Smart Social Security Decisions for Women

The US Department of Labor estimates that almost 90% of women will end up solely responsible for their financial well-being.  Given that women tend to earn less than men over their lifetimes to begin with, and may spend a good deal of time out of the workforce to care for families, women facing retirement may have fewer retirement resources, maximizing Social Security benefits available is critical.

The first thing for women (and men for that matter) to understand is how Social Security benefits are calculated in the first place.  To be eligible for Social Security, you need to have been employed in a job that participates in the Social Security system for about 10 years.  The benefit amount is calculated based on your highest 35 years of earnings, indexed for wage increases over the years.  If you haven’t worked for 35 years, years you were out of the workforce will count as zero, and naturally bring the average down.

On the other end, earnings are capped at an amount determined annually, and earnings only count up to that amount, no matter how high they may be.  In 2010 that cap is $106,800.  Those 35 years of earnings are then converted to a monthly amount, to come up with your “average indexed monthly earnings,” or AIME.

That number then goes through a calculation to come up with your monthly benefit amount, or “primary insurance amount,” PIA.  Obviously, if you have several years of zero or low earnings, that is going to bring down your PIA.  One way to increase your benefit, if you are now earning a higher wage is to stay in the workforce long enough to replace those years with your current higher earnings.  This is especially important for a never married woman.

When it comes time to collect Social Security, if you are married, you can either claim your own benefit, or 50% of your spouse’s, whichever is greater.  If you are divorced, and were married for at least ten years, you can still claim based on his earnings, as long as you are 62 or older and still unmarried, regardless of whether he has started receiving benefits yet or not.  It doesn’t matter if you haven’t seen your ex-husband for many years; you can apply without his knowledge or consent; no messy conversations asking for his earnings records necessary!

You do have to be divorced at least two years though, and he has to be eligible for benefits and at least age 62.  If you wait until your full retirement age, you will receive 50% of his benefit, but if you claim benefits at age 62, you can only receive 35%.  It doesn’t matter, either, how many ex-wives your husband has; they all can claim on his record, without affecting the other ex’s.

Social Security provides for a survivor benefit for both wives and ex-wives.  If your spouse (or ex) dies, you may apply for survivor benefits from age 60 on.  But again, if you apply prior to full retirement age, your benefits are reduced.  At full retirement age, the wife’s amount is 100% of the husband’s.  One strategy to explore, if  the benefit amount on your own is close to your late husband’s, is to claim a reduced survivor benefit at age 60, and then switch to your own benefit at your full retirement age.

A variation of this strategy for married couples, assuming you are the lower earning spouse:  you claim your benefit at age 66 (or your full retirement age if different), and your husband claims a spousal benefit based on your record also at full retirement age, then delays claiming his own benefit to age 70.

The usefulness of these strategies depends on a number of factors and break even analyses.  There are a number of calculators and tools available on the Social Security website to give you a start.  Here are just two:

SSA Benefit Calculators

Retirement Estimator

You may also wish to speak with a Social Security representative (they are very helpful) or a financial planner to crunch the numbers.

About the author

Erin Baehr CFP®, EA

Financial Advice for Everyday Life

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