset, applies if you get a government pension not covered by Social Security and are eligible for Social Security benefits as a spouse or survivor. The spousal or survivor benefit may be reduced in that case. You can learn more at http://www.socialsecurity.gov/retire2/gpo.htm.

The second provision is the windfall elimination provision, which may reduce your Social Security or retirement benefit if you receive a pension from a job not covered by Social Security. You can learn more at http://www.socialsecurity.gov/retire2/wep.htm.

These provisions were put into place because some people with a pension from a job that didn’t pay into Social Security were getting more Social Security benefits than the system intended. If they worked mainly in the job with the pension, but also had jobs that paid Social Security taxes, their Social Security benefits were often calculated as if they were long-term, low-wage workers. Since Social Security is designed to replace a larger percentage of earnings for low-paid workers — and a smaller percentage for higher-paid workers — these folks wound up with a bigger benefit than their earnings actually justified.

Now available: My new book!

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Working longer means more money overall

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Dear Liz: You’ve been answering several questions about when to start Social Security benefits. Most people who talk about the break-even point seem to fixate on when you’ll end up with the most money, but they’re only considering Social Security money. It’s worth pointing out that if one continues to work until full retirement those wages, for most of us, will add up to much more than the reduced Social Security payments for those first four or five years. So unless a person really hates his or her job, or poor health makes the person no longer able to do that job, working until age 66 or 67 will give a person the highest total.

Answer: That’s a good point, and it’s not just the wages you earn that are important. It’s the fact that you can delay tapping your retirement savings, so that those can continue to grow tax deferred. The effect of delaying retirement even a few years is so powerful that people who have saved substantially over their working lives can actually stop saving in their 60s — and use the extra cash for fun stuff like travel — without increasing their risk of running out of money, according to research by mutual fund company T. Rowe Price. The company has dubbed this approach “practice retirement,” and you can read more about it at http://www.troweprice.com/practice.