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#14 - Top 5 Things Every Woman Should Know About Social Security

As Eleanor Roosevelt once said; “A little simplification would be the first step toward rational living, I think”

In this episode, Eric discusses important aspects of Social Security benefits, specifically for women who are looking to financial plan and navigate their portfolios. He covers topics such as social security filing strategies, the three keys to a successful retirement for women, eligibility requirements for benefits, spousal benefits, and survivor benefits, the impact of age on benefits, and challenges faced by business owners in saving for retirement.

 Key Highlights: 

  • Social security as a guaranteed retirement income source that increases annually
  • Eligibility requirements for Social Security retirement benefits
  • Spousal benefits and eligibility based on spouse's or ex-spouse's work history
  • Filing benefits off of a spouse's work history does not reduce benefits
  • Choosing benefits if married multiple times for at least ten years each
  • And more!

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Episode Transcript

Wendy McConnell - Today, we're going to talk about the five things all women should know about Social Security.

Eric Blake - Social Security is one of the most undervalued aspects of retirement income planning. It gets a bad rap, and maybe it should. But Social Security isn’t being used today for the purpose it was originally designed for. Still, I think making sure that you evaluate your Social Security filing strategies and understanding what your options are is important, especially for women who are planning for retirement on their own. 

I think the three keys to a successful retirement for women are making sure you minimize your lifetime tax liability, investing smarter, and optimizing Social Security. Not necessarily in that order of priority. But that third one is such an undervalued aspect, and I want to make sure we talk about what I think are the five keys to Social Security that all women need to know.

Wendy McConnell - I think it's been beaten into our heads that you can't depend on Social Security, so none of us are depending on it. But you're right. As of right now, it's something that can be and should be utilized.

Eric Blake - Right. Many people aren't going to be able to live on it as their sole source of income, but Social Security is the one retirement income source that is guaranteed for life and will also increase every year based on a cost-of-living adjustment. There's nothing else out there that offers that. So that's why you've got to make sure you're making the right decisions, and for women, making sure you're involved in that decision is crucial as well.

Wendy McConnell - Okay. So, tell me, what’s the first thing we should know about Social Security?

Eric Blake - First is just understanding what it takes to be eligible for a retirement benefit. Because it really doesn't take a whole lot. It takes at least ten years of Social Security earnings to qualify for some type of retirement benefit. Understanding how that ten years works is important because you need 40 credits to be eligible. You can earn up to four credits per year, so four per year times ten is 40 total credits that get you a Social Security retirement benefit.

The other thing to understand is that it doesn't take a whole lot of earnings to get a credit. For 2023, for example, you only need to earn $1,640 to get a credit. Again, you can only earn four per year, but if you're a seasonal worker or a part-time worker, if you make about $6,500 in earnings for the year, it counts as a full year of Social Security earnings credit. I think people need to understand that. It doesn't take a whole lot to get there. 

I always use my wife as an example. She taught for 25 years, and now, because she wanted to make sure she got her kid-fix, she works as a crossing guard. She doesn’t make a whole lot of money. She does it because she wants to tell dad jokes to the kids. She works one hour in the morning and one hour in the afternoon only during the school year. But she earns enough to get Social Security credit for those earnings.

Eric Blake - Number two is spousal benefits. We know there are many situations where women take time out of the workforce, or maybe they don't have an earnings history at all. Maybe they just took some years off because they were taking care of family, taking care of children. If you qualify, you may also be eligible for a benefit based on your spouse's work history or even your ex-spouse's work history. If it's a spousal benefit or an ex-spousal benefit, it's not technically a retirement benefit, but you can earn up to 50% of your spouse's benefit. 

You have to have been married for at least a year before you're eligible for a spousal benefit based on your spouse's work history, and as an ex-spouse, you need to have been married for at least ten full years to be eligible for a benefit. You can’t imagine how many women I’ve talked to who don't realize that they may be eligible for a benefit from their ex-spouse. It happened to my mom. I'm sure she gets tired of me telling the story, but she made a mistake. She was divorced and filed for her own benefit, she could have filed off of her ex, and it would have made a big difference in her lifetime benefit.

Wendy McConnell - So let me ask you this. If you’re married or divorced and you have the option of going with a spousal benefit, it's either a spousal benefit or your own Social Security, not both, right?

Eric Blake – Right. You get one or the other; it's 50% of your spouse's benefit or 100% of your own, whichever is higher. Let's say your spouse's benefit is $2,000, and your benefit is $750. Half of that spouse's benefit is $1000, which is more than $750, so in that case, if you were to file,  you would be eligible to get the $1,000 benefit rather than your smaller $750 benefit from your own work record.

Wendy McConnell - Is that a requirement then? Because I'm thinking of it this way … if I use a spousal benefit, that cuts the spouse's benefit in half. He's only going to get half, and I'm going to get half.

Eric Blake - No. That’s a great point. I'm glad you asked. If the husband has a $2,000 retirement benefit of his own and his ex-wife or wife didn't have any work history and has no retirement benefit at all, she’s eligible to receive 50% of the working ex-spouse's benefit with no impact on the working spouse. The husband can still receive his $2,000 a month while his spouse or ex-spouse receives a $1,000 a month spousal benefit. So that's a $3,000 total benefit between the two. 

Wendy McConnell - Okay, that makes sense. I like that a lot because my thought was, well, if it's going to be half, then I'll still take mine, and he can keep his full. But it doesn't work that way.

Eric Blake - It doesn’t work that way at all, and I’m glad you asked for the clarification of that. The benefits don't get reduced based on a spouse filing for benefits on their spouse or ex-spouse's work history.

Wendy McConnell - What happens if you remarry?

Eric Blake - If you get divorced, and you’ve been married for ten years, you're eligible for an ex-spouse benefit of 50% of that ex-spouse's benefit, but if you remarry, you’re no longer eligible for an ex-spouse benefit unless this next marriage ends in divorce. As soon as you remarry, you’re no longer eligible for an ex-spouse benefit from a previous spouse. Of course, you could be eligible for a spousal benefit from your new spouse once you've been married for at least one year. 

Wendy McConnell - So if I get divorced from the second marriage in three years, I can go back to the first husband and take the spousal benefit from that.

Eric Blake – Yes, if you were married for at least ten years in that first marriage. 

Wendy McConnell - So if the second marriage doesn't last as long as the first marriage and you’re not eligible for spousal benefits from that second marriage, you can still go back to the first marriage.

Eric Blake - Yes. Now, here's a crazy scenario that wouldn't have been considered 50 years ago. As long as each of those marriages lasted more than ten years, the ex-spouse could choose which of the benefits they want to take. If you were married three times for at least 30 years, no less than ten years each, you can choose which of those three spouses you want to take the ex-spouse or spousal benefit from. And none of their benefits get impacted. They may not necessarily like that you can do it, but they can't really do anything about it.

Wendy McConnell - Well, it's not hurting them anyway.

Eric Blake - Let's say the ex-spouse you chose to take benefits from is actually currently married. It also doesn't impact their current spouse's benefit. 

Wendy McConnell - So somebody can just go along and keep getting spouses and…

Eric Blake - The ten-year requirement is a long time. If you live long enough to have multiple ten-year marriages, then all the best to you.

Wendy McConnell - Let's go on to number three.

Eric Blake - Survivor benefits. Talk about being undervalued. As it relates to Social Security benefits, I think survivor benefits may be the most undervalued aspect of the five we're talking about. It’s especially important for women because, statistically speaking, the wife is going to outlive the husband. That's just the way the numbers work. Women typically outlive men.

So just hitting on some of the key points here around survivor benefits. If your current spouse passes away, as long as you were married for at least nine months, you’re eligible for a survivor benefit from that spouse, unless it was some type of accident. That's the only scenario where you could be eligible for a survivor benefit with a shorter marriage. If there was an accident, you may still be eligible for a survivor benefit. 

And it’s the same ten-year number for an ex-spouse’s survivor benefits. If you were married to your ex-spouse for at least ten years, you could be eligible for a survivor benefit if they die. 

A key difference between the spousal benefit and the ex-spouse survivor benefit is that if you remarry before the age of 60, you’re no longer eligible for any type of survivor benefit based on an ex-spouse. If you marry after you turn 60, you could still be eligible for a survivor benefit based on an ex-spouse, even if you're still married, as long as you didn't get married until after the age of 60.

The big thing to remember about survivor benefits is that it’s 100% of that spouse's benefit at the time they passed or what they’d have been eligible for at the time. That's a key differentiator from the spousal benefit, which is a maximum of 50%. In survivor benefits, you receive 100% of the deceased spouse's benefit. The other variation that confuses many people is, let's say, both of you are 75 years old. Your husband's receiving a Social Security benefit, and you’re receiving a Social Security benefit. Your husband's is $2,000 and yours is $1,500. If the husband passes away, the spouse can switch to his higher benefit and start receiving a $2,000 per month benefit. But her $1,500 benefit goes away completely. She's only going to have $2,000 a month in Social Security benefits. She doesn't get to keep hers or get it cut in half or anything like that. One benefit goes away, and she keeps the higher of the two.

This is why I always tell women how important it is for them to be involved, if not the decision-maker. I encourage the wife to be the decision maker when it comes to "when are we going to start Social Security?" It needs to be a joint conversation because the statistics tell us it's more likely that she's going to get impacted negatively by the wrong decision.

Wendy McConnell - Do survivor benefits start at age 67, the retirement age?

Eric Blake - It depends on the spouse’s age when he passes away. If you're both younger than age 60, you’d first be eligible for a survivor benefit at the age of 60. That's the earliest you could be eligible, which is, again, different than the retirement age, which we'll touch on in just a second. The earliest you can start a retirement benefit is 62, but you can start survivor benefits as early as age 60. If you happen to be disabled, you could potentially start those benefits as early as age 50. But keep in mind that the earlier you start, the more reduced the amount you're going to receive. 

Wendy McConnell - Okay. It's always that decision. I could live a long time, but I could also get hit by a bus tomorrow.

Eric Blake - That's a conversation that happens a lot. Sometimes it's hard to overcome, especially if a wife has gone through an emotional situation. You know, it's hard to make a rational decision, especially when you're going to be losing some type of income.

It becomes harder to make a decision based on longevity, but in most cases, longevity should win out. Unfortunately, it's not always the case that that's how the decision gets made. 

Wendy McConnell - Which kind of leads us into number four, which is delayed retirement credits. 

Eric Blake - The earliest you can start your retirement benefits is 62. But the earlier you start, the more of a reduction it's going to be. Full retirement age is the age you see when you log in. And you should be logging in. You log in and find my full retirement age and see the benefit you’d receive if you wait til your full retirement age. Typically, that’s anywhere between the age of 66 and 67, depending on your birthday. 

If you start at 62, your benefit could be reduced by as much as 30%, so a benefit of $2,000 becomes $1,300 a month, and that difference in benefit gets compounded over time because you're also receiving your cost-of-living increases based on that lower amount as well.

Once you turn 62, you're eligible to receive benefits if you choose to. But for every year you wait, you get about an 8% increase in benefits, until you get to full retirement age, and then you can actually extend it all the way to age 70. That’s the maximum age you’d want to start benefits. You don't get any additional benefits by waiting beyond 70.

Full retirement age is important because it’s also the age where there's no impact if you choose to or need to continue working. If you reach full retirement age and you still want to or need to work, you can receive you can apply for and receive whatever you're eligible for, whatever your full retirement age benefit is, and continue to work with no reduction in benefits because you’re working. That's the other caveat with starting early. You’re subject to what's called the Earnings Test, so you can only earn certain amounts before reaching full retirement age because of your earnings potential.

I tell people if they can make enough money to live on, don't use that as a reason to not work. In 2023, if you're more than a year from your full retirement age, you can earn $21,240 before your benefit gets impacted. If you’re a part-time worker and your benefit is $2,000 a month, you're able to earn $15,000 a year doing something part-time, something you enjoy. That's a great strategy because it doesn't impact your Social Security benefit. You're earning a little money to cover your expenses, and maybe it allows you to delay tapping into your retirement assets or your investment accounts. 

But if somebody comes to me and says, “I got this job offer, I'm going to be able to make $60,000 a year", then go make $60,000 a year. Don't use the fact that it’s going to reduce your Social Security as a reason not to work because, well, it's benefits. You don't actually lose it. You might get it reduced in that particular year, but what actually happens is it gets deferred. It gets pushed off into the future. Once you reach full retirement age, it gets recalculated into your benefit at that full retirement age. So you don't lose the benefit. It gets pushed into the future for you.

Wendy McConnell - Okay. I like that better because that's not what I've heard in the past. That’s a nice clarification.

Eric Blake - Yes, people think, “I'm going to lose my benefits if I do that.” No, it's going to get reduced this year, but you're going to get it in the future.

Wendy McConnell - Okay. So what's the last one?

Eric Blake - Work history. The impact of your work history. There are a lot of different variables we could look at with this. The most important one is that it's your highest 35 years of earnings that determines your benefit. There's so much confusion, because people think maybe it's five years, or your last five years, or maybe it's three years, maybe it's 20 years. The right answer is it's your highest 35 years of earnings history that determines your Social Security benefit.

The reason that's important is if you've been out of the workforce for any reason. You stayed home to take care of children.. you had to take time out to care for family... you went back to school. Anything that means you've got years with zeros in there. For every year, even if you earn just a little bit, that counts towards Social Security. Every year you can earn something, it replaces a zero year with a something year.

If it's $5,000, $10,000, anything you earn will improve your benefit because you're replacing zero years with positive earnings years. That can make a huge difference. I had a scenario last year where a client got a letter from Social Security, and she called and said, “Do you know why my Social Security went up more than just the cost of living increase? When I read it, I explained that it was because she was still working. She was in her 70s, but she was consulting, earning a good salary, 

Wendy McConnell - So they were still counting that.

Eric Blake - They were still counting. Those extra years of earnings were replacing lower years from the past, so she was making more in the current year than she’d made in some prior year. That improved her 35-year average, so her benefit went up even more than just the basic cost of living increase. That can be huge. 

We're talking lifetime guaranteed income with cost of living adjustments every single year. So that's why work is never a reason to make a decision on Social Security. You have to look at your entire situation and do the math. There are some great calculators on this website. We'll talk about that in the action items. Talk to your financial advisor and have them crunch the numbers for you. Ask what happens if I decide I want to work another two, three, four, or five years or longer. Is that going to improve my Social Security benefit? Make an educated decision.

Wendy McConnell - What if you're a business owner?

Eric Blake - Business owners are notorious for recognizing as little income as possible because they don't want to pay taxes. I hate taxes too, but what they often don't realize until it's too late is that all those years where they were cash flow-rich income poor impacts their Social Security benefit. 

Let's say you had a net cash flow of $100,000 a year, but you only had $25,000 in taxable income. $25,000 is what determines your Social Security benefit, and if you had a loss, that's a zero Social Security earnings year. It hurts, and many people are surprised. 

They started working when they were 12 or 15 years old. They've been working for more than 35 years, but they've got zeros mixed in... they've got low-income years mixed in because they didn’t want to pay taxes. They didn't want those self-employment taxes. That's the thing people don't think of. They hear it's self-employment taxes and don't realize that's basically the other half of Social Security. As an employee, I'm putting money into Social Security and Medicare, and my employer is also putting in the other half, so there's the two parts. If you're self-employed, you're paying both halves. 

Wendy McConnell - You're paying as both employer and employee.

Eric Blake - Right. Business owners put their heart and soul into their business, and maybe they don't save a whole lot. Not only have they reduced their Social Security potential, they also haven't saved as much as they probably needed to. 

Wendy McConnell – Okay, let's go over some of the action items.

Eric Blake - Absolutely. The first thing I’d suggest is a webinar I did earlier this year called Savvy Social Security Planning for Women. It’s on our website. Go to the Retirement Insights tab, to the drop-down there. It's a little bit less than an hour, but we go into much more detail on these topics, spousal benefits, ex-spousal benefits, and different examples. You can see how the math works. That would be a great place to start. 

The second thing would be to go to the Social Security website. Go to SSA gov. If you haven't created an account, do so. They have those frustrating questions you have to answer about what car you had in 1985 or whatever it might be.

Wendy McConnell - Identity questions

Eric Blake - Yes. Once you’re on, you can find out what your full retirement age benefit is and see your earnings history. How many years have I worked? How many credits do I have? You can also check your earnings history. Does it look accurate? Is there a zero year where there probably should be a number? Make sure you're double-checking that.  It’s also a good idea to check because it’s not unheard of for people to get hold of somebody's Social Security number and start claiming benefits. Anyway, see how many credits you have because it's pretty easy to say, well, if I've got 25 years of earnings, I need to work another ten years to get to that 35-year mark.

Number three is to understand your full retirement age. What does it mean, and what is your full retirement age? There have been some changes. The most significant Social Security changes we saw were back in 1983 when they extended the full retirement age to what it is now, 67. They did it in stages, so if you were born in late 1960 or later, it's pretty easy. Your full retirement age is 67. If you're born before that, it's going to be 66 and some months, 66 and four months, six months, eight months, ten months, whatever it might be, depending on your specific year of birth. Your full retirement age tells you your full retirement age benefit. One of the reasons that's important is because if you have to or want to continue working, that's the age where you can continue working and receive your full benefit with no impact because of how much you're earning. That's a big number.

We talked about this a little bit, but again, printing out how many earnings years you have, whether you have 20 years or five years, maybe you have 30 years or 40 years. You can use that information to determine whether to continue working longer and if it’s going to make an impact. There are some people for whom it makes a significant impact, and for others, it's a few bucks. You can use that information to make a decision.

Wendy McConnell - So what's next?

Eric Blake - If you’ve been divorced or widowed, make sure you know whether you’re eligible for a spousal or ex-spousal benefit or any type of survivor benefits. 

Wendy McConnell - And finally….

Eric Blake - Again, I hit on this once before, but I can't tell you how important it is that, as a wife, you’re involved in the decision-making process when it comes to when you’re going to start Social Security. If you're part of a married couple, be involved in the decision. If you're single, widowed, or divorced and you haven't remarried, it's basically up to you. You've got to make that decision, consult an advisor, and find out what's going to be the most effective way of optimizing your Social Security benefit. But if you’re part of a married couple, be involved in the conversation again.

Wendy McConnell - I feel like I learned a lot today.

Eric Blake - I'm glad to hear it. Thank you again for joining me and helping me keep things on track, as always. Please like, follow, and share this podcast. If you’d like to learn more about our firm, please visit our website at www.blakewealthmanagement.com. You can learn more about our team, download and review our free resources. Sign up for our newsletter, and if and only if you feel you're ready, click the "Start Here" button to review our Simply Retirement Roadmap Process™. This is our process for helping you make an educated and informed decision about whether we’re the right firm to help you navigate your retirement journey. 

And remember, retirement is not the end of the road. It’s the start of a new journey.

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