We found a good piece from another advisor, Mary Dean of Dean Roland Russell Family Wealth Management in San Diego. Mary is one of Frank’s colleagues and she shares many important points on Social Security. Like Frank, Mary is featured in the 2012 book, America’s Top Financial Advisors by Benjamin Rush.
Social Security FAQ
Here are some highlights from the one day class I attended on social security on 7/13/2012 plus classes in May at the national convention:
1. It used to be that Medicare and the Social Security full retirement age started at the same age, 65. No more. Medicare starts at age 65. Full retirement age for social security is at age 66 today and will increase to age 67 for those born 1/2/1960 and later. Many believe that full retirement age will eventually extend to age 70.
2. When should you apply for Medicare? You should apply three months before your 65th birthday. This is true even though your health insurance may be covered by your employer. Your benefits could be reduced if you do not apply at or before age 65.
3. How long does it take to receive social security benefits after filing? Depending on the state, it can take up to six months to receive benefits after application.
4. Can you take social security before full retirement age, age 66 today? Yes, but your benefits are only 75% of those at full retirement age if the start date is age 62; if the start date is age 63, 80%; if the start date is 64, 86.7%; and if the start date is age 65, 93.3%.
5. Are there two types of social security retirement benefits? Yes, your own based on your own earnings and the spousal which is the higher of 50% of your spouse’s benefits or all your own benefits. The spousal is reduced if you or your spouse start benefits before full retirement age, age 66. That based on your own earnings likewise is reduced if taken before full retirement age. Can both of you claim spousal benefits? No.
6. Does it pay to delay benefits beyond age 66? The yearly benefit increases by 8% for every year you delay social security benefits between ages 66 and 70.
However delaying benefits may not make sense for someone in poor health and a life expectancy under 77. Still life expectancy should include that of the healthy spouse since he or she will receive survivor benefits (benefits paid after the worker’s death) based on the worker’s social security benefits. At death the surviving spouse receives 100% of the deceased spouse’s benefits. Note: we are assuming that the surviving spouse’s benefits are lower. If they are higher, he or she will receive the higher amount. It is important to note that he or she will not receive both.
There is NO advantage to delaying retirement benefits beyond age 70.
7. What if my spouse was covered by a government plan where no social security was withheld? That spouse may only receive a portion or possibly none of your benefits. This frequently happens with school teachers. The formula is too detailed to outline here. This also applies to foreign pension benefits. German holocaust victim pensions will not offset social security benefits.
8. Should benefits be delayed given the current budget crisis and lower percent of working adults in ten years? No, benefits should not be delayed. All three speakers believed that benefits were safe for those 50 and older. Those under age 50 will get benefits if full retirement age is changed to age 70.
9. Divorced spouses can receive social security retirement benefits if they were married to the worker for at least ten years and 1) are not currently married or 2) married and age 60 or older.
Does this take away social security benefits from the current spouse? No, as long as you have been married to the current spouse for at least nine months, that spouse will be eligible for spousal benefits. In short social security benefits can be paid to former spouses meeting the tests mentioned in the above paragraph and the current spouse.
Can the current spouse collect from more than one spouse (former or current)? No.
10. Is it worthwhile to continue working or resume working? Social Security benefits are based on the highest income over 35 years. Lower earnings receive most of the benefit. The system is weighted more for those with low earnings than high earnings. The computation is too long to display here but once you exceed average indexed monthly earnings over 35 years (AIME) of $767 at age 62, you receive very little benefit from additional earnings. The percent of benefits up to $767 is 67.5%. From $767 to $4,624 it is about 24%. Above $4,624 it is about 11.3%.
The bottom line is that your benefit increase will probably not merit continue working. However, the cash flow from earnings could allow you to defer taking benefits to a later age. As mentioned under #6, delaying benefits adds another 8% per year.
If you had social security withheld from your pay for less than ten years, you may not have enough credits for your own social security. You would still be eligible for spousal and survivor’s benefits. The amount of credits required for your own social security depends on your age. See www.socialsecurity.gov/retire2/credits3.htm.
11. Will your social security retirement benefits be reduced by earnings? If you work and are full retirement age or older, you may keep all of your benefits, no matter how much you earn. If you are younger than full retirement age, there is a limit to how much you can earn and still receive full Social Security benefits. However, if you are younger than full retirement age during all of 2012, $1 is deducted from your benefits for each $2 you earned above $14,640. If you reach full retirement age during 2012, $1 is deducted from your benefits for each $3 you earn above $38,880 until the month you reach full retirement age.
It is important to note that social security can consider even rental income as earned income. Earned income for social security purposes depends on frequency. If someone does some repairs for a friend on a one time basis, it will not reduce his or her social security benefits. Caring for a disabled Mom will not reduce your social security benefits even if the government pays you. Being a managing member of a partnership, will also be considered frequent earnings.
12. BE CAREFUL – 1) Be careful of taking benefits the same time that your spouse takes benefits. It is common place for both to file at the same time. If one is under 66, their benefits could be permanently reduced. 2) Be careful of following social security advice. They have a 43% error rate. 3) Be careful to request your final discharge papers from the military. Apparently the military has lost social security data. 4) Be careful about disclosing part-time work to social security if you are under full retirement age. You may have to prove that it is infrequent.