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- [Female Announcer] Social Security is a labyrinth of regulations.

In "Social Security & You," seasoned financial journalist and Social Security expert, Mary Beth Franklin, leads the viewer through the many decisions they must make and when to make them.

From the steps of claiming Social Security to strategies for maximizing benefits, Mary Beth shares clear, concise, and useful information to help Americans take control of their financial future.

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- [Female Announcer] And by the generous contributions of viewers like you.

Thank you.

And now here's your host, Mary Beth Franklin.

(audience applauding) - Hi everybody, and thank you for coming to this special program, "Social Security & You."

I'm Mary Beth Franklin, I'm delighted you're here with me.

You know, when most people think about retirement, one of the first questions they ask is, "When should I collect Social Security?"

Well, the answer may not be quite as simple as you think.

Do you know there are more than 2,700 rules that govern your Social Security benefits?

And deciding when and how to claim benefits can have a major impact on your retirement income for the rest of your life.

Now, whether you're contemplating your own retirement, maybe helping your parents with their retirement decisions, or maybe you just started working and wonder, is Social Security gonna be there for me?

This is the program for you.

For the past decade, I've been writing and speaking about Social Security rules and strategies to help people make the best decision for them, whether they're married, single, divorced, widowed.

And today I'm here to share my top tips with you.

Now, the bottom line is the longer you wait to claim Social Security benefits up until age 70, the bigger the monthly benefit will be for the rest of your life.

Now, you can claim benefits as early as age 62, but you might not want to because those benefits could be permanently reduced by 25% or more.

That's a big haircut.

Deciding when to claim Social Security is a really personal decision.

Now, for some people it makes sense to claim reduce benefits early.

Maybe you are in poor health, maybe you need the money.

Go ahead claim those benefits.

You have worked so hard for them and paid so much for them in forms of the FICA payroll taxes you pay every week.

But for those people who say, "You know, I hear Social Security is going broke, I'm gonna grab those benefits as soon as I can."

Well, I have this cautionary tale for you.

The idea of claiming reduce Social Security benefits early out of fear is a bit like selling your stocks in a down market.

The only thing you have guaranteed is you just locked in a loss.

(soft upbeat music) So let's dive into some of the basics of Social Security.

Who pays for it?

How do you become eligible?

And most importantly, how do you figure out how much you get?

For most retirees, Social Security is a critical piece of our individual retirement income puzzle, particularly in an era of disappearing pensions.

Social security is, for many of us, the only form of guaranteed income for the rest of our lives no matter how long we live.

And more importantly, it's adjusted for inflation.

Even people who are lucky enough to have a traditional pension, it's unusual to get an inflation adjustment unless you happen to work for the federal government.

But Social Security was never designed to be your sole source of retirement income.

On average, it replaces about 40% of pre-retirement income for the typical worker.

And for higher income workers, it's even less, about 25%.

So what does that mean?

It means you need other sources of income in retirement to have a comfortable retirement.

Now, it could be you have savings in a 401K, or an IRA, or maybe you're lucky enough to still have a pension.

For some people it's working part-time in retirement, or seasonally, or as a consultant.

And for a lot of American homeowners, they have more money tied up in their homes than they have in a 401K plan.

In some cases it may make sense to tap some of that home equity to help you ease into retirement.

And then there are other peoples who have a lot of other assets.

They might have brokerage accounts, they might have an inheritance, they might have a rental property that produces incomes.

Each of those forms of income creates your individual retirement income puzzle.

The challenge is how do we get the right amount of money out in the right form in the least taxed way?

'Cause just like the days when you're working, in retirement it's not just what you have but it's what you keep after you pay your taxes.

Social Security benefit got a huge increase for 2023, 8.7%.

That is the biggest increase we have seen in more than 40 years.

And what a great thing that is for retirees who are collecting benefits.

But for people who continue to work, particularly higher income workers, it also means they will be paying more in payroll taxes than they were the year before.

(soft upbeat music) Over the years I have answered thousands of questions from consumers like you and financial advisors of when's the best time to collect Social Security benefits.

And the most popular question I'm getting these days is, "Hey, big, 8.7% COLA, I guess I should claim Social Security now."

You know what?

You don't have to.

For every year you are eligible to claim Social Security starting at age 62 up until the time you actually claim benefits, as late as age 70, every single year that there is a cost of living adjustment, it is automatically factored into your future benefit.

So if you are 62 or older in 2023, you do not need to claim Social security in order to take advantage of that cost of living.

Whenever you claim it in the future, that will be baked into your future benefits.

Let's go back to the important stuff.

Who pays for Social security?

We all do.

Workers and employers each pay 6.2% of gross wages to fund Social Security benefits.

If you happen to be self-employed, like me, you get the privilege of paying both shares as employer and employee for our combination of 12.4%.

And we pay these FICA taxes up to a certain taxable wage base.

For 2023, it's about $160,000.

If you make more than that, you don't pay FICA taxes on that excess amount that funds Social Security.

It's a big jump from the year before when it was 147,000, which means higher income workers will be paying more FICA taxes in 2023 than they did the year before.

Now, Social Security is a pay-as-you go system.

It's not like your private IRA with your future Social Security benefit in a lockbox someplace.

No, not at all.

Your taxes that you pay now as a worker are funding the benefits of today's retirees.

Now, it's a social insurance program, it's a pooled benefit.

And today's workers pay taxes that pay the benefits of today's retirees.

It's a pay-as-you-go system, which means when you finally get around to claiming Social Security benefits, you will be relying on the taxes paid by the workers at that time to fund your benefits.

So you better be nice to your kids.

(audience laughing) (soft upbeat music) How do you qualify for benefits?

Well, not only do you pay these taxes, but you have to earn a minimum amount of credits.

You can earn at least four credits per year and you need a minimum of 40 credits.

So essentially, you have to work in covered employment for at least 10 years to be eligible for a future Social Security benefit.

If you don't have 40 credits, you can't get a Social Security benefit.

But the good news is, every time you continue to work regardless of your age, it will continue adding to your earnings history.

So once you get to those minimum 40 credits, you're good.

In the future, you will qualify for Social Security at the appropriate age.

How do we figure out how much those benefits are?

There's another piece of the puzzle.

It's based on your average lifetime earnings.

Now, Social Security defines that as your top 35 years of earnings, index for inflation.

So what you made back in 1978, they factor into roughly what it would be worth now.

So you get your top 35 years of earnings to indicate what your average lifetime earnings were and they apply a formula to that.

What happens if you didn't work 35 years?

Maybe you were a stay-at-home mom and you only work 20 years, you took care of your kids.

You'll have 15 years of zeros in your calculations because Social Security always divides by 35.

That means you're going to have a smaller average lifetime benefit, and consequently, a smaller future Social Security benefit.

But remember, if you keep working even at advance ages, you could increase your future Social Security benefit.

(soft upbeat music) The key though that determines how big your benefits are are your age when you claim benefits.

Yes you can claim as early as age 62, and in some cases that may make sense.

But if you do, your benefits will permanently be reduced by 25% or more depending on your birth year.

For example, I was born in 1954, my birth year was the last year that the full retirement age is 66, after that it creeps up.

Those born in 1955 at 66 and two months.

56, 66 and four months, all the way up to 67 for people born in 1960 or later.

The other disadvantage of claiming benefits before your full retirement age, not only are they reduced for claiming early but if you continue to work, and this is earnings from a job or self-employment, it's not pension or investments or any passive income like this, but if you claim benefits before your full retirement age and continue to work, now you're gonna lose even more benefits if you make too much money.

And in 2023, you know what too much money is?

About $21,000 a year.

Not a good idea.

If you wait till your full retirement age, not only do you get 100% of the benefits that you have worked so hard for and paid so much for, but there's no earnings restrictions.

The earnings cap goes away at your full retirement age.

So you could keep working and make as much money as you want and it will not affect your Social Security benefits.

But for those people who are able and willing to wait, patience really pays off.

You can earn a delayed retirement credit worth 8% per year for every year you postpone claiming your Social Security beyond your full retirement age up until age 70.

So my full retirement age is 66.

If I wait till 70 to claim benefits, that's an extra four years, that's an extra 32% more than my full retirement age benefit.

I've just increased my benefits by a third.

That is a smoking hot deal.

Now, over the past decade we have lived in a virtually zero interest rate environment and the government was saying to us, "Wait.

And each year you wait, I will give you 8% a year."

You couldn't get that anyplace else.

You have to compare it to a risk-free investment.

Yes, you could take that money and put it in the stock market.

Hey, last year you might've done great, this year not so great, you might have lost 30%.

But to put it in the bank until about a year ago, you would've gotten zero and the government was giving you 8%.

We're now in a different interest rate environment, interest rates are starting to creep up.

But still, you might get 4% on the CD, but I don't know any place else you're gonna get 8% a year the way you will by waiting for Social Security.

As I mentioned, your full retirement age depends on your birth year.

It goes anywhere from 66 up to 67.

Now that's under current law.

Things could change in the future.

I've often said that it would not surprise me if the full retirement age is increased gradually, like maybe it'll 69 or 70.

But don't panic, I am talking about today's two-year-olds.

They'll get used to it, they're gonna live to 120 anyway.

The last time they changed the full retirement age was in 1983, the last time we had major Social Security reform.

When they said we are going to gradually increase the full retirement age from what was then 65 to 67, that was in 1983, that law is not fully implemented yet.

In fact, in 2022 was the first year that people who were born in 1960 and have a full retirement age of 67, they reached their eligibility age, 62 in 2022.

That was nearly 40 years of phasing in that change.

When Congress makes a public policy change and gives us a long time to adjust, in my opinion that's good public policy.

Not so great when they change the rule and only give you a few months or a few years to adjust.

Here is a really key point to make you think about why you might want to delay.

The difference between claiming your benefits as soon as possible at age 62 or waiting till the maximum age of 70 to claim the biggest benefits possible, means your monthly Social Security benefits would increase by 76%.

That is enormous.

And as a certified financial planner, there is no investment that I can recommend to you that is guaranteed to increase 76% over an eight year period.

And not only do these delayed retirement credits increase by 8% per year, between your full retirement age and age 70, but remember every cost of living adjustment that is applied between the time you're 62 and the time you claim is also added to it.

So your benefit could be significantly larger.

(soft upbeat music) Now, who gets those delayed retirement credits?

They're called delayed retirement credits for a reason.

They only apply to a worker's own retirement benefit.

If I don't have my 40 credits, I'm not entitled to Social Security, but hey, I'm married to somebody who gets Social Security.

I can qualify as a spouse.

But my benefit as a spouse is worth the maximum amount when I claim it at my full retirement age.

It's half of my husband or half of my wife's full retirement age benefit.

It does not grow any bigger if I wait beyond my full retirement age to collect it.

Same thing with survivor benefits.

If my husband or wife dies, my maximum survivor benefit is if I claim it at my full retirement age.

It does not continue to grow by 8% a year.

Only a worker's retirement benefit does.

But, if one spouse decides to claim benefits at age 70, they create the largest retirement benefit possible, while both spouses are alive.

And if that spouse, who tends to be the husband, who tends to die first, if he dies first, the survivor benefit for his wife will be 100% of what he was entitled to, including those delayed retirement credits.

So having one spouse wait until age 70 creates not just the maximum retirement benefit but possibly the maximum survivor benefit.

My number one rule about claiming Social Security benefits is in most cases if you plan to keep working, it does not make sense to claim benefits before your full retirement age.

You're gonna take a cut in benefits for claiming early and another cut in benefits in case you make too much money.

And all types of benefits; retirement benefits, spousal benefits, survivor benefits, they are all subject to the same earnings restrictions, which in 2023 is about $21,000 a year.

If you make more than that, you lose a dollar in benefits for every two over the limit.

So you make about $60,000.

Gone, everything's gone.

But, when you get to your full retirement age, Social Security is going to review your record.

"Hey Mr. Johnson, I see you claimed your benefits early at 62 and you took a 25% haircut.

And I also see here you worked part-time over the last four years and you forfeited two years worth of benefits.

So now we're gonna readjust it and pretend as if you claimed at 64 instead of 62, you're gonna get a larger benefit going forward."

But it can be in a nasty accounting problem.

You retire early, Social Security says, "So, do you plan to work?"

And you say, "No, I'm not gonna work."

You figure you put a fast one over on Social Security.

Well, they do talk to the IRS.

Sometimes it takes a couple years and then Social Security will send you a letter that says, "Dear Mr. Johnson, it looks like we overpaid you by $30,000.

We'd like that back right now in a lump sum."

Really avoid the problem and just don't claim benefits early if you continue to work.

But the golden lining, silver lining of this is if you forfeit any benefits to the earnings restrictions, you will get them back once you reach full retirement age in the form of larger monthly benefits.

They're really not gone forever.

(soft upbeat music) So the bottom line is, should you delay to claim Social Security?

It's a bit like the lottery, you must be present to win.

You know, if you're not gonna be around a long time, maybe not such a good decision.

But frankly, most people underestimate their average life expectancy.

The average 65 year old man will live till 84, the average 65 year old woman will live till 87, and half of Americans will live even longer than that.

The pros of waiting to collect the biggest benefit possible is, of course, you get a bigger benefit the longer you wait up until age 70.

Now you never wanna wait beyond 70 to claim benefits because those delayed retirement credit stop.

So, what's the point?

Collect it at 70 even if you're still working and even if you don't need the money.

By choosing a bigger benefit, you have also created a bigger benefit base.

So each year when there is a cost of living adjustment, most recently 8.7%, that percentage is applied to a bigger base.

And that means you will get a larger annual raise each year.

And for married couples, particularly having at least one spouse wait until age 70 to claim creates not only the biggest retirement benefit, but possibly a larger survivor benefit.

Now it's not a slam dunk decision.

The decision to delay benefits means you have reduced cash flow now.

What do you do for money in between?

If you're like a lot of people who plan to keep working, problem solved, you've got income from a job, But in other cases you might actually want to retire and yet still delay that decision to claim Social Security benefits, what do you do in between?

You could tap some of those other assets like your IRA, your 401k, maybe some other investments, as a way of buying yourself a bigger guaranteed benefit in the future.

Now the real downside is what happens if you die before you claim?

Well, if you are single, that's unfortunate.

Because Social Security is a social insurance program.

You don't have a survivor, your money goes back into the pot so that it will be distributed to other retirees.

But, if you are married, someone is likely to get your survivor benefit.

So there are some good reasons to claim early.

If you're in poor health and unlikely to reach normal life expectancy, but Americans live a long time.

In general, a 65 year old woman's gonna live till 87, 65 year old man till about 84, and half of all Americans will live longer than that.

Other people simply need the money now.

A lot of old workers lost their jobs during COVID, either because their jobs disappeared or due to health concerns they were afraid to go back to work.

Some people choose to retire early and work part-time.

If you're earning less than the earnings cap, about $21,000 a year in 2023, might make sense.

And finally, for married couples, it may make sense for one spouse to claim benefits early.

So up next, I'm gonna talk about why your marital status, whether you are single, married, widowed, divorce, should determine when you claim your Social Security benefits.

So stay with us and we'll be right back.

(audience applauding) (soft upbeat music) - [Announcer] Stay tuned for more "Social Security & You with Mary Beth Franklin."

(soft upbeat music) (audience applauding) - Welcome back to "Social Security & You."

Let's talk about how your marital status affects your decision of how and when to claim Social Security.

But here's a few important facts first.

Women tend to live longer than men.

That means they tend to spend more years in retirement.

Unfortunately, since they tend to earn less money over their lifetime, often because they're taking time out of the workforce to care for kids or elderly family members, their savings tend to be less, their Social Security benefits tend to be less, and they have to make them stretch over a longer period of time.

Women are also most likely to end their final years alone due to widowhood, divorce, or increasingly the fact that a lot of women simply don't get married.

So consequently, more women rely heavily on Social Security than men.

In fact, more than half of all Social Security beneficiaries are women.

And when we get to the oldest ages of 85 plus, two thirds of all Social Security beneficiaries are women.

(soft upbeat music) You can collect Social Security benefits in a variety of ways.

If you've earned your minimum of 40 credits, you may collect as a retiree on your own work record.

If you become disabled, you're unable to work, you may qualify for Social Security disability benefits.

If you don't have enough work credits on your own.

but you're married to someone who is, or in some cases divorce from someone who's entitled, you may be able to claim benefits as a spouse.

And if you lose your spouse, you may be able to claim survivor benefits.

Let's start with singles.

I'm defining singles as those people who were not married or if you were married, you were divorced before 10 years.

And that's because Social Security defines an eligible divorce spouse as someone who has been married at least 10 years, divorced and currently single.

But if you meet the definition of single, your decision of when to claim Social Security is pretty straightforward.

It's based on your average lifetime earnings and the age when you choose to claim.

If you claim benefits early, they will be reduced.

If you wait till your full retirement age, you get your full benefit.

Now here's the tough choice for singles.

Should you delay up until age 70?

Yes, it is true, you will get a bigger benefit and if that is going to make a big difference in your retirement income plan, that may be the right decision for you.

But if you have health concerns or if longevity doesn't run in your family, you may wanna claim benefits at your full retirement age and bank the difference.

Because frankly, if you die before collecting Social Security, there's no survivor to get your benefit.

Let's talk about married couples.

Now they have a lot of options.

In most cases it makes sense for the higher earning spouse to wait as long as possible, up until age 70, to claim benefits.

We've talked about this, biggest retirement benefit possible and possibly creating the larger survivor benefit.

Having said that, the lower earning spouse, the spouse with the smaller Social Security benefit, may wanna go ahead and claim benefits at 62, if she is not working, because we always have to worry about those earnings restrictions, or at full retirement age if she is.

The idea is to bring some income into the household and it takes a bit of the sting away of having the other spouse wait up until 70.

And here's one of the great secrets that most people don't understand.

Even though the spouse who claims benefits early, her retirement benefits would be permanently reduced because she claimed them early.

It will have no impact on her survivor benefits if she is at least full retirement age when she collects them.

So in theory, she could collect her reduced retirement benefits as early as age 62 and up to the time she becomes a widow.

And if she is at least full retirement age to the time, those survivor benefits are going to be worth 100% of what her late husband was collecting, if he was already collecting benefits, or entitled to collect when he died if he had not yet claimed them.

So retirement benefits, survivor benefits are two different pots of money, and this is the most important concept for married couples to understand.

The other thing is how do you figure out how much you get?

I'm gonna do a little basic math with you.

We have a husband, we have a wife.

Let's assume the husband's full retirement age benefit is $3,000 a month.

In theory, if he has a stay-at-home wife who has never earned her own benefits, at full retirement age, once he claims, she would be entitled to a spousal benefit.

A spousal benefit is worth half of his full retirement age benefit or $1,500 a month in this case.

Now let's assume maybe she has her own benefit, it's $1,000 a month.

Same thing's gonna apply.

The spousal benefit is bigger than her own benefit, once he claims and she claims her benefit, she's going to get the larger of the two amount, the equivalent of the spousal benefit.

She's actually getting a thousand bucks on her own record plus the excess difference, an extra $500, to bring it up to $1,500 a month.

But what if you are a more typical dual income couple and the wife in this case has her own benefit of $2,000 a month.

That's larger than the spousal benefit.

And in this case, she's only going to get her own retirement benefit and that spousal benefit's gonna go to waste, essentially.

That's one of the reasons I have been on this mission this last decade to teach people about claiming Social Security benefits.

Because in the case of these dual income couples, we are both paying into the system, but in many cases that second spouse is not getting that spousal benefit out.

So that's one of the reasons you wanna be aware of spousal benefits, survivor benefits, how do I maximize this investment we have all made in Social Security.

Now, if I'm one of those spouses who is not entitled to my own Social Security benefit, I will get one as a spouse once my husband claims.

So, maybe in that case of this couple, that husband does not wanna wait until age 70 to collect the biggest benefit possible 'cause it also means his wife has to wait until he claims to trigger a benefit for her, that may not be the best move for them.

And keep in mind, the maximum spousal benefit is if I claim it as my full retirement age.

Maybe my husband claimed reduced benefits early or maybe he waited till 70 to claim them, but my spousal benefit while he is alive is still based on half of his full retirement age benefit.

Once he dies and I step up to this survivor benefit, I'm gonna get a hundred percent of what he was collecting, including any delayed retirement credits and my smaller retirement benefit will go away.

The goal of most married couples should be, how do I maximize the survivor benefit?

So to keep in mind, spousal benefits while your spouse is alive are worth 50% of his full retirement age amount, a survivor benefit after his death is worth 100% of what he was collecting, including any delayed retirement credits.

Survivor benefits are a little different in that they're available as early as age 60 rather than 62, but they're worth less.

If I needed to collect benefits early at 60, I would only get 71.5% of my late husband's benefit as opposed to 100% if I waited till my full retirement age.

And it's a sliding scale in between.

So the big surprising rule, to reiterate for couples, is even if I collect my own reduced retirement benefit early and my retirement benefit is permanently reduced, it will have no impact on my survivor benefit as long as I'm at least full retirement age at the time.

(soft upbeat music) Now, this is my favorite part of the Social Security rules, rules for divorce spouses.

Now, this doesn't apply to me personally, I've been married 45 years, but I have two very good girl friends who were each married nine and a half years.

And apparently their divorce attorney didn't know or didn't tell them that you have to be married 10 years to be able to collect on your ex.

So if you remember nothing else from my presentation, remember this.

There must be at least a decade between I do and I don't.

(audience laughing) If your marriage is falling apart in years eight and nine, string out the paperwork.

The only dates that married are the day you were married and the date of your final divorce decree, you are one day short and you will get squat.

So there's the basic rule.

You must be married at least 10 years before you get divorced.

And to be able to collect on a living ex, you must be currently single.

Maybe he got remarried, doesn't matter.

But if you are currently single and your benefit as a spouse is larger than your own benefit, you can collect on your ex to get the larger benefit amount.

Now, you might have had a nasty divorce situation, which sometimes happens.

I mentioned that for currently married couples, if I'm not entitled to my own benefit, I'll get a spousal benefit once my husband or my wife claims.

But picture a nasty divorce and one ex-husband, ex-spouse says to the other, "I am never gonna retire and you are never gonna get a dime of my Social Security benefits."

Well, congress thought that might be a problem.

So among the 2,700 rules that govern your Social Security benefits, there's a lot of exceptions and a lot of the exceptions apply to divorce.

So here's another thing.

In addition to being married at least 10 years, divorced and currently single, if you have been divorced for two years and each of you are at least 62 years old, meaning you're eligible for Social Security, you can collect on your ex even if your ex has not yet claimed.

That is known as being an independently entitled spouse.

And guess what?

He doesn't even need to know about it.

You do this all through the Social Security Administration.

You give them your paperwork, I was married on such and such a date, I was divorced on such and such a date.

They will take care of the rest.

If you are collecting as a spouse, it does not take away from your former spouse's benefit.

If he or she has remarried, it does not take away from its new family's benefits.

I'm going to give you an example in a minute that will make your head spin.

We have a couple, John and Mary.

They're married for 10 years, they get divorced, Mary remains single.

John then marries his secretary, Susie, it's an old story.

They're married for 10 years, they get divorced, Susie remains single.

John's one of those guys doesn't really like to be alone.

He goes to the local pub and he meets Tiffany.

Tiffany's 30 years old, they fall madly in love, they get married and now they have a little two-year-old, little Johnny.

Then Big John drops dead.

Who gets benefits?

Everybody gets benefits.

The first ex-wife, married at least 10 years, divorced and currently single, does not have to share.

She gets 100% of John's survivor benefit.

So does the second ex-wife, married at least 10 years and currently single also gets 100% of John's survivor benefits.

That's 200 so far.

And in fact, Mary and Susie both could have waited till age 60 and remarried and still collect survivor benefits even if they're married to somebody else at the time.

Now we got little Johnny, he's two years old, he'll get 75% of dad's benefits every single month until he turns 18.

And then there's Tiffany, she's 30 something now, she'll get 75% of John's benefits every single month until little Johnny turns 16.

So if you're worried about Social Security running outta money, less to do with trust funds, a lot to do with divorce.

(audience laughing) (soft upbeat music) Survivors can switch benefits.

This is a very important concept for widows, widowers, and eligible divorced spouses.

If you are entitled to your own retirement benefit and you are also a survivor or a surviving ex-spouse, you may be able to claim one type of benefit first and switch to the other larger benefit later, and do it in either order.

I'm going to give you two examples.

Let's say we have a young widow, she's 62, she's not working, and her husband's survivor benefit is bigger than her own.

What should she do?

In this case, she should probably collect her own reduced retirement benefit at 62.

Yes, that benefit will be permanently reduced, but that's her retirement benefit.

When she gets to her full retirement age, she can now switch to her full survivor benefit and that's the amount she will collect for the rest of her life.

Now let's turn it around.

Maybe we have a business executive.

He lost his wife to breast cancer.

He's entitled to a survivor benefit, but it's much smaller than his own.

What should he do?

He should probably wait till his full retirement age when survivor benefits are worth the maximum amount and when earnings restrictions go away.

He can keep working, collect survivor benefits, and it won't affect the amount he receives.

But in the meantime, his own retirement benefits continue to grow by 8% a year and at 70 he would switch to his maximum retirement benefit.

Next, we're gonna talk about surprising rules and exceptions.

So stay tuned and we will be right back.

(audience applauding) (soft music) - [Announcer] Stay tuned for more "Social Security & You" with Mary Beth Franklin.

(soft upbeat music) (audience applauding) - Welcome back to "Social Security & You".

I am Mary Beth Franklin.

As you've probably figured out by now, there's a lot of surprising rules and exceptions to Social Security, and one of the most surprising is don't forget the kids.

Every year, millions of children collect Social Security benefits.

And that's because if their parent is collecting a retirement benefit or a disability benefit and there is a minor dependent child in the household, that's defined as usually under age 18 or sometimes up to age 19 if still in high school, if mom or dad is getting a Social Security benefit, then the minor dependent child gets one as well.

That dependent benefit is worth 50% of the parent's full retirement age benefit.

If the parent died, the minor dependent child is entitled to survivor benefits worth 75% of the parent's benefit.

And the dependent children can continue getting these benefits up until age 18 or 19 if they're still in high school.

Also, permanently disabled adult children are also entitled to dependent benefits while the parent is alive and after their death, and those benefits continue for the rest of that adult child's life.

Now, there is a maximum family limit.

You can't have 18 people collecting on dad's benefit.

But generally if you have a spouse and maybe one dependent child or two dependent children and no spouse, they're going to collect the full benefits.

(soft upbeat music) I've been talking about how important it is to decide when to claim benefits because it affects the amount you receive.

And generally, those decisions are irreversible but there are two exceptions.

Anyone who first claims benefits can change their mind within the first 12 months receiving Social Security.

They can withdraw their application for benefits, but there's a catch.

They have to pay back all the benefits they have received, and if someone else was collecting on their record, like a spouse or a child, they have to pay those back too.

Now, why would anybody wanna do that?

It's because it wipes the slate clean as if you've never claimed Social Security.

So at a later date when you're older, you will start at a higher benefit level.

Now there's a second opportunity, but you have to wait until your full retirement age or later to do it.

A lot of people don't like the idea of having to pay back benefits, but gee, they wish they could have restarted them and get a bigger benefit later.

They can by suspending their benefits.

What that means is those nice checks you've been getting every month stop, but now they're gonna start earning delayed retirement credits of 8% a year up until age 70. Who should think about doing this?

Well, let's say we go back to the husband and wife, the husband's the bigger earner, he decides to collect his retirement benefits early at 62 and they're reduced by 25%, he's fine with that.

But it didn't occur to him that if he gets a smaller benefit and he dies first, now his wife's gonna get a smaller survivor benefit.

The survivor benefit is worth 100% of what the late worker was collecting or entitled to collect at time of death.

He gets a smaller benefit, she's gonna get a smaller benefit.

He might want to think about suspending his benefits.

Doesn't have to pay anything back.

The math would work like this.

His full retirement age benefit is $2,000 a month.

He decides to collect early at 62 and he takes a 25% haircut.

So he doesn't get $2,000 a month, he gets $1,500 a month.

He collects that check every month up in the time he's 66, his full retirement age, and then he suspends his benefits.

The benefits stop, but now they're earning 8% a year for four years, that's 32%.

If I multiply the 75% benefit he was receiving at age 62 times 1.32, it comes out to 99%.

He effectively would've restored his full retirement age benefit by age 70.

And if he dies first, that's the benefit his surviving spouse would get.

So I usually tell the gentleman in the audience that next Valentine's Day, forget the flowers, forget the chocolates, get a really nice card and say, "I'm waiting till 70.

You're welcome."

(audience laughing) (soft upbeat music) Here's another surprise.

Did you know that if you wait until after your full retirement age to claim benefits, you may be able to request a lump sum payout of up to six months of retroactive benefits.

But those benefits couldn't begin before your full retirement age.

So here's an example.

Your full retirement age is 67.

You decide to claim benefits at 68, that's a year after your full retirement age.

You have two choices.

You could be paid as if you claimed at 68, which would be your full retirement age benefit amount, plus one year of delayed retirement credit, so that's 108%, and that's the amount you get every month going forward and cost of living adjusted in the future.

Or you could say, "I'd like six months of retroactive benefits paid in a lump sum."

And they would give you that chunk of money, but going forward, they would pay you as if you claimed at 67 and a half.

You can't double dip, and get a delayed retirement credit and a retroactive benefit for the same period of time.

Now, it might make sense for some people as they go into retirement, maybe I wanna pay off that mortgage.

That lump sum payoff would help.

Maybe I wanna go on that big vacation we've promised ourselves on retirement.

That might help.

But do keep in mind that if you request this lump sum payout, your income's gonna go way up that year and so are your income taxes.

Because one of the other surprises in retirement are your Social Security benefits are taxable.

They're based on something called combined income that's defined as your adjusted gross income, which is everything on your tax return, plus half of your Social Security benefits, plus any tax exempt interest you earned on investing in municipal bonds.

If you add that all together and your combined income is $25,000 or more if you're single or $32,000 or more if you're married filing jointly, you will pay income taxes on some of your Social Security benefits.

Worst case scenario, up to 85% of your Social Security benefits can be taxed at your ordinary tax rate, which might be 12% or 22% or 24%.

In addition, although most states exempt Social Security benefits from taxes, some of them do tax your benefits.

(soft upbeat music) Let's talk about the elephant in the room.

Is Social Security going broke?

No, it's not, but it does have some long-term financing problems.

We keep hearing about the trust funds running dry around 2035.

What does that mean?

Well, way back in 1983, the last time we had major Social Security reform, Congress did a lot of smart things back then.

One of the things it did was looking ahead to the massive baby boomer generation starting to retire around 2010, and they said, "Let's raise more Social Security tax revenue than we need right now and stockpile it in what we now think of as the Social Security trust funds."

Well, for the last 30 something years, those trust funds were growing and growing and growing because we didn't need it.

There was enough FICA payroll taxes to pay ongoing Social Security benefits.

Around 2010, when the boomers started to retire and we were all recovering from this major financial crisis, Social Security FICA taxes weren't enough to pay those promised benefits.

So we started tapping the interest on the trust funds.

That was fine for about 10 years.

And then around 2021, it wasn't enough.

So for the first time, we had to start drawing down on the trust fund reserves in addition to the FICA taxes to pay the promise benefits.

As we continue to draw down on those trust funds, if Congress does nothing between now and about 2035, the trust funds will run dry, those extra reserves will be gone, but there will still be enough money left from ongoing tax revenues to pay about 80% of promised benefits.

Now, you, me, and anybody else in this room will not be satisfied with 80% of promised benefits, and there's a lot of things they can do to fix it.

But for those people who decided to claim their reduced benefits early, and if we all got a 20% benefit cut, they're just gonna get another reduction on top of that.

So what's Congress to do about it?

You know, this is a political problem, not a math problem.

The answers are you either raise taxes, you cut benefits, or you do a little bit of both.

In the past, the magic formula is you have to make sure both parties are equally unhappy.

Republicans generally hate tax increases, democrats generally hate budget cuts.

So just like in 1983, we'll probably do a little of both, but we have some added challenges this time around.

(soft upbeat music) The workforce has changed.

We have a lot of gig economy workers.

We have a lot of women who take time out of the workforce to be caregivers for their children, our elders.

There's lots of talk about how we make Social Security benefits more equitable for a 21st century workforce.

We also know, for lower income workers, Social Security taxes are the biggest tax they pay.

We have to make sure that there's a balance between what workers pay in FICA taxes and what future retirees receive.

So I don't have any answers.

My crystal ball looks a bit like a snow globe at this point, but I am confident Congress will step in to fix it.

It might be at the last minute, but I don't think they want to tick off more than 70 million retired voters because everybody knows older people vote in higher numbers than anybody else.

So let's wrap up a final word of what hopefully we learned tonight.

Social Security is complicated.

There are more than 2,700 rules that govern your benefits, and I hope I've been able to, you know, demystify some of them and give you a better understanding of how to choose the right benefit for you.

Don't underestimate the value of guaranteed income that is inflation adjusted for the rest of your life, no matter how long you live.

Certainly, you should take your health, and your other sources of income, and your marital status all into consideration when you decide when to claim your Social Security benefits.

But for those who can afford to wait, there is a big reward of a huge benefit at the end.

And finally, the decision of when to retire and when to claim Social Security benefits are two separate decisions.

They don't have to happen at the same time.

Just make sure you make the right one for you.

So thank you for listening to "Social Security & You."

I'm Mary Beth Franklin.

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