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.

Related:

How does Social Security work?

When can I start collecting Social Security benefits?

Why should I wait past age 62 to start collecting benefits?

MONEY Social Security

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

woman flicking light switch
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

stethoscope with golf ball
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.

MONEY Social Security

When It Comes to Claiming Spousal Benefits, Timing Is Everything

Seemingly straightforward questions about claiming Social Security spousal benefits can wind up becoming complicated in a hurry. Here's one answer.

Recently I received a question from a reader that opens up all sorts of concerns shared by many couples:

I am four years older than my husband. I have reached my full retirement age (66) in June 2014. My own benefit is very small ($289/month), since my husband is the bread earner. I have been mostly a stay-at-home mom.

Should I just claim my own benefit now and wait four more years for my husband to reach his full retirement age, then apply for spousal benefits? That means he will get about $3,000/month, and I will get half of his benefit.

Or should my husband apply for early retirement now, at age 62, so I can apply for my own spousal benefits? He can then suspend his benefit and wait four more years until his full retirement age to get more money.

Please advise.

First, your husband should not apply for early retirement at 62. If he does so, his benefit will be reduced by 25% from what he would get if he waits until age 66 to file, and a whopping 76% less than if he waits to age 70, when his benefit would hit its maximum.

Further, if he does file at 62, he cannot file and suspend, as you suggest. This ability is not enabled until he reaches his full retirement age of 66. So if he files early, he will be triggering reduced benefits for the rest of his life. And because his benefits are set to be relatively large, this reduction would involve a lot of money.

If your household absolutely needs the money now, or if your husband’s health makes his early retirement advisable, he could file early and then, at 66, suspend his benefits for up to four years. They would then grow by 8% a year from their reduced level at age 62 – better than no increase, but not nearly as large a monthly benefit as if he simply files at age 66 and then suspends.

I normally advise people to wait as long as possible to collect their own benefits. But this is probably not the best advice in your case. Here’s why:

When your husband turns 66 in four years, it’s clear that you should take spousal benefits based on his earnings record. You say he would be entitled to $3,000 a month at that point and that you stand to get half of that, or $1,500 a month. That $3,000 figure seems a little steep to me, so I’d first ask you to make sure that is his projected benefit when he turns 66 and not when he turns 70.

In either event, however, it’s clear that your spousal benefit based on his earnings record is going to be much, much higher than your own retirement benefit. Even if you waited to claim your own retirement benefit until you turned 70, your spousal benefit still would be much higher.

Thus, you’re only going to be collecting your own retirement benefit for four years, from now until your husband turns 66. Even though your own retirement benefits would rise by 8% a year for each of those four years, those deferred benefits would never rise enough to come close to equaling the benefits you will get by filing right away.

So, take the $289 a month for four years, and have your husband wait until he’s 66 to file for his own retirement benefit and enable you to file for a spousal benefit based on his earnings record. He may decide to actually begin his retirement benefits then or, by filing for his benefit and then suspending it, earn annual delayed retirement credits of 8% a year, boosting his benefit by as much as 32% if he suspends until age 70.

If he does wait until 70, he will get his maximum monthly benefit. But you also will benefit should he die before you. That’s because your widow’s benefit would not just be equal to your spousal benefit but would equal his maximum retirement benefit. So, the longer he waits to file, the larger your widow’s benefit will be.

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.

Related:
Here’s How to Avoid Making a Huge Social Security Mistake
Here’s How to Handle Social Security’s Trickiest Claiming Rule
How to Claim Social Security Without Shortchanging Your Spouse

MONEY Workplace

What Labor’s Win at Market Basket Means for Your Job Security

140829_RET_Market_1
Elise Amendola/AP

The victory at a New England grocery chain might seem like a fluke. But economic trends show that workers may be finally getting some leverage.

You don’t often hear about it, but every day, in countless workplaces, people make difficult choices to do the right thing by standing up for co-workers—often at great risk to their careers. These workers are the true heroes of this and any other Labor Day. Which is why what happened recently at Market Basket is so unusual: labor won a major victory, and it got a lot of press.

For those who don’t live in the Northeast, Market Basket is a family-owned New England grocery chain. A bitter family feud led to the ouster of the revered CEO, Arthur T. Demoulas. Market Basket’s workers backed his reinstatement with protests and rallies, which ratcheted up after the company threatened to fire some of them. Public opinion was heavily in the workers’ favor. Today the majority owners of the company announced their decision to sell their shares to Demoulas, who not only gets his job back but control of the company to boot.

It’s not everyday that you see relatively low-paid supermarket workers demonstrating on behalf of their CEO. But what’s really unusual here is the display of an all-too-rare commodity in an American workplace: trust between workers and management.

The Great Recession should have been dramatic evidence to those who manage and staff the nation’s workplaces that we’re all in this together. But, of course, it wasn’t. Employers cut payrolls and benefits—remember defined benefit pensions?—some of which perhaps was unavoidable. They also outsourced jobs and even entire operations to lower-cost markets, creating armies of freelancers who work without full salaries or even a 401(k) plan. Yet many companies, if not most, continued to provide upper-management lavish pay packages and perks that further distanced them from the people whose labor was essential to their long-term success.

Some people feel workers will never recover the ground they’ve lost. But there are encouraging signs that labor may be gaining some leverage.

Like an economist who has correctly predicted nine of the past two recessions, I have repeatedly stressed that the U.S. economy is running out of workers. Even though many Baby Boomers are continuing to work past traditional retirement age, the numbers of boomers who have retired exceeds the flow of new entrants into the labor force.

Up till now labor shortages were masked by steep employment declines during the recession. But the recovery has slowly reduced unemployment. The Congressional Budget Office just forecast improved economic growth rates over the next few years. And the Wall Street Journal, among others, recently reported that shortages of unskilled labor are forcing up wage rates in some parts of the economy. And other indicators show that the job picture is brightening for those looking for work.

No question, this recovery remains very disappointing. We haven’t recovered enough lost jobs. Real wage gains remain elusive. There are few if any signs that the economic gap between rich and poor is narrowing. But even abysmal growth will, over time, lead to spot labor shortages. And with immigration reform stalled, boosting the nation’s labor supply with more newcomers is not going to happen anytime soon, which will give workers more bargaining power.

Employers may already be responding. Gallup reports that 58% of workers—both full- and part-time—are “completely satisfied” with their job security. That’s a new high, which exceeds levels just before the recession and even the levels during the dot-com euphoria of the late ’90s. Gallup also found that 71% of workers were completely satisfied with their relations with co-workers, 63% with the flexibility of their working hours, and even 60% with their boss or immediate supervisor.

Confident employees are more likely to push back against their bosses and to seek other jobs if current employers fail to meet their needs. If today’s attitudes do translate into more employee assertiveness, we can expect to see not only higher wages and improved retirement benefits, but also increased demands for restructuring jobs and job responsibilities. This would mean jobs with more flexibility, jobs that use technology to allow teams to work together from different locales, and jobs that measure outputs and judge workers on results, not the number of hours they worked or time spent at meetings in the office.

Achieving such results will stretch both managers and employees. And it will require major efforts to rebuild trust. For now, I will just wish you a happy Labor Day, with a special shout-out to the folks at Market Basket.

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

Here’s How to Handle Social Security’s Trickiest Claiming Rule

Grandfather with family
Cavan Images—Getty Images

Your spouse and other family members may depend on Social Security benefits. But their income may be limited by the family benefit "ceiling"—unless you plan now.

Social Security benefits include a surprising array of payments beyond your own retirement benefit. As I wrote last week, these so-called auxiliary benefits, which are geared to your earnings record, may provide income to your spouse (or former spouse), your children and even your parents. If you’re disabled, yet another set of Social Security benefits to your present and former family members may kick in.

This is, overall, a good deal. (And it’s a reason why delaying your own benefits is a thoughtful way to increase benefits to your loved ones.) But there is a big, big catch—it’s called the Family Maximum Benefit (FMB). This rule limits total Social Security payments to you and any eligible family members to a percentage of your own Social Security benefit. And it’s arguably one of the most tricky aspects of figuring out the best Social Security claiming strategy for you and your family.

Basically the FMB limits total payments to you and eligible family members to a total of 150% to 187% of the payments you alone would receive. It thus sets a ceiling on total family benefits—often, a very low ceiling. Here’s how it works:

Let’s say your spouse applies for spousal benefits based on your earnings and the payout is equal to 50% of your retirement benefit. Already we’re up to 150% of your retirement benefit. Now let’s say you have other family members who qualify for benefits—perhaps dependent children—who add another 150%, for a total of 200% on top of your payout. In all, these payments would cost Social Security 300% of your benefit.

This is where the the FMB ceiling comes in. If your FMB is 175% of your retirement benefit, then the rule will require the agency to reduce everyone’s benefit (except yours, which cannot be reduced) to a total of 75% of your benefit. Your family members will have to take nearly a two-thirds’ haircut in their benefits.

For those who want to get deeper into Social Security math—the rest of you can skip ahead—the FMB ceiling is based on what’s called your Primary Insurance Amount (PIA). This is the monthly retirement benefit you would receive if you started payments at what’s known as the Full Retirement Age (FRA), which is age 66 for those born between 1943 and 1954. (The FRA then will rise by two months a year for those born between 1955 and 1959, finally settling at 67 for anyone born in 1960 or later.) If your PIA is projected to be $2,500 in a few years, and you’re using this number for making auxiliary benefit decisions, here’s the way this year’s FMB formula would work:

  • 150% of the first $1,042 of your PIA (or $1,563);
  • 272% of the PIA between $1,042 through $1,505 (or $1,259);
  • 134% of the PIA over $1,505 through $1,962 (or $612); and,
  • 175% of the PIA over $1,962 (or $942).

The sum of these four numbers—$4,376—is the FMB for monthly benefits for all Social Security claims based on your earnings record. It equals 175% of your PIA. There is a separate formula covering FMBs for disabled persons, and it can produce very small benefits for lower-income claimants.

Is there a way around the FMB ceiling? Yes, but only if your family is flexible. Since the FMB limits apply to total benefits being collected on your earnings record in a given year, consider staggering the timing of your family’s claims. That way, they may be able to stay under the ceiling.

Here’s one example: Say you have a spouse and younger children who qualify for benefits. If your FMB would seriously reduce all these benefits, it might be best for your husband or wife to hold off on claiming the spousal benefit and take the child benefits only. The amount of money your family receives might not drop much, if at all. And the child benefits likely will expire anyway when the kids are older. Your spouse can make a claim at a later date, when the benefit also may have risen in value, depending on your age and the age of your significant other. Clearly, when it comes to strategizing benefits, Social Security is a family affair.

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

How to Claim Social Security Without Shortchanging Your Spouse

Deciding when to take Social Security can have a big impact on your family's income. Here's what you need to know.

When it comes to claiming Social Security, millions of people make this huge mistake: overlooking the impact on their family’s income.

Many people don’t realize that Social Security pays a host of benefits beyond your individual retirement income. The program may also pay so-called auxiliary benefits to your spouse, your children and even your parents. A separate program may provide auxiliary benefits if you become disabled, and, in some cases, if you are divorced or if you have passed away. The amount of these benefits is tied to your earnings record—the wages you’ve earned over a lifetime during which you’ve forked over Social Security payroll taxes—and your decision on when to file your claim.

To make the best choices about when to claim Social Security, anyone who is, or was, married, and especially those with children, needs to consider not only their own retirement benefits but also benefits that might be available to family members. This is especially true of survivor benefits.

Let me give you an example. (I wish it was simple but very little about Social Security is simple.) Say you’re 62 and your wife is 58. You’ve heard that delaying Social Security will raise your income but you want the benefits now, so you begin looking into the process of claiming them.

If you file for benefits at 62 (the earliest claiming age unless you’re disabled or a surviving spouse), they will be reduced by 25% from what you could get at full retirement age, which is 66 for people now approaching retirement. What’s more, that payout would be a whopping 76% less than if you waited until age 70 to file. To use convenient numbers, if your benefit at 66 would be $1,000 a month, you would get only $750 a month if you filed at age 62 but $1,320 a month if you waited until age 70.

Perhaps you’re okay with receiving lower income, if you start getting it sooner. But how about your family members? These reductions would also apply to their auxiliary benefits.

The most dramatic impact of early claiming decisions affects widows. Husbands are overwhelmingly likely to begin taking their retirement benefits before their full retirement age, according to Social Security data. Yet husbands are likely to die several years before their wives, statistics show, which leaves many widows struggling on small incomes.

Granted, many women have salary records of their own, and as their wages have increased over the past 30 years, so have Social Security benefits. But many women now reaching retirement age have not accumulated Social Security benefits equal to that earned by their husbands.

That inequality is a real problem for widows. While they both are alive, each spouse can collect his or her own Social Security benefit. But after one dies, the surviving spouse can only collect the greater of the two benefits. This is likely to be the husband’s benefit, even if it’s been reduced because he filed for it early.

As a result, millions of widows in this country are receiving reduced survivor benefits based on their late husband’s earnings record. Had he waited to file, their survivor benefits would have been higher—much higher in many cases.

The trend is so pronounced that the agency devised a special way of calculating benefits to try and ease its impact. It’s called the Retirement Insurance Benefit Limit, or RIB-LIM in the agency’s acronym-crazy jargon. It’s also known as the Widow(er)’s Limit.

When you make the decision when to claim Social Security, make sure it’s in the best interest of everyone in the family. To really understand this decision, you’ll need to know about Social Security’s family maximum benefits. Tune in next week to learn how they work.

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

Here’s How to Avoid Making a Huge Social Security Mistake

Spousal benefits are a crucial Social Security option for millions of couples. But getting extra, and in some cases “free,” spousal benefits is not possible for couples that run afoul of the agency’s tricky “deeming” rules.

Spousal benefits are a crucial Social Security option for millions of couples. But getting extra, and in some cases “free,” spousal benefits is not possible for couples that run afoul of the agency’s tricky “deeming” rules.

To understand deeming, it helps first to understand the best-case scenario for spousal benefits. Take a couple where the wife is about to turn 66 and her husband is about to turn 70. For her, age 66 is considered “full retirement age”, when, among other things, she can claim benefits without any early retirement reductions. For him, age 70 is when he can claim the greatest possible benefit, assuming he has so far deferred filing.

In this example, if the husband files for his own retirement benefit at 70, his filing permits his wife to file only for her spousal benefit, which is equal to half of the benefit he was entitled to at his full retirement age — not, that is, half of the larger amount he can claim at age 70.

But if the wife files what’s called a restricted application for spousal benefits at 66, she can receive these benefits while deferring her own retirement benefit for up to four years until she turns 70. During this time she earns delayed retirement credits so she, too, can claim her highest-possible benefit at that time. During this period, she can receive what essentially are free spousal benefits – free in the sense that collecting them has no adverse effect on her own retirement benefits.

This claiming strategy has been so well-publicized that the Obama Administration has proposed ending it — reportedly because the maneuver is used predominantly by wealthier workers, who are most likely to be able to afford deferring their benefits to age 70. But let’s debate the fairness of this proposal another day.

The problem is that this maneurver doesn’t work at all when people file before reaching full retirement age. Say that our couple is instead aged 62 and 65. And remember that 62 is generally the earliest that people who are married can file for spousal benefits. So our couple figures that the 62-year-old wife will file for spousal benefits on the earnings record of her 65-year-old husband, while she defers her own retirement benefits. This may be a logical assumption based on the ideal claiming scenario of our first couple. But it won’t be allowed by Social Security.

Here’s where “deeming” comes in. Remember that for the wife to file for spousal benefits, her husband first has to file for his retirement benefits. And because she is younger than full retirement age, Social Security’s rules will “deem” her to be also filing for her own retirement benefit when she files for her spousal benefit. There is no way around this if she is younger than 66. And the benefit she will actually receive won’t be both of these benefits but in effect only the larger of either her retirement benefit or her spousal benefit. Further, because she’s filing before reaching full retirement age, both benefits will be subject to early claiming reductions.

And remember her hubby, who filed for his own retirement at 65 to enable her to file for spousal benefits? He will get a reduced early retirement benefit, not the benefit he could get by waiting until full retirement age, let alone the benefit he would get if he deferred retirement until age 70.

Unfortunately, very few people even know deeming exists, so many of them unknowingly file for both spousal and retirement benefits at the same time without realizing it.

In 2012, 6.8 million persons – nearly all of them women – were simultaneously receiving two benefits at the same time, according to Social Security records. But the agency says it has no idea how many of these people were affected by deeming and how many of them were aware their filing action had automatically triggered a claim for a second benefit at the same time.

The bottom line here: You can qualify for two Social Security benefits at the same time but you can only collect an amount that is equal to the greater of the two benefits. In practical terms, the second benefit is lost to you because of deeming. If you can defer one benefit instead, it might be possible to have the best of both benefits.

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

9 Steps to a Successful Retirement Plan

These time-tested moves can help you achieve a retirement that meets your financial goals and is emotionally satisfying too.

Your retirement will benefit from an informed understanding of key numbers, as I explained last week. How big is your nest egg? How much money will you need to live on? How much should you draw from your funds each year? How long do you expect to live?

Whether your retirement is successful, however, will depend not so much on these numbers but on whether your later years fulfill your emotional needs.

Money is important to happiness, of course. But there are other requirements here, including feeling secure about your future, not being exposed to investment risks you consider excessive, satisfying your concerns and goals for the legacy you wish to leave behind, and, when all is said and done, feeling you’ve run the best race of your life.

These are emotional and aspirational goals and you can’t put numbers to them. Yet, everyone has them, so it’s important to factor them into your retirement savings, investing and spending plans.

I’ve written gobs of stories about “can’t miss” and “best practices” retirement plans, speaking with retirement experts across the spectrum. From them, I’ve fashioned an approach to retirement that I like so well that I’ve adopted it for my own retirement plan. Here it is.

My advice to you, as with pretty much all financial advice, is to use this approach as a starting place. Adopt it, modify, or toss it out. But by all means, think about it and use it to help you make your own retirement plans.

My plan is shaped by my risk tolerances (low) and desire for financial security (high). It creates a 100% likelihood that I will not outlive my money. It is also a strategy that includes the needs of myself and my wife. We are willing to leave some money on the table in the interest of security. And we also are willing to defer some retirement income and thus “lose” money should we die earlier than we hope.

Step One: Add up sources of guaranteed retirement income—Social Security and pensions. In terms of longevity risk, the odds favor at least one member of a 65-year old couple living into their 90s. Therefore, give serious thought to deferring Social Security until age 70, when it has reached its maximum value.

Beyond being guaranteed, Social Security payments also increase each year to reflect the prior year’s inflation. They are, quite simply, the very best retirement dollars around. And I don’t buy all the gloom-and-doom stories about the program’s demise. Social Security will be here for a long, long time.

Step Two: Unless you know a shorter life is in the cards, opt for joint survivorship payments on any pension proceeds. They will be smaller than payments that would stop upon you or your spouse’s death. But both pensions will continue so long as either of you live. The goal here is to maximize security, not dollars.

Step Three: Tote up how much guaranteed money you will receive every month once you stop working. This could be a long time off or, depending on an adverse health or other life event, just around the corner.

Step Four: Build a detailed record of household spending, perhaps divided into major spending buckets—mortgage, utilities, good, cars, insurance, out-of-pocket healthcare, etc. Make note of required versus discretionary spending.

Step Five: Compare your projected guaranteed retirement payments with your current required spending needs. The goal here is for the two numbers to match. If they do, then in a worst-case world, you will always have enough money to keep a roof over your head and maintain a lifestyle that is close to the one you now have.

Step Six: If your fixed income today is projected to be smaller than your current fixed expenses, you will need to downsize. This might involve your home. Getting out from under mortgage and upkeep costs is the largest downsizing opportunity for most people.

Step Seven: If downsizing doesn’t get you there, consider using a portion of your nest egg to get more guaranteed lifetime income by purchasing an immediate annuity that will close the gap. This would reduce your savings, of course, but it scores very, very high on the “Sleep at Night” scale! Consider a longevity annuity as part of your solution.

Step Eight: Having balanced your fixed income and expenses, you can tap your investment portfolio to fund the gratifying things you want to do during your retirement years. If market returns are good, you will be able to do more. And during the inevitable periods of poor market performance, you can reduce discretionary spending without putting your basic standard of living at risk.

Step Nine: Set aside a portion of your savings against the day when one of you dies, so that it can compensate for the loss of one Social Security benefit. If you want to leave a financial legacy, set it aside here as well. If you still own a home after downsizing, use your equity as a piggy bank you hope never to break open. But it will be there for healthcare and other unforeseen emergencies.

That’s my plan. What’s yours?

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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