According to the Social Security Administration (SSA), women account for 55.5% of the 37.8 million social security beneficiaries over age sixty-five and 65% of the beneficiaries over age 85, making social security benefits a more fundamental part of their overall retirement plan.
Why, as a demographic, have women become more heavily dependent on social security to supplement their retirement income? Not only do longer life expectancies put elderly women at increased risk of exhausting their other sources of retirement income, but prime accumulation years spent outside the workforce for caretaking and lower lifetime incomes due to the gender wage gap mean that women are generally far less financially prepared for retirement in the first place. Data from Prudential’s 2018 Financial Wellness Census revealed that women had saved an average of $115,000 compared with $203,000 for men and nearly half (46%) of women said they have no retirement savings at all.
For women who will rely more heavily on social security benefits to help close the retirement income gap, maximizing benefits will be an essential part of the retirement planning process. As such, we’ve compiled this list of the top 4 questions every woman should answer before making the decision to begin claiming benefits.
Should I Consider Working in (or into) Retirement?
Social security benefits are calculated based on an individual’s highest-earning thirty-five years in the workforce. However, for each year under thirty-five where an individual does not show an income, a “zero” is factored into their benefit calculation. These non-working years can severely injure a lifetime benefit amount.
As such, many women will consider extending their careers (either in a full or part-time capacity) into retirement, especially if they are at the height of their earning years. Even when a woman has already logged thirty-five years towards social security, she could still use this opportunity to replace her low-income years with higher-earning ones.
Extra time in the workforce can not only work to boost social security benefits, but provide some supplemental income, mental stimulation, and personal fulfillment for the woman not quite ready to make the full transition.
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However, if an individual begins claiming benefits prior to their full retirement age and continues to work, they could face a $1 reduction in benefit amount for every $2 earned over the very low annual limit of $17, 640 for 2019. But, once an individual reaches Full Retirement Age, earned income will no longer reduce benefit payments.
When Should I Begin Claiming Benefits?
Once you file for social security benefits, your benefit amount is determined for life (save for the annual cost of living adjustments made to account for inflation). In other words, you’ll want to make an informed decision about when you begin claiming your benefits because you will not be able to amend that decision once you have filed.
There are three choices as to when you can begin claiming social security benefits and your choice will directly affect your benefit amount:
“Early” at age 62
Age 62 is the earliest you are eligible to begin claiming benefits, but you will pay a penalty in the form of reduced lifetime benefits for doing so. For example, someone whose Full Retirement Age is 66 would have his or her monthly benefit amount reduced by 25% for life by claiming at age 62.
“On time” at your Full Retirement Age (which is determined based on your birth year)
Full Retirement Age (FRA) is reached between ages 66 and 70, depending on the year you were born. This is the year when you qualify for your full benefit amount without penalty.
“Delayed” until age 70
If you choose to postpone taking benefits past FRA, your benefit amount will continue to rise each year you delay until you reach age 70. Those who wait until age 70 could enjoy benefits of up to almost 33% higher than if they had claimed at FRA.
If an individual has the resources to delay taking benefits and is in good health, a delayed filing could secure a higher lifetime payout for either themselves or their survivor. However, it may be more advantageous, from a tax-planning perspective, for an individual to begin taking social security benefits early and delaying distributions from other savings vehicles that could continue to grow in the interim.
Overall, the decision about when to begin taking social security benefits is one that should always be made in the perspective of all available financial resources.
Should I Claim a Spousal Benefit or My Own?
For women who anticipate receiving a low benefit amount, claiming spousal benefits in place of her own may provide a higher guaranteed income for life. The SSA allows current, ex-, and widowed spouses alike to file for spousal benefits.
For Married Women: For those who are still married at the time of taking SS benefits, and both spouses have worked, both wives and husbands will receive their own social security benefit. When you file for benefits, you will be deemed to be filing for all benefits you are eligible for. If your spouse has already filed, you will automatically receive the larger of your own or the spousal benefit (one-half of husbands’ full benefits).
For Divorced Women: Divorced spouses are also eligible for one-half of their ex-spouse’s full benefit amount if the marriage lasted for 10 consecutive years or more, both ex-spouses are over age 62, the claiming ex-spouse is not remarried, and the marriage was terminated 2 years prior to claiming benefits.
While current spouses are not eligible to apply for benefits until after the spouse applies, ex-spouse’s can begin claiming anytime after the primary beneficiary turns 62, regardless if he or she has begun claiming yet or not.
Fortunately, taking a spousal benefit does not affect the amount your current spouse, ex-spouse, or ex-spouse’s current spouse will be eligible to receive.
Also, Check Out This Northstar Related Article: What Women Need to Know About Social Security and Divorce
For Widows: The Social Security Administration recently reported that it had underpaid $224 million to about 25,000 widows and widowers. In a random sample of this group, it found that 82 percent could have gotten a higher monthly benefit if they had claimed survivor benefits first and delayed claiming their own retirement benefits until age 70.
Determining a widow or widower benefit is significantly trickier; the guidelines are commonly misunderstood due to the long list of stipulations and conditions the SSA has prescribed regarding eligibility. Both yours and your deceased spouse’s (or ex-spouse’s) timelines, FRAs, delayed credit earnings, and filing statuses will all have an impact on when and how much you are eligible to receive. For a more detailed overview, check out our article, Have You Been Underpaid? What Widows Need to Know about Social Security Benefits.
How Do I Coordinate My Benefits with Those of My Spouse?
For married couples looking to maximize each of their benefits in such a way that optimally supports their long-term retirement plan, more factors come into play including current health conditions, the availability of additional financial resources, and strategic tax planning. Too many couples fail to see how coordinating claims can actually help to augment their overall retirement income and miss out on significant increases. Consult with your financial advisor about how to best coordinate you and your spouse’s claiming timelines into your complete retirement plan.
While Social Security may not be an individual’s main source of income in retirement, it is certainly not a factor to be overlooked since deciding when and how to claim benefits can considerably affect your lifetime benefit amount.
If you feel you need assistance working social security into your retirement plan, or are unsure you’re prepared to take on this major life transition alone, we’d be happy to sit down with you and discuss your current strategy. Our Certified Financial Planner ® professionals and Certified Financial Transitionist® professionals would love to hear from you. Contact us today for a complimentary Get Acquainted meeting to discuss how we can help you plan for a smooth and gratifying retirement transition.