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In the first season of “Friends,” Rachel Green looks at her first paycheck as a waitress and asks, “Who’s this FICA guy, and why is he getting all my money?”
That’s one hard lesson about Social Security. Another is that when it’s time to claim, you can’t depend on the Social Security Administration to be your personal adviser.
In an effort to save time and cut costs, Social Security employees generally don’t give case-specific advice. So that means you are on your own to make the most important financial decision of a lifetime. You have to read the rules and do the research yourself.
Read on to brush up on Social Security benefits that are not commonly known.
There are many ways a married couple can decide to take their Social Security benefits, according to Alicia Munnell, director of the Center for Retirement Research at Boston College. You can’t ask Social Security to list them all, so what’s the right choice?
Munnell says it’s hard to beat waiting until you’re 70 to begin benefits because the monthly payment is 76 percent higher than it would be if you had started to take benefits at 62 and 32 percent higher than it would be if you claimed at age 66.
On the other hand, some people advocate drawing Social Security benefits at the first opportunity.
Doug Carey, who founded the financial planning software firm WealthTrace, says Social Security doesn’t see itself as an oddsmaker, but it does require you to bet on your longevity. He offers this chart as proof. It graphs the break-even point for a person who earned the inflation-adjusted equivalent of $70,000 per year for 35 years. If this person waits until 70 to claim Social Security and lives until at least age 90, he’ll accumulate almost $162,000 more in benefits than he would if he had claimed at 62. But there’s a possibility of losing the bet and getting nothing.
Retired law professor and Social Security expert Merton Bernstein says the longevity bet odds are bad, so claim early. “You never know when the bell will ring. I subscribe to the Woody Allen principal: ‘Take the money and run.'”
Social Security does a good job of explaining widow and widower benefits, but Dan Keady, director of financial planning for TIAA-CREF Financial Services, says it doesn’t clearly spell out a key difference between widow/widower benefits and spousal benefits. A widow/widower can begin benefits based on his or her own earnings record and later switch to survivors benefits or begin with survivors benefits and later switch to benefits based on his or her own record — even if the surviving spouse is filing before full retirement age. You can’t do that with spousal benefits.
In other words, a widow can begin drawing a survivors benefit on her late husband’s Social Security when she is as young as 60, but only at a reduced rate. Then she can choose to leave her own Social Security alone, allowing it to grow in value until her full retirement age — or even age 70. This works for widowers, too.
When you apply for disability insurance, Social Security doesn’t tell you that your first step ought to be to hire a lawyer or other expert adviser. Allsup, a private firm that advises people about how to get SSDI, says Social Security doesn’t even make it clear that an applicant can have representation from the very beginning of the application process. As a result, lots of people don’t get help until they’ve been initially denied, and that slows down the process unnecessarily.
The Social Security website offers an explanation of how your benefits are calculated, but it’s a little hard to follow. You can find a simpler explanation at MyRetirementPaycheck.org, a website sponsored by the National Endowment for Financial Education.
Your Social Security payment is figured using a complex calculation based on a 35-year average of your covered wages. Each year’s wages are adjusted for inflation before being averaged. If you worked longer than 35 years, the government will use the highest 35 years. If you worked for less than 35 years, they’ll average in zeros for the years you are lacking. You don’t have to be a math genius to figure out the impact of that — it drags down your average. If you can avoid zeros by working a couple of years longer, you’ll increase your Social Security payment.
Most Americans watch their money go into the Social Security trust fund in the form of payroll deductions as soon as they begin working, when retirement seems a long way off. As a result, many go through their working lives without giving it much thought.
Here are a few facts everyone should know about Social Security benefits before making any decisions about retirement.
Just about anybody who has worked for 10 or more years is eligible for Social Security retirement benefits.
You need 40 credits or quarters of coverage, earning a minimum income of $1,200 per quarter, according to the Social Security Administration.
The income requirement is so low that “it could be met with seasonal work,” says Richard W. Stumpf, a Certified Financial Planner at Financial Benefits Inc. in Wichita, Kansas.
There are some exceptions. Most federal employees hired before 1984 aren’t eligible to participate, says Brett Horowitz, principal and wealth manager at Evensky & Katz/Foldes Financial Wealth Management in Coral Gables, Florida, Stumpf adds that pastors may choose not to pay in.
Also, railroad workers and their families generally get benefits through a separate retirement system.
The size of your monthly check is arrived at by a series of calculations.
Your primary insurance amount, or PIA — the benefit you would get at full retirement age — determines the size of your monthly retirement check. According to the Social Security Administration’s website, the PIA is based on the Average Indexed Monthly Earnings, or AIME, as applied to an inflation-adjusted formula. The PIA is then adjusted for whether you take retirement before or after your normal retirement age — 66 for those now reaching retirement age, but gradually adjusted to age 67 for those born after 1960.
You can begin drawing reduced Social Security as early as 62. For every month you delay after reaching full retirement age, up to age 70, the monthly benefit increases.
According to a 2010 report of the Senate Special Committee on Aging, for someone with an AIME of $5,000 in 2010, the PIA would total $1,971.
In keeping with the original intent behind Social Security — a way to lift seniors out of poverty — lower-wage earners get a higher proportion of their earnings than higher-wage earners. The maximum monthly benefit that can be received in 2014 is $2,642 for a worker retiring at full retirement age.
If one partner in a marriage earns significantly less than the other, the lower-earning spouse can collect spousal benefits rather than payouts based on his or her own earnings history.
“The spouse can get the greater of their own or 50 percent of the other spouse’s PIA,” Horowitz says. “The lower-earning spouse is not eligible until the higher earner starts getting benefits, but both can start as early as 62.”
Stumpf says this option can be a financial planning tool.
“Imagine a high earner whose spouse is his employee,” he says. “If they cut her pay and transfer the rest to him, when she reaches retirement age, one-half of his income will be significantly higher than what she earned.”
A divorced spouse who was married for more than 10 years and has not remarried can draw against the ex-spouse’s work history. Widows and widowers can receive the higher of their own or their spouse’s monthly payment, but not both.
“That’s why it’s important for the higher earner to delay taking benefits for as long as possible,” says Horowitz.
According to the 2014 annual report from the Social Security Board of Trustees on the financial status of the program, without policy changes, the combined Social Security trust funds will become depleted and unable to pay scheduled benefits in full on a timely basis in 2033. After that, Social Security could pay about three-fourths of scheduled benefits through 2089.
The year that funds fall short varies somewhat in each annual report depending on economic, demographic and other variables, according to the Center on Budget and Policy Priorities, but it has ranged between 2029 and 2042 for the past two decades.
In theory, they’re held in trust by the government. But it’s not as if your money sits there in the Social Security trust fund waiting for you to retire. After current beneficiaries are paid, surplus dollars are used to buy bonds from the U.S. Treasury. So the trust has the bonds, but the money is now in the Treasury, where Congress can use it for any purpose.
“The Social Security trust fund is … a piggybank holding paper IOUs from Congress,” Stumpf says.
For the trust funds to remain solvent over the next 75 years, the 2014 Trustees Report says, one of these measures would have to be implemented immediately:
- Payroll taxes would have to increase by 2.83 percentage points, from its current level of 12.4 percent to 15.23 percent;
- Benefits would have to be cut by 17.4 percent to all current and future beneficiaries;
- If applied only to beneficiaries enrolling in 2014 or later, benefits would have to be cut by 20.8 percent;
- Or some combination of the above should be adopted.
According to the report: “The Trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them.”
Lawmakers have been dragging their heels to make any fixes to Social Security, in part because it’s such a hot-button issue.
For most people, Social Security is one component of retirement income — one leg of the so-called three-legged stool.
Pensions are another component, but these days few workers get a pension. The last leg would be personal savings, whether in a 401(k) plan, IRA, an investment account or savings account.
Frequently Asked Questions about Social Securities
Dr. Don’s Social Security advice
- Does it make sense to retire early and stop saving?
- Will I get more if I defer taking widows benefits until I’m 70?
- Can I draw spousal benefits while I’m working until I turn age 66?
- Will my wife be eligible to collect spousal benefits at age 66 if I wait until age 70 to collect mine?
- Can my husband and I both “file and suspend” and then collect spousal benefits until age 70?
- I’m 66 and don’t need my Social Security benefits. In what tax shelter can I invest the money?
- I am 62. If I pay back the Social Security I already collected, can I get a higher benefit later?
- Will working while taking survivors benefits penalize me if I switch to my own higher benefit later?
- Can my older wife start drawing spousal benefits before I am eligible to collect?
- Can I collect a spousal benefit before I collect my own retirement benefit?
- Can I collect off my husband’s record next year when we’re 62 if he “files and suspends”?
- What happens to a spouse’s Social Security after he dies and there are no children?