Social Security and Making Money: Today we’re answering your questions on how working, collecting a paycheck, or investing during retirement might affect your Social Security benefits. Plus, some call her the “Goddess of Social Security”: InvestmentNews contributing editor and nationally recognized Social Security expert Mary Beth Franklin joins Big Al to go over the basics of Social Security, as well as claiming benefits as a single person, a married couple, a public employee – and whether or not you may be eligible for retroactive Social Security benefits.
- (01:00) Can I Make Money and Take Social Security? Part 1
- (09:16) Can I Make Money and Take Social Security? Part 2
- (19:29) Mary Beth Franklin on the Basics of Social Security
- (29:18) Mary Beth Franklin on Social Security for Singles, Marrieds, Public Employees and Retroactive Benefits
Today on Your Money, Your Wealth it’s wall-to-wall Social Security. Before we get into it, click Special Offer at YourMoneyYourWealth.com right now and download our new Social Security Handbook for free. It’s chock full of information to help you make decisions about one of the most important aspects of your retirement – your Social Security.
Now, we’ve had a LOT of questions lately on how collecting a paycheck or investing during retirement might affect your Social Security benefits – so today Joe and Big Al have got some answers for you. Plus, some call her the “Goddess of Social Security.” InvestmentNews contributing editor and nationally recognized Social Security expert Mary Beth Franklin joins Big Al to go over the basics of Social Security, as well as well as claiming benefits as a single person, a married couple, a public employee – and whether or not you may be eligible for retroactive Social Security benefits. Now, here are two gods of… finance? No. The microphone? Eh, probably not. Well anyway. Here are Joe Anderson, CFP® and Big Al Clopine, CPA.
01:00 – Can I Make Money and Take Social Security? Part 1
JA: You know what, since we’ve got Mary Beth on, let’s tease it a little bit with some email questions we got in regards to Social Security. This is from Jessica. “My yearly income is $19,800, and I’m 62 years old. Can I collect my Social Security benefit and still earn this income without penalty?” Alan, what say you?
AC: My yearly income… we have to know what kind of income. So if it’s salary, it’s over $17,000 plus limit, so you can collect most of your benefit but not all, because it’s, what, about $17,500, give or take? Somewhere in that range.
JA: $17,800 I believe?
AC: Yeah something like that
JA: No no no no.
AC: That was like two years ago. It’s close. You got the thing right there. See how fast you can come up with it. Anyway, once you’re over this limit, which will tell you in a second, then for every two dollars that you’re over that limit, you get one dollar less of Social Security benefits.
JA: It’s $17,040. (Joe and Al crack up.)
AC: $17,040? So Andi was right. (laughs)
JA: Yeah, we were like, “No!” (laughs)
AC: “That’s way off!” So we should just have Andi do the show because we obviously don’t know what we’re talking about. (laughs)
JA: So you know how to do the math on that Alan?
AC: Yeah, $19,800, let’s call it $17,000 to make it round. So that’s $2,800, so we divide that by two. So it’s, what, about $1,400 that she would have to give back.
JA: Yeah, it would be reduced. So let’s do that again. So she says her income is $19,800. So the limit is $17,040. (laughs) So you take your income – and this has to be earned income, wages, self employment income, things like that. So $19,800, you subtract the $17,000. So Alan your math was $2,800, divide that by two. So then every two dollars that you earn over that threshold, you have to give a dollar back. So you divide it by 2, which was about $1,400. So if her benefit, let’s say, was $24,000, her benefit would have been reduced by $1,400. So that’s how that math works.
AC: Now if the $19,800 was something other than earned income, you don’t have to do this computation. So say it was dividends, or say it was a pension, or say it was something else that wasn’t something that you had to pay Social Security taxes on. OK. Is that the question?
JA: Yep that was the question. I have another one here. This is from Jim Bob from Ramona. “If your investments mature and you are receiving Social Security benefits, does it impact your Social Security benefits? Is the investment considered income?”
AC: If your investments mature? And you’re receiving benefits, does it impact your Social Security benefits?
JA: I guess what he’s saying is that he’s got like a CD maybe and the CD is maturing or something.
AC: Yeah or series EE bonds, now the interest is coming due and he has to pay taxes on it. And so if you’re asking the question, does it affect how much and benefits you get to keep, the answer is no because it’s only earned income that you receive prior to full retirement age, which is age 66, may be limited depending upon your earned income level.
JA: Right. So I guess, going back to our previous question from Jessica, she had earned income $19,800 of earned income. So she was working, is what our assumption is, of course. And then with Jim Bob here, he has investment income. So the investment income does not count in the computation. So your Social Security benefits would not be reduced.
AC: Yeah, on the other hand Joe, if the investment income is large enough, and if he’s asking about, will he have to pay taxes on his Social Security, if you have other income over and above Social Security benefits, then at certain levels part of your Social Security could be taxable.
JA: Yeah. And you know, it’s interesting when it comes to investing and when it comes to taxes, especially with Social Security, because some people just think, “hey, I’m in a low tax bracket,” but them one dollar of let’s say earned income from an IRA distribution pops them up because of how the computation is set with Social Security. It’s based on provisional income. And so with provisional income, that’s your adjusted gross income. But there’s an add back of half your Social Security, and then, what, like municipal bond interest?
AC: Well, it’s adjusted gross income without regard to your Social Security. And then you add half of your Social Security and municipal bond interest to get provisional income. Then when you know what your provisional income is then you go to this schedule to see how much of your Social Security is taxable.
JA: So if you are married and your provisional income is under $32,000, then your Social Security income is tax-free. So going back to these two questions, one of them has earned income of $19,800, plus the Social Security benefit on top of that, if she’s taking it at 62 years of age. If there is other type of interest income, dividend income, IRA distributions, things like that, you add all that stuff up to come up with your provisional income, plus half your Social Security benefit. And if you are married, if it’s under $32,000 you’re good, there are no taxes on that benefit, if you’re single it’s $25,000. So that’s the threshold. As soon as you get one dollar over that, then everything kind of changes. So if you’re married it’s $32,000 to $44,000, then 50% of your Social Security benefit is subject to tax. And if you’re single it’s $25,000-$34,000, and then anything over $44,000, an additional 35% is taxed. or 85% of it is taxed.
AC: Yeah. And the way that the math works here Joe, let’s say your dollar over $32,000. So that means that extra dollar, of course, as income, gets taxed at the tax rate, which is 12% right now if you’re married. So 12 cents on the dollar. But then now you’re over that dollar, so now 50% of Social Security dollars are taxed. So that’s another six cents on that, so you’re actually in an 18% tax bracket even though you thought you were in a 12% bracket from that one dollar. And where we see this impacting people is they think, “OK, I’m in a low tax bracket. I’m going to pull money out of my IRA. I’m only going to pay 12% tax.” Lo and behold, it pushes more of their Social Security income to be taxable, and they end up in a higher effective tax rate. And it can be, in some cases, you get up into that next bracket so that dollar is not only taxed at 12% but now that Social Security dollar, 85% of that is taxed, so that’s another, call it 9% or so. So now you’re over 20% thinking you’re in a 12% bracket.
JA: Yeah It’s almost 100% increase in your tax – 85% increase in your tax.
Making money while you collect Social Security, whether it’s earned income or not, how it’s taxed – it’s all pretty complicated. We’ve got a blog post and a video on this topic the show notes at YourMoneyYourWealth.com, so you’re covered whether you prefer to watch or read! Both explain what counts as income and when it’s taxed, and it’s all nicely laid with charts and graphs so you can see exactly how to hold onto as much of your Social Security benefit as possible. If you’d like Joe and Al to take a look at your specific situation, you can always call (888) 994-6257 or email email@example.com. Let’s get to some more of those questions about making money while taking Social Security.
09:16 – Can I Make Money and Take Social Security? Part 2
AC: Who’s this from?
JA: Jacob. Jacob said, “I am on disability and Social Security benefits. I was paralyzed four years ago.” Jacob, sorry to hear that. “Can I invest in the stock market without it impacting my disability or Social Security benefits? Are there any benefits or programs in place to help disabled low-income people like me to invest for the future? Do I need to start a trust or an IRA or a Roth IRA?” Are there any benefits or programs in place to help disabled low-income people like me to invest for the future? Well, I don’t know if there are any benefit programs…
AC: I don’t think there are any government programs, there are organizations like AARP and others that help retired or nearly retired folks, and certainly, if you go to their website, they have stuff on investing, but it’s not really different for someone who’s disabled, it’s just resources.
JA: I give him credit it’s like, “I’m kind of stuck. I got Social Security benefits. I need to save for my future. I’m limited maybe to the amount of income that I can potentially make.” Potentially. There’s a lot of things that he could do. Let me answer a few questions. Can he start a retirement account – you need earned income.
AC: Right. So probably not from yourself, unless you have earned income. If you’re married and have a spouse that has earned income, then you could set up an IRA or a Roth IRA.
JA: So earned income is a requirement for any type of retirement account. So let’s say if you have Social Security benefits, disability benefits, and then you also have some additional income. Yeah, you could then save into some retirement accounts there. “Do I need to start a trust?” It really depends on the assets. There are things called special needs trusts that can help shelter individuals with disabilities so they don’t lose some of their Social Security benefits. And that trust is set aside to provide maybe some additional help or maintenance for that individual inside a trust. But if he’s saving inside the trust, yeah, I mean, it would avoid probate. It’s not going to give any type of other benefit, I don’t think.
AC: Yeah. And typically you set up this trust for a kid or a grandkid, not necesarily for you yourself. That’s typically what we see. I’m not sure you get the same benefits when you set it up for yourself. And I guess the first question on can you invest in the stock market without impacting your disability Social Security benefits. What do you think?
JA: Well sure, yeah. Because that’s only related to earned income. So if he’s got some money and all of a sudden you’re investing in the stock market, by all means, there’s no reason why you want to invest in the stock market. I don’t know how old you are, but if this money is for the future, yes, you could absolutely invest in the stock market, the interest and dividends that you receive are going to come to you as income, but it’s un-earned income.
AC: Correct. And that’s typically not only Social Security, it’s any disability policy. If you have earned income, it can affect your benefits. If you don’t have earned income, then your un-earned income, like interest, dividends, capital gains, shouldn’t apply.
JA: OK. I don’t know if that was helpful or not.
AC: We did our best, Jacob. (laughs)
JA: I give that like a C minus. (laughs)
AC: Yeah that was not our best work. (laughs)
JA: All right. Let’s see if we can redeem ourselves. This is from Larry, Larry lives in Oceanside. “I’m 53 years old and I have worked for 26 years. Currently, my estimated Social Security benefit is $2,500. If I reach age 67, will my benefits decrease if I work part-time or per diem starting in 2018?”
AC: Great question. The answer, I believe, is yes, because when you get your estimate of benefits at age 67, the Social Security administration assumes that you’re going to be making similar salaries up to that age. And so now, if all of a sudden in 2018 or 2019 or whenever you go part time or per diem, and presumably you’re making less money doing that, then they’re going to be recalculating that benefit. So yes, it actually very likely will be lower. You worked 26 years, the Social Security Administration takes your highest 35 years. If you already had 35 high years then maybe it wouldn’t matter, but you don’t necessarily.
JA: Right – if you maxed out the benefit for 35 years then no. But that’s very difficult to do.
AC: Right. It’s hard to be making a great salary when you come out of school.
JA: And so he’s fairly young, 53 years old. So the problem is, he’s looking to retire a little bit early it looks like, or at least slow down a little bit. Then he gets his Social Security benefit statement, he’s like, “Man, at 67 I get $2,500 a month, I think I’m pretty good.” Here’s probably what would happen, his benefit will be $2,500, but in today’s dollars, not future dollars.
AC: Yeah, it may not grow. And I think this is a point for our listeners to consider, which is, a lot of people want to retire at 60 or 62 or whatever, and they’re going to wait to receive their benefits to full retirement age, which could be 66 to 67, depending upon what year you’re born. And if you stop working at 60 and you don’t have full maximum 35 years of pay, then actually, your benefit will be probably lower than what it says on the statement.
JA: In some cases, but I don’t think they include inflation on the statements. So the cost of living adjustments? It’s dicey.
AC: I agree with that. It’s hard to say exactly, but the point is, the Social Security Administration, by your full retirement age, is taking your current salary and projecting it all the way out to age 66 or 67. And if you don’t make those wages, then your benefits may not be as high as what you’re thinking.
JA: If you continue to work while you’re collecting Social Security after your full retirement age, your benefit is either going to stay the same or it can increase. It will never go down. So in this instance, let’s say if he collects his benefits at full retirement age and then goes per diem, and he’s still working, he’s still putting into the system, it’s like, “I’m making a lot less now, I was making $200,000, now I’m making $20,000.” They’re not going to reduce your benefit once you start collecting it.
AC: Right because you already made it to 67 so you could only help it. But that would mean Larry would have to work another 14 years. I don’t think he wants to. He wants to retire this year.
JA: Yeah, he’s like per diem.
AC: “I’m done.” And I get it, in your 50s you start thinking…
JA: Didn’t you want to retire in your 50s?
AC: Yeah because you get burned out. It’s like, “I’ve had enough already.”
JA: Well you were a real estate mogul.
AC: I know, until the Great Recession, then that changed. (laughs) But then I found a new career and I got reenergized. So here I am.
JA: Yes you did. So happy to have you. Do you want to give us a sneak peek of Mary Beth?
AC: I interviewed her a couple of days ago, and we’re going to start with basics – like when can you collect Social Security benefits, and how does it work if you wait, you get higher benefits, we’ll kind of go into that. But then we got a little bit deeper into what are some of the best strategies for a single person versus a married person. And then we got really deep, we started to get into things like what if you work for the government. There’s a windfall elimination provision, and so you may not get all your Social Security benefits that you thought you’re going to get. So we’re going to kind of get into that stuff as well.
JA: Did you get political and say the system is blowing up?
AC: No, I didn’t do a Larry Kotlikoff, we didn’t go there. We just talked about the rules.
JA: The trust fund is going to be depleted in 2033 and only 77% of that is going to be able to be funded and that’s going to affect every man living child in America?
AC: Right. And those under 50 are going to get no benefit?
JA: Pretty much. Thank you. (laughs)
AC: (laughs) Since you’re under 50. No, we didn’t go there, and part of the reason we didn’t go there is, in my belief, the Social Security situation is fixable by doing a few tweaks. I’m not too concerned.
JA: Hey, you can check out our learning center at YourMoneyYourWealth.com – we have a new Social Security handbook and new Social Security videos and blogs. So this handbook is phenomenal, by the way. So if you are all interested in Social Security, go to our learning center at YourMoneyYourWealth.com and get our Social Security handbook. We got Roth IRA basics. We got Big Al’s Quick Retirement Calculator Guide, we got Pursuing a Better Investment Experience white paper, we have a Retirement Readiness Guide, we have new blogs and videos on portfolio manage-ne-ment, diversification, and rebalancing. Did you hear how I said portfolio manage-ne-ment? (laughs)
AC: (laughs) Yeah that’s a new service we’re offering. It is better than management, it’s manage-ne-ment.
JA: I don’t know how I speak for a living when I’m probably one of the worst speakers. (laughs)
AC: It never stops you. I have the same problem. You and I have the exact same problem when we try to read something. You know when I interviewed Mary Beth, I screwed up the open, so I re-did it, screwed it up, re-did it, screwed it up. Fourth try, I finally got it, but I even screwed that up. And so she said, “just start in the middle – half of it is good already!”
And therein lies the magic of the podcast producer. If you guys hadn’t mentioned it the audience would never know you can’t talk – I only left that last bit in as proof. Just call me the goddess of editing. But now Joe has told you all about the cool stuff in the Learning Center at YourMoneyYourWealth.com, so I’m just gonna take out Big Al’s introduction of Mary Beth Franklin and do it myself: It’s time for everybody’s favorite part of the show, where we talk to someone way smarter than everyone in the room. Mary Beth Franklin is a contributing editor for InvestmentNews and is a nationally recognized expert on Social Security – yes, some even call her the Goddess of Social Security. She was formerly a Capitol Hill reporter at United Press International and a retirement and tax editor at Kiplinger’s Personal Finance. Please welcome to Your Money, Your Wealth® Mary Beth Franklin.
09:29 – Mary Beth Franklin on the Basics of Social Security
MBF: I’m delighted to be here. Thank you.
AC: I know you know a lot about Social Security, and I know virtually all of our listeners are interested in what you have to say, so why don’t we start with basics like, when can you claim Social Security? Let’s kind of start there and then we’ll get more advanced as we go.
MBF: The basic stuff – and let’s focus on retirement benefits first, because Social Security is really a three-pronged program. It has retirement benefits when you stop working. Disability benefits when you’re ill or injured and can’t work, and then also survivor benefits for your surviving spouse or dependent children. So retirement benefits, in general, are available as early as age 62. And in the past, a lot of people claimed it at 62, but frankly, they could, and a lot of people retired earlier. But more and more people say they want to work longer, and it’s important for people to realize that if you claim Social Security benefits as early as you’re eligible at age 62, not only will they be permanently reduced for the rest of your life by 25% or more, but if you continue to work while collecting Social Security benefits before your full retirement age, you may lose some or all those benefits if you earn too much money.
AC: And I think that’s really confusing to a lot of people because at certain ages you can claim and get your full benefits, and at other ages you claim and you have to give some of the benefits back. So why don’t you go through that?
MBF: Right. So the earliest you can claim is age 62. If you do, your benefits are reduced for the rest of your life. And that’s actuarially fair because the concept is you’re going to get more, smaller checks, starting sooner, rather than waiting for bigger checks to start later. Over your lifetime it should average out if you wait until your full retirement age, and that depends on when you were born. If like me, you were born in 1954 or earlier, your full retirement age is 66. If you’re born after that date, your full retirement age could be higher – 66 and two months, four months, six months, et cetera, up to age 67 for people who were born in 1960 or later. Now. if you’re willing to be patient. there is a huge payoff. For every year you’re willing to postpone claiming your Social Security benefits beyond your full retirement age, you earn an extra 8% per year in delayed retirement credits. Think of that – if your full retirement age is 66 and you wait until age 70, you could collect a maximum 32% in additional benefits. That’s a third more in Social Security benefits for the rest of your life. And the reason that is so important is we have been living in, essentially, a zero interest rate environment for the last decade. Meaning, if you put money in the bank, if you buy a Treasury Insured Protected Security, a TIPS, you’re basically getting 0% interest. The government is saying. if you wait an extra year to take Social Security, I’m going to give you 8%. It’s, in the words of some top Social Security Administration officials, a smoking hot deal.
AC: Yeah I would agree with that. And plus now the actuarial tables that the Social Security Administration came up with were done back in the 80s and we’re now living longer.
MBF: That’s correct. And people get very confused. They talk about, “oh gee, when Social Security was first created, people died before age 65.” Well, that’s not quite true if you looked at it from birth, because there was a lot of child mortality. But if you looked at age 65, how old you are likely to live once you reach age 65, that too has been increasing. The average age now is about 85 years old. Meaning, half of all Americans are going to live longer than that. So it’s a bit like that Clint Eastwood movie. Do you feel lucky? If you think you’re going to live longer than average life expectancy, the longer you can delay, the bigger your benefits will be over your lifetime. And most importantly for married couples, they should think of this as a joint decision, not just two separate people. Because if the person with the bigger benefit delays up until age 70, that’s when those delayed retirement credits stop, and get the biggest benefit possible – if that person dies first, that biggest retirement benefit now becomes the maximum survivor benefit. And if, on the other hand, they chose to collect early and die, their surviving widow or widower will get a smaller benefit.
AC: And when you look at joint life expectancy, so a 65-year-old couple, there’s there’s more than a 50% chance at least one of them is going to live to age 90. So you almost kind of want to look at this as longevity insurance.
MBF: Absolutely. And again it all comes down to, I say that people have to be healthy enough, in other words, likely to outlive the average life expectancy, and wealthy enough to make this decision. Because if you choose to delay your Social Security benefit, the big question is what do I do from money in between? Now for a lot of people who say they plan to keep working longer, that could be your solution. For other people who plan to stop working early but still delay claiming their Social Security benefit until later. then they have to think, “what do I do for money between?” And for many, it may make sense to draw down those personal retirement savings, whether they’re 401(k) if they’re in the private sector, 403(b) if they’re in the public sector, their personal IRA – draw some of that money down first to basically create an income bridge until they’re a little older and they can earn those guaranteed 8% a year extra benefits.
AC: Yeah I think that makes a lot of sense – and another factor too is, Social Security is somewhat tax-favored. In the worst case, you’re paying taxes on 85% of Social Security, meaning that 15% of your benefits are tax-free. In some cases, it’s all tax-free. And then a state like ours in California, it’s a 100% tax-free.
MBF: That’s right. The majority of states do not tax Social Security benefit at the state level. It is taxed at the federal level, as you suggested. But worst case scenario, up to 85% of your benefits can be taxed at your ordinary income tax rate. And generally, most people are paying taxes on some benefits, because the threshold for when you aren’t taxed for your Social Security benefits is so low.
AC: Now I want to talk about maybe one more kind of basics of Social Security, and that is when you’re younger than full retirement age, then if you’re working, you may not be able to keep all of your benefits. How does that work?
MBF: That’s right. That’s called the earnings restriction. And it means that if you claim your Social Security benefits before your full retirement age, which is either 66 or 67 or somewhere in between, and you continue to work – this means earnings from a job – the earnings cap does not apply to other types of income, like investment income, or pension income, or income from other government programs. It’s only earnings from a job. But say I’m 62 and I claim my benefits early and I keep working. If I earned more than $17,040 this year, I am going to start losing benefits. And when I get to a certain point, basically about $55,000 or so, I’m going to give them all back. Now they’re not gone forever. Once I get to my full retirement age, Social Security will review my earnings record and they’ll say, “OK Mary Beth, we see you claim your benefits early and you took a 25% cut because you claimed four years early. And we see you were also working and made too much money, and we took all your benefits away. Well now that you’ve reached your full retirement age, we are going to restore any benefits that you’ve lost to the earnings cap in the form of higher monthly benefits going forward.” Once you reach your full retirement age this earnings cap doesn’t apply anymore, which means I could claim Social Security benefits and continue to work and not lose any benefits. So I do urge people who plan to keep working, not to claim benefits early, because frankly, it’s an accounting nightmare. And if you’re not accurate with your estimate of how much you’re going to make for Social Security to withhold those benefits in the first place, you’re going to end up paying some back later and it’s pretty dicey.
AC: Yeah I would agree with that. If you’re working, you shouldn’t be claiming the benefits up to full retirement age. Now I guess the year that you’re in your full retirement age, the earnings limit is a little bit higher.
MBF: Yes, it’s a much higher limit. In the year you reach full retirement age, and let’s assume it’s 66, in the month before your 66th birthday, there’s a much higher limit. It’s about $45,000 a year. And once they start taking benefits away, the reduction formula is not as stringent as for younger people. Once you hit that magic age of 66, the restrictions go away. So it pretty much depends on when is your birthday? If your birthday is, say, May, and you’re not going to make more than $45,000 before May, you may want to claim in January. If your birthday is like mine in December, I might wanna wait till my birthday, because I’m still probably going to make more money than even that higher earnings cap.
In the coming weeks, former Wall Street Journal columnist and founder of HumbleDollar.com Jonathan Clements tells us how we can enrich our financial lives in just 77 days – and Joe spends the entire show trying to pronounce his name correctly. Forbes contributor Jeff Levine talks about the latest changes that’ll affect your retirement and taxes, and Cubert from AbandonedCubicle.com shares how he’s using vacation rental real estate to reach his goals for FIRE – financial independence / retire early. Don’t miss a thing, including all the transcripts and resources – check it all out and subscribe to the podcast at YourMoneyYourWealth.com.
29:18 – Mary Beth Franklin on Social Security for Singles, Marrieds, Public Employees and Retroactive Benefits
AC: We’re interviewing Mary Beth Franklin who’s an expert on Social Security. Let’s now talk about a single taxpayer, like let’s say I’m single and I’m 62 and I’m thinking, “gosh, should I claim Social Security?” It seems like if I really need the money, that would be one reason to do it, or if my health was really poor and I didn’t feel like I was going to live that long, maybe that would be another reason. Are there other considerations as well?
MBF: I think those are the two main issues for single people. As I mentioned earlier, married couples really should be coordinating their claiming strategy, of not only how to maximize retirement benefits while they’re both still alive, but how to maximize that survivor benefit for the person left behind. But survivor benefits only go to a surviving spouse, or a surviving ex-spouse in the case of a divorce where someone’s been married at least ten years, or to minor dependent or disabled children. If you are a single person with none of those eligible survivors, nobody’s going to get a survivor benefit when you die. So in that case, you may want to say, “well, if I plan to keep working, I don’t want to claim benefits before my full retirement age of 66. But hmmm, do I want to wait till 70? That’s a tougher call. Yes, it would give me a bigger benefit once I turned 70. But in the event I die prematurely, there’s no one to get my benefit.” So I think for single people, they really have to look at their overall retirement income picture, which would be Social Security, any of their savings, if they have any pensions, and say, “how much Social Security benefits do I really need from a cash flow standpoint, and does it make sense for me to delay beyond full retirement age?” It’s important to know, for anyone, you don’t want to delay beyond age 70, regardless of your marital status, because those delayed retirement credits of 8% a year stop at age 70. There’s no additional benefit to waiting beyond age 70.
AC: If you forget, let’s say you start claiming at 70 and four months, they’ll actually do a little retroactive payment, right?
MBF: Which is a very important issue, that I just wrote about last week. When do you qualify for retroactive Social Security benefits? The general rule is there is a maximum of six months of retroactive benefit that can not be started before full retirement age. So using your example, I’m 70 and four months. I could get up to six months of retroactive benefits – that’s the maximum. If I claim at 66 and four months, the maximum retroactive benefit I could get is four months, because that retroactivity cannot begin before my full retirement age.
AC: So it does behoove you to know when to claim, as you said. So if I wait till 73, I’m just out a whole bunch of money that I could have gotten. It’s not like they say, “well you know what, you’re a good guy or gal. Here’s a pile of money for you.” It’s just gone.
MBF: Right. And I have had just a slew of questions over the last couple of weeks from people who did delay for another reason. We’ve been talking primarily about retirement benefits, which are based on your work record for your Social Security benefits. Now, there are cases where I might have no Social Security benefits of my own, but because I’m married to someone who is eligible for Social Security, I can get benefits as a spouse. Those are equal to up to half of what my husband or wife is collecting. Same thing with survivor benefits – it’s not based on my record, but if I’m married to someone who dies and who is entitled to Social Security, I can get benefits as a survivor. Those are worth up to 100% of what my late husband or wife was collecting. But in both those cases, as a spouse while my mate is still alive, or a survivor after I become widow or widower, the maximum benefit is when I reach my full retirement age of 66 in my case, not 70. And I have had widows wait till 70 and saying, “hey, your maximum benefit was 66, and your maximum retroactive benefits is six months.” So I think it’s very important for individuals and their financial advisors to realize who is eligible for that bigger benefit at age 70, and who maxes out at age 66.
AC: Now what about if I’m divorced and I had two or three other former spouses? How does that work?
MBF: I like to think of it as the Johnny Carson rule, that if you’re married to someone for at least 10 years, divorced, and you are currently single – even if your mate remarried, it’s you we’re talking about – you are eligible to collect Social Security benefits just as if you are still married. That means you might be able to get a spousal benefit, and if your ex dies, you may be eligible for a survivor benefit. But we’ve had some broader changes in Social Security benefits over the last few years. And I actually think it’s divorced spouses who were most hurt by these changes. That rule says, whether you’re married or an eligible divorced spouse, if you’re born after 1953, you are never going to be able to say, “pay me only as a spouse, let my own Social Security benefits keep growing up until age 70, and then let me switch to my own maximum retirement benefit.” People who were born in 1953 or earlier can still do that when they reach their full retirement age of 66.
AC: I remember we talked with you about that three years ago, and that was really kind of a big game changer wasn’t it?
MBF: Oh it’s huge. The other thing to keep in mind is if you are a member of a couple, or you’re a financial advisor advising a couple where at least one of them is born before 1954, take advantage of this strategy if you can. It means one person must actually claim their Social Security benefit and the other person, when they reach for retirement age, can say, “give me only my spousal benefits and let my own keep growing.” That window is slowly disappearing. The last person who will be eligible will turn 66 on January 1st, 2020. We’ve got this little window over the next year. Now they can continue collecting that for four more years, but the last eligible person will turn 66 on January 1st, 2020.
MBF: Got it. OK so now let’s talk about the person that worked for the government. And then there’s this thing called Windfall Elimination Provision, which basically means you may not get all your Social Security benefits. How does that work?
MBF: Right. Social Security is a “you must pay to play” kind of game. And in about 15 states, of which California is one of the premier ones, if you are a public employee and this is the key – and you do not pay FICA taxes, those Social Security payroll taxes while you’re working, your future Social Security benefits may be reduced or completely eliminated, depending on your situation. And there are two major situations. One is, I’m a California Public Employee, let’s say I’m a school teacher, who does not pay FICA taxes while I’m a California employee. And the triggering factor is I will get a benefit from the state of California. Now, in addition, let’s assume I worked in the private sector for at least 10 years, meaning I’m eligible for my own Social Security benefit. I will get a Social Security benefit, but it will be reduced by something called the Windfall Elimination Provision. WEP. I’ll get my Social Security but it can be reduced by up to about almost $500 a month. But I will get something. Now let’s assume I’m a California teacher with a pension, and I know I’m not going to get a Social Security benefit, but I’m married to someone who is going to get a Social Security benefit. I may think, “hey, no problem, I’ll just go ahead and claim my Social Security spousal benefit.” No, you won’t. Because there’s an even more onerous rule called the Government Pension Offset rule. GPO, what some people call the “grumpy partner” rule. It says, if I have a public pension based on work where I did not pay Social Security taxes, and I try to collect Social Security benefits as a spouse or survivor, my benefits may be completely wiped out. Basically, they would reduce any potential Social Security spousal or survivor benefits by two-thirds of the amount of my public pension with no cap. So let’s say I have a California pension of $3,000. Two-thirds of that would be $2,000. They would subtract $2,000 from my potential Social Security benefit. As a spouse, that’s going to wipe out any spousal benefit. As their survivor, it’s going to significantly reduce or eliminate my survivor benefit. So for California couples where one of them is a public employee, I tell them, forget about my earlier advice of coordinating your climbing strategies as a married couple. You should think of yourself as a single person because the main reason married couples would want to delay their benefit is so that the surviving spouse can get a survivor benefit. But in the case of people with public pensions, that surviving spouse is unlikely to get a Social Security survivor benefit. So it may not make sense for the other person to wait.
AC: Boy. Why is this so complicated?
MBF: There are more than 2,700 rules that govern your Social Security benefit, and hence why I have a job writing about them every day.
AC: (laughs) You sure do. Mary Beth Franklin, thanks so much for joining us. That’s a wealth of information and we really appreciate you coming on.
MBF: Well thank you for the invitation. It’s really important that people understand their benefits, get good advice before it’s too late.
AC: And so where can people find out more about you?
MBF: Well you can go to InvestmentNews.com. I write for a publication that’s primarily for financial advisors. But if you just Google my name Mary Beth Franklin, which is three words, you’ll probably have a search that will come up with my latest stories that anyone can read. Also I have an e-book available at InvestmentNews.com/MBFebook. Those are my three initials last name, you can buy that for $29.95 and learn everything that you and I just discussed here.
AC: Mary Beth, thank you so much you are in fact the Social Security goddess, and we were very fortunate to get you on our show.
MBF: Thank you so much. Have a great rest of summer.
AC: All right. you too.
JA: Okay, that’s it for us today, hopefully, you enjoyed the show. Thanks for joining us, thanks to Andi Last for a great job on controlling this show.
AL: Hey, I do what I can!
JA: Clopine did a wonderful job as well, and we’ll see you guys next week. The show is called Your Money, Your Wealth.
Special thanks to today’s guest, the Social Security Goddess from InvestmentNews, Mary Beth Franklin. Visit the show notes for links to all her latest articles and her book, Maximizing Social Security Retirement Benefits.
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