Making the right selection for Social Security benefits means making more money
Social Security was instituted in an earlier era, when most married women did not work. To give women a measure of financial security in their old age, Social Security offers a benefit titled spousal benefits. There are over 3000 rules in the social security handbook, so when we are speaking about social security strategies, we are speaking in general terms. There are exceptions to the rule and everyone’s situation is different. How these strategies apply to you may have a different impact on someone else.
The spousal benefit is an amount that is equal to 50% of the husband’s Primary Insurance Amount. The Primary Insurance Amount is the amount that one can collect at their full retirement age which is typically age 66 for most baby boomers. If a wife applies for spousal benefits at 62, it will be 35% of the husband’s Primary insurance amount. If the woman is the provider, the husband has the same access to the spousal benefit.
There are two myths and concerns about Social Security that need to be explained.
Myth # 1 – Will Social Security will be broke by the time I collect social security?
There are two components to funding social security:
1. The Current Trust Fund which is expected to last 20 more years in the worst case scenario and possibly as much as 50 years or more in the best case.
2. The 2nd component is ongoing Social Security Payroll taxes. If and when the trust fund is depleted, it is expected that payroll taxes will be sufficient to cover 75% of all benefits. The good news is that our generation can still expect to receive benefits and future generations may still receive 75% of their benefits. As a good rule of thumb, plan for the worst and hope for the best.
Myth # 2 – Should I take my social security benefits as soon as I can?
The standard argument that if you take social security early and invest it verses taking it later, the breakeven point is about age 78. However, there are many good reasons to delay taking your social security. When to take your social security benefits maybe one of the most important financial decisions you make in your lifetime.
Divorced Spousal Benefits
Unbeknownst to most women who are divorced, they may be entitled to a spousal benefit that is also equal to 50% of their ex-husband’s benefit if taken at Full Retirement Age, which for many of us is age 66. There are rules to meet to qualify. While there are many complexities, the basic rules to qualify are:
- The marriage must have lasted 10 years or more,
- The ex-husband “Joe” is entitled to Social Security,
- Both ex-husband “Joe” and wife “Julie” are at least 62 years old,
- The ex-wife “Julie” is at least 62 year old,
- If Julie is over 62 and under full retirement age:
- Julie’s own benefit must not be higher than the Spousal Benefit.
- Julie must take her own benefit if it is the higher of the two.
- Joe must be entitled to benefits, at least age 62 and either,
a. Applied for benefits or,
b. You have been divorced more than 2 years.
- If Julie has reached Full Retirement Age, Julie has the choice of,
- Taking a spousal benefit and delaying her own benefit or,
- Taking her own benefit.
Scenario 1. Let’s assume that Joe and Julie meet the qualifications and Julie is 62
- Based on her own record she could collect $900.
- Joe’s Primary insurance amount is $3000.
- Julie’s spousal benefit at her full retirement age of 66 would be half or $1500.
- But since she is 62, it is reduced to $1050.
- Julie is entitled to the spousal benefit of $1050.
Now, if Julie’s own benefit was higher, let’s say $1200, then she would be required to take her own benefit and forego the spousal benefit.
Let’s add a twist to that Live Case
Let’s assume that another woman named Mary came to us at age 66.
Based on her earnings record, she could collect a little over $27,000 at her age 66.
Mary’s spousal benefit, based on her ex-husband’s amount would only be about $15,000.
Now here is the twist, remember in the first case, Julie is required to take the higher of her own benefit or the spousal benefit. However, at full retirement age, (which we often refer to as the magic age) Mary has the choice of:
1. Taking her own benefit or,
2. Taking the spousal benefit.
So why would Mary take the spousal benefit of $15,000 versus $27,000?
For every year Mary delays taking her own benefit, it increases by 8% plus Cost of Living to her age 70. Where else can you get a guaranteed 8% return with Cost of Living adjustment? If we assume a historical inflation rate of 3% that increases her own benefit to over $39,000 at 70, a difference of $12,000 a year.
So by collecting the spousal benefit of $15,000 and delaying her own benefit to 70 Mary will have increased her benefit by approximately $12,000 a year. Now, what 80 year old woman could not use an extra $12,000 per year? Ten years later, this exceeds $120,000 by age 80.
Of course all of these scenarios must be considered in the context of current cash flow, other resources available and tax consequences.
Additional Rules for divorced-spousal benefits
Assume that Joe has been married 3 times. All three ex-wives can claim divorced-spousal benefits, as long as the marriages lasted at least 10 years.
The benefits paid to one ex-spouse do not affect those paid to Joe, the current spouse, or the other ex-spouses. Joe will not be notified that his ex-wife Julie has applied for benefits. So you need not worry that your long-lost ex-husband will find out that you applied for benefits based on his work record. You do not need to know his whereabouts, only enough identifying information that the Social Security people can look up his records. You’ll also need to provide documentation showing the dates of the marriage and divorce. If you are receiving divorced-spousal benefits and you remarry, your divorced-spousal benefits will stop. However, you may then be eligible for spousal benefits based on your new husband’s work record. Or you can switch to your own benefit, of course, if you also qualify for Social Security.
Social Security also provides survivor and divorced survivor benefits when you lose your spouse or ex-spouse.
Survivor benefit will depend on:
- The age at which the deceased spouse originally claimed his benefit (the “original benefit”)
- If he claimed before Full Retirement Age (FRA), survivor benefit will be limited to the higher of the deceased spouse’s actual benefit or 82.5% of his PIA
- If he claimed after FRA, the survivor benefit will include delayed credits
- The age at which the widow claims the survivor benefit (the “actual benefit”)
- If she claims before her FRA, her survivor benefit will be a fraction of the original benefit (e.g., 71.5% if claimed at 60)
- If she claims at her FRA or later, her survivor benefit will equal 100% of the original benefit
Survivor benefits can be somewhat complicated, but it’s important to understand how they work because decisions you make now can influence the amount of the survivor benefit later on.
There are several factors that influence the amount of the survivor benefit.
The first factor is the age at which the deceased spouse, let’s say Frank, originally claimed his own retirement benefit. If Frank originally applied for Social Security before full retirement age, the survivor benefit will be his actual benefit or 82.5% of his PIA, whichever is higher. If Frank applied at his full retirement age, the survivor benefit will equal 100% of his PIA. If he applied at 70, the survivor benefit will include delayed credits. We’ll see an example in a moment.
The second factor influencing the amount of the survivor benefit is the age at which the widow claims the survivor benefit. If she claims it at 60, or 50 if disabled, the survivor benefit will equal 71.5% of the original benefit amount. If she claims it at her full retirement age or later, her survivor benefit will equal 100% of the original amount. She may, of course, apply for it anytime between the ages of 60 and 70 and the reduction will be prorated.
Survivor benefits for Widows
If Frank dies while both are receiving benefits, his widow, let’s say Nancy, may switch to the higher benefit of the two.
- Frank and Nancy are married. Both are over full retirement age.
- Frank’s benefit is $2,000, Nancy’s benefit is $1,200.
- Frank dies.
- Nancy notifies Social Security and her $1,200 benefit is automatically replaced with her $2,000 survivor benefit.
If both spouses are receiving benefits and one spouse dies, the other spouse may switch to the higher benefit.
Here’s a hypothetical example. Let’s say Frank and Nancy are married. Both are over full retirement age and currently receiving Social Security benefits. Frank’s benefit is $2,000 and Nancy’s benefit is $1,200. If Frank dies, Nancy’s $1,200 benefit will stop and she will start receiving $2,000.
One important note about survivor planning is the loss of one benefit. Most widows and widowers need at least two-thirds of the amount of income they were receiving as a couple, so it is important to plan for the loss of one spouse’s Social Security benefit. Even though it is often the higher benefit that will be retained, the death of a spouse means the loss of one Social Security check.
Rules for survivor benefits for divorced women are the same as for a widow except:
- Marriage must have lasted at least 10 years
- Survivor must be at least 60 for reduced benefit (50 if disabled), or FRA for full benefit.
- Must not have remarried before the age of 60, unless that marriage ends.
- (So ladies, if you are close to 60 and planning to remarry, you might just want to wait)
Jane is 60 years old and had been divorced nearly 20 years. She was trying to live on $1500 a month and had no idea she could collect a $900 monthly survivor benefit based on her deceased ex-husband’s benefit for the rest of her life. That $900 a month made a huge difference for her and, if her benefit at a later age is higher, she can always take that higher benefit.
You can see that Social Security can be quite complicated. It is worth the time and effort to explore various options to assure that you are maximizing your benefit. You worked for it, now you need to claim it properly.