Social Security might end up being your most valuable retirement asset…and the most difficult to understand. The system has more than 2,700 core rules and thousands more codicils. A single misstep could cost you as much as one-third of the money you might have received. Here’s a closer look at four Social Security guidelines that are poorly understood, even by financial planners…
You might have more than one benefit available to you, but you can’t claim more than one at a time.
Examples of benefits in addition to your standard retirement benefit…
• If your spouse (or former spouse if you are divorced and your marriage lasted at least 10 years) is alive, you might qualify for a monthly spousal benefit equal to as much as 50% of your spouse’s “full retirement benefit”—the amount your spouse would receive if he starts his benefits at his “full retirement age,” which is 66 for people born between 1943 and 1954…between 66 and 67 for people born between 1955 and 1959…and 67 for people born in 1960 or later.
• If your spouse or ex passes away, you might be entitled to a monthly survivor benefit of as much as 100% of the retirement benefit that he could have received if he were still alive.
Social Security rules make it difficult to understand that you can’t get more than one of the benefits at the same time. The rules seem to indicate that you can receive your own retirement benefit plus the portion of another benefit that is in excess of your retirement benefit—but that’s really just a confusing way of saying that the smaller of the two benefits is eliminated.
What to do: It sometimes is worth claiming first one benefit, then switching to a different one later on. Doing this delays the start of the second benefit, which could increase the size of the check that you receive each month from that benefit for the rest of your life.
There are many complex rules governing this. It’s easy to make a mistake and apply for two benefits even though you intended to apply for just one. If this happens, you might eliminate any upside to switching benefits later. Three important benefit-switching guidelines…
• It may not be wise to claim a spousal benefit before you reach your full retirement age. Doing so would cause you to be deemed to be filing for your own retirement benefit at this early age, too, forever reducing your monthly retirement benefit.
• If you are married, you cannot file for a spousal benefit until your spouse has filed for his own retirement benefit (though if you are divorced, you can).
• Although your monthly retirement benefit continues to increase in size for each month you delay starting it until age 70, spousal and survivor benefits stop increasing once you reach your “full” retirement age, so there is no advantage to delaying the start of these benefits any further.
Mishandling Medicare premiums could lead to a Social Security loss.
It’s not uncommon for people to start Social Security benefits and then later suspend them. Suspending benefits, like delaying the start of benefits, can result in larger monthly benefits later. Example: A woman applies for her retirement benefit at age 62. Four years later, her husband turns 70 and starts his own retirement benefit, so she suspends her retirement benefit and switches to a spousal benefit based on his earnings. That way, her own monthly retirement benefit checks will be larger when she restarts them at age 70.
Trouble is, many people have their Medicare Part B (doctor visits and treatment) premiums withdrawn directly from their Social Security benefits—and if these premiums are withdrawn from a suspended account, the account might not be considered fully suspended. When the benefits are later restarted, the recipient might be shocked to discover that her monthly checks are no larger than they were when the payments were supposedly suspended years earlier. The whole point of suspending benefits is to receive larger monthly checks later. If future checks are not larger, years of checks have been sacrificed for nothing.
What to do: Switch to paying Medicare premiums out of pocket if you suspend your Social Security benefits. If you currently are paying Medicare premiums out of a suspended Social Security account, contact the Social Security Administration immediately. If you have not yet reached age 70, you can request a lump-sum payment of what you could have earned while the account was suspended. Your future benefits will not be increased, however—your checks still will be the same size that they were before the account was suspended. This money likely is gone forever if you do not request the payment by your 70th birthday.
If you claim your benefit early, your spouse might pay the price.
Many people start their retirement benefits as soon as they become eligible at age 62. That can be a very costly decision—especially if you are a man who is both older and higher-earning than your wife. If your spouse outlives you, as is usually likely, her survivor benefit will be based on the monthly retirement benefit you are receiving (or entitled to) when you pass away. And the retirement benefit you are receiving will be larger the longer you wait, up to age 70.
Example: A 67-year-old man was diagnosed with cancer and told he had two years to live. His local Social Security Administration office suggested that he file for benefits immediately—better to receive two years of benefits than nothing at all. But that advice assumed the man’s goal was maximizing his own benefits rather than the combined amount he and his wife would receive. The couple would have been better off if he continued to delay the start of his benefits until he turned 70 or died. If this man’s monthly benefit was $2,000 at age 67, two years of benefits would net him $48,000—but delaying benefits by two years would increase his wife’s future monthly survivor benefits by 16%, putting an extra $3,840 in her pocket for every year that she survived him (actually a bit more, because Social Security benefits are inflation-adjusted). She would steadily earn back that forgone $48,000 over a period of 12.5 years, and after that all of the additional benefit amount would be a bonus.
Social Security’s earnings penalty often is not much of a penalty at all.
You might have heard that the “earnings penalty” makes it foolish to continue to work while receiving Social Security benefits, whether it’s standard retirement benefits or spousal or survivor benefits. After all, this penalty can claim $1 of your benefits for every $2 you earn above a very low income limit (currently $15,720). But this earnings penalty may not be as bad as it seems for two reasons. It applies only to people who have not yet reached their full retirement age…and benefits lost to the penalty are paid back later in the form of a higher monthly benefit starting at full retirement age (unless you are receiving benefits as a survivor because you are caring for a minor or disabled child).
Your monthly benefit will be adjusted by the amount that would fully compensate you for the withheld money if you live to a certain age. If you don’t live to that age, you will come out behind…live longer, and you will come out ahead.
What to do: Most people should not let the earnings penalty stop them from earning more than $15,720. But if you have not yet reached your full retirement age and poor health or family history suggests a short life span, it is worth avoiding. And anyone who does incur the earnings penalty probably shouldn’t switch from one type of benefit to another during retirement. Only the specific benefit that is subject to the penalty will be adjusted upward later.
Example: If you are receiving a survivor benefit when the earnings penalty is imposed, only this survivor benefit will be increased at your full retirement age to pay back the earnings penalty.
Take income taxes into account when you decide whether to continue earning income while receiving Social Security benefits, however. Your benefits could be taxable if you earn more than $25,000 a year ($32,000 for joint filers). Unlike money lost to the earnings penalty, money lost to income taxes is gone forever.
