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Ask Larry: Will My Current Lower Income Significantly Reduce My Social Security Retirement Benefit?

Today’s column addresses questions about potential effects of years of lower income before filing, taking spousal benefits before survivor benefits, potential strategies for a married couple ten years apart and taking survivor benefits while delaying retirement benefits till 70. Larry Kotlikoff is a Professor of Economics at Boston University and the founder and president of Economic Security Planning, Inc, which markets Maximize My Social Security and MaxiFi Planner.

See more Ask Larry answers here.

Have Social Security questions of your own you’d like answered? Ask Larry about Social Security here.

Will My Current Lower Income Significantly Reduce My Social Security Retirement Benefit?

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Hi Larry, I’ve enjoyed reading your insights. All of the Social Security calculators I’ve seen assume that I will be making the same income as I did in 2019. Due to COVID-19, many of us are taking pay cuts and being furloughed. I’m in the trade show industry, so it will be a long slog with lower income.

Specifically, I am 62 and furloughed to half pay. Will this lower income significantly reduce my full retirement benefit at 65.5? Are there other considerations that come into play when deciding when to retire during our current economic situation? Thanks, Rebecca

Hi Rebecca, I guess that depends on what amount you consider to be significant, but I think it’s safe to say that any difference in your rate that’s caused by your reduced earnings won’t be substantial. I can’t estimate the effect of your lower earnings in dollars, though, because there are too many variables involved.

Your Social Security retirement benefit rate will be based on an average of your highest 35 years of wage-indexed earnings. So if you’ve already had at least 35 years with earnings on which you’ve paid Social Security taxes, then any current or future earnings that you have would only increase your benefit rate if your earnings in a year are higher than in one of your previous 35 highest years.

Even if you stopped working altogether, though, it wouldn’t reduce your rate. Instead, it would just mean that you wouldn’t be increasing your rate with higher years of earnings.

The benefit calculator in my company’s software — Maximize My Social Security or MaxiFi Planner — allows you to enter your projected current and future earnings so that you can gauge the effect of the new earnings on your benefit rate. The software would also allow you to compare your filing options so that you can determine the best strategy for maximizing your benefits. By the way, your full retirement age (FRA) wouldn’t be 65.5 as you mentioned. If you were born in 1957, your FRA would actually be age 66.5. Social Security calculators provided by other companies or non-profits may provide proper suggestions if they were built with extreme care. Best, Larry

If I Apply For Spousal Benefits Will My Widow’s Compensation Be Reduced?

Hi Larry, I cant find the answer to my Social Security question anywhere. I am 69 and husband is 74. We are both taking our Social Security retirement benefits. I never heard about spousal benefits until the other day. If I apply for spousal benefits, will my widow’s compensation be reduced if my husband passes first? I only get $500 for my retirement benefit. My husband’s is $2,000. Thanks, Carolyn

Hi Carolyn, Drawing spousal benefits would have no adverse effect on your future potential widow’s benefits. And if you can qualify for spousal benefits, you should apply for them as soon as possible. Social Security regulations limit retroactive entitlement of spousal benefits to no more than six months prior to the month you apply for them, and you’d want to claim the maximum retroactivity.

Even though your benefit rate is substantially lower than your husband’s benefit rate, you may still not qualify for spousal benefits, though. The only way you’ll qualify is if 50% of your husband’s primary insurance amount (PIA) is higher than your PIA. A person’s PIA is equal to the amount of their Social Security retirement benefit rate if they start drawing at full retirement age (FRA).

For example, say Mary filed for her Social Security retirement benefits at 62. Mary’s PIA is $800, but she only receives a monthly rate of $600 because she started drawing at age 62. Mary’s husband waited until 70 to start drawing his retirement benefits, and his PIA is $1,500. However, his monthly benefit rate is $1,980, or 32% more than his PIA, because he waited until 70 to start drawing.

In the example above, even though Mary’s husband’s current increased monthly benefit rate is more than three times as much as her rate (i.e. $1,980 vs. $600), Mary doesn’t qualify for spousal benefits because her PIA of $800 is more than 50% of her husband’s $1500 PIA. Best, Larry

What Should My Wife And I Do?

Hi Larry, My wife is 10 years older than me. She is 64 and I am 54. I will have a much higher benefit than she will. My estimated retirement benefit at FRA is ~$3,000 and hers is ~$2,000. What should we do? Thanks, Skip

Hi Skip, Your choices sound pretty straightforward, so it really comes down to what you’re most comfortable doing. Based on your figures, both you and your wife will only receive your own retirement benefits based on your own individual earnings histories for as least as long as both of you are living. And the earlier that each of you starts drawing prior to 70, the lower your individual monthly rates will be.

The surviving member of a couple usually receives the higher of their two benefit rates, so if you die first your wife would qualify for survivor benefits. If you want to provide her with her highest potential survivor rate, you should wait until 70 to start drawing your retirement benefits. Since your benefit rate is higher than your wife’s though, the only way that you’d qualify for survivor benefits is if your wife dies before you start drawing your retirement benefits, in which case you could potentially start out drawing survivor benefits and then switch to your own higher benefits at 70. Best, Larry

Will My Social Security Retirement Benefits Continue To Grow Until 70 If I’m Receiving Widow’s Benefits?

Hi Larry, I am currently 66 and I retired at 61. I started collecting widow’s benefits at 62. Will my personal Social Security retirement benefits continue to grow until I turn 70, and should I go to SSA and see if my retirement benefits are greater than what I am currently receiving? Thanks, Cecelia

Hi Cecelia, Yes, your own Social Security retirement benefit rate would continue to grow until you reach 70 as a result of delayed retirement credits (DRCs). The fact that you’re drawing survivor benefits has no adverse effect on your own retirement benefit rate. And, yes, when you’re nearing 70 it would be a good idea to check with Social Security to see if you could qualify for a higher benefit amount by switching to your own Social Security retirement benefits once they’re as high as they can be when you turn 70. Best, Larry

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