Photo by Carlos Alberto Gómez Iñiguez on Unsplash
There are some things in finance that, as long as you follow a few general rules of thumb, you’re going to be fine:
Save about 10% of your wages in a variety of stocks and bonds
Take 20 times your annual wage and buy that much term life insurance
Withdraw about 4% from your retirement account each year.
There is certainly room for more nuance in these rules, but they get you close to success.
Social Security is a different animal. There are general rules, but the potential benefit over a couple’s lifetime is so significant, that it’s worth knowing some particulars. I’d like to lay a few of these out in this post.
Remember a few Social Security basics
Despite having a bad rap for some justifiable reasons, Social Security has many virtues. It’s a guaranteed income stream backed by the full faith and credit of the US government, it has a cost of living (inflation) increase each year, and your Medicare payments come directly out of it.
The benefit over one’s lifetime is substantial. When you calculate the equivalent net present value of most Social Security lifetime payments, the present value amount is worth well over a million dollars.
Your benefit is based on your earnings, meaning most earners can intentionally earn more and increase their benefit. For this reason it’s important to review your Social Security statement from time to time, especially before you file. The Social Security Administration has been known to get part of your earnings history wrong. Reviewing it and reporting any needed corrections can potentially increase your benefit as well.
“You get a benefit! You get a benefit! And you get a benefit!”
In a famous episode of The Oprah Winfrey Show in 2004, Oprah gave away a free car to literally every person in the studio audience. The place went nuts of course, and so did Oprah. “You get a car!” became a popular meme, humorously applied in all sorts of situations today.
While not everyone gets a Social Security benefit, some form of Social Security benefit can potentially go to a lot of different people:
People who have earned a wage
Spouses who have earned a wage
Spouses who have NOT earned a wage
Divorcees
Widows and widowers
Disabled children or children under age 16
Disabled adults
The most popular benefits are the earned benefit and spousal benefit. Any worker can be eligible for an earned benefit if they have earned enough credits to qualify. The benefit increases or decreases based on how much you earn, how long you work, and how long you wait to claim your benefit, among other factors. In a married couple, both people can receive their own earned benefit.
The spousal benefit is a benefit available to a spouse that may have earned enough for their own benefit, but their spousal benefit–based on 50% of their spouse’s earned benefit–may be higher. In this case, this earner can choose between their spousal or their earned benefit, and can even claim their earned benefit first while waiting to receive their spousal benefit (spousal benefits can only be received once the other earner has started their benefit.)
Surprise! Child-in-Care Benefits
I’ve recently interacted with some couples who have disabled children, revealing yet another potential benefit called child-in-care.
This provides a benefit to couples with a dependent in their care who is under age 16 or disabled. In order to receive this benefit your spouse must be receiving their Social Security benefit. The amount of the child-in-care benefit is 50% of the spouse’s full retirement benefit.
For example, suppose you and your wife have a disabled 22 year old child as a dependent. Your female spouse’s Social Security benefit is $1,200 per month. If your spouse were to start receiving her Social Security benefit your family could also enroll for a child-in-care benefit, which would result in an additional $600 per month for your spouse for the life of your spouse.
Several people I’ve spoken with were completely unaware of the child-in-care benefit. It’s worth finding out all you can about who can potentially benefit from Social Security.
Increased benefit over time (waiting until FRA or 70)
While the majority of Americans claim their Social Security benefit before their Full Retirement Age (FRA), it usually makes sense to wait, for a couple reasons.
First, an early claimed benefit is penalized with a permanent reduction that you’re usually stuck with (see one exception to this below).
Second, waiting until beyond your full retirement age can lead to a permanent increase–to the tune of about an 8% increase per year until the age of 70. For most, this means waiting until age 70 translates to a permanent increase to your benefit of about 32%.
It’s important to look at this delay as a return on your investment, similar to the stock market. By waiting to claim your benefit, you are guaranteed an increase to your benefit of 8% per year. There aren’t many guarantees like that.
What if you got it wrong?
Some believe claiming Social Security is a one-and-done decision, and that you can’t go back on your decision once you’ve started your benefit. Not true. There is a grace period of 12 months if you decide you really screwed up and want to undo things.
There are some catches. First, this can only be done once in your lifetime, so make sure you know what you’re doing. Second, all the benefits received up to that point must be returned. This includes benefits paid to your spouse, children, and any benefits withheld for Medicare, which you’ll need to pay for out of pocket instead. Finally, you need consent for anyone who also benefits from your benefit application, such as a spouse.
There’s wiggle room in personal finance. Some decisions are a little more “horse shoes and hand grenades,” meaning you want to get close but not worry too much about precision. The complexities around Social Security and risks of “not knowing what you don’t know” present an opportunity to do the work to get this financial benefit right.