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timing Social Security benefits

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.

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.

 

How to claim SS now, and claim more later

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Dear Liz: You recently wrote that people who start Social Security benefits before their full retirement age are locked in and can’t switch to a higher benefit later. You are indeed locked in to that reduced benefit, but by switching to a spousal benefit at age 66, for example, it is possible to receive a higher benefit. Getting correct information about this is tough. I’m a certified financial planner and I received three different answers from Social Security personnel. Search the FAQ on the ssa.gov site for “receiving full and reduced benefits.”

Answer: Thanks for that important clarification. The original letter referenced a technique that some married couples can use to significantly boost their overall benefit. The technique allows people to start spousal benefits — Social Security payments based on the work record of a husband or wife — while letting their own benefit grow, to be claimed later. But the option of switching from the spousal benefit to your own benefit is available only if you start spousal benefits at your own full retirement age (which is currently 66). People who start spousal benefits before full retirement age can’t later switch to their own benefit.

As you note, however, people who start with their own benefit may be able to switch to a spousal benefit later. Both their own benefit and their spousal benefit would be reduced because of the early start. Here’s how Social Security explains it:

“When you apply for reduced retirement benefits, we will check to see if you are eligible for both your own retirement benefits and for benefits as a spouse. If you are eligible for both, we always pay your own benefits first. If you are due additional benefits, you will get a combination of benefits equaling the higher spouse’s benefit. If you are not eligible for both because your spouse is not yet entitled, but you are due a higher amount when he or she starts receiving Social Security benefits, then the higher spouse’s benefit is payable to you when your spouse applies for retirement benefits. Remember, you cannot receive spouse’s benefits until your spouse files for retirement.”

Social Security claiming strategies can be complicated. The AARP has an excellent guide at http://bit.ly/153Quvh.

Early Social Security start precludes switching later

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Dear Liz: In a recent column, you noted that someone who chooses to obtain Social Security at age 62 on her own account is unable to switch to her spouse’s account at age 66. Is this true for a spouse who is older than the husband? My husband is one year younger than me. If I chose to start Social Security at age 62 on my own benefits, would I be able to switch to his when he retires at age 66 (and I would be age 67 at the time)?

Answer: You’ve actually got it a bit backward. Someone who waits until her full retirement age to apply for Social Security has the choice of starting with a spousal benefit (typically half of what the spouse gets) and then switching to her own benefit later, usually at age 70 when it’s reached its maximum level.

This is often a recommended strategy with two high earners, since the one receiving spousal benefits can “graduate” to her own, higher benefit later. If the spouse receiving spousal benefits was a lower earner, her benefit might not be as big as her spousal benefit at age 70, so there would be no reason to switch.

If you start spousal benefits before your own full retirement age, however, you’re locked in. You can’t let your own benefit grow and switch to it later.

For a program meant to benefit ordinary Americans, Social Security can be mind-numbingly complex. Fortunately, you can find good calculators at the AARP and T. Rowe Price websites to help you sort through your options.

How couples can maximize Social Security

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Dear Liz: I will be 68 this summer and plan on working two more years. My wife retired in 2011 after turning 60. We would like to maximize our Social Security and are planning on having her take spousal benefits when I retire. When she turns 70, she can switch to her own benefit. How much of my benefit will she receive if she starts receiving it when she is 64 and I’m 70?

Answer: If your goal is to maximize your Social Security benefits as a couple, you should rethink having her apply before her full retirement age.

If she applies before she turns 66, she won’t have the choice of switching benefits later. The Social Security Administration will compare the benefit she has earned with her spousal benefit (basically half of your benefit, reduced by the fact that she is applying early). If her spousal benefit is larger, she will get her own benefit plus an amount of money to make up the difference between the two. What she won’t get is the option to let her benefit continue to grow so that she can switch to that larger check later. The option to switch is available only if she waits until her full retirement age to apply.

There are several good online calculators to help you compare your Social Security options, including ones at AARP and T. Rowe Price.

Social Security curtails “do over”

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Dear Liz: In a recent column, you answered a question from someone who had started receiving Social Security benefits at 62. You mentioned the many advantages of delaying the start of Social Security checks until full retirement age but then said, “In your case, it’s too late for second thoughts anyway.”

Why didn’t you mention the option of repaying all the Social Security checks you’ve received and then restarting your benefit at a higher amount, based on your age? I first learned about that option from one of your columns a few years ago, and actually did it. It sure worked out great for me. Viewed as purchasing a fixed annuity in the amount I paid back, I’ve been getting about a 9.5% annual return. Thanks so much for alerting me to that option!

Answer: The payback option was indeed a good one for people who regretted starting their benefits early and who had the means to pay back everything they’d received from the program. This “do over” allowed them to lock in a higher benefit amount for themselves and for their surviving spouses. In essence, they were able to “invest” the money they paid back and get a higher return than they could get from any other safe investment.

Unfortunately, after the payback option started receiving a lot of publicity, the Social Security Administration decided in 2010 to end it. So it’s no longer possible to correct the mistake if you start benefits too early unless you do so within the first year after applying.

This just underscores why it’s so important to research and understand your options before you apply for Social Security. Good resources include the AARP website, which has an easy-to-use retirement planner, and the book “Social Security for Dummies” by Jonathan Peterson. Another resource is the “Maximize My Social Security” calculator developed by economist Laurence Kotlikoff at www.maximizemysocialsecurity.com. For $40, the calculator will allow you to play with different scenarios and show you which options will increase your lifetime benefits.