Social security can be a confusing government benefit. The following is a brief list of tips to make it more beneficial to you.
1. If you are already collecting your retirement benefit and
are at or over full retirement age, you can tell Social Security you want to
suspend further benefits and then ask them to restart your benefits at a later
date, say age 70. Social Security will then apply its Delayed Retirement Credit
to your existing benefit once you start collecting again. Hence, this is a
means by which current Social Security recipients who aren't yet 70 can collect
higher benefits, albeit at the cost of giving up their check for a while. But this
trade off will, on net, often be very advantageous. For example, if you started
collecting at 62 and are now at your full retirement age, i.e., 66, you can
suspend benefits until 70 and then start collecting 32 percent higher benefits
for the rest of your life. This benefit collection strategy can be called Start
Stop Start.
2. But if you are married or divorced, waiting to collect
your retirement benefit may be the wrong move. If you are the low-earning
spouse, it may be better to take your retirement benefit starting at age 62 and
then switch to the spousal benefit you can collect on your current or
ex-spouse's account starting at your full retirement age. But beware of the
Gottcha in item 5.
3. If you're married, you or your spouse, but not both, can
receive spousal benefits after reaching full retirement age while deferring
taking your retirement benefits and, thereby, letting them grow. This may
require having one spouse file for retirement benefits, but suspend their
collection. This is called the File and Suspend strategy.
4. Be careful! If you take your own retirement benefit early
and are below full retirement age, you will be forced to take your spousal
benefit early and at a permanently reduced level if your spouse collects
his/her his/her retirement benefit before or in the month in which you apply to
collect your retirement benefit. If your spouse is not collecting a retirement
benefit when you apply for an early retirement benefit, you will not be deemed
to be applying for your spousal benefit. Hence, you can start collecting your
spousal benefit later. (See item 33)
5. Start Stop Start may also make sense for married workers
who aren't already collecting and whose age differences are such they they
can't take advantage of File and Suspend. Take, for example, a 62 year-old high
earner, named Sally, with a 66-year old low earner spouse, named Joe. By
starting retirement benefits early, Sally permits Joe to start collecting a
spousal benefit immediately. The reason is that spouses aren't eligible to
collect spousal benefits unless the worker is either collecting a retirement
benefit or has filed for a retirement benefit, but suspended its collection. If
Sally starts her retirement benefit at 62, Joe can apply just for his spousal
benefit at 66 and then wait until 70 to collect his own retirement benefit,
which will be at its highest possible value thanks to Social Security's Delayed
Retirement Credit. As for Sally, she can suspend her retirement benefit at 66,
when she reaches full retirement, and then restart it at 70, at which point her
benefits will be 32 percent higher than what she was collecting. Even singles
workers may opt for Start Stop Start to help with their cash flow problems.
6. If your primary insurance amount (your retirement benefit
available if you wait until full retirement) is less than half that of your
spouse and you take your own retirement benefit early, but are able to wait
until full retirement age to collect your spousal benefit, your total check,
for the rest of your life, will be less than one half of your spouse's primary
insurance amount. Nonetheless, this may still be the best strategy. This
reflects another Gotcha explained in 8.
7. On its website, Social Security states, "your spouse
can receive a benefit equal to one-half of your full retirement benefit amount
if they start receiving benefits at their full retirement age." This is
true only if your spouse isn't collecting his/her own retirement benefit. If
your spouse is collecting her own retirement benefit, his/her spousal benefit
is calculated differently. Rather than equaling one half of your full
retirement benefit, it's calculated as half of your full retirement benefit
less your spouse's full retirement benefit. This difference is called the
excess spousal benefit. The total benefit your spouse will receive is her
retirement benefit, inclusive of any reduction, due to taking benefits early,
or increment, due to taking benefits late, plus the excess spousal benefit. The
excess spousal benefit can't be negative; i.e., its smallest value is zero.
Take Sue and Sam. Suppose they are both 62 and a) Sue opts to take her
retirement benefit early and b) Sam opts to file and suspend at full retirement
and take his retirement benefit at 70. Between ages 62 and 66 (their full
retirement age), Sue collects a reduced retirement benefit, but is not forced
to take her spousal benefit (which would be reduced) because Sam isn't
collecting a retirement benefit during the years that Sue is 62 to 66. Now when
Sue reaches age 66, she starts to collect an unreduced spousal benefit because
Sam has qualified her to do so by filing and suspending for his retirement
benefit. OK, but her unreduced spousal benefit is calculated as 1/2 x Sam's
full retirement benefit less Sue's full retirement benefit. Sue ends up getting
a total benefit equal to her own reduced retirement benefit plus her unreduced
excess spousal benefit. This total is less than half of Sam's full retirement
benefit. To see this note that the total equals half of Sam's full retirement
benefit plus Sue's reduced retirement benefit minus Sue's full retirement
benefit. The last two terms add to something negative.
8. Are there are two different formulas for spousal benefits
depending on whether the spouse is collecting his/her own retirement benefit?
It sure seems that way because when the spouse is collecting a retirement
benefit, the excess spousal benefit (potentially reduced for taking spousal
benefits early) comes into play. And when the spouse isn't collecting a
retirement benefit, the spousal benefit equals half of the worker's full
retirement benefit. (Note, the spouse has to collect a retirement benefit
before full retirement age if she applies for her spousal benefit.) The answer,
in fact, is no. There is only one formula. The formula for the spousal benefit
is always the excess benefit formula. But here's what happens to the
application of that formula if the spouse is not collecting a retirement
benefit. In that case, the spouse's full retirement benefit (also called the
Primary Insurance Amount) is set to zero in calculating the excess spousal
benefit. The reason, according to Social Security, is that a worker's Primary
Insurance does not exist (i.e., equals zero) if the worker has not applied for
a retirement benefit (and either suspended its collection or started to receive
it). In other words, your Primary Insurance Amount is viewed as non-existant
until you apply for a retirement benefit. This construct - the primary
insurance amount doesn't exist until it's triggered by a retirement benefit application
-- lets Social Security claim to have one formula for spousal benefits. But
there are, in effect, two spousal benefit formulas and which one you -- the
person who will collect a spousal benefit -- faces will depend on whether or
not you take your retirement benefit early.
9. If you are divorced, both you and your ex can collect
spousal benefits (on each others work histories) after full retirement age
while still postponing taking your own retirement benefits until, say, age 70,
when they are as high as can be. This is an advantage for divorcees. But
there's also a disadvantage. A divorcee who applies for spousal benefits before
full retirement age will automatically be forced to apply for retirement
benefits even if her/his ex isn't collecting retirement benefits.
10. There is no
advantage to waiting to start collecting spousal benefits after you reach your
full retirement age.
11. There is no
advantage to waiting to start collecting survivor benefits after you reach your
full retirement age.
12. If you started
collecting Social Security retirement benefits within the last year and decide
it wasn't the right move, you can repay all the benefits received, including
spousal and child benefits, and reapply for potentially higher benefits at a
future date.
13. If you wait to
collect your retirement benefit after you reach your full retirement age, but
before you hit age 70, you have to wait until the next January to see your full
delayed retirement credit show up in your monthly check.
14. Millions of Baby
Boomers can significantly raise their retirement benefits by continuing to work
in their sixties. This may also significantly raise the spousal, child, and
mother and father benefits their relatives collect.
15. If you take retirement, spousal, or widow/widower
benefits early and lose some or all of them because of Social Security's
earnings test, Social Security will actuarially increase your benefits (under
the Adjustment of Reduction Factor) starting at your full retirement age based
on the number of months of benefits you forfeited. This is true whether the
loss in benefits due to the earnings test reflects benefits based on your own
work record or based on your spouse's work record. Consequently, you should not
be too concerned about working too much and losing your benefits if you elected
to take them early.
16. When it comes to possibly paying federal income taxes on
your Social Security benefits, withdrawals from Roth IRAs aren't counted, but
withdrawals from 401(k), 403(b), regular IRAs, and other tax-deferred accounts
are. So there may be a significant advantage in a) withdrawing from your
tax-deferred accounts after you retire, but before you start collecting Social
Security, b) using up your tax-deferred accounts before you withdraw from your
Roth accounts, and c) converting your tax-deferred accounts to Roth IRA
holdings after or even before you retire, but before you start collecting
Social Security.
17. Social Security's online benefit calculators either
don't handle or don't adequately handle spousal, divorcee, child, mother,
father, widow or widower benefits, or file and suspend options.
18. The default assumptions used in Social Security's online
retirement benefit calculators is that the economy will experience no
economy-wide real wage growth and no inflation going forward. This produces
benefit estimates that can, for younger people, be significantly less than what
they are most likely to receive.
19. Some widows/widowers may do better taking their survivor
benefits starting at 60 and their retirement benefits at or after full
retirement. Others may do better taking their retirement benefits starting at
62 and taking their widow/widowers benefits starting at full retirement age.
20. If you're below full retirement age and are collecting a
spousal benefit and your spouse is below full retirement age and is collecting
a retirement benefit, your spousal benefit can be reduced if your spouse earns
beyond the Earnings Test's exempt amount. And it can also be reduced if you
earn beyond the Earnings Test's exempt amount.
21. The Windfall Elimination Provision affects how the
amount of your retirement or disability benefit is calculated if you receive a
pension from work where Social Security taxes were not taken out of your pay,
such as a government agency or an employer in another country, and you also
worked in other jobs long enough to qualify for a Social Security retirement or
disability benefit. A modified formula is used to calculate your benefit
amount, resulting in a lower Social Security benefit than you otherwise would
receive.
22. Based on the Government Pension Offset provision, if you
receive a pension from a federal, state or local government based on work where
you did not pay Social Security taxes, your Social Security spouse's or widow's
or widower's benefits may be reduced.
23. If you have children, because you started having
children late or adopted young children later in life, they can collect child
benefits through and including age 17 (or age 19 if they are still in secondary
school) if you or your spouse or you ex spouse are collecting retirement
benefits.
24. If you have children who are eligible to collect
benefits because your spouse or ex spouse is collecting retirement benefits,
you can collect mother or father benefits until your child reaches age 16.
25. Your children can
receive survivor benefits if your spouse or ex-spouse died and they are under
age 18 (or age 19 if they are still in secondary school).
26. You can collect mother or father benefits if you spouse
or ex-spouse died and you have children of your spouse or your ex-spouse who
are under age 16.
27. There is a maximum family benefit that applies to the
total benefits to you, your spouse, and your children that can be received on
your earnings record.
28. If you choose to file and suspend in order to enable
your spouse to collect a spousal benefit on your earnings record while you
delay taking your benefit in order to collect a higher one later, make sure you
pay your Medicare Part B premiums out of your own pocket (i.e., you need to
send Social Security a check each month). If you don't, Social Security will
pay it for you and treat you as waving (i.e., not suspending) your benefit
apart from the premium and, get this, you won't get the Delayed Retirement
Credit applied to your benefit. In other words, if you don't pay the Part B
premiums directly, your benefit when you ask for it in the future will be NO
LARGER than when you suspended its receipt. This is a really nasty Gotcha,
which I just learned, by accident, from one of Social Security's top actuaries.
29. If you are collecting a disability benefit and your
spouse tries to collect just his/her Social Security benefit early, she will be
deemed to be filing for her spousal benefits as well. I.e., if your spouse
takes his/her retirement benefit early, he/she won't be able to delay taking a
spousal benefit early, which means both her retirement and spousal benefits
will be permanently reduced thanks to the early retirement benefit and early
spousal benefit reduction factors.
30. When inflation is low, like it is now, there is a
disadvantage to delaying until, say 70, collecting one's retirement benefit.
The disadvantage arises with respect to Medicare Part B premiums. If you
collecting benefits (actually were collecting them last year), the increase in
the Medicare premium this year will be limited to the increase in your Social
Security check. This is referred to as being "held harmless." Hence,
when inflation is low, the increase in your check due to the cost of living
adjustment will be small, meaning the increase in your Medicare Part B premium
will be limited. But, if you aren't collecting a benefit because you are waiting
to collect a higher benefit later, tough noogies. You're Medicare Part B
premium increase won't be limited. And that increase will be locked into every
future year's Medicare Part B premium that you have to pay. You can wait to
join Medicare until, say, age 70, but if you aren't working for a large
employer, the premiums you'll pay starting at 70 will be higher and stay higher
forever. So much for helping the government limit its Medicare spending!
31. Hold harmless -- the provision that your increase in Medicare
Part B premium cannot exceed the increase in your Social Security check due to
Social Security's Cost of Living Adjustment -- does not apply if you have high
income and are paying income-related Medicare Part B premiums.
32. The thresholds beyond which first 50 percent and then 85
percent of your Social Security benefits are subject to federal income taxation
are explicitly NOT indexed for inflation. Hence, eventually all Social Security
recipients will be tax on 85 percent of their Social Security benefits.
33. If you take your retirement benefit early and your
spouse takes his/her retirement benefit any time that is a month or more after
you take your retirement benefit, you will NOT be deemed, at that point (when
your spouse starts collecting his/her retirement benefit) to be applying for a
spousal benefit. In other words, you can, in this situation, wait until your
full retirement age to start collecting your unreduced excess spousal benefit.
The retirement benefit collection status of your spouse in the month you file
for early retirement benefits determines whether you are deemed to be also be
applying for spousal benefits. This means that you should think twice about
applying for retirement benefits in the same month as your spouse if one or both
of you are applying early.
View more information from Marc J. Soss at http://www.fl-estateplanning.com/ and http://info.fl-estateplanning.com/
Marc Soss' practice focuses on estate and tax planning; probate and trust administration and litigation; guardianship law; and corporate law in Southwest Florida. Marc is a frequent contributor to LISI and has published articles and been quoted in the Florida Bar, Rhode Island Bar, North Carolina Bar, Association of the United States Navy, Lawyers USA, Military.Com, Forbes.Com, and CNN Business. Marc also serves as an officer in the United States Naval Reserve.
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