Social Security rules are complicated and change often. For the most recent “Ask Larry” columns, check out maximizemysocialsecurity.com/ask-larry.
Boston University economist Larry Kotlikoff has spent every week, for over two years, answering questions about what is likely your largest financial asset — your Social Security benefits. His Social Security original 34 “secrets”, his additional secrets, his Social Security “mistakes” and his Social Security gotchas have prompted so many of you to write in that we feature “Ask Larry” every Monday. Find a complete list of his columns here. And keep sending us your Social Security questions.
Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version. His new book, “Get What’s Yours — the Secrets to Maxing Out Your Social Security Benefits,” (co-authored with Paul Solman and Making Sen$e Medicare columnist Phil Moeller) was published in February by Simon & Schuster.
Watch Larry explain how Paul and his wife could collect an extra $50,000 in Social Security benefits:
Rick — Tucson, Ariz.: I will be 65 in Oct. Wife will be 65 in August 2016, and has begun taking her SS at 62. I plan to file and suspend at 66. We have legal custody of our 4-year-old grandson – looks to be permanent. Can we receive benefits as his 100 percent custodial caregivers? Or do we have to adopt him to receive benefits? AND, do we receive potential benefits when I hit my full retirement age at 66?
Larry Kotlikoff: Grandchildren are only eligible to collect benefits on grandparents’ work records if they are adopted or if both of their natural parents are deceased or disabled. If you adopt your grandson, your grandson can collect child benefits starting immediately based on your wife’s work record.
(BTW, the requirement in the case of stepfathers and stepmothers differs. In this case, one just needs to show that the child is being supported by the stepfather or stepmother. The child does not have to be adopted.)
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Moreover, if you are not going to be hit or hit too hard by the earnings test (because you are retired or aren’t earning too much), you, yourself, can collect a child-in-care spousal benefit starting right now.
This won’t trigger deeming like a straight spousal benefit would do. Deeming, by the way, is the requirement that if you take a spousal benefit (not a child-in-care spousal benefit) before full retirement age, you have to take your own retirement benefit early as well. Deeming is bad news because taking two benefits is bad news: when you take two benefits at once, Social Security will give you just the larger of the two. So if you were deemed, your retirement benefit would likely exceed your spousal benefit and wipe it out. But, again, there is no deeming triggered by taking a child-in-care spousal benefit.
As for what else you and your wife should do, let me consider three cases under the assumption that you both formally adopt your grandson.
Case 1: You and your wife had similar earnings or both had at least middle-class level earnings.
In this case, you probably do not want to file and suspend at 66. Instead, you continue to take your child-in-care spousal benefit after reaching full retirement age, and at 70 you file for your retirement benefit. (By the way, once you reach full retirement age and are no longer subject to deeming, you can convert to a spousal benefit rather than a child-in-care spousal benefit, but it won’t have any impact on what you receive since both benefits are calculated the same way if taken after full retirement age. Before full retirement age, the spousal benefit becomes, due to deeming, the excess spousal benefit and is subject to reduction. The child-in-care spousal benefit is equal to the full, not the excess, spousal benefit, and is not subjection to reduction.)
When you reach 70, your grandchild (who will still be younger than 18 or 19 if still in elementary or high school), can switch to a child benefit on your record if your full retirement benefit is larger than that of your wife. Also, your wife, at that point, could file for a spousal (or child-in-care spousal benefit) based on your work record. It will, given my assumption about your earnings, likely be zero. Your wife should suspend her retirement benefit at 66 and restart it at a 32 percent higher level (after inflation) at 70. Her suspension won’t prevent your grandchild from collecting a child benefit based on her work record. Nor will it prevent you from collecting a child-in-care spousal benefit or, after you reach 66, a full spousal benefit.
Case 2: You had much higher covered earnings than your wife.
In this case, your filing and suspending at 66 will likely be best. At that point, your grandchild will be able to collect a larger child benefit from your work record. Your wife will likely be able to collect an unreduced excess spousal benefit based on your work record in addition to her own reduced retirement benefit. She could file and suspend at full retirement age and just take her excess spousal benefit, but the increase in her retirement benefit may not raise her total check after age 70 at all or by enough to offset the loss of benefits between 66 and 70.
Here’s why. Your wife’s total check after age 70 would equal the sum of A) her reduced (because she took it early) retirement benefit multiplied by 1.32, which reflects the accrual of delayed retirement credits, plus B) her excess spousal benefit. But her excess spousal benefit will equal half of your full retirement benefit less 100 percent of her full retirement benefit times the 1.32 factor.
So if you look at this closely, it means that part A goes up due to your wife’s suspending at 66 and restart at 70, but part B goes down. If the excess spousal benefit remains positive when she is 70, part B will have gone down by as much as part A goes up, leaving your wife with the same total check from age 70 that she would receive were she not to suspend at age 66. In this case, her suspending and restarting at 70 would just cost her four years of her retirement benefit and produce no larger check from age 70 onward. Even if the excess spousal benefit at 70 becomes zero, the increase in her total check from 70 on may be large enough to compensate for the loss of four years of retirement benefits.
So this is a case in which Social Security either fully or mostly taxes away the delayed retirement credits. Very nasty business. Indeed, this is one of Social Security’s nastiest gotchas. (One small technical point for SS nerds like me: If one suspends one’s retirement benefit and collects just an excess spousal benefit until the retirement benefit is restarted, the excess spousal benefit is not reduced due to the accumulation of delayed retirement credits until the retirement benefit is restarted.)
Case 3: Your wife had much higher covered earnings than you.
In this case, when you reach 66, you could wait until 70 to take your own retirement benefit. At 66, your child-in-care spousal benefit would convert to a full spousal benefit. But if the full spousal benefit were to exceed your age 70 retirement benefit, you’d just collect your age 70 retirement benefit.
At 70, your own retirement benefit, inclusive of the delayed retirement credits, will either exceed or not the full spousal benefit. Regardless, you’ll get the larger of the two benefits from 70 on. As for your wife, she’d optimally suspend her own retirement benefit at 66 and restart it at 70. (Her own excess spousal benefit, which she can file for after you take your own retirement benefit, will, by assumption, be zero.)
The rub, here, however, is that you and your grandson’s combined benefits received off of your wife’s work record will be limited by the family benefit maximum. Hence, it’s possible that a better option would be for you to file for your retirement benefit at full retirement age, at which point the family benefit maximum that constrains the benefits you and your grandson can collect on your wife’s record becomes the sum of the family benefit maximum calculated based on your work record and that calculated based on your wife’s work record. But in filing, your spousal benefit would become your excess spousal benefit and the sum of your child benefit and your excess spousal benefit would then be compared with the family benefit maximum. (Recall that the excess spousal benefit formula is the full spousal benefit, less your own full retirement benefit, and this word less is key because it represents a taking away of something, which is not necessarily paid back as discussed above.)
A third way to go is for you to file and suspend at full retirement age and restart your retirement benefit at 70. This move would also lead the family benefit maximum to be the sum of your two maximums. But given the assumption that your wife had much higher covered earnings, this is probably not going to be as beneficial.
Have I driven you mad with this answer?
Your situation is about as complex as can be. I recommend you read what I wrote about 10 times over, take a read of my new book with Paul and Phil, which lays the above out in a much more accessible, and dare I say, fun fashion. And then run yourself through an extremely precise, commercially available Social Security maximization program, which takes into full account of all the elements referenced above (including the earnings test and the adjustment of the reduction factor, which will be relevant if you are still working).
Whatever you do, don’t ask Social Security what to do. Tell them what you want to do. Social Security doesn’t have the software to optimize your lifetime benefits. And the chance that you’ll talk to someone who can get even the above general points right is, in my estimation, at most 50 percent.
Bill – Howard, Ohio: I am brand new to reading your column. I am interested in the effect that withdrawing money from my IRA (taxable income) will have on my Social Security benefits. Is it best to withdraw money from the IRA until age 70 and then claim maximum Social security benefits, or will the IRA income adversely affect the benefits schedule? Is there an advantage to postponing withdrawal from the IRA until after I start receiving Social Security benefits?
Larry Kotlikoff: Yes, timing your taxable withdrawals from your tax-deferred retirement accounts (regular IRAs, 401(k)s, 403(b)s, Keogh accounts, SRAs, etc.), your non-taxable withdrawals from non tax-deferred retirement accounts (Roth IRAs, Roth 401(k)s, Roth 403(b)s, …) and your partly taxable withdrawals from your non-deductible IRAs can and will affect all your future tax payments. So, too, will doing Roth conversions and deciding whether to contribute, at the margin, to Roth or non-Roth accounts. In general, you want to time your taxable withdrawals to periods when your tax rates are low. Roth withdrawals don’t trigger Social Security benefit taxation, which is based on the level of modified adjusted gross income of MAGI. Roth withdrawals aren’t counted as part of MAGI. So having more in Roths and less in regular retirement accounts is a good thing from the perspective of Social Security benefit taxation. There is extremely precise commercial software software program available to explore ways to safely raise and smooth your lifetime living standard, including managing your retirement account contributions and withdrawals and considering Roth conversions.
Anonymous – Keene, N.H.: How can I audit the calculation made by the Social Security Administration of my benefits? Is there a process for them to disclose the data used, and which rules were applied, to determine the amount that I receive?
Larry Kotlikoff: You can retrieve you covered earnings record online, if you haven’t started taking your retirement benefit. If you have, you will, I believe, need to contact Social Security and request they mail it to you. I find it crazy that people who are already collecting benefits can’t access their earnings records online, but, unless they’ve changed things of late, that’s the case.
When you get your work record, make sure it’s correct. Even if it is, you can count on Social Security to give you a bogus estimate of your Primary Insurance Amount if you are under 60 or over 60 and still working, because Social Security assumes that the economy will never ever experience any inflation and will never ever experience any growth in average wages. They will also, in their standard calculation/calculators, assume you will keep working through your full retirement age and earn the same amount each year.
My company’s software goes to considerable lengths to reverse engineer Social Security’s benefit estimates as needed to properly account for future growth in wages and prices as well as the precise amount each household members expect to earn in the future. We’ve found that Social Security can significantly underestimate benefits for those below age 60. For example, for many 50-year-olds, the underestimate is roughly 20 percent.
All this said, once you retrieve your covered earnings record, the only way to audit Social Security’s benefit calculation is to use a commercial software program.
Anonymous – Brooklyn, N.Y.: My friend is a resident alien married to a U.S. citizen. He is 75 and never worked enough to qualify for SS benefits of his own. The SS office told him that he would not qualify for spousal benefits until his wife started to collect her benefits. She has been waiting till age 70 this coming November in order to maximize her benefit; I don’t believe she’s aware of the file and suspend option. Is it true that he has to wait even if she files and suspends because he is not a citizen, or was the SS office just not telling them the whole story?
Larry Kotlikoff: Social Security was just not telling them the whole story. She can file and suspend today and he can start collecting his spousal benefit immediately. He should ask for six months of spousal benefits in arrears. They won’t pay more unless she can prove to them that she was misled.
Anonymous: I was windowed when I was 45. I did remarry. We have been married for 10 years. I am now 59. My late husband’s social security and disability is three times larger than mine, so obviously I would rather draw his. If I am understanding correctly, we can divorce and I would be eligible to receive my late husband’s SS. My current husband is disabled and is not dependent on me for medical from my job. What do you think?
Larry Kotlikoff: Yes, you can get divorced and start collecting a divorcee widow benefit on your late husband’s work record starting as early as age 60. Once you reach age 60, you can remarry your current husband and this remarriage won’t affect your ability to collect your divorcee widow’s benefit.
This, at least, is what I’ve come to understand. I would double check with folks at Social Security and have them stipulate in writing that what I’m saying is correct.
This said, your better strategy is to collect you own reduced retirement benefit at 62 and take your divorcee widow’s benefit when you reach full retirement, when it will be as large as possible. I’m presuming, here, that, since you reference your current husband as having been on disability, that he did not collect his Social Security retirement benefit before his full retirement age. If he did collect early, you’d want to take your widow’s benefit earlier than full retirement age do to the RIB-LIM formula discussed in my book with Paul and Phil.
Anonymous — Chatsworth, Calif.: I have a 48-year-old developmentally disabled son who has been on SSI since age 22. His only jobs have been one year in a sheltered workshop, a few months as an ice cream dispenser at Thrifty, and 1-1/2 years as a cart person at Target. We have attempted on several occasions to get him on my husband’s SS, but have been denied because he earned $12,000 in 2002 as a cart person at Target. We were never advised to watch his earnings other than turning his time sheets in to SS, which we did, so they could deduct the required amount from his SSI check. We are 72 and worry about his ability to live on $882.00 per month when we are gone.
Larry Kotlikoff: Your situation truly makes me incredibly sad and angry. Any reasonable person would award your son a child benefit based on the larger of your two work records, converting to a surviving child benefit when one of you passes away. But Social Security is claiming your son was not disabled before age 22. They are, I expect, also claiming that he can’t collect a disability check on his own work record because he didn’t work long enough. I’m so sorry, but I don’t see any way for you to get them to change their rules and do the right thing.
UPDATED 4/22/2015: After we published this answer, Jerry Lutz, the former Social Security Technical Expert who checks this column for accuracy, wanted to offer this couple some additional info on how they could pursue this matter further. From Jerry:
Social Security is saying that your son cannot be considered to have a childhood disability because he performed substantial gainful activity (SGA) after he turned age 22. In 2003, $800 per month was considered SGA, so your son’s earnings of $12,000 exceeded the limit by about 20 percent. If there is any basis for establishing that your son did not fully earn his salary, then there is a possibility that his work at Target could be excluded from counting as SGA. For example, if he was hired under a program sponsored by his sheltered workshop or some other agency or if he had a job coach, SSA may be able to establish that his wages were subsidized. If his supervisor at Target could be contacted to certify that your son only performed his job at a level comparable to less than 80 percent of what would be expected of an unimpaired person, that could be a basis for establishing that his work was not SGA.
Social Security can also subtract impairment related work expenses (IRWE) from a person’s earnings when determining if their wages are SGA. So, if your son had any special expenses like transportation costs related to his impairment, those may be subtracted from his earnings when determining whether or not his work was SGA. Here is a link to the section of Social Security’s manual that explains how countable earnings are determined.
If any of the above issues were involved with your son’s job at Target, you may want to have him re-apply for childhood disability benefits. Be sure to specify any issues that were involved with this job that would indicate that he did not fully earn his salary. If his claim is still disallowed, there is an appeals process. The first step of appeal is called reconsideration, which is unlikely to reverse the initial decision because it is handled within Social Security. However, the second appeals step is a hearing before an administrative law judge (ALJ). ALJs have much greater ability to use discretion in their decision than do SSA employees, and in some jurisdictions they overrule more than 80 percent of the initial determinations made by Social Security. So, don’t give up too easily.
Anonymous: Why always divorced, widowed or married SS questions? How about some single, never-married and childless ideas for when to collect? We do exist, you know…
Larry Kotlikoff: Single, never-married childless people need to optimize their Social Security, too, so I’m glad you wrote me. The most important thing in this regard is to try to defer taking your retirement benefit until age 70. It will start at an inflation-adjusted value that’s 76 percent higher than if you take it at 62. Also, when you reach full retirement age, you should file for, but suspend your retirement benefit. Doing so will give you the option to receive, in a single lump sum payment, all your suspended benefits if, for example, you discover you have a terminal disease. My waiting till 70 advice is, to be clear, predicated on your having a very high maximum age of life. You maximum age of life, not your life expectancy, is what matters here because you can’t count on dying on time.
Linda — Tulsa, Okla.: This question may be a first for you — hopefully not. For nearly a year, I have talked several times, face-to-face, with my local Tulsa Social Security Office, as well as via telephone to the 1-800 Social Security office. I have been told by several employees of Social Security that I am entitled to my ex-spouse’s benefit. I am soon to be 66 years old. My ex-husband just turned 62. My ex-husband and I were married two times and divorced two times — for a total marriage time of more than 16 years. Social Security has informed me that this situation is called a “material marriage” and that those years of marriage together would make me eligible for his social security while I let mine grow until I am 70. I just yesterday made another appointment and visited yet another Social Security person to ask other questions about Social Security, in general. Meanwhile, the person behind the desk and I began talking about my upcoming 66th birthday and the benefit I would receive from my ex-husband. The person behind the desk tells me she has never heard of the two marriages being combined to allow me to receive any benefit. I explained to her that HER office and several of the other persons there had also told me that indeed, I was eligible for his benefit due to the fact that we had been married for approximately 16 years — even though we had been married and divorced two times. By the way, I have never remarried. I am aware of the 10 year rule for ex-spouses, from both Social Security, as well as your book. All of this to say, first of all, I’ve been told for months now that I would be able to collect on his Social Security. Now, all of a sudden, my whole game plan has changed, as you can imagine. It appears to me that there might be some discrimination concerning this issue. I am simply desperate for an answer. Each and EVERY time I go to our local Social Security office (as you state in your book), I NEVER get the same answers. Very frustrating.
I would appreciate anything you might be able to help me with concerning this issue.
Larry Kotlikoff: Yikes, here’s my understanding from consulting with Jerry Lutz, the former Social Security Technical Expert who checks over all my answers each week. If you remarried your ex in the same year as your divorce or in the year after you got divorced, your marriages are considered continuous. This means that you could get divorced on, say, January 1st and remarry on December 31st of the following year and then get divorced one day after the 10th anniversary of your initial marriage and still collect your divorcee spousal benefits. In this case, you would have only been married for 8 years and 2 days. I haven’t heard of a “material marriage” exception to this requirement. Neither has Jerry. So I’m really truly hoping you got re-hitched in time.
Larry — Alexandria, Va.: Thanks for your most informative book. I’m 60 now and have been studying the file and suspend until 70 approach. During an office discussion with a colleague, he explained the “file at 62 and invest what you receive from social security”; the idea being that the investment growth over time more than compensates for waiting until 70. I recognize that 1) your financial situation must afford you the ability to do this, 2) you must have the discipline to do so and 3) there is some level of risk in relation to the return on investment. My question is, what are your thoughts on this approach? I realized while we were talking that I did not recall seeing this method as part of your trade off analysis and discussion vis a vis filing and suspending until 70. Thanks very much again for all your advice and efforts to make this challenge understandable.
Larry Kotlikoff: As we point out in the book, Social Security can’t be considered as an investment. It’s an insurance policy — a unique insurance policy, which protects you against one of life’s biggest risks, namely, living. By this I mean living too long. If we die, we’re off to heaven and not to worry. It’s living and having to support yourself year after relentless year that makes living so tragic. ( Yes, this is a bit tongue in cheek.)
I realize that this point may not get your colleague to change his thinking. He may insist on comparing what he can make on the stock market from taking benefits early with what he’ll be able to get from Social Security in the form of higher benefits by waiting to collect.
If so, tell him two things. First, he needs to risk adjust the return from putting his money in the market. Once he does this, his investment return will be, at most, 80 basis point (eight tenths of one percent), which is what 30-year Treasury Inflation Protected Securities (or TIPS) are now yielding. Second, tell him that Social Security’s increases from waiting to take your benefits (these are called actuarial increases) embed a 300 basis inflation-indexed rate of return. So on a risk-adjusted basis, your colleague is telling you to trade a security that cost X and yields 3 percent real (after inflation) per year for one that you can buy for X, but which yields just 0.8 percent real (after inflation). If he’s an investor, he’ll recognize that as an investment waiting to collect Social Security represents a pure arbitrage opportunity.