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.
Dear Devoted Social Security “Ask Larry” Readers,
Before answering this week’s questions, I want to alert you to a terrific new column that Phil Moeller, one of our nation’s leading personal finance columnist, is now writing on Medicare for Paul Solman’s Making $ense page. Phil is a co-author with me and Paul of a forthcoming book, called “Get What’s Yours — The Secrets to Maxing Out Your Social Security Benefits,” coming out in February from Simon & Schuster.
But Social Security is only one of the big issues you need to consider in facing retirement. Medicare is another biggie. Phil is going to help you decide when to enroll for particular parts of Medicare, how to decide which Part D prescription drug insurer to use, the cost to some people of not enrolling early for Medicare Part B, the crazy way in which Medicare Part B premiums rise with your income, the new Medicare tax on the asset incomes of those with high adjusted gross incomes, and more…
So please read Phil’s outstanding column and follow him on Twitter!
Question: My husband passed away unexpectedly at 58. We owned a small dental laboratory that he operated at that point because I could not. With not much income of my own, I took the survivors benefit at 59-and-a-half, knowing it would be reduced. My question is, what happens to my Social Security benefit? Based on my earnings, it would be $580 per month. Do I lose my benefit? My survivor benefit is almost triple this amount.
Larry Kotlikoff: I’m sorry to hear about your husband. I’m also very sorry to say that you aren’t able to collect anything more based on your own work record since Social Security will give you the larger of either your own retirement benefit or your widows benefit. And even if you wait until you are 70 to collect your retirement benefit, when it will be as large as possible, it will, it seems, still be below your widows benefit.
Had you been able to get by on just your own retirement benefit, it would have been best, in your case, to have started your retirement benefit at age 62 and your widows benefit at full retirement age, when it would have been as large as possible. Between 62 and full retirement age, you would have received the larger of either your retirement benefit and, well nothing, because you would not yet have taken your widows benefit.
Wish I had better news, but Social Security forces people to pay FICA taxes for their entire working lives and often, as in your case, gives them nothing in exchange for all those contributions because of their receipt of a larger ancillary benefit. This is like a company telling a widow that it canceled her pension because her husband died and left her life insurance.
Question: I’m 55 years old and have been on Social Security Disability (SSDI) since 2007. It has been my sole source of income since that time. I last worked the first half of 2001, at which time my annual salary was $92,600. What is the age at which my SSDI benefit switches to Social Security, and how can I determine what the amount of my Social Security benefit will be at that age?
The benefits calculator on the Social Security website gave me an amount less than what my current SSDI benefit is. How would I determine at what age I would maximize my lifetime benefits from Social Security? I assume I will live to be 90, the same age at which both of my parents died.
Larry Kotlikoff: At your full retirement age (66 and 10 months), your disability benefit will automatically convert into your retirement benefit unless you withdraw it. Your benefit amount won’t change. The only thing that will change is the name of the benefit.
Note that “withdrawing” your benefit is not the same as suspending it. As I have discussed, if you are or were married, you may want to withdraw your retirement benefit when you reach full retirement age in order to collect a full spousal, a full widower’s, a full divorced spousal, or a full divorced widower’s benefit based on the work record of a current, ex or deceased spouse.
If collecting on an ex, you need to have been married at least 10 years. If there is a spouse or ex-spouse on which you can collect and you do withdraw, you can restart your own retirement benefit at a roughly 25 percent larger value at age 70. If you restart it before age 70, it will receive fewer delayed retirement credits, but it will still be larger than it was when you reached full retirement age. Delayed retirement credits are allocated on a monthly basis, but add up to an 8 percent increase per year.
If you suspend, rather than withdraw your retirement benefit when you reach full retirement age, you can also accrued delayed retirement credits, which will kick in when you restart your benefit. An advantage of suspending, rather than withdrawing your retirement benefit, is that you can, if you need a major cash infusion in the case of an emergency, request all your suspended benefits be repaid in a lump sum. Doing so will entail giving up your delayed retirement credits going forward, however. But suspending, as opposed to withdrawing your retirement benefit, will preclude your collecting the aforementioned full spousal or widower benefits based on your current or ex-spouse(s).
Douglas — Ashtaula, Ohio: Am I correct that if I wait to age 70 to claim Social Security benefits there are no limits on what I can earn by continuing to work after that? In other words, there won’t be any deductions from my benefits?
Larry Kotlikoff: Not quite correct. Social Security’s earnings test ends the nanosecond you reach your full retirement age. That’s age 66 for those born from 1943 through 1954.
Even for those under full retirement age, the earnings test can be far less of an issue than is commonly believed. The reason is that benefits, be they retirement, spousal, or widow(er) benefits, lost due to the earnings test are subject to what Social Security calls “the adjustment of the reduction factor” or ARF. Thanks to the ARF, Social Security bumps up your benefit to fully compensate you in the future for benefits lost in the past due to your having earned too much money.
However, if you were receiving benefit X and lost some of X due to the earnings test and then, after reaching full retirement age, begin taking benefit Y, which exceeds X, the ARF won’t do you any good. The reason is that Social Security only pays the larger (or something quite close to the larger) of the two benefits. In this case Y isn’t “ARF’d,” so the fact that benefit X has been restored to its full value doesn’t matter because you won’t be collecting X. Instead, you’ll be collecting Y.
Question: I am 63 and working, widowed 20 years ago. My husband was retired and collecting Social Security. I did collect survivor benefits for our young son, but my own survivor benefits were suspended because I was earning too much.
Does it make sense for me to file now as a widow against my deceased husband’s account, and then switch to my own retiree benefits when I retire in two to three years? My current salary is $100,000. Thank you.
Larry Kotlikoff: Very precise commercial software can tell you exactly what’s best, but my guess is that you should apply for your widows benefit as soon as you retire, and then at 70, apply for your own retirement benefit. If your earnings fall to the point that you won’t lose them all due to the earnings test, you should immediately apply for your widows benefit.
Your widows benefit will then be bumped up at full retirement age (66 in your case) based on any months of benefits lost due to the earnings test. This is done via the adjustment of the reduction factor.
You are making a high salary now, but that may not have been the case in the past. And your husband may have been a high earner before he passed away. So what’s best to do really depends on the exact details. With sophisticated software, you can also see whether continuing to work for more years will raise your lifetime Social Security benefits and, if so, by how much.
Gloria — Wenatchee, Wash.: My husband Earl had to take an early retirement at the age of 54 because he had a stroke, and also started receiving his Social Security then. He died five years ago at the age of 62. I am 59 now and have always heard I have to be either disabled or 60 to receive his Social Security benefits. Is this true?
Larry Kotlikoff: Yes, you need to be disabled to collect widows benefits early (indeed, as early as age 50). But since you aren’t disabled, you can’t collect a widows benefit until you reach age 60.
However, if you take your widows benefit then, it will be reduced. This may, nonetheless, be the optimal thing to do depending on your own work record. If, let’s assume, you have been a high earner, taking your widow’s benefit at 60 and your own retirement benefit at 70 may maximize your lifetime Social Security benefits. On the other hand, if you haven’t earned much in the past, it may be best to take your own retirement benefit early — at 62 — and then take your widows benefit at full retirement age when it will start at its largest possible value.
Question: My late husband and I were married for 36 years when he passed away in 2010 at the age of 61. He had already retired from his job. I continue to work full time. At this point, when I retire, I believe my Social Security benefit amount will be greater than his would have been. He had planned to collect at age 65. So if I collect the widows benefit based on his Social Security amount, accumulated to age 61, how will it affect my Social Security amount if I retire at age 66 (I was born in 1952)?
Larry Kotlikoff: My sincere sympathies for your loss. If you aren’t earning enough to lose all your benefits under the earnings test, you may be giving up benefits for no good reason right now. Most likely, you will want to take you widows benefit as soon as possible, and certainly starting at full retirement age, and postpone taking your own benefit until age 70. But another option, if you aren’t earning so much as to lose all benefits to the earnings test, is to take your own retirement benefit starting right now and start your widows benefit at 66. Only extremely careful software will get this straight for you.
Left: Even if you've paid FICA taxes throughout your career, you won't receive your own Social Security benefit if you receive a survivor benefit that is larger. Photo by Flickr user meddygarnet.
Laurence Kotlikoff is a William Fairfield Warren Professor at Boston University, a Professor of Economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Fellow of the Econometric Society, a Research Associate of the National Bureau of Economic Research, President of Economic Security Planning, Inc., a company specializing in financial planning software, and the Director of the Fiscal Analysis Center. Kotlikoff's columns and blogs have appeared in The New York Times, The Wall Street Journal, The Financial Times, the Boston Globe, Bloomberg, Forbes, Vox, The Economist, Yahoo.com, Huffington Post and other major publications.
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