Thursday, September 13, 2012

Do You Understand Your Retirement Benefits?

I wrote last month about how I was planning to postpone accepting Social Security retirement benefits until I was 66 or 70 so I would be able to collect more each month. It turns out that there is a lot about Social Security that I didn't understand, and I'm realizing than many others, especially women, don't understand it either.

For my international readers, you may not be eligible for Social Security from the US, but you may have a different system in your own country or a pension from your work. Please make sure you understand what you have coming so there won't be any nasty surprises later.

If you are the main bread-winner of the family, it's probably pretty plain and simple. You've paid into the system all your working life, and when you retire, you will collect according to your earnings over the years and your age when you decide to retire. Most of what I will write about here is going to mean more to women who may not have had a career of their own, but it also goes for the guys whose wives earned more than they did.

When to Retire???

You can begin collecting Social Security benefits at 62 but you will get a lesser monthly amount than if you wait until your full retirement age. But did you know that if you agree to accept the lower monthly payments because you want to retire early, you can later pay it all back so that you can re-retire at an older age and collect more monthly income? Of course, that wouldn't make a lot of sense unless you unexpectedly came into some money that allowed it to happen.

Most people seem to collect as soon as they can. No one knows how long they will live, so they might as well start early and collect it as long as possible. But that is not always the best way to go about it. If you wait until your reach 70, you won't get to collect as many payments, but each that you do collect will be larger. It turns out that if you die early, you will be ahead by starting early. But, if you live to about 77 or 78, you will be ahead if you waited to collect the higher amount. And you will continue to collect the higher payment for as long as you live.

Life Expectancy

The Social Security people have this all figured out. Once we have reached the ripe old age of 65, a man has a life expectancy of 83 and a woman has a good chance of making it to 85. Those ages might be the averages, but one of every four 65-year-olds will live past 90, and one in every ten will make it past 95. 

Combining Work and Social Security

I always thought that if you work while collecting Social Security, they will deduct $1 for every $2 that you earn. That's true as far as it goes, but there's more to it. That 1-for-2 deduction only happens if you earn more than the annual limit, which is $14,640 in 2012. But once you reach full retirement age (depending on when you were born)--for me it's 66--there is no longer a limit on what you can earn, so there will be no deduction of benefits for working.

Divorced Spouses

I spent most of my life as one of those unpaid workers whose job it is to stay at home and take care of the cooking, cleaning, laundry, shopping, child care, husband, etc., like many women in my age bracket. I didn't work outside the home enough to be eligible to collect Social Security in my own name. Because my husband and I were married for more than ten years and I never remarried, I will collect based on his earnings. The catch is that I only get a percentage of what he gets. If I start collecting at 62, I get only 35% of his monthly benefit; at 66, I will receive 50% of what he gets. The tricky part here for retirement planning is finding out how much the spouse you're divorced from will earn so you can figure out how much you will earn. Important note: the fact that I get this money does not affect either his own benefit or the benefits his current wife will get.

Surviving Spouses

Once one of the couple dies, the survivor may be entitled to benefits based on what the deceased partner earned. Fortunately for them, the percentage is higher--possibly 75 to 100% of what the worker received. But this is one of those instances where the widow or widower has to be alert.

My friend's mother did work outside the home enough to earn a retirement benefit of her own. It wasn't as much as her husband earned, but the combined benefits let them live quite comfortably. When her husband died, my friend's mom thought she would be able to continue collecting her benefit and receive a surviving spouse benefit. It turns out that it doesn't work that way. Once her husband had died, they paid her the higher of the two benefits, which meant that she now receives her surviving spouse benefit but no longer receives a benefit based on her own earnings. She still has enough, but she was looking forward to a little fun money.

Divorced Surviving Spouse

This is the one that really surprised me. Once my ex-husband dies, I will also receive the same surviving spouse benefit as his current wife, who will then be his widow. So as long as I hang on longer than he does, I will get a big raise when he goes. And, I could start collecting at age 60 in this case. So, if I retire at 66 and he is still alive, I will receive 50% of what he receives. But if he has died by then, I will receive 75%. (The lady who answered the phone at the Social Security office suggested that I not get any ideas about helping this along.) And if I begin collecting at the 50% Divorced Spouse rate, that will change to the 75% Surviving Divorced Spouse rate upon his death.

A Note for Expats or Anyone Considering Retiring Abroad

Expats can collect Social Security while living in a foreign country. There are a couple of extra hoops we have to jump through, but it's not bad. With direct deposit, they put the money in your account in the states and you take it out via ATMs wherever you may be. However, as of right now, although we are eligible for Medicare, we cannot use it outside the US. We are all hoping that will change before too long.

Be Sure You Know What's Yours

I hope this helps to explain Social Security for you. Please, please, please, though, do not rely on what I have said. Call Social Security at 1-800-772-1213 to ask for an estimate of your benefits so you won't be unpleasantly surprised. Be prepared to settle down with a cup of coffee and something to read while you are waiting for them to get to your call. They say they are busier in the morning, so try to call later. They are open from 7am until 7pm - I assume that is eastern time.


  1. It does get complicated for each of us. If the laws stay the same, since I am 3 years older than my husband he can use the following scenario. I have to decide when to start collecting my benefits but assume I am doing so. Then he can file for spousal benefits anytime from 62 to 69 and wait to collect under his earning history at 70. Since he has earned more over his lifetime his benefit will then be higher for the rest of his life than if he started his own SS at a younger age. Of course this assumes we don't need the additional income he would get from collecting his own benefit prior to 70.

  2. Great post, Kathy. People can also go online to receive an estimate of their benefits,

  3. I must be supposed to think about this topic, as yours is the second post I've discovered whilst surfing this morning. I live in England and I have thought I would delay collecting SS until 70 as I have other sources of income. Britain has a treaty with the US that says my SS contributions could be credited to increase my UK pension (and I suppose vice versa) but of course that would mean drawing only one or the other. I'm inclined to collect both, even if at the lower rate. We have the NHS here, so Medicaid means less to me. I've found it interesting reading about your life in Mexico. I'm envious of your flip-flop weather, but the cooler weather does have some advantages, particularly when I'm trying to do exercise. Just don't tell me you live next to a beach!

  4. My aunt collected a small Social Security pension after retiring to El Salvador. We learned she could opt out of Medicare and this increased her pension by the amount of the Medicare Part B premium (~$99). This was a viable option for her because she had no intention of ever living in the USA again and she would never benefit from Medicare services where she was living.

  5. Anyone can opt out of Part B of Medicare and save that $99, but it is probably not a good idea if you live in the US and don't have another insurance to take up the slack. We always hope that one day we will be able to use our Medicare outside of the country. The arguement against is always about potential fraud, but when you compare the cost of the excellent health care available here to what it costs in the US, you have to wonder just where the fraud really is.