Ask Liz Weston

Get smart with your money

Social Security

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.

Live it up now, or insure against longevity

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Dear Liz: I was born in 1960 and plan to retire with reduced Social Security benefits at 62. I’ve read in many places that taking reduced benefits isn’t a good idea because you are locked into a lower amount for life. While this is true on a monthly basis, what about on a cumulative basis? I have figured out that on a cumulative basis I can collect to about the age of 78 and be even with collecting full benefits at 67, and this doesn’t include cost-of-living increases that would add a few more years before full benefits exceed reduced benefits on a cumulative basis.

This means I would be collecting my benefits while I am younger and healthier so I can enjoy it as opposed to delaying it on the presumption I will live well into my 80s when who knows what the future holds. Social Security will not be my main source of income as I will have a sizable amount saved by then. Would taking reduced benefits make sense for me, or am I missing something?

 Answer: You’re right that the break-even period — the point where waiting for full benefits gets you more than taking benefits early — is typically in your late 70s. A male at age 62 is expected to live 19 more years on average, while a woman the same age is expected to live 22 more years. If you’re in poor health and don’t expect to live long after you retire, however, that can tip the scales toward taking benefits early.

Wanting to claim your benefit early, while you’re “young enough to enjoy it,” is certainly understandable. But you might also want to look at Social Security as a kind of longevity insurance. If you live into your 80s and beyond, you may well exhaust your savings and wind up relying more than you think on your Social Security check. In that case, you might appreciate the larger benefit you’d get from waiting until your full retirement age.

AARP has a free Social Security benefits calculator that can help you determine the best time to claim benefits.

How the “earnings test” works

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Dear Liz: Hi. I learned the hard way about taking early Social Security benefits. I kept working and wound up losing $1 of Social Security benefits for every $2 I earned over a certain low threshold. Do I get this money back at some point or is it a penalty?

 Answer: It’s considered a penalty, but you also get the money back. This so-called “earnings test” is one of several ways the Social Security system tries to discourage people from taking benefits early. The threshold for exempt earnings in 2012 is $14,640. After that point, your Social Security checks will be reduced $1 for every $2 you earn until you reach full retirement age. Once you reach that age, your checks will be increased to reflect the withheld amounts.

Delay collecting Social Security for a bigger benefit

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Dear Liz: My spouse started collecting Social Security in 2002 at age 63. I am 59, and not working, so my future benefits are unlikely to increase very much, even if I wait until age 70. If he dies before I do, will I get same amount he would be collecting at that time? If I collect Social Security at 62, would Social Security combine our records to calculate my benefit? In other words, should I try to wait or just start collecting at 62?

Answer: Your presumption that your benefit wouldn’t increase much by waiting is incorrect. Even if you aren’t working now, your benefit amount will grow the longer you can wait to apply. That’s true whether you ultimately get benefits based on your own work record or your husband’s.

When you apply, the Social Security Administration will compare your earned benefit with your spousal benefit and give you the larger of the two. Your spousal benefit starts at half of what your husband’s benefit would have been at full retirement age. That amount is reduced significantly if you apply for benefits before your own full retirement age (which is 66 for you, although it rises to 67 for anyone born after 1959).

Also, if you apply for spousal benefits before your full retirement age, you wouldn’t have the option of switching to your own benefit later, even if your benefit grows to a larger amount than what you’re receiving based on your husband’s record.

When your husband dies, you can switch to survivor’s benefits, which equal what he was receiving. Since he started benefits early, however, his checks have been permanently reduced to reflect that early retirement. In other words, if he had waited longer to retire, you would have been entitled to a larger survivor’s benefit.

The Social Security system is designed to reward people for delaying retirement, which is why it often makes sense to do so.

How to get an ex’s Social Security information

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Dear Liz: I am 63 and divorced after being married over 10 years. I was told by our local Social Security office that I need my ex’s Social Security number in order to find out whether spousal benefits based on his record would be more than benefits based on my own record. I have his full name and date of birth, but I would rather not ask him for his Social Security number. If I do really need that, do you have any suggestions? Would some other type of information suffice?

Answer: The information you received from your local Social Security office is incorrect. You do not need your ex’s Social Security number to apply for spousal benefits, said Jonathan Peterson, AARP executive communications director and author of “Social Security for Dummies.” The more identifying information you can provide, the better, but the Social Security Administration can track down his records without it.

That said, you might want to dig around in your old files to see whether you can find a joint tax return, which will certainly have his number, or an old health insurance card, which might.

Spousal benefits are available to divorced people as long as they were married at least 10 years, are 62 or older and are currently not married.

How spousal benefits work

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Dear Liz: My wife has never worked outside the home and therefore has no Social Security credits. My understanding is that as a nonworking spouse, she is entitled to 50% of my benefit, assuming she is 66 years old and I have started receiving benefits. Is that correct?

Answer: You’ve got the right general idea. But spousal benefits are available to working spouses as well, your wife has the right to start benefits earlier (at a discounted rate) and you don’t have to actually receive checks for her to get this benefit.

Your wife is eligible for a spousal benefit based on your “primary insurance amount.” That’s the amount you would receive at your normal retirement age, no matter whether you’ve actually attained that age or started benefits. Normal retirement age is currently 66, but it will rise to 67 for people born after 1959. If she waits until her own full retirement age to start benefits, then she can qualify for a benefit equal to half your primary insurance amount. If she starts earlier, the benefit is permanently reduced.

If your wife had worked and qualified for her own retirement benefit, the Social Security Administration would give her whichever benefit paid the most — her own, or a portion of yours.

Because you’re still married, your wife wouldn’t be able to start spousal benefits until you’ve claimed your own benefit. However, if you’ve reached your full retirement age, you have the option to “file and suspend.” That means you’d file for benefits but immediately suspend your claim. That way, your benefit could continue to grow while she could begin receiving her payments.

If you were divorced but had been married at least 10 years, she could begin her benefits without waiting for you to file for your own. That exception was put into place so people wouldn’t have to seek their exes’ cooperation to get benefits.