MONEY Social Security

The Right Way to Claim Social Security Widow’s Benefits

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q. I am 61 and was divorced from my husband two years ago after more than 16 years of marriage. He died a few months ago at 72 and had been receiving Social Security benefits of $1,663 a month. I am working part-time, earning $13,000 a year, and want to continue doing so. According to the Social Security calculator, my own retirement benefit would be $1,028 a month if I claim at age 62, $1,364 at age 66 (my full retirement age), or $1,800 at age 70. If I claim a (reduced) widow’s survivor benefit before age 66, I expect to receive $1,314 a month if I file now at age 61½ or $1,347 at age 62.

Can I apply just for my survivor’s benefits now, continue to work, apply for Medicare at age 65, and at age 70 file for my own benefits? Also, while receiving survivor’s benefits, would I need to apply for my own benefits at age 66 and suspend it until age 70; or can I continue to collect survivor’s benefits, with no need to apply and suspend at 66, and change to my own benefits at 70? — Elizabeth

A. This is an incredibly well-informed query, so, first off, kudos to Elizabeth for doing her homework and doing such a good job looking out for herself. The details she provides are essential for figuring out her best Social Security claiming choice.

The simple answer to her question—whether to claim survivor’s benefits now—is “Yes.” The reasons for this illustrate the complexity of individual retirement benefits, as well as the way benefits interact, which can increase or reduce your Social Security income. This is a key issue for women, who tend to outlive their spouses and file the lion’s share of survivor claims.

The rules for widow’s (or survivor’s) benefits are different from spousal benefits, which involve claims on a current or divorced spouse. Survivor’s benefits may be taken as early as age 60, while spousal benefits normally can’t begin until age 62. Both benefits are lowered if you claim early, but the percentage reductions differ. That’s because survivors can claim up to six years before reaching their full retirement age (FRA), which is 66 for current claimants, compared with just four years for early spousal claims.

Another key difference is that survivor benefits do not trigger deeming when taken prior to full retirement age, which can be a real headache. If you are eligible to file for a spousal benefit and do so before age 66, Social Security will deem you to be also filing for your own retirement benefit. It does not pay two benefits at the same time but will give you an amount roughly equal to the greater of the two benefits. Further, once your retirement benefit has been triggered early, it will be permanently reduced.

The good news is that deeming does not apply to survivor benefits. So Elizabeth can file for a widow’s benefit right away and not trigger a claim for her own retirement benefit. Because it’s likely her retirement benefit will be higher at age 70 than her widow’s benefit, she should plan on taking the widow’s benefit as soon as possible. At age 70, she can switch to her retirement benefit .

She is correct that she will be hit with an early filing reduction. But given the small increases she would receive if she waited, the benefit of deferring is outweighed by the gains of claiming now. That’s because she will get more years of benefits, so the cumulative amount of income will be greater.

The modest earnings she receives won’t be a factor either. “Since her earnings are below the 2014 annual earning limits, she could qualify for widows benefits beginning this month with no loss of benefits due to the earnings test,” says James Nesbitt, a Social Security claims representative for nearly 40 years who now provides benefits counseling for High Falls Advisors in Rochester, NY.

“Depending on her past work history, her continued contributions into the Social Security system by working may have the effect of increasing her monthly benefit amount,” he adds. “The online retirement calculator on Social Security’s website will allow for future earnings to be used in estimating benefits.”

Elizabeth should set up an appointment now at a local Social Security office in order to begin receiving benefits as soon as possible, Nesbitt adds. If she files for her survivor benefit before age 65, Social Security should automatically enroll her in Medicare.

Further, Nesbitt notes, the precise amount of her survivor’s benefit depends on when her late husband filed early for his retirement benefit. This, like much else about Social Security, can be very complicated. But if his $1,663 benefit was the result of an early retirement filing, her actual survivor’s benefit could end up being much higher than she estimates. She should review this possibility when she meets with the agency to file her claim.

Lastly, she should not file and suspend her own retirement benefit but simply collect her survivor’s benefit and then claim her own retirement benefit at age 70. “Once a retirement claim has been filed at 66, albeit suspended, the amount of the widow’s benefit will be calculated as if she is [also] receiving the retirement benefit,” Bennett notes. “A ‘file and suspend’ would reduce or possibly eliminate the widow’s benefit.”

Philip Moeller is an expert on retirement, aging, and health. His book, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” will be published in February by Simon & Schuster. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

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MONEY

How Your Earnings Record Affects Your Social Security

Q: I took my Social Security in Jan 2011 at age 65 1/2 and have continued to work full time. By the end of this year, I figure I will have contributed around $5,500 into Social Security in each of the past four years. Knowing I made more money in recent years than I did in the prior years—the years on which my Social Security was based—I expected a readjustment, but my benefits didn’t change. My local Social Security office told me that any readjusting would have been done automatically in January. Then last month I got a letter stating that my check will increase by $1 per month, attributed to the 2013 year. What about 2011 and 2012? Nice return on $5,500! Do I have any recourse? Don

A: First off, I agree that it is very hard to keep paying into Social Security after you’ve started receiving benefits and not feel like you’re getting anything out of it. I think payroll taxes should be reduced for people who have reached full retirement age (it’s 66 now and will rise to 67 for people born in 1960 and later). Doing this would benefit workers and also give employers an incentive to hire older workers. To say the least, I am not holding my breath waiting for such changes to be enacted.

The specifics of how your future benefits are affected by your recent earnings is all about how Social Security calculates your earnings base. Social Security keeps track of all your covered earnings (earnings on which you paid Social Security payroll taxes) during your working life. Each year, it applies an index factor to your earnings to adjust them for the wage inflation that has occurred since that year.

In this way, money earned during 1985, for example, carries the same weight in calculating your Social Security benefits as money earned in 2005 or 2010 or 2014. This indexing stops when you turn 60; any earnings after that age are included in your earnings record on an unadjusted basis. Because of wage inflation, it’s quite likely these later-age earnings will raise your benefits.

The agency uses your highest 35 years of earnings to determine what it calls your Primary Insurance Amount (PIA), the benefit you’d get if you began collecting benefits at your full retirement age, which in your case is 66. If you do not have 35 years of eligible covered earnings, the agency enters a zero for each “missing” year. So, for example, if you had only 20 years of covered earnings, Social Security would calculate your benefit by using the earnings for those 20 years, adding 15 zeroes, and using this average to determine your PIA. (The PIA is also used in determining benefits to your spouse or former spouse that are based on your earnings record.)

Now, even though your earnings have been increasing, it’s possible they would not become one of your new top 35 earnings years. And even if they did, they might not raise your earnings base very much.

Perhaps you already have obtained your earnings record from Social Security. If not, you can get your earnings record at the Social Security website. It’s also possible, but a lot of work, to use this record to compute your earnings base.

The only recourse I can suggest is to take your earnings record to a Social Security office and ask a representative to walk you through it to make sure you’re being properly credited for your recent work history.

I hope this helps—though I realize my suggested remedy may only lead to more frustration for you. Best of luck.

Philip Moeller is an expert on retirement, aging, and health. His book, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” will be published in February by Simon & Schuster. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

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MONEY Social Security

The Hidden Pitfalls of Collecting Social Security Benefits from Your Ex

Q. I have spoken with seven people at the Social Security Administration and gotten five different answers to my question. I want to draw Social Security from my ex-husband of 30 years at my present age, 62. I know that is not my full retirement age, and I would receive a reduced benefit. I also want to wait until full retirement age, 66, to draw from my Social Security benefit and receive it in full without reduction. Can I do this? —Sandra

A. This sounds like a sensible plan but unfortunately, when it comes to Social Security rules, logic doesn’t always carry the day. In this case, your plan conflicts with the agency’s so-called “deeming” rules, which apply to people who apply for spousal benefits—whether they are married or divorced—before they reach full retirement age.

Before we get to the problems with deeming, let’s quickly review the basics. If you were 66 and filed a divorce spousal claim, you would collect the highest possible spousal benefit—50% of the amount your ex-husband is entitled to at his full retirement age. It isn’t necessary for your ex to have filed for his own benefits at 66 for you to receive half of this amount. In fact, he doesn’t even need to have reached age 66. That’s just the reference point for determining spousal benefits.

Since you’re filing early, however, you won’t get half of his benefits. The percentages can be confusing, so here’s an example from the agency’s explanation of benefit reductions for early retirement. If your ex-husband’s benefit at full retirement age was $1,000 a month, your “full” divorce spousal payout at age 66 would be 50%, or $500. If you file at age 62, that amount will be reduced by 30% of $500, or $150. The payout you get, therefore, comes to $350 ($500 minus $150), or 35% of his benefit.

There are a few other rules for receiving divorce spousal benefits. You cannot be married to someone else. And if your former husband has not yet filed for his own Social Security retirement benefit, you must be divorced for at least two years to claim an ex-spousal benefit.

Now for the deeming pitfalls. If you meet these tests and file for a divorce spousal benefit before reaching full retirement age, Social Security deems you to be simultaneously filing for a reduced retirement benefit based on your own earnings record. The agency will look at the amount of each award and will pay you an amount that is equal to the greater of the two.

Since your spousal filing has also triggered a claim based on your own work history, you cannot then wait until full retirement age to file for your own benefits. In other words, your own retirement benefit will be reduced for the rest of your life. Logical or not, those are the rules.

There’s no simple solution to the deeming problem, but you do have some choices. Figuring out the best option depends on many factors, including the levels of Social Security benefits that you and your ex-husband can receive, as well as your overall financial situation. Do you absolutely need to begin collecting some Social Security benefits at age 62, or can you afford to wait? You should also consider whether you’re in good health and how long you think you may live.

Your first choice is to do nothing until you turn 66, which is the full retirement age for someone who is now 62. Once you hit that milestone, deeming no longer applies. At that time, you could collect your unreduced divorce spousal benefit and suspend your own benefit for up to four years till age 70. Thanks to delayed retirement credits, your benefit will rise by 8% a year, plus the rate of inflation, each year between age 66 and 70. (Your spousal benefit remains the same, except for the inflation increase.) So, even if your divorce spousal benefit is greater than your retirement benefit at age 66, this may no longer be the case when you turn 70.

But if you need the money now, your best choice may be to file for reduced benefits. If your reduced divorce spousal benefit is higher than your own reduced retirement benefit, you have another option. At 66, you could suspend your own benefit and receive only your excess divorce spousal benefit—the amount by which your ex-spousal benefit exceeds your retirement benefit. It probably won’t be much. Still, suspending your benefit will allow it to rise until age 70, though it will be lower than you would have otherwise received because of early claiming. If these increases provide more income than your divorce spousal benefit, this move may be worth considering.

Variation of these choices include filing early at age 63, 64, or 65. You can also consider how delayed retirement credits would affect your decision if you filed at age 67, 68, or 69. In the end, you’ll need to do the math to compare the potential benefits of delaying vs. claiming now. Or you may want to get help from a financial adviser.

Philip Moeller is an expert on retirement, aging, and health. His book, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” will be published in February by Simon & Schuster. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

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MONEY Social Security

Why Social Security Suddenly Changed Its Benefits Withdrawal Rule

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: I retired in 2009 to care for an ailing parent who has since passed away. I took Social Security at age 62, when the law allowed claimants to pay back their Social Security and receive the highest benefits at age 70. Since that time the law has changed and repayment can only be made in the first year. Do you know of any proposal to change the current rules for those who signed up under the old law? —Sandra

A: As Sandra correctly notes, Social Security changed its benefits withdrawal policy in December 2010, after she had retired under its prior rules—and it’s one of the most unusual policy shifts that the agency has enacted. Consider that Social Security, which often gets dinged for slow response time, made this change lightning fast. What’s more, the new policy seems to have little to do with the needs of beneficiaries like Sandra and everything to do with the agency being surprised—and perhaps chagrined—that people were paying attention to its often arcane rules and actually taking advantage of them.

Under the old policy, people who had begun receiving benefits could, at any time, pay back everything they’d received and effectively wipe clean their benefit history. By resetting their benefit record this way, people who took reduced retirement benefits early would be able to file later for much higher monthly payments. For people born between 1943 and 1954, for example, retirement benefits at age 70 are 76% higher than those taken at age 62.

Few people paid much attention to this rule until a growing group of financial planners and Social Security experts began highlighting the possible gains of withdrawing benefits and delaying claiming. As the word spread, journalists began to write about these rules for an even wider audience.

Social Security, which previously had no problem with the rule when few were using it, changed its mind as more and more people began withdrawing their benefits. Suddenly, without an extended period for evaluation or debate, the agency issued a final rule limiting the benefit withdrawal option—and it took effect immediately. If the public wanted to comment, it would be able to do so only after the rule was changed. By comparison, the decision to raise the official retirement age in the program from 66 to 67 was enacted in 1983—37 years before it will take effect in the year 2020.

Here’s what the agency said at the time it changed its rules on withdrawing benefits:

“The agency is changing its withdrawal policy because recent media articles have promoted the use of the current policy as a means for retired beneficiaries to acquire an ‘interest-free loan.’ However, this ‘free loan’ costs the Social Security Trust Fund the use of money during the period the beneficiary is receiving benefits with the intent of later withdrawing the application and the interest earned on these funds. The processing of these withdrawal applications is also a poor use of the agency’s limited administrative resources in a time of fiscal austerity—resources that could be better used to serve the millions of Americans who need Social Security’s services.”

Further, in making the shift to a one-year withdrawal period, the agency explained that the policy was designed to reduce the value of the option so few people would use it. Today, by the way, the agency supports delaying retirement much more than it used to.

Of course, telling people to delay claiming is of little help to people like Sandra, who retired under the old rule and was caught by the sudden policy shift. Is there any likelihood that the rule could be changed to accommodate this group? Not really, says James Nesbitt, a Social Security claims representative for nearly 40 years who is now providing benefits expertise for High Falls Advisors in Rochester, NY. “Unfortunately,” he says, “this change did not contain any grandfathering provision. I am not aware of any pending actions within Congress or Social Security that would extend grandfather rights to those who were disadvantaged by this change.”

Philip Moeller is an expert on retirement, aging, and health. His book, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” will be published in February by Simon & Schuster. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

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How to protect your retirement income from Social Security mistakes

Here’s how Social Security will cut your benefits if you retire early

Will Social Security be enough to retire on?

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MONEY Social Security

How to Protect Your Retirement Income from Social Security Mistakes

pencil eraser
Ryan McVay—Getty Images

At the budget-strapped agency, reps may hand out incorrect information. Here's how our Social Security expert helped readers get the right answers.

Suspending your Social Security benefits as a way of boosting your retirement income can make sense in certain situations. But some readers who tried to follow this strategy say they have encountered problems from an unexpected source—Social Security representatives who either don’t understand how suspending benefits works or actually claim it can’t be done.

People who begin taking benefits between age 62 and their full retirement age (FRA)—66 for those born in 1943, rising to 67 for those born in 1960 or later—have the option of suspending benefits at their FRA. They can resume them at any time until benefits reach their peak at age 70. For those who defer Social Security benefits until age 70, your benefit will be 76% higher than if taken at 62, the earliest age that most people can begin claiming retirement benefits. Still, most people decide to take Social Security early because they need the money or cannot continue to work for medical reasons.

Even so, circumstances may change. Maybe a private pension kicks in, reducing the need for Social Security. Or your kids move out on their own, reducing household expenditures and the need for current income. Or maybe you simply want to walk back your decision to claim early, given the higher income you might receive by delaying—a survey last summer sponsored by Nationwide Financial found that nearly 40% of those who filed early for Social Security later regretted their move and wished they had waited. If so, suspending your benefits can be a smart strategy.

If you want to pursue this option, however, your first step is to become well informed—especially given the possibility you’ll encounter opposing views from Social Security representatives. That’s the problem one reader wrote me about:

“The agent at our Social Security office said he didn’t know anything about this and that I could check online at socialsecurity.gov and if I found out any additional information on this I could contact him and he would advise me someone I could call and get more information on this. I was shocked that he (a paid official Social Security agent) told me if I found out any additional information on this to come back to the office.”

As I told her, all the agent had to do was check his own web site to become informed. That doesn’t sound like too much to ask, does it?

While this agent did not know about suspending benefits, at least he didn’t provide the wrong information. Here’s an agent who did, according to another reader:

“We both are retired. I am 71 years old. My wife is 67 years old. I started taking Social Security benefits at 66 (my FRA) and my wife started taking early (reduced) benefits at 62 on her own income. We went to the Social Security Administration office today to sign up to stop my wife’s benefits for the next three years and start taking benefits at the age of 70. The SSA office says that we can do that but you have to pay back the total (large) amount that she received from the day she started taking benefits at 62. Without paying that large amount, they said, we cannot do that. We showed them the copy of your article and requested them to review it. We also requested that we would like the office supervisor also to review our case and your article. After reviewing your article, the SSA office supervisor told us that information in your article is incorrect.”

Now, I admit that being infallible is above my pay grade. But the right of this woman to suspend her benefits is not in question. And she doesn’t need to repay Social Security one penny of her earlier benefits. I urged the couple to do some homework and go back to their SSA office and try again:

Your wife can SUSPEND her benefit at any time between her FRA (age 66 in her case) and age 70. She does not have to repay anything that she had received in the past. But she will have to make sure she pays for any future Medicare premiums that had been deducted from her Social Security. The only time that repayment of prior benefits is required is if she WITHDREW her benefits entirely. However, this is only permitted within 12 months of when she began taking benefits, and this is not the case with her. Often, people get confused about whether they’re talking about SUSPENDING or WITHDRAWING benefits.

Here are the official descriptions of the suspension rules from the Social Security Program Operating Manual System (POMS):

GN 0249.100: Voluntary Suspensions

GN 0249.110: Conditions for Voluntary Suspension

Everyone makes mistakes, and Social Security’s rules are very complicated. Further, the Social Security Administration has been hammered by budget cuts, forced to reduce staff, and close many offices around the country, as a Senate report last summer documented. That’s still no excuse for providing people with wrong or misleading information. But it further reinforces the need for people to learn the agency’s basic rules so they can look out for themselves.

Social Security, by the way, agrees. “If the situations you described are indeed accurate, they are unacceptable and we apologize for providing any misinformation,” agency spokeswoman Dorothy Clark said. “While our programs are complex, the vast majority of our employees provide accurate information. However, when we learn of these situations, we take action to correct the errors and provide further employee training.”

Philip Moeller is an expert on retirement, aging, and health. His book, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” will be published in February by Simon & Schuster. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

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MONEY Social Security

Here’s a Quick Guide to Fixing Social Security

Band-Aid on Social Security card
John Kuczala—Getty Images

These changes could easily balance the program for the next 75 years. But reaching consensus on the mix of reforms is the real challenge.

Social Security likely will move back to center stage after this week’s elections. The program’s finances have eroded bit by bit for years, drawing calls for change every year. But nothing has been done. Now Congress could continue kicking this can down the road. Or it could decide to actually tackle the problem and change things, most likely as part of a broader look that also includes Medicare and Medicaid.

With favorable prospects for a Republican majority in both houses of Congress, stories already abound about raising the retirement age, changing the annual cost-of-living adjustment or raising the ceiling on earnings subject to the payroll tax.

AARP, the National Committee to Preserve Social Security & Medicare and other Social Security support groups have gone on the offensive. Far from just defending the program from cuts, they are speaking out aggressively about the merits of raising benefits

All of which makes a recent report from the Social Security Administration particularly timely. It reviews more than 120 ideas for changing Social Security and calculates how each would affect the program’s future finances. The report was overseen by Stephen C. Goss, chief actuary of the Social Security Administration. If any source is both informed and free from political spin, it is this one.

Within this list are enough changes to balance the program several times over during the next 75 years. But then, this has never been the issue. Rather, the contentious debate has been over the “right” mix of changes. And people have not been able to agree on that.

Here’s a quick guide to the reforms that would have the biggest impact, according to the report. It is tempting to just add up the financial impact of each change to see if they erase the Social Security shortfall. But, as the report notes, some reforms would affect others. So although the sum of impact of the changes will give you a ballpark estimate, the actual results are likely to be a bit different.

Cost-of-Living Adjustment (COLA). The annual cost-of-living adjustment to Social Security benefits (1.7% for 2015) has received lots of attention, primarily from a proposal to substitute a less-generous “chained” Consumer Price Index for the current inflation measure used to set the yearly change. Using the chained CPI would close 19% of the program’s projected shortfall. A more draconian measure—reducing the COLA by a percentage point from what it would otherwise be—would cut 61% of the shortfall all by itself. However, senior’s groups think the COLA should be increased to more accurately reflect the larger weight of health costs for older consumers. This proposal would raise the shortfall by 13%.

Monthly Benefits. Adjusting the complex formulas used to calculate benefits could make big dents in the shortfall. Right now, benefit increases are tied to changes in average wages. Linking them instead to general price inflation could cut as much as 90% of the system’s shortfall. That’s because wages historically have risen by more than the rate of inflation, so this change would effectively reduce the size of future benefit increases. There also are a slew of suggested sweeteners that would reduce the pain of smaller increases, although they tend not to add much to the shortfall.

Retirement Age. The normal retirement age for benefits is now 66 and set to rise to 67 in the year 2027. Raising it to 68 over a six-year period would shave 15% from the shortfall, while increasing it to 69 over 12 years would cut 35% off the long-term deficit. Raising the age to 70 over a shorter time period, and automatically adjusting it to reflect expected longevity gains, would cut the shortfall by an even larger 48%—but that’s only if the hike is combined with an increase in the earliest age for claiming benefits from 62 to 64. Reducing benefits to early retirees is strongly opposed by senior and labor groups who argue that workers in physically demanding jobs are often forced to retire early for health reasons.

Payroll Taxes and Covered Earnings. The system could be balanced by raising the payroll tax rate from its current level of 12.4% (paid half and half by employees and employers). There is a separate payroll tax for Medicare. Other proposals would raise the wage ceiling subject to payment taxes, which will rise to $118,500 in 2015. These suggestions would have large effects on program shortfalls. Simply eliminating the wage ceiling for employer payments would cut 50% from the projected 75-year deficit. Raising the ceiling so that 90% of earned wages are subject to Social Security taxes would cut 48% of the deficit. The stiffest medicine – raising the tax rate from 12.4% to 15.5%—would balance the program all by itself, and then some. On the flip side, a proposal to exempt people with more than 45 years of earnings from payroll taxes would widen the deficit by 11%. Such a change, advocates say, would improve retiree incomes and stop penalizing older workers, who must continue payroll taxes even thought their benefits do not rise as a result.

Trust Fund Investments. Social Security reserves are now invested in a special issue of U.S. Treasury Securities. Putting some of these funds into the stock market has long been a high priority of many conservatives, and strongly opposed by liberal groups. If 40% of trust funds were invested in stocks, and if they earned an annual return of 6.4%, after calculating the effects of inflation, this would close 21% of the program’s long-term funding shortfall. For comparison, the report assumed the long-term returns of the special issue of Treasury securities would be 2.9% a year, after inflation.

Getting the “right” mix of changes would be terrific, but enacting even a mediocre compromises next year would be far, far better. Think about a series of trade-offs. One side might get a later retirement age and reductions in the rate of future benefit growth, from changes to the COLA and annual wage base. The other side could get hefty hikes in payroll taxes for wealthier workers and more protection for lower-income, early retirees. Now if we could only get Congress to start the negotiations.

Philip Moeller is an expert on retirement, aging, and health. His book, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” will be published early next year by Simon & Schuster. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

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MONEY Ask the Expert

Here’s How Social Security Will Cut Your Benefits If You Retire Early

man holding calculator in front of his head
Oppenheim Bernhard—Getty Images

Whether you retire early or later, it's important to understand how Social Security calculates your benefits.

Q: I am 60 and planning on withdrawing Social Security when 62. Due to a medical condition, I am not making $16.00 an hour anymore but only making $9.00. Do you know how income level is calculated on early retirement? Thank you.

A. Social Security retirement benefits normally may be taken as early as age 62, but your income will be substantially higher if you can afford to wait. If you are entitled to, say, a $1,500 monthly benefit at age 66, you might get only $1,125 if you began benefits at age 62. Defer claiming until age 70, when benefits reach their maximum levels, and you might receive $1,980 a month.

Still, most older Americans are like you—they can’t afford to wait. Some 43% of women and 38% of men claimed benefits in 2012 at the age of 62, according to a Social Security report. Another 49% of women and 53% of men took benefits between ages 63 and 66. Just 3% of women and 4% of men took benefits at ages 67 and later, when payouts are highest.

Why are people taking Social Security early? The report didn’t ask people why they claimed benefits. But academic research suggests that the reasons are pretty much what you might expect—retirees need the money, and they also worry about leaving benefits on the table if they defer them. There is also strong evidence that most Americans are not fully aware of the advantage of delaying benefits. A study last June sponsored by Nationwide found that 40% of early claimants later regretted their decisions.

So before you quit working, it’s important to understand Social Security’s benefits formula. To calculate your payout, Social Security counts up to 35 of your highest earning years. It only includes what are called covered wages—salaries in jobs subject to Social Security payroll taxes. Generally, you must have covered earnings in at least 40 calendar quarters at any time during your working life to qualify for retirement benefits.

The agency adjusts each year of your covered earnings to reflect subsequent wage inflation. Without that adjustment, workers who earned most of their pay earlier in their careers would be shortchanged compared with those who earned more later, when wage inflation has caused salary levels to rise.

Once the agency adjusts all of your earnings, it adds up your 35 highest-paid years, then uses the monthly average of these earnings (after indexing for inflation) to determine your benefits. If you don’t have 35 years of covered earnings, Social Security will use a “zero” for any missing year, and this will drag down your benefits. On the flip side, if you keep working after you claim, the agency will automatically increase your benefits if you earn an annual salary high enough to qualify as one of your top 35 years.

The figures below show how Social Security calculated average retirement benefits as of the end of 2012 for four categories of worker pay: minimum wage, 75% of the average wage, average wage, and 150% of the average wage. (The agency pulls average wages each year from W-2 tax forms and uses this information in the indexing process that helps determine benefits.)

  • Worker at minimum wage: The monthly benefit at 62 is $686 and, at age 66 is $915.50. The maximum monthly family benefits based on this worker’s earnings record (including spousal and other auxiliary benefits) is $1,396.50.
  • Worker at 75% of average wage: The monthly benefit at 62 is $975 and, at age 66 is $1,300.40. The maximum monthly family benefits based on this worker’s earnings record (including spousal and other auxiliary benefits) is $2,381.20.
  • Worker at average wage: The monthly benefit at 62 is $1,187 and, at age 66 is $1,583.20. The maximum monthly family benefits based on this worker’s earnings record (including spousal and other auxiliary benefits) is $2,927.40.
  • Worker at 150% of average wage: The monthly benefit at 62 is $1,535 and, at age 66 is $2,047. The maximum monthly family benefits based on this worker’s earnings record (including spousal and other auxiliary benefits) is $3.582.80.

In short, claiming at age 62 means you’ll receive lower benefits compared with waiting till full retirement age. But given a lifetime earnings history and Social Security’s wage indexing, receiving a lower wage for your last few working years will not make a big difference to your retirement income.

Philip Moeller is an expert on retirement, aging, and health. His book, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” will be published early next year by Simon & Schuster. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

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How does Social Security work?

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MONEY Social Security

This Little-Known Social Security Strategy Can Boost Your Retirement Income

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JGI/Jamie Grill—Getty Images

For retirees who need added income temporarily, turning your Social Security benefit on and off can be a smart move. It may also help your family over the long term.

Welcome to the Social Security claiming world of start-stop-start, a sophisticated strategy that can add big bucks to some people’s lifetime benefits if properly used.

By now, anyone who regularly reads about Social Security likely knows that delaying benefits until age 70 allows them to reach their highest level.

They also probably know that beginning to collect retirement benefits as early as age 62 will reduce them by 25% from what they would have been at age 66 (and 76% from their level at age 70 if claiming is deferred).

But it’s a whole lot less likely that they know about being able to begin taking benefits early, stopping them at age 66, and enjoying the benefits of delayed retirement credits until age 70. This is a potentially great option that can boost lifetime benefits, as well as help people who may be in a temporary financial bind in their early 60s—perhaps they have to take early retirement, but later end up earning more money in a second career.

Larry Kotlikoff, an economics professor (and co-author of my upcoming book on Social Security claiming), provides a useful and detailed explanation of the start-stop-start strategy. His analysis includes extensive computer simulations to determine how best to take advantage of these rules.

How Start-Stop-Start Works

The flexibility to start and stop your benefit is yet another important aspect of the agency’s rules regarding what it calls Full Retirement Age (FRA). This is 66 for people born between 1943 and 1955. For people born later, it rises by two months a year before hitting 67 for anyone born in 1960 and later. (I wrote recently about how the FRA can affect claiming decisions.)

I recommend that people consider waiting until age 70 to begin Social Security. But there are lots of valid reasons to begin claiming as soon as 62, which normally is the soonest you can receive benefits (there are earlier claiming ages for people with disabilities and surviving spouses).

If you take reduced benefits early—with “early” meaning before your FRA—you generally are stuck at those reduced benefit levels until you reach your FRA. There is a provision that lets you withdraw your benefit decision within a year of making it, pay back everything you’ve received from Social Security (included Medicare premium payments, if applicable) and get a fresh start with your claiming record.

But most early claimers don’t do this. Once they file early, they are stuck with whatever reduced benefit they get until they hit their FRA. At that time, Social Security rules allow a person to suspend their benefits for as long as four years. This is the “stop” part of start-stop-start. And most people are not aware of this FRA-related rule.

During this “stop” period, their benefits will earn delayed retirement credits. If they suspend for the full four years before their second “start,” their benefit will be 32% higher than when they suspended it. That’s a real 32% gain, too, as the delayed credits include the program’s annual cost-of-living adjustments for inflation. Now, this person’s benefits at age 70 will still be less than if they had never claimed a reduced benefit. But they’ll still be much higher than if they had never suspended them at their FRA.

Here’s a simple example: Say you are due a $1,000 retirement benefit at your FRA of 66. It will rise 32% to $1,320 a month (in real, inflation-adjusted terms) if you wait to claim until you turn 70. It will be reduced 25% to $750 a month if you claim early at age 62. However, that $750 will rise by 32% to $990 a month if you suspend at age 66 (the “stop”) and resume (the second “start”) at age 70. That’s a lot more than $750, of course, but it’s still far short of the $1,320 you’d get if you never claimed benefits at all until you turned 70.

Who Benefits by Resetting Your Claim

Besides helping out those in a temporary financial bind, this strategy may also improve your spouse’s benefits. Under Social Security rules, one spouse has to first file for their retirement benefit before the second spouse can file for a spousal benefit. While filing for retirement early will reduce that filer’s benefits, it could increase your family’s overall income. That’s because your husband or wife can then collect spousal benefits, while his or her individual benefit will keep rising till age 70.

If there’s a big age difference between you and your spouse, or if your spouse has a work record to consider, it can make sense for one spouse to begin benefits early, then suspend them when the second spouse reaches an optimal claiming age. The benefits of start-stop-start can become particularly valuable in maximizing family benefits for a couple, especially if they have young children.

As you can see, calculations for how to maximize benefits using start-stop-start can be very complex. You will probably do best to get help from a financial adviser, or use a benefits claiming calculator (see some recommendations here and here), or both.

Philip Moeller is an expert on retirement, aging, and health. He is an award-winning business journalist and a research fellow at the Sloan Center on Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

MONEY retirement planning

Smart Moves for Controlling Health Care Costs in Retirement

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pixhook—Getty Images

Planning for later-life medical costs is essential. These steps can keep you healthy longer and ease your worries.

It’s clear that planning for later-life health care costs is essential for a secure retirement—but figuring out what to do about them is a lot less clear. Out-of-pocket health expenses are not only a big-ticket item but are not predictable or controllable. No wonder few of us build financial strategies for future health needs, preferring the ever-popular ostrich plan: Place head in sand and hope for the best.

“Less than one out of six pre-retirees has ever attempted to estimate how much money they might need for health care and long-term care in retirement,” according to a report by Merrill Lynch and Age Wave, a consulting firm. Knowledge about Medicare is abysmal, the survey found, even among those already enrolled in the program.

And a recent health benefits survey by the Employee Benefits Research Institute, a non-profit retirement industry think tank, found that while nearly half of workers were confident about their ability to get the treatments they need today, only 30% were confident about that ability during the next 10 years, and just 19% are confident once they are eligible for Medicare.

Having a plan is a good way to build confidence. So start by taking a look at the mirror and asking yourself: How long do you think you’ll live and how healthy will you be in your later years?

“A 65-year-old male in excellent health can expect to live to age 87, while the same male in poor health has a life expectancy at age 65 of approximately 81 years,” said a recent study from the Insured Retirement Institute, a trade group that pushes annuity investments. A 65-year-old female in excellent health has a life expectancy of 89, or 84 in poor health. An average couple age 65 has a 40% chance that one or both will live to age 95.

While living to an old age may be better than what’s behind Door Number Two, it may prove costly. Old-age health expenses tend to be loaded into the last few years of life, often to deal with chronic illnesses, especially Alzheimer’s.

Average out-of-pocket health care expenses for that 65-year-old male will be an estimated $246,000 for the rest of his life if he is in poor health and dies at 81, the IRI study said. The lifetime bill rises to $345,000 for the healthy man who survives to an average age of 87.

Adopting healthy lifestyle habits may significantly reduce older-age health expenses. Just as important, it’s the best investment you can make in a higher quality of life during your later years.

The Merrill Lynch-Age Wave study recommends these proactive planning steps:

  1. Map out future out-of-pocket health expenses, including estimating future Medicare premiums and co-pays.
  2. Learn how Medicare and long-term insurance work.
  3. Develop contingency plans, for you and other family members, should illness cause lost income from an extended work disability.
  4. Broaden your planning to include those family members most likely to comprise your caregiving and financial support network.

The IRI report, not surprisingly, sings the virtues of using annuities to provide guaranteed lifetime streams of income to deal with long-running health care expenses. Many financial advisers prefer other investments. But you should at least look at annuity options as part of your long-term financial planning anyway.

If you’re especially worried about running out of money in your 80s— and, God willing, your 90s—then you should explore deferred annuities. Often called longevity insurance, a deferred annuity can be designed to not begin payouts until old age. If you buy one of these products in your 50s or 60s, the insurance company will provide very attractive payment terms. And it should, of course, because it will have the use of your annuity purchase money for 20 or even 30 years, with a good chance you’ll die before they have to pay you a cent.

The other insurance product worth a close look is long-term care insurance. Increasingly, this product is being linked with annuities to provide purchasers with choices—receive annuity payments or use the money for a qualifying long-term care needs. Generally, such hybrid products provide less bang for the buck than a pure annuity or long-term care policy. Also, keep in mind that your goal here should be to protect you and your family from ruinous health care bills. This is primarily an insurance product, not an investment.

Finally, the best annuity around is Social Security. It offers lifetime payments, annual inflation protection and government payment guarantees. That’s why I pound the drum of deferring Social Security until age 70, if it makes sense for your financial, family and longevity profile.

Philip Moeller is an expert on retirement, aging, and health. He is an award-winning business journalist and a research fellow at the Sloan Center on Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

MONEY Social Security

The Social Security Mistake Even Its Reps Are Making

The rules surrounding claiming requirements are so complicated that the official source of information doesn't always get them right. Here's some guidance that will save you money—and keep you from settling for bad advice.

Claiming Social Security benefits is an exercise in timing. Benefits are pegged to what the agency calls your Full Retirement Age, or FRA, 66 for those now near retirement. Claim too early—or too late—and you could be out truly big bucks.

First, there are early retirement reductions. For example, if you file at the earliest claiming age of 62, your benefits will be reduced by up to 25 percent. Early claiming reductions are even greater for spousal benefits: up to 30 percent if a spouse files at 62 versus 66.

The agency also has rules affecting the maximum benefits that qualifying family members may receive based on a person’s earnings record. So if a worker files early, the whole family stands to lose benefits.

The effects of early claiming don’t end there. If a person files for spousal benefits before reaching their FRA, Social Security deems them to be filing at the same time for their own retirement benefits. They will receive the greater of the two amounts, but will not be able to file a restricted application for just the spousal benefit.

Further, they will not be able to suspend their own retirement benefit and take advantage of Social Security’s delayed retirement credits, which add 8% a year to someone’s benefits, adjusted for inflation, between the ages of 66 and 70.

When someone has reached their FRA, however, such deeming no longer applies. The claimant can file for just the retirement or spousal benefit, receiving its full value while letting the second benefit rise in value until they switch to it at a later date.

These are complicated rules. Even if you understand them, Social Security representatives may not, or there may be communications and misunderstandings.

That’s what happened to Steve Hirsh, from Ridgeland, Miss. After reaching his FRA, Hirsh filed for his retirement benefit. His wife, who is younger, has not reached her FRA and has not yet filed for any benefit. The couple’s plan, Steve wrote, is for his wife to claim a spousal benefit at age 66, which would equal half of Steve’s benefit at his FRA.

At the same time, she would suspend her own retirement benefit for four years. Then, when she turned 70, she would stop receiving spousal benefits and begin taking her own retirement benefits, which would have risen during four years of delayed retirement credits and reached their maximum amount.

Steve’s plan is sound, but he said that Social Security didn’t see it that way. “I have been told repeatedly by various Social Security reps that she cannot file for the spousal option because her [earnings] base is more than half of mine,” he wrote to me via email. In other words, her retirement benefit from her own work record would be larger than her spousal benefit from Steve’s work history. “Is the Social Security office correct that we can’t do this because of the relative values of our full base amounts?”

Steve got bad advice from Social Security. Repeatedly. The relative values of a couple’s Social Security earnings can come into play if either spouse files for benefits before reaching FRA and is deemed to be filing for multiple benefits. But deeming ends at FRA, and the relative values of a couple’s covered earnings does not restrict their ability to collect a benefit.

I asked Steve to take another crack at Social Security, and he did. This time, the agency got it right. He sent me the agency’s response, which said in part, “Please note that deemed filing is not applicable for a claimant who is full retirement age (FRA). If an individual is FRA, he or she can file for a spousal benefit and delay filing for his or her own retirement benefit until a later time.”

Steve was delighted. “This will make a significant difference in our overall retirement strategy,” he said.

Beyond congratulating him for being persistent, we should read this as a cautionary tale. Even the official source of Social Security information can make mistakes, and what you don’t know can hurt you. So, do your homework and understand Social Security benefits. If Steve and his wife had taken the agency’s earlier responses at face value, they would have lost a lot of retirement income.

Philip Moeller is an expert on retirement, aging, and health. He is an award-winning business journalist and a research fellow at the Sloan Center on Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

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