Note: This is the 2nd in a 3 part series called “Social Security: What You Think You Know Might Hurt You”. Part 1 provided an overview of the program, how your benefit is calculated, and strategies for optimizing your benefits. This segment will concentrate on strategies for couples to maximize their benefits,as well as the rights and benefits for divorced spouses. The final section of this article discusses some of the more common misconceptions/FAQs about Social Security.
May 8, 2012 — As we discussed in Part 1, the decision to file for Social Security benefits is a personal one that means balancing several inputs. But for married couples, these factors get even more complicated. One spouse might be younger than the other. One person in the couple often has a higher earning record for social security, so he or she stands to collect more. They each might have different ideas about when to stop working and start collecting. And finally, and most importantly – when the first spouse dies the surviving spouse is entitled to their own benefit or that of the spouse, whichever is larger. Although people don’t tend to think about it, most of these same factors apply to the disability and survivors benefits that Social Security pays.
We attended a recent seminar organized by the Oakley Wing Group, where guest speaker Kurt Czarnowski offered 3 very smart claiming strategies for couples. We will share them here, using Ward and June Cleaver, a couple familiar to just about every baby boomer, as examples.
1. File and Suspend
Update Nov. 15, 2015: The Budget Bill signed into law in late 2015 dramatically changes the popular “File and Suspend” strategy discussed here. People who can take advantage of it by April 1, 2016 are grandfathered, but depending on your birth date, the strategy has gone away for other folks. See our article “How the New Social Security Claiming Rules Affect You” for more.
Ward reaches Full Retirement Age (66) and files for Social Security benefits, then suspends (thus declining to take benefits at this time). If June is at least 62 she can now file and be eligible to start collecting the spousal benefit. Her benefit will not increase from this point, other than from COLAs.
Strategy: Ward’s benefit will continue to increase at 8% per year while he does not collect, and if he is working, he might further increase his benefit. Yet June can start collecting now, bringing money into the family without any downside to the higher earner’s potential benefit.
2. Claim Some Now, Claim More Later
Ward files at any age he is eligible and starts collecting. June waits until she reaches Full Retirement Age and begins collecting the spousal benefit (50% of Ward’s). By delaying her own benefit, and if she continues to work, she can increase her monthly benefit. See our article “How the New Social Security Claiming Rules Affect You” for how this strategy changed in 2015.
Strategy. The lower earner can start collecting early, preserving and maximizing the higher earner’s higher benefit.
3. Combination to Maximize Benefits for Both
Assumes both spouses have reached Full Retirement Age. Then one spouse files for benefits and immediately suspends (does not start collecting). The second spouse can now collect the spousal benefit on the first spouse. Later on the suspended spouse can start collecting his/her higher benefit (which will have increased by waiting), and the spouse taking the spousal benefit can file for their own benefit if higher.
Strategy: Allows both spouses to maximize the benefit from their earning record by delaying benefits past FRA, up to age 70. Also allows the couple to start getting 1 spousal benefit at FRA, but without jeopardizing the benefit they can get from their respective earning records.
These 3 strategies are fairly complex, and of course the rules could always change. We recommend consulting a professional before implementing to make sure our assumptions are correct. But if one of these fits your particular situation it could represent a very effective tool for you. Here is where Social Security’s Online Estimator (see Q & A’s below) might help you do some what-ifs to inform your decision. This page at the Social Security site, “Benefits for Your Spouse“, helps to explain spousal rights quite clearly.
Rights of Divorced Spouses
If you are divorced you are probably entitled to the spousal benefit from your former spouse (or your own benefit entitlement if you prefer). These conditions apply:
– You were married for at least 10 years to that person
– You are at least 62 and unmarried
You don’t have to wait for your former spouse to file – you can collect 50% of their current entitlement (or take your own). The fact that you are taking benefits based on your former spouse’s record has no impact on his/her benefit.
More frequent questions and misconceptions about Social Security
Q: Didn’t Social Security stop sending out those helpful benefit statements? Is there any way to get your statement?
A: Yes. They did this as a money saving idea. However, people over 60 years of age will start getting them again this year (2012). Furthermore, Social Security has 2 wonderful online tools to help:
Use this tool to estimate how much your benefit will be, based on your actual payments into the system and when you intend to start collecting. You will need to enter some personal information into the system to prove that it is you using the tool.
(Note: We have had trouble reaching this page using Firefox, so you might want to try it in another browser). If you create an account and provide the tool with your personal information, it will give you the same online statement you are used to getting in the mail.
Q: Will Social Security run out of money?
A: There are a lot of people asking this question. According to a 2012 report from the public trustees of the Social Security program, the system will not be able to pay 100% of promised retirement benefits beginning in 2033 (and the disability component will have that problem beginning in 2016) – unless Congress does something to fix the program.
However, this does not mean that Social Security is flat broke in 2033 if Congress fails to act. That’s because Social Security is a pay as you go program. FICA payments from people who are currently working will be coming into the system, and that will permit the Agency to pay at least 75% of promised benefits.
Q: Is the money that I paid into Social Security there in some specific account with my name on it?
A: No. As mentioned before, this is a pay as you go system. As designed, the taxes paid by current workers finance the payments to current retirees.
Q: What is behind the shortage looming in 2033?
A: There are 2 main factors:
1. Most importantly, it is demographic. There are so many baby boomers about to retire that they will outnumber the baby bust generation who are working to pay their retirement benefits.
2. Life expectancy keeps going up. When Social Security began most workers had physically demanding jobs, and the average life expectancy was much less than it is now. The result is that the program is paying benefits for many more years per worker than when it started.
The program clearly needs some minor adjustments to planned benefits and the ages at which people become eligible to overcome factors 1 and 2. Let us see if Congress will rise to the task!
The Social Security website, ssa.gov, has a tremendous reservoir of Frequently Asked Questions. It is definitely worthwhile spending some time going through the various categories.
Note: Be sure to take our new “What is Your Social Security IQ Quiz“. It will give you a score and detailed explanations to make you a Social Security expert (our best advice, read this article first!).
About Czarnowski Consulting
Kurt Czarnowski is currently the principal in “Czarnowski Consulting,” a retirement planning company which provides “Expert Answers to Your Social Security Questions.” Czarnowski is the former Regional Communications Director for the Social Security Administration (SSA) in New England, a position he held from December 1991 until his retirement at the end of 2010.
About this conference
This conference was organized by the folks at the Oakley Wing Group at Morgan Stanley Smith Barney in Essex, CT, an asset management team who specializes in helping baby boomers coordinate and oversee their financial affairs leading up to and throughout retirement. The team is available to help clients learn more about the preparations necessary to make a financially sound transition into retirement. You can call or email 860-447-4847 or William.email@example.com. The event sponsor was Transparent Value, an asset management company within Guggenheim Partners, a private global financial services firm. in Essex, CT.
Part 1: What You Think You Know About Social Security Might Hurt You
Part 3: How to “Buy” an Annuity from Social Security
AARP: 10 Things You Need to Know About Social Security
Fewer claiming Social Security Right at Age 62
Comments: Please let us know what you think about these strategies in the Comments section below. Do you plan to use one of them? What tactics are you using to maximize your legal benefits? Please also see the Comments made in Part 1 of this series.