retirement

Social Security Truth or Consequences

How well do you know Social Security rules and claiming strategies? Test yourself by analyzing some specific scenarios.

Social Security is a foundational piece in every retiree’s income plan, and yet many people have no idea how it works.

The choices you make regarding when and how you claim your benefit can have a major impact on your future financial security. Hundreds of claiming strategies exist that factor in your age, your marital status and spouse’s age, and which spouse is or was the higher earner. You’ll also have to consider how your Social Security income will affect your income taxes.

Here are some scenarios I’ve run into over the years with clients and prospective clients. Perhaps some will sound familiar; you may have friends or family who are in a similar situation. See if you can determine if these soon-to-be retirees are headed for success or failure.

How Does Remarrying Affect Widows Benefits?

Question: The future is looking brighter for Mary. Although her husband died when she was just 55, she’ll be able to retire in six months when she turns 60 — thanks to her Social Security widows benefit. Her plan is to claim her widows benefit soon after her birthday, then marry a longtime friend a couple of months later. Can she do this?

Answer: Yes. The widows benefit may begin as early as age 60, and she’ll get 71.5% of her deceased husband’s full benefit. (The amount would increase if she waited.) Mary is able to keep the benefit even after she remarries only because she is remarrying after age 60. She then can switch over to her own benefit as early as age 62 if she chooses. She can also allow her own benefit to continue to grow.

What About Taxes on Your Benefits?

Question: John is excited to retire and start receiving his Social Security benefit. As he looks at his current pay stub, he sighs happily and says, “Finally, I’ll have income coming in, and the government won’t take anything out.” Is his relief warranted?

Answer: No. There are several expenses that could be withheld from John’s Social Security payment, including Medicare premiums if he’s 65 or older, and even alimony or child support. If his income exceeds a designated threshold, he may have to pay taxes on a portion of his Social Security, and if he chooses, he can ask the Social Security Administration to withhold a percentage of his choosing each month to cover that amount.

Oops, I Made a Mistake. Now What?

Question: Although Joan planned to work full time until she was 67, she was laid off from her job when she was only 64. She didn’t expect to get another job and needed the income, so it made sense to her to file for her Social Security benefit early. To Joan’s surprise, within three months she was offered a position with a friend’s employer. Can she turn back the clock?

Answer: Yes. Joan was relieved to learn she can withdraw her application for Social Security. This option is available only once in a lifetime, and it must be done within 12 months after applying. Joan will have to repay the money she already received.

What Is File and Restrict?

Question: Susan, a schoolteacher, decided to retire and claim her Social Security benefit this year when she turned 65. Her husband, John, who is 66, decided to wait until he turns 70 to claim his benefit so he can get the highest amount possible. Their plan is for John, who was the higher earner, to claim the spousal benefit now so his benefit can keep growing. Will this idea work?

Answer: Yes. For people born before Jan. 2, 1954, there is an option called “file and restrict (although to avoid possible confusion, you should know that the folks at the Social Security office would refer to it as “restricting an application to spousal benefits only”) that has been eliminated for those born on or after that date. John is at his full retirement age, so he is allowed to file on Susan’s full retirement benefit even though she started her benefit before reaching her full retirement age. He receives 50% of her full retirement age amount. His own benefit will then grow by 8% per year until he reaches age 70, when he plans to switch to his higher payment.

How Can Husbands and Wives Maximize?

Question: Mark was self-employed for most of his adult working years. His wife, Barb, who is three years younger and the higher earner, has worked for a corporation since she finished college. Mark has decided to claim his full Social Security benefit when he is eligible in two years. Then, when Barb becomes eligible for her full benefit, he plans to change over to the 50% spousal benefit, which is more than twice his. Will that be possible?

Answer: Yes. When Mark applies for his benefit, Barb won’t have claimed hers yet, so his will be the highest benefit he is eligible for at that time. He will have waited until his full retirement age to apply for his benefit, so when Barb starts hers, Mark can receive the higher 50% spousal amount.

What About Benefits for Ex-Spouses?

Question: Patti and Joe were married for 25 years, then divorced. Patti thought she would be able to receive full spousal Social Security benefits based on Joe’s record if she waited to file until she was 66. Then Joe remarried. Now she’s worried she won’t be able to file for that benefit, which is higher than her own. Is she right?

Answer: No, Patti doesn’t need to worry. Since she and Joe were married for more than 10 years, she is eligible to file for the 50% spousal benefit — regardless of how many times Joe might marry. Because they have been divorced for more than two years, her eligibility isn’t dependent on whether Joe has filed for his benefit yet. The only way she could become ineligible to collect on his record is if she remarried. As long as she is single at the time she applies, and remains single, she will continue to receive the 50% spousal benefit. (Note: Should she apply early, she would be eligible for a reduced spousal benefit.)

The decisions you make when claiming Social Security will have consequences for the rest of your life. The workers at your local Social Security Administration office are not allowed to offer advice, so it’s important to understand how the program pertains to you. If you’re working with a financial professional, make sure he or she is up to date on the various claiming strategies.

If you’re mulling over this decision, do your homework, which may include getting a second opinion.

Kim Franke-Folstad contributed to this article.

About the Author

Nancy Fleming, CFP®, Investment Adviser

President, Fleming Financial Services

Nancy Fleming, CFP®, is the president of Fleming Financial Services, based in Gilbert, Arizona. She is an Investment Adviser Representative and licensed insurance professional.

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