FREE NEWSLETTER
AT FIRST GLANCE, Social Security appears straightforward. During our working years, we pay into it, and in retirement, it sends us a monthly check, guaranteed for life. Unfortunately, it isn’t always so simple. Below are five aspects of the system that are frequently misunderstood.
Benefits estimates. Look at a Social Security statement, and an easy-to-read chart provides estimates of the benefits available at various ages. The heading above the chart reads, “Personalized Monthly Retirement Benefit Estimates Depending on the Age You Start.” That seems clear. But there’s a caveat that can make the chart misleading. Off to the side, there’s a further explanation that reads: “These personalized estimates are based on your earnings to date and assume you continue to earn [your most recently reported salary] per year until you start your benefits.” The numbers shown, in other words, are not guaranteed.
Why would the statements be presented this way? It’s because the Social Security Administration can’t predict when any given person will stop working, so for simplicity of presentation, it assumes that someone will continue working and continue earning the same income each year into the future and will then retire and immediately claim benefits. For most people, this isn’t how it works out, but Social Security has no way to know what each person will choose. That’s why benefits statements shouldn’t be taken at face value.
How can you forecast your actual benefit? Fortunately, Social Security’s website provides a calculator that allows custom calculations based on actual retirement expectations.
Continuing to work. Some people worry that there would be a negative impact if they chose to continue working after claiming Social Security. This concern isn’t totally unfounded. It’s known as the Social Security earnings test, but there are some details to be aware of.
First, the earnings test doesn’t apply after a worker reaches Full Retirement Age. And second, to the extent that benefits are reduced in the years before FRA, Social Security will add back those amounts to future checks. So working while on Social Security shouldn’t be viewed as so problematic.
Maximum benefit. All things being equal, Social Security retirement benefits increase with each year that you wait, up until age 70. This is broadly understood. The problem, though, is that oftentimes people view it almost as a rule to wait until 70, but that isn’t always the best choice. For married couples, especially where one spouse has accumulated a larger benefit, there are two reasons why one spouse might claim earlier than 70.
The first relates to what’s known as the spousal benefit. This is a feature that originated in the days when more families had just one working spouse, and it provides a benefit to spouses who haven’t worked the requisite 10 years to earn a benefit. In general, the spousal benefit is equal to half of the higher-earning spouse’s benefit at their Full Retirement Age (FRA), which is now age 67 for most people. The only requirement is that the lower-earning spouse can’t start benefits until the higher-earning spouse has started his or her own benefit.
The spousal benefit is terrific, but a commonly misunderstood limitation is that—unlike a worker’s own benefit—it doesn’t continue to increase each year until age 70. It hits a maximum at the spouse’s FRA. For that reason, it’s important for a spouse to not delay beyond that point.
Even when both spouses have accrued their own benefits, it often makes sense for the spouse with the smaller benefit to claim somewhat earlier than 70. To understand why, we need to look at it from the perspective of the higher earning spouse’s benefit. Because that benefit would also be available to the lower-earning spouse in the form of a survivor’s benefit (discussed further below), that larger benefit will be available to either spouse as long as either is living. The smaller benefit, on the other hand, has value only while both spouses are living. And while it’s unfortunate to say, that is statistically less likely. For that reason, I generally recommend that the lower-earning spouse claim at, or around, Full Retirement Age.
When to claim. In most conversations about Social Security, people tend to talk about claiming decisions in round numbers—claiming at 67 or 68, for example. The reality, though, is that you can claim at any time between ages 62 and 70. You don’t need to wait for your birthday, and the benefit simply increases by a bit for each month that you wait. I find this helpful because it allows flexibility in how we think about claiming. Not sure whether to start at 67 or 68? You can easily split the difference.
Survivor benefits. To understand how the survivor benefit works, imagine a married couple, Joe and Jane. Joe’s benefit is $5,000 per month, and Jane’s is $4,000. Now suppose that Joe passes away. At that point, Jane wouldn’t be able to claim the combined total of $9,000. However, she could claim a survivor’s benefit that would increase her monthly check from $4,000 to $5,000, matching what Joe was receiving.
That’s the simplest case, but the survivor benefit decision is often more complicated because it also depends on the age of the survivor. Survivor benefits can be claimed as early as age 60, and that can be helpful in certain situations, but there’s also a penalty for claiming too early. Benefits can be reduced by nearly 30%. In other words, and importantly, Jane wouldn’t automatically be entitled to $5,000 just because that was what Joe was receiving.
When would Jane be able to claim the full $5,000? For this determination, Social Security uses a yardstick known as the Full Retirement Age for Survivors. This isn’t exactly the same as the standard FRA, but it’s close. (Social Security provides a calculator to look it up.)
What might this look like in practice? Suppose Jane were a year shy of the FRA for survivors at the time that Joe died. In this case, Jane would have a choice. She could claim her survivor’s benefit at that time, but her total check would come out to somewhat less than $5,000. Fortunately, Social Security doesn’t automatically turn on survivor benefits when a spouse dies, thus providing survivors more control. In Jane’s case, she might continue with her own benefit of $4,000 per month for one more year. Then, once she became eligible for 100% of the survivor’s benefit, she could claim the full $1,000 to reach $5,000.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
Thanks for updating my incorrect understanding of the Survivor full retirement age. When I read about a matter that I have misunderstood I often think about the quote attributed to Mark Twain – “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so”.
Adam, thanks for the excellent information. I’ve never understood why the Survivor FRA is not the same as the standard FRA. I researched it and it seems that it is a matter of timing and legislation. The increased FRA for retirement benefits and survivor benefits were transitioned on slightly different schedules, thus the difference. It appears that both FRAs will be 67 for people born in 1960 and later.
Another excellent article, Adam. Nice to know I made the right decisions, and you confirmed that my spouse will get the higher Social Security amount if I pass away first.