Social Security rules are complicated and change often. For the most recent “Ask Larry” columns, check out maximizemysocialsecurity.com/ask-larry.
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.
William — New York, N.Y.: My wife and I are the same age (64 this July and October). I intend on waiting until age 70 to start collecting Social Security benefits. I was thinking of filing and suspending benefits when I turn 66 (my full retirement age). My wife could then start collecting her spousal benefits. Would we be ahead in the long run if she started collecting her own benefits now (at 64), and then collected spousal benefits when I file and suspend when we are 66? She barely qualifies for her own benefits since she was a homemaker raising five sons for over 30 years.
Larry Kotlikoff: Your wife’s benefit at full retirement age will be her permanently reduced retirement benefit, plus her excess spousal benefit since she would have dropped into excess benefit status by filing for her full retirement benefit.
The excess spousal benefit is half of your full retirement benefit less 100 percent of your full retirement benefit. If X is her own full retirement benefit, she’ll get the amounts A) X times R, which is the reduction factor she’ll permanently face for filing at 64; plus B) 50 percent of your full retirement benefit less X. Her benefit after full retirement age will then be 50 percent of your full retirement benefit, plus (R-1) times X. Since R is less than 1, if you do what you are considering doing, she’ll end up receiving a smaller total check after full retirement age through the end of her life. So, no, I wouldn’t necessarily recommend your proposed course of action.
Mary Elizabeth — Massachusetts: I am 66 and applied for Social security in June 2014. I have only 25 credits since I stayed home to take care of my children. Social Security denied me and said I am short and need 15 more credits. They told my husband last year when he applied that I could apply under his name. What should I do, and who is telling me the truth? I am getting the run around.
GOT SOCIAL SECURITY QUESTIONS?
Larry Kotlikoff: You do need 40 credits to qualify for your own retirement benefit. But you don’t have to work another 15 quarters to get those extra 15 credits. If you earn enough in a given quarter, you can garner multiple coverage credits.
You do, it seems, now qualify for a spousal benefit. Your total check will be half of your husband’s full retirement benefit (not necessarily what he’s now collecting) for the rest of your life (but adjusted for inflation). There is no gain to waiting to collect your spousal benefit. And don’t apply for retroactive benefits for any months prior to full retirement age because you will have your spousal benefit permanently reduced.
Jacqueline — Illinois: I started taking Social Security at age 62 and continued working. I am now 66 and still working. My ex-husband passed away last year and had been on Social Security disability since 2010. We were married for 20 years. Am I able to draw my Social Security and draw from my ex-husband’s Social Security? I have not remarried.
Larry Kotlikoff: You are eligible to collect the larger of either your current reduced retirement benefit or your widows benefit based on your husband’s work record. This can also be described as collecting your own reduced retirement benefit plus your excess widows benefit, where the excess widows benefit is just the positive excess of your widows benefit over your own reduced retirement benefit. Your widows benefit will be calculated based on a special RIB-LIM formula for widows of disabled workers.
I won’t get into all the details because it’s terribly complicated. But the bottom line is you should check with Social Security if your widows benefit exceeds your current reduced retirement benefit. lf it does, you can start taking it now. You also have the option of taking your excess widows benefit now (if it’s positive) and suspending your own reduced retirement benefit and restarting it again at 70 at a 32 percent higher level than is currently the case.
If your excess widows benefit is very small, this suspension option may be in your interest. If it’s not, suspending your retirement benefit could actually hurt you. The reason is that between now and 70 you’d collect just your excess widows benefit (which is less than your widows benefit). But after age 70 you’ll collect just your widows benefit. In other words, if your excess widows benefit is large enough, it means the larger of your widows benefit is likely to be larger than your current retirement benefit multiplied by 1.32. Hence, suspending your retirement benefit entails taking an excess widows benefit for four years and then getting the widows benefit because, I’m assuming, it will be larger than 1.32 times your reduced retirement benefit.
In this case, suspending means moving from A) getting a check for the rest of your life equal to your widows benefit to B) getting a smaller check for four years, namely your excess widows benefit, and then getting a check equal to your widows benefit from age 70 on. Clearly the suspension option will produce lower lifetime benefits.
Yes, this is really complicated to follow. So you need to sit down with your local Social Security office and have them put down in writing what you will get each year from now on if you do and don’t suspend your retirement benefits given that you are going immediately to file for your widows benefit. Because the widows benefit won’t rise from waiting, you can only lose money if you don’t file now for your widows benefit. Again, if your excess widows benefit is positive, your check will increase if you don’t suspend your retirement benefit. If you do suspend your retirement benefit, you may or may not make the right decision. But looking at the annual amounts you’ll get from suspending will make clear if suspension makes sense.
The lesson here is that suspending retirement benefits can hurt you or help you depending on your circumstances. And if it hurts you, it can hurt you a lot!
Barbie — Houston, Texas: My husband died at age 61 before receiving Social Security. My adult mentally impaired son and I currently receive Social Security based on his earnings. We receive 150 percent of his benefit. I am 64. I have not been employed for many years. My husband always earned more. Should I apply for Social Security based on my earnings? Should I apply for Social Security for myself rather than receive benefits based on the fact that I am caring for my child? Will the benefits be different?
Larry Kotlikoff: Yours is actually a very complicated case. There are three benefits involved here: your mother’s benefit (the survivor’s benefit you are now collecting based on having a disabled child in your care), your widows benefit, which exceeds your mother’s benefit, but will be reduced if you take it before full retirement age (66 in your case), and your own retirement benefit, which will be reduced if you take it now compared to its maximum value at age 70. You can’t receive more than one of these benefits at once.
It might be optimal to take your own reduced retirement benefit starting now and your widows benefit at 66. Or it might be optimal to take your widows benefit before 66 — even as soon as right now — and then take your own retirement benefit at 70 when it will be as large as possible. You need to use commercial software that can look at all the strategies and decide which is going to maximize your Social Security benefits on a lifetime basis.
Eric — Evansville, Ill.: My sister Stephanie was married more than 10 years but divorced in mid-life. She originally worked as a licensed practical nurse before marriage and children. She worked for her husband’s business as well for a few years. After raising her children, she went back to work as a nurse’s aid not making too much. She recently retired at 62 but has not started taking Social Security yet. My guess is that she’ll be better off taking her own retirement at 63 or 64 and then taking half of her ex-husband’s when he retires at full retirement age. How can I evaluate this? The Social Security administration said she’d be better off taking her own Social Security, but I doubt it; her ex-husband always made pretty good money.
Larry Kotlikoff: Commercial software can help, but she surely should do what you are guessing she should do. If she files for her own retirement benefit before full retirement age, she will be deemed to be filing for her divorced spousal benefit (if her ex is older than 62). In this case, she’ll be forced to take what is pretty close to the larger of the two reduced benefits. Most likely her reduced retirement benefit exceeds her reduced spousal benefit, and she’ll just get her reduced retirement and never see a penny in terms of a divorced spousal benefit.
Another way of saying this is that the minute someone files for a retirement benefit, they are tossed into excess benefit hell and can never receive a full spousal or widows benefit by itself — just the excess or close to the excess of their spousal or widows benefit over their retirement benefit, inclusive of any delayed retirement credits. This is even true during years in which one suspends one’s retirement benefit. My guess is the best option for Stephanie is to wait until full retirement age, collect just her divorced spousal benefit and then at 70, start collecting her retirement benefit, which will begin at its highest possible level. In other words, she should not file for her retirement benefit until 70.
Soila — San Antonio, Texas: I am a retiree receiving a government pension. Because of the “off-set” law that affects government employees, I never paid into Social Security. I only have 28 quarter credits from other employment, so I don’t have the required 40 credits for Social Security benefits. I have been married for almost 27 years to my husband who currently gets a government pension and reduced Social Security benefits of approximately $440 a month due to the “off-set” clause.
Can I receive 50 percent of his Social Security benefit when I reach 66 or would I have to wait when until I turn 70 to get 50 percent or more? I forgot to mention I turned 61 in March 2014.
Larry Kotlikoff: You can collect a reduced spousal benefit now or a full spousal benefit at 66, but it will be reduced by two-thirds of your own non-covered pension. When your husband passes away, you can collect a widows benefit, but it will also be reduced by two-thirds of your non-covered pension. If your non-covered pension isn’t adjusted annually for inflation, the spousal or widows benefit you can collect may become positive if, as I suspect, it starts out at zero. Sorry for this mostly bad news.
Carlene — Ohio: When I watch Suzie Orman, I cringe! Is she really wanting us all to work past 70?
At age 56, my husband had 38 years of service and accepted a buyout. He gets a great pension. I still work full time as a nurse. We will be 62 in October. He is applying for Social Security in August. My goal is to retire in January 2015. I will get a small pension as a nurse. I want to start collecting in January.
MORE FROM LARRY
My dilemma is health insurance to bridge us until 65. My insurance will be outrageous and out of the question (you would think hospitals would have good retiree ins). I’m hoping “Obamacare” will make it affordable.
We don’t have a cool million in our retirement accounts. Why does Orman want to make all of us regular stiffs feel bad? She never mentions pensions combined with 401(k)s. Are we part of a dying breed that collects pensions? In your opinion, are we on the right track? We have no consumer debt.
Larry Kotlikoff: With personal finance, it’s never, ever the case that one size fits all. You appear to be what we economists call “borrowing constrained.” You don’t want to borrow to smooth your living standard, but you also want to wait to collect certain benefits to enjoy the very high return Social Security provides for maximizing or optimizing your lifetime benefits.
I recommend you use ESPlannerBASIC, which is a free financial planning tool provided by my software company. It can help you see if you can actually wait to collect benefits by looking at your cash flow problems. The program shows what you want to spend each year to have a stable living standard, but it won’t put you in debt to achieve that end. It will let you consider tapping your 401(k) money first and then going onto Social Security. It was ranked the best financial planning tool on the web a couple years back by Money Magazine, and it’s only gotten better. Again, it costs zero to run.