You have your Social Security strategy all wrong

Social Security rules are complicated and change often. For the most recent “Ask Larry” columns, check out

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.

Scott — South Glastonbury, Conn.: My wife just turned 66 and we have been married three years. Her husband died in 2008 and she is beginning to receive survivor benefits based upon her deceased husband’s earnings.

I will be 66 at the end of September. I was formerly married to a wage earner for 15 years and divorced in 2011. Both my wife and I are actively employed and intend to be so as long as we can.


Pose Your Questions to Larry Here

We are trying to maximize our respective payouts. Do I have this right strategically?
First, I should file and suspend when I turn 66, and at the same time, file for spousal benefits from my ex-wife. Second, begin taking my full retirement benefit at 70. And third, when I turn 66, my current wife should file for spousal benefits from me and then defer taking her full benefit until age 70. Am I missing anything?

Larry Kotlikoff: Unfortunately, through the fault of our government, which has made Social Security as complicated as humanly possible, you have this about as wrong as possible.

First, since you are remarried, you can’t collect spousal benefits from your ex-wife. You can collect widows benefits on your ex-wife when she dies because you remarried after age 60. Second, the nanosecond that you file for your own retirement benefit, you are plunged into “excess benefit” hell, meaning you can no longer collect a full spousal benefit, a full widow(er)s benefit or a full divorced widowers benefit by itself while letting your own retirement benefit grow through age 70. Instead, you’ll receive your excess spousal or widower benefit, which could well be very small or zero.

Your best strategy may entail your current wife continuing to collect her divorced spousal benefit and both of you waiting until 70 to collect your own retirement benefits. If you file and suspend to get her a full spousal benefit, that spousal benefit may be less than her divorced widows benefit, which she can keep collecting until 70 and, indeed beyond, if it exceeds her own age-70 retirement benefit. And if she files and suspends, you can collect a full spousal benefit on her record, but the widows benefit for the next four years will turn into an excess widows benefit, which may be very small.

Question: I am 67 years old and collecting civil service retirement. I am of the understanding that I cannot collect spousal benefits from my wife. So in that case, my wife filed for Social Security at age 63 even though we do not need the cash. We are planning on investing this money and buying life insurance with it. Your thoughts?

Larry Kotlikoff: Social Security has its own life insurance benefits. They are called survivor benefits and they consist of widow(er)s benefits, divorced spousal widow(er)s benefits, child survivor benefits, mother and father benefits, divorced spousal mother and father benefits, and parent benefits. The Government Pension Offset (GPO) provision affect​s ​​both ​your spousal​ and widow(er)s ​benefit. The Windfall Elimination Provision does not affect your wi​dow(er)s benefits.

What will affect your widowers benefit, and adversely so, is having your wife file for her retirement benefit any time before age 70. By waiting untill age 70 to collect her retirement benefit, your wife will maximize both her own retirement benefit a​s well as​ your widowers benefit​ (which, admittedly, may not be very large given the GPO)​.

But, from what you’ve told me, I think your wife should file for her retirement benefit when she reaches full retirement age and then suspend it. This will let you collect a spousal benefit, while still letting her collect her largest possible retirement benefit starting at age 70. Yes, the GPO may wipe out your spousal benefit, but maybe not entirely. Also, by filing and suspending, your wife will retain the option, if she needs the cash, to request that all her suspended benefits be paid to her in one lump-sum check. This will, however, reset her retirement benefit back to the level it was when she suspended it.

Martha — Cameron Park, Calif.: I turned 66 this year and filed for “spousal benefits” ($925). My husband is 76 and started Social Security when he was 65 ($1,740). I plan to retire in January 2015 but not claim Social Security until I reach 70, when I will earn $3,490. I am still working full time and hope to work “per diem” to earn a little to supplement our combined Social Security after January 2015. Can I do any better?

Larry Kotlikoff: If you can earn enough to raise your Average Indexed Social Security benefits, you can can still raise your age-70 retirement benefit and, thereby, raise your lifetime benefits. Also, if your 76-year-old husband is able to earn, he too may be able to raise his own retirement benefit and, potentially, the widows benefit you’ll collect after he passes away. If either of you can earn above the covered earnings ceiling, it’s a sure thing that you’ll raise your own retirement benefit and your spouse’s potential widow(er) benefit.

There are other ways to safely raise your retirement benefit, like moving to a state like Florida with no income tax, or optimizing the timing and type of your retirement account withdrawals. There is a free program my company provides that can help you explore these options.

Question: My question regards the Windfall Tax Act. I’m a retired city employee receiving a minimal pension. It is my understanding that Social Security will slash my retirement considerably. I also understand that this particular act is only valid in certain states. Massachusetts being one. Will this ever be repealed? I also know that New Hams​p​hire is not part of this act. If I moved to New Hampshire, would this alleviate this problem?

Larry Kotlikoff: You are mistaken. Receiving a noncovered pension — a pension from work anywhere in the U.S. that was not covered by Social Security (so that no Social Security payroll taxes were deducted) – will trigger the Windfall Elimination Provision (WEP) when it comes to your own benefits or your family members collecting benefits based on your covered work record. If you are now or were married and then divorced after being married for 10 or more years, your noncovered pension will also trigger the Government Pension Offset (GPO), which will reduce your spousal, divorced spousal, widow, and divorced widow ​​benefit that you are eligible to receive based on your current o​r ​ex-spouse’s work record. The ​WEP​ will not impact your ​husband’s or ex-husband’s widower ​benefit should you​ pass away. Careful software can calculate the exact impact of the WEP and GPO on your own benefits and those of your family members.

Farmington Hills, Mich.: I collect Social Security and work a full-time job. How can I tell if my employer is taking enough Social Security out?

Larry Kotlikoff: Your paystub should indicate FICA contributions equal to 7.65 percent of your gross pay, assuming you are below the Social Security taxable earnings ceiling.

For more about how Americans pay into Social Security, watch Paul Solman’s 2005 segment exploring public opinion about raising the cap on taxable earnings.