McAtee & Associates, CPAS
With today’s post, we want to share….
6 Costly Social Security Traps to Avoid
Hidden deep within Social Security’s Handbook and Program Operations Manual System are lots of what we call “gotchas.” Some may be familiar. Others won’t. Take a look if you want reassurance that you aren’t falling into any of the system’s traps.
If your blood pressure rises, bear in mind that the folks at Social Security aren’t to blame. They didn’t design this maddening system, which despite its many deep flaws has done enormous good over the decades for hundreds of millions of Americans. No one at Social Security is trying to get us to make the wrong decisions and end up with lower benefits than possible. But very few people at Social Security know the rules well enough to guide us to the right choices. So, as the old saying goes, forewarned is forearmed.
1. If You Take Two Benefits at Once, You Lose One of the Two
Social Security won’t pay you two different benefits at the same time. Instead it will pay you the larger of the two benefits (or something pretty close to this amount). For example, if you are married and take or are forced to take your retirement benefit when you take your spousal benefit, you’ll lose your retirement benefit if your spousal benefit is larger. Social Security won’t say it has eliminated your retirement benefit. Instead, it will claim it’s giving you your retirement benefit plus the difference or excess between the two. But, in reality, it has used the spousal benefit to wipe your retirement benefit. You can receive two different benefits, but not at the same time.
Spouses and qualified divorced spouses who were 62 before January 2, 2016, can receive two different benefits (their retirement and their spousal/divorced spousal benefits), but not at the same time. Those spouses who were widowed before taking their retirement benefit can take their widow(er) benefit before or after they take their retirement benefit. The same holds for qualified divorced widow(er)s.
2. You Can Contribute to Social Security Your Entire Working Life and Receive Nothing Whatsoever in Extra Benefits
Suppose you start working at age 16 and continue working through full retirement age (FRA). Every week, week in and week out, you and your employer pay 12.4% of every dollar you earn in Social Security payroll (FICA) taxes. Also, suppose you earn relatively little in absolute terms and also relative to your spouse. Then you may do best to wait to collect your spousal benefit starting at FRA (spousal benefits don’t increase after FRA), assuming your partner has filed for his or her retirement benefit.
At age 70, you file for your own retirement benefit, but now you get hit by Gotcha #l. And if your spousal benefit exceeds your age – 70 retirement benefit (that is, inclusive of the Delayed Retirement Credits), your total payment will continue to equal just your spousal benefit. Yes, Social Security will describe your total check as consisting of your own age – 70 retirement benefit plus your excess spousal benefit. But the sum of these two components will just equal your spousal benefit. So, you’ll get nothing in extra benefit s for all the years you contributed. Furthermore, when your spouse dies, you’ll collect a survivor benefit based on their earnings record, which will be even larger than your spousal benefit, which is larger than your own retirement benefit.
3. Suspending Your Retirement Benefits Can Cost You Big Bucks
This gotcha pertains to those whose auxiliary benefit is larger than their retirement benefit even inclusive of the maximum amount of Delayed Retirement Credits that can be accumulated. For these people, the amount by which their auxiliary benefit exceeds their retirement benefit is treated by Social Security as their excess auxiliary benefit.
Now suppose you are in this boat and you decide to suspend your retirement benefit and restart it at 70. Under the new “Bipartisan Budget Act of 2015” signed by President Obama in November, you can’t collect any excess benefit of any kind during the period your benefit is suspended. So you get nothing whatsoever until you reach 70. At 70, you restart your retirement benefit only to find that the total payment is no larger than you would have received during the suspension period had you not suspended. Yes, your retirement benefit is larger thanks to the Delayed Retirement Credits. But, given the assumption that your excess benefit at 70 is still positive, this excess benefit is lower by exactly the amount by which your retirement benefit is larger. Hence, suspending in this situation is simply a decision not to take benefits for the period of suspension. It does nothing to raise your total benefit payment.
In other words, you would have suspended for nothing, losing potentially thousands of dollars in lifetime benefits. If you realize you made a mistake in suspending your retirement benefit (and seeing no change in your monthly payment is the clincher), you may be able to undo the mistake and recover all your suspended payments. But, it appears, only if you suspended before April 30, 2016.
4. If You are Forced to Take Your Retirement Benefit at the Same Time as Your Spousal or Divorcee Spousal Benefit, Your Retirement Benefit Will Generally Wipe Out Your Spousal or Divorced Spousal Benefit
The formula that takes your Average Indexed Monthly Earnings and turns it into your Primary Insurance Amount (PIA)—your full retirement benefit—is highly progressive. Benefits paid to lower paid workers are a much higher percentage of their pre-retirement incomes than is the case for highly paid workers. Consequently, even if you’ve earned relatively low covered wages during your working years, taking your retirement benefit will likely mean never receiving a spousal benefit because 1)taking your retirement benefit keeps you from ever taking another benefit by itself and 2) spousal benefits are at best only half of your spouse’s PIA, so your retirement benefit will likely exceed your spousal or divorced spousal benefit and, therefore, wipe it out.
Stated differently, excess spousal benefits or divorced spousal benefits are generally zero or very small if we’re talking about two spouses or two ex-spouses who earned even modest levels of wages.
5. Being Deemed Before Age 70 Leads to Permanently Reduced Retirement Benefits
Apart from those grandfathered against post-FRA deeming, being deemed whether before or after FRA, but before age 70, forces you to take your retirement benefit earlier than 70, which means your retirement benefit will permanently fall below its value were you to start it at age 70. Furthermore, if your excess spousal benefit is zero, you’ll receive only your reduced retirement benefit.
Yes, you can undo some of the damage by suspending your retirement benefit at FRA and starting it up again at 70 at a 32% higher real (after inflation) level. But this 32% kicker coming from the Delayed Retirement Credit will be applied to your reduced retirement benefit, not to your full retirement benefit. So once this gotcha gets you, you are gotten for life.
6. You Need To Get It in Writing
It’s one thing to ask Social Security for a benefit to which you are eligible and to start receiving it when you want. It’s another thing to actually get what you asked for when you ask for it. If you don’t specify in writing on your benefit application form in the Remarks section exactly what benefits you are filing for and which benefits you aren’t filing for and precisely when you want to receive the benefits for which you are applying, you won’t have any legal proof to appeal a mistake by Social Security if it makes one. It’s very hard to write anything on an application form over the phone. You can file over the phone for some but not all benefits, and Social Security will send you a copy of your application perhaps with the Remarks section properly filled in based on your dictation. The safest way, though, would be to visit your local office and make sure your wishes are properly noted by the claims rep in the Remarks section and make sure you leave with a dated (in effect, time-stamped) copy of your application.
Excerpted from Get What’s Yours–Revised And Updated (Simon & Schuster, 2016)
by Laurence J.Kotlikoff, Philip Moeller and Paul Solman.
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