How your lifetime Social Security benefits could be higher

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Larry Kotlikoff’s 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 now feature “Ask Larry” every Monday. Find a complete list of his columns here. We are determined to continue it until the queries stop or we run through the particular problems of all 78 million Baby Boomers, whichever comes first. Let us know your Social Security questions. Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version.

As I’ve done in the last two weeks, I’m first providing some quantitative sense of how important it is to maximize Your Social Security benefits. Then I’ll turn to some of your questions.

Disability hits the Joneses

Ted and Martha Jones know, unfortunately, all too much about disability. Ted became disabled at 45 due to a traffic accident. While he can’t work, his maximum age of life hasn’t changed. Ted’s now 65 and Martha’s 62. Ted’s collecting $2,000 per month in disability insurance benefits. Martha’s thinking of applying for her retirement benefit right away and waiting until full retirement age (FRA) to collect her spousal benefit. Her full retirement benefit is $1,250 per month.

What Martha wants to do and can do are two different things. If she files for her retirement benefit, she’ll be deemed to be filing for her spousal benefit as well. The reason is that for purposes of deeming, Social Security treats a spouse (Ted in this case) who is over 62 and is collecting disability benefits as having filed for a retirement benefit.

If Martha does what she plans, she’ll receive only her retirement benefit because her excess spousal benefit will be set to zero (because her spousal benefit is less than her retirement benefit). For spouses of disabled workers, the excess spousal benefit is calculated based on the difference between half of the disabled worker’s disability benefit and 100 percent of the spouse’s own full retirement benefit. For Martha, this amount is negative, making her excess spousal benefit equal to zero.

If Martha follows her game plan and Ted continues to receive his disability benefit after reaching FRA — at which point, its name will change automatically to a retirement benefit — the couple will have lifetime benefits of $915,551.

But they can do better. At FRA (66 in this case), Ted can withdraw his retirement benefit (withdrawing is not the same as suspending) and start it up again at age 70 at a 32 percent larger value, after inflation. And Martha can wait until FRA and collect a full (as opposed to an excess spousal benefit) through age 70 and then switch to her retirement benefit. This strategy will produce $244,979 in higher lifetime benefits!

Disability hits the Smiths

Lisa Smith, age 62, is disabled and is receiving $500 per month. Her husband, Bill, is 66, meaning he has just reached FRA and has a $3,000 per month full retirement benefit. Lisa has a relatively short maximum age of life — only age 75. Their plan is to have Bill wait until 70 to collect his highest possible retirement benefit of $3,960.

But they can do better. Bill can file and suspend, thus permitting Lisa to get an excess spousal benefit of $700 a month through FRA. This will raise her total check to $1,200 per month!

Now, on to your questions.

Glendon — Arkansas: My wife and I want to retire this year. I will be 66 in October 2014 and my wife will be 62 in November 2014. We don’t want to wait until she is at FRA or until I am 70. What, in your opinion, would be our best way to maximize our monthly benefits? And is there anything that could harm us?


Pose Your Questions to Larry Here

Larry Kotlikoff: You should consider filing just for your spousal benefit and having your wife file for her retirement benefit. When you are 70 and file for your retirement benefit, she can file for her spousal benefit (which is likely to be small or zero) and, if you can afford it, she can suspend ​her retirement benefit at full retirement age and start it up again at 70. This strategy for your wife is what I call the “start-stop-start” strategy.

Sally — New Mexico: I am 60 years old and just became disabled in February 2014. I worked until then, for 40 years. My husband died back in 1979 in a tragic accident. I did get benefits for my two daughters until they were 18 years old. I was told now that I applied for disability that I cannot get my deceased husband’s benefits unless I had been disabled within seven years of his death. Is this true? What are dual benefits?

Larry Kotlikoff: I believe the rule in your case is that you can receive disability widow benefits on your deceased husband’s work record as early as age 50 if your disability occurred within seven years of the cessation of your mother benefit (the benefit you received or may have received as a widow because you had children of your husband in your care and they were either under 16 or were disabled, having become disabled before age 22). But if you don’t meet this criterion, you can still collect reduced widow’s benefits starting immediately — assuming that his primary insurance amount is higher than your disability benefit. If that’s the case, you would be eligible for an excess widow’s benefit in addition to your disability benefit, which is an example of dual benefit entitlement.

Tony — New Jersey: I am over 66 and still working, earning $90,000 a year. I started collecting my Social Security in March, which is $1,948 a month. When I file my tax return this year, do I have to include my Social Security as earnings?

Larry Kotlikoff: There is a line in your 1040 tax return (line 20a in the 2013 form) where you enter your taxable Social Security benefits. So the answer is yes, but it is more complicated than that.

The first “but” is that your other income may be sufficiently low that, based on the worksheet used to calculate your taxable benefits, your taxable benefits are zero. The second “but” is that your monthly Social Security check may already be net of taxes withheld by Social Security and sent to Uncle Sam. In other words, if you do have taxable benefits, you may already be sending in enough money each money to the government to cover them come April 15.

Paul — California: I would like to maximize my long-term Social Security income by delaying benefits as long as possible. Our situation is a little different than the general case because I am 56 and my wife will be 65 this year. My wife will be eligible for full retirement next year and would get a benefit of about $500 per month, as she only worked sporadically.

When I retire, I’ll be eligible for full benefits (I’m assuming about $2,000 a month). Although her spousal benefits would be greater, I believe she won’t be able to tap them until she is 70 and a half, when I reach early retirement age (62).

Should she start drawing her own full retirement at 66 and then switch to spousal retirement at 70 and a half, or is it worth it for her to wait for delayed retirement (70)? In order to get my wife spousal benefits when she’s 70-and-a-half, should I apply for early retirement at 62 and then immediately suspend my retirement until I reach 70 to get delayed retirement benefits? Also, does when my wife sign up for Medicare factor into the decision of when to take Social Security retirement benefits?

Larry Kotlikoff: First of all, when you sign up for Medicare has no impact whatsoever on when you are allowed to start collecting particular Social Security benefits.

In your case, your wife will collect her own retirement benefit, inclusive of any delayed retirement credits (DRCs) she receives if she waits until after full retirement age to start collecting, plus an excess spousal benefit when you file to collect your retirement benefit. The excess spousal benefit will equal half or your own full retirement benefit (i.e., half of $2,000, or $1,000) less 100 percent of your wife’s full retirement benefit, $500, plus any delayed retirement credits she would receive were she to wait until after full retirement age to start collecting her retirement benefit.

Suppose, for example, she waited until age 70 to collect. Then her delayed retirement credits would be 32 percent times $500, or $160. In this case, her total check would be $1,000, which is A) $660 (her own $500 retirement credit augmented by the $160 in DRCs), plus B) $340 (half of your full retirement benefit, which equals $1000 less the $660).

Alternatively, suppose she takes her retirement benefit at 66, which is her full retirement age. Her total check before age 70-and-a-half, assuming you file at age 62, equals $500, and after age 70-and-a-half, it would equal A plus B, which, in this case, is also $1,000.

So your wife can’t lose anything by filing at full retirement age for her own retirement benefit if you are definitely going to file for your own reduced retirement benefit at age 62. The reason is that her excess spousal benefit will be reduced dollar for dollar for every dollar her own retirement benefit increases by waiting to collect it.

But, and this is a good-sized “but,” if you file for your retirement benefit at 62 or at any age before full retirement, you can’t suspend its collection. You can only suspend the collection of your retirement benefit if you are between full retirement age and 70.

So you can start your retirement benefit at age 62, but it will equal your full retirement benefit permanently reduced by almost 30 percent. And then at full retirement age – likely around 66 and 6 months in your case, given your year of birth, you can suspend this delayed reduced retirement benefit, and at 70, restart it at a 26.6 percent larger value, thanks to accumulating three years of DRCs. In following this strategy, you end up permanently reducing your own retirement benefit in order to kick your wife’s total check up from $500 to $1,000 (in today’s dollars) as soon as possible.

This is what I call the start-stop-start strategy, and I do think this is your best strategy. But when you should start requires using expert software. I’m pretty sure that starting start-stop-start at 62 won’t be optimal for you. But it may be optimal starting, say, at 64. What’s optimal will strongly depend on your maximum age of life and your wife’s maximum age of life. If you are sure you will die by, say 75, then starting up at age 62 might be best, but if your wife has a maximum age of 100, it’s not so clear. That’s because taking your own retirement benefit early can limit what your wife gets for a widow’s benefit off of your earnings record.