spousal benefits

Q&A: Social Security and spousal benefits

September 1, 2014 By Liz Weston

Dear Liz: A friend of mine has told me that he thinks that I can apply for spousal benefits at my full retirement age and hold off getting my Social Security under my own work record until I am 70. Here is the scenario: My husband is 77 and has been collecting Social Security since he was 62. He continues to work. I will be 66 in November and I am still working. I plan to take Social Security at age 70. Can I apply for spousal benefits and receive an amount equal to half of what my husband receives from the age of 66 until I turn 70 and then apply under my own account at age 70 and receive my maximum benefit at that age? My friend feels strongly that this can be done, but I called Social Security and explained it clearly (or at least I thought I did) to them and they said that this could not be done. Then I went into the Social Security website and looked under “Spousal Benefits,” but the wording did not clearly say that this couldn’t be done.

Answer: What you’re describing is the “claim now, claim more later” strategy that can boost a couple’s lifetime Social Security by tens of thousands of dollars. It’s one of the approaches outlined in AARP’s excellent primer, “How to Maximize Your Social Security Benefits,” which you’ll find on its site, http://www.aarp.org, along with a calculator to help you understand how different claiming strategies could affect what you get.

These strategies capitalize on the fact that delaying the start of Social Security benefits results in substantially larger checks for life. In the case of two-earner couples, the “claim now, claim more later” strategy allows one spouse the option of getting checks (the spousal benefit) for a few years while allowing her own benefit to grow to its maximum.

As long as you wait until your own full retirement age to apply for spousal benefits, and your spouse is already receiving benefits, then you should be allowed to switch to your own benefit when it maxes out at age 70. If your spouse weren’t receiving benefits yet, but had reached his full retirement age, he could file for benefits and immediately suspend his application (“file and suspend”) so that you would be eligible for spousal benefits and his own benefit could continue to grow.

It’s not clear why you would have been told otherwise, since this isn’t exactly a secret strategy. But not all Social Security employees are equally informed. Sometimes calling back and asking your question again of another representative will result in a different or more complete answer.

When you file for benefits, make clear on the form that you are restricting your application to the spousal benefit only and aren’t collecting your own retirement benefit

Social security switch

April 13, 2014 By Liz Weston

Dear Liz: When I turned 66, I applied for and then suspended my Social Security benefits so that my husband could take spousal benefits based on my work record. Shortly after he turned 69, he decided to start taking his full benefit from his own work record, so we canceled the spousal benefits.

After he applied to take his full benefit, I applied for spousal benefits from his account. Since I am only 67, the plan was for me to collect spousal benefits until I reached 70 and then collect off my account. Since I am the primary breadwinner, that allows the maximum lifetime funding should something happen to either of us. I sat with an employee at the local Social Security office. Together we processed all the appropriate documentation and she submitted it.

I just received a notice of denial that says, “We cannot approve your request because we received it after the 12-month limit.” I took the letter to the Social Security office for an explanation, and the woman had never heard of the rule it cited. The rule, it turns out, was designed to prevent people from repaying all the benefits they’ve received over the years so that they can restart their benefit at age 70. The rule says that they can pay back only benefits received in the prior 12 months to restart their benefits. But that is not what I did.

Answer: No, it’s not, but what you tried to do still won’t work.

Here’s the simplest way to explain it: There’s only one spousal benefit for each couple. Once you filed for your own benefit, allowing your husband to claim spousal benefits, you aren’t allowed to switch even though you hadn’t started receiving checks yet.

If it’s any consolation, you chose the right spouse to receive spousal benefits, since you’re the higher earner. It would have been best if your husband had waited to switch at age 70, when his benefit reached its maximum, but his checks are still substantially larger than they would have been if he had started earlier.

Another point that should be made because it’s often misunderstood, is that your husband was allowed to switch from spousal benefits to his own benefit because he started Social Security at or after his own full retirement age. If he’d started benefits before his full retirement age, which is currently 66, he would have been stuck with a discounted spousal benefit and couldn’t have switched to his own benefit later.

You may not be as smart as you think you are

March 13, 2014 By Liz Weston

Most people are better off delaying the start of their Social Security benefits as long as possible. That’s the consensus of the AARP, financial planners and researchers who have studied the thousands of different claiming options. In fact, the benefits of putting off Social Security have grown in recent years, thanks to low interest rates, gains in longevity and changes in the law since the 1990s.

Still, every time I pass along the advice that waiting is better, I hear from those who just refuse to believe it. They focus on breakeven points rather than longevity risk; they don’t factor in spousal or survivor benefits; they underestimate how much their benefit can grow with even a few years’ delay.

So when Financial Engines approached me with the results of a recent survey, I just nodded my head in recognition. Their poll found that most people nearing retirement are confident that they can make smart Social Security claiming decisions–but that most do poorly on a test that measures their understanding of basic Social Security claiming concepts. You can read more about it in my column this week for Bankrate, “Are you Social Security smart? Guess again.”

My best advice is that before you claim Social Security, use some of the software tools that are available to help you evaluate your options. The AARP has a good calculator here. If you want to play with the numbers and assumptions a bit more, MaximizeMySocialSecurity.com has software that will really let you get your geek on; a one-year license is $40. You also can talk to a fee-only financial planner who is savvy about claiming strategies.

Here are two things you should know:

1. If you’re married (and that includes you same-sex couples, if you file in a state that legally recognizes your marriage), you have unique opportunities to maximize your lifetime benefits and protect your surviving spouse from poverty. The difference between the best claiming strategies and the worst can be $250,000. No, that’s not a typo.

2. Social Security is not going to disappear. The program is simply too popular and its problems, though real, are not insurmountable. Even if Congress does nothing, the system can still pay out 75% of the benefits promised just from the taxes it will collect. If Congress does do something, the changes almost certainly won’t affect near-retirees but will instead change benefits for younger taxpayers. Signing up for benefits as soon as you’re eligible in order to “lock in” your checks will just lock you in to a much lower payment, for life.

If you’re one of those people who likes to dive into the academic research surrounding claiming strategies, here are a few articles to check out:

“Recent Changes in the Gains from Delaying Social Security.” This article in the Journal of Financial Planning demonstrates how changes in interest rates, longevity and the benefit formula have dramatically improved the benefits from delaying Social Security claims.

“How the Social Security Claiming Decision Affects Portfolio Longevity.” Researchers William Meyer and William Reichenstein have done a lot of research on Social Security claiming strategies, and in this Journal of Financial Planning article they use a sophisticated model that factors in taxes to weigh how delaying Social Security can help retirees make their savings last longer.

“Should You Buy an Annuity from Social Security?” This brief from Boston College’s Center for Retirement Research explains why it often makes sense to tap retirement savings so that you can delay the start of Social Security benefits.

“When Should Married Men Claim Social Security?” This article, also from the Center for Retirement Research, should be required reading for any married couple thinking of starting benefits early. It does a great job of summarizing potential spousal and survivor benefits–and of making the point that starting too early can leave your surviving spouse in a world of hurt.

Don’t obsess about Social Security “breakeven”

February 18, 2014 By Liz Weston

Dear Liz: I read your recent article in which you advised waiting before starting Social Security benefits. Is this good advice for everyone? You probably know that there is a break-even age around 85, so that if you die before 85, starting benefits early is better, but if you die after 85, starting late is better. “Better” means you receive more money. So, right off the bat the advice to delay is wrong for half the people in their 60s, since about half will die before the crossover, and if they had delayed, they lost money.

Answer: The problem with do-it-yourself financial planning is that people often focus their attention too narrowly and ignore the bigger picture. That’s what leads them to do things like pay down relatively low-rate student loan debt while failing to save for retirement. They may focus only on the expected returns of each option, while ignoring the tax implications, company retirement matches and the extraordinary value of future compounding of returns.

Obsessing about the break-even point — the date when the income from larger, delayed retirement benefits outweighs what you’d get from starting early — is often a mistake, financial planners will tell you. There are a number of other considerations, including the value of Social Security benefits as longevity insurance. If you live longer than you expect, a bigger Social Security check can be enormously helpful later in life when your other assets may be spent. Also, if you have a spouse who may be dependent on your benefit as a survivor, delaying retirement benefits to increase your checks will reduce the blow when she has to live on just one check (yours) instead of two (yours and her spousal benefit).

In his book “Social Security for Dummies,” author Jonathan Peterson offers a guide to figuring out your break-even point based just on the dollars you can expect to receive (rather than on assumed inflation or investment returns). In general, the break-even point is about age 78. That means those who live longer would be better off waiting until full retirement age, currently 66, than if they started early at age 62.

Currently, U.S. men at age 65 can expect to live to nearly 83, and the life expectancy for U.S. women at age 65 is over 85.

You can change that break-even by making assumptions about inflation and your future prowess as an investor, but remember that the increase in benefits you get each year by delaying retirement between age 62 and 66 is about 7%. It’s 8% for delaying between age 66 and age 70, when your benefit maxes out. Those are guaranteed returns, and there’s no “safe return” anywhere close to that in today’s environment.

Don’t forget that those benefits will be further compounded by cost-of-living increases. One researcher published in the Journal of Financial Planning found that an investor would have to achieve a rate of return that exceeds inflation by 5% to justify taking benefits at 62 rather than at full retirement age.

“At higher inflation rates and/or higher marginal tax rates, the rate of return may need to be even higher, perhaps in excess of 7% or 8% above inflation to justify taking benefits at age 62,” wrote Doug Lemons, a certified financial planner who retired from the Social Security Administration after 36 years.

You can read Lemons’ paper, as well as other research that planners have done on maximizing Social Security benefits, at http://www.fpanet.org/journal.

Your payout from Social Security and Medicare

December 9, 2013 By Liz Weston

A reader recently wondered what the average person could expect from Social Security, compared to the taxes we pay into the system.

Urban Institute has done the math, and recently released “Social Security and Medicare Taxes and Benefits Over a Lifetime: 2013 Update.” The institute figured out net present values of money paid in and paid out for various situations: single male and single female, one-earner family, two earner families. Spoiler alert: in most situations, people in the simulations pay more in Social Security taxes than they get back in benefits–but they get back vastly more Medicare benefits than they pay in taxes. Overall, benefits received exceed taxes paid. Here’s one example with a cogent comment from the Wall Street Journal:

Consider: A one-earner couple with a high wage ($71,700 in 2013 dollars) retiring in 2015 can expect lifetime Social Security benefits of $640,000. The same couple can expect to get $427,000 in lifetime Medicare benefits—while paying only $111,000 in Medicare taxes. The latter figures help illustrate how Medicare, in particular, is expected to strain future federal budgets.

The report, which you’ll find here, is interesting reading. Obviously, there are caveats. Nobody can know for sure what his or her Social Security “payout” will be, since a lot depends on longevity. And that brings me to the most important point: it’s really not about money in, money out.

Social Security isn’t an investment scheme. It’s insurance. (The formal name for what we know as Social Security is Old Age, Survivors, and Disability Insurance or OASDI). It’s insurance against poverty, against outliving your assets, against a downturn in the market at the wrong time that could leave you with too little money on which to live. You still should save and invest as much as you can on your own, but Social Security provides a safety net in case things don’t go as planned.