The Definitive Guide to Social Security Planning for Women in 2020

Today we are going to cover everything you need to know to take full advantage of your social security benefits.

I am going to show you:

-Why Social Security is important to women?

-Do I qualify for a benefit and if so when?

-How much will my benefit be?  

-Can I work and still get my benefit?

-Can I take my husband’s benefit?

-What if I am divorced?

-What if my husband dies?

-How do I maximize my social security benefit now and in the future?

-Do I have to pay taxes on my benefit?

-and more!

Throughout this guide we will refer to things from a woman’s point of view. The strategies we talk about, however, are gender neutral.  Men can benefit from understanding these strategies just the same.  

Let's dive right in! 

Why is social security important to women? 

Well for starters there are more women collecting Social Security Benefits.  In 2018, women made up about 55% of all social security beneficiaries over 62.  Of those over age 85, women represent about 65%.  

There isn’t a disproportionate number of women born each year vs men. Women simply live longer on average.  According to SSA’s Office of the Chief Actuary, women reaching age 65 in 2018 are expected to live, on average, an additional 21.4 years compared with 18.9 years for men.

Next, although we have come a long way, I don’t think anyone is naïve enough to think that we have reached the point of gender pay equality in the United States.  In fact, depending on the study, women earn about $0.81 on the $1 compared to male counterparts.  

Making less in the same job is one factor. Another factor is under representation of women in high ranking roles.  Men hold 62% of manager-level positions. The number of women decreases at every subsequent level.

This leads to lower lifetime earnings for women.  Lower earnings typically mean less money to save towards retirement and lower pensions (do those still exist?).  Social Security may have to make up a bigger portion of a women’s retirement income to make up the gap. 

Understanding the Value of Social Security

Social Security offers you an income you cannot outlive.  This is especially beneficial if you have a longer life expectancy (looking at you women).  If your monthly benefit starts out at $2000 and you live for 10 more years (assuming no COLA - which we will cover next), you would have received almost a quarter of a million dollars from Social Security.  If you live 30 years, you will receive $720,000!  

The very first recipient of a Social Security Benefit was a woman by the name of Ida May Fuller.  She started drawing her benefit in January 1940 at the age of 65.  She then proceeded to crush her life expectancy and live to the ripe old age of 100. She received $22,888.92 and only contributed $22.54!

As you can see, it pays to live a long time.  This becomes even more obvious when we factor in COLAs.  No, not that kind of Cola.  Although thanks to COLAs you should be able to buy a few more Cokes each month.

COLA, stands for Cost of Living Adjustments.  Since 1975 the Social Security Administration has had the ability to increase benefits across the board each year.  The amount is determined using the Consumer Price Index for Urban Wage Earners and Clerical Workers or CPW-I.  They then apply a formula (which I won’t get into because we would all fall asleep) to determine what the COLA will be that year.  

In 2019, the COLA was 1.6%.   It was 2.8, 2.0, 0.3 and 0 in the previous 4 years, respectively.  As you can see, this number can vary greatly and sometimes may be 0.  Some folks also claim that Medicare premiums tend to rise along with COLA (or even faster) so that extra cash doesn’t necessarily make a big impact for most retirees.  

Let’s go back to the previous example to see how COLA impacts benefits over a long life.  If we apply an average 2.7% yearly COLA to a $2000 monthly benefit, the benefit will become $2611 after 10 years.  After 30 years, the benefit will have grown to $4448. More than double the original monthly benefit!

How does Social Security Work? 

By now it should be clear how valuable Social Security can be for a retiree and why it is extra important to women.  Now we are going to discuss how to qualify for a benefit and the different rules based on marital status.  

How Do I Qualify for my own benefit? 

To qualify for a benefit of your own you must have worked in a job covered by Social Security for at least 10 years (more specifically 40 quarters).  These do not have to be consecutive.  

Once you qualify, you need to ask yourself a few questions:

• Are you currently married? Has your husband started receiving his Social Security benefit?

• Have there been any prior marriages?

• Did the marriage(s) end by death or divorce?

• If by divorce, did marriage last at least 10 years?

• Is ex-husband still living? Is he over 62?

• If a former husband is deceased and you are currently married, did this marriage occur before or after age 60?

Depending on how you answer these questions, you could qualify for one of the following benefits:

• Retirement Benefit

• Spousal Benefit

• Divorced Spousal Benefit

• Survivor Benefit

When Can I take a Benefit? 

An important term to remember is “Full Retirement Age” or FRA as the cool kids call it.  This is the age when you are eligible for your Primary Insurance Amount or PIA.  So, you get your PIA at your FRA.  Remember that.  

Your FRA depends on the year you were born.  See the chart below.  They made it simple by randomly adding 2 months to the FRA every year for 6 years 😉.

1943-54                                              66

   1955                                   66 and 2 months

   1956                                   66 and 4 months

   1957                                   66 and 6 months

   1958                                   66 and 8 months

   1959                                   66 and 10 months

   1960 and later                   67

So, how is your PIA determined?

Well, there is a complicated formula that is beyond the scope of this article.  The easiest thing to do is just look at your Social Security Statement or go to SSA.gov.  It will say something like this:

“You have earned enough credits to qualify for benefits. At your current earnings rate, if you continue working until your Full Retirement age (XX Years) your payment would be about….$XXXX.XX”

This number is your Primary Insurance Amount or PIA.  

You can begin drawing your benefit as early as 62, but it will be reduced.  For each month you draw prior to FRA, your PIA will be reduced by a set percentage.  

Example: You get 75% of your PIA if your FRA is 66 and you begin drawing at 62.  Your $2000 monthly benefit would become $1500. Permanently.

You can also delay your benefit and earn what are called delayed credits.  Each year you delay past your FRA, you receive an 8% delayed Credit.  You get no additional credit for delaying past 70.  

Example: If you delay until 70 and your FRA is 66 you will receive 132% of your PIA.  Your $2000 benefit will become $2640.

If you factor in an average COLA, your benefit could be over $3000 at age 70! If you plan to live a long time, it pays to delay.

One extremely important fact to consider is that the longer you live the greater this gap will become.   Especially when factoring in COLA.   

Let’s look at age 85. A $2000/mo PIA and 2.7% COLA.  If you had start drawing at 62 your benefit will be $2768 at age 85.  Not bad.  If you had delay until 70 your benefit would now be $4872!  That’s over $25,000 a year difference!    

Want another reason to consider not drawing before FRA?

No? Well here’s one anyway.   The Earnings Test.  Essentially the SSA does not want you to take your benefit early and keep working in your full-time job.  In order to “enforce” this desire, they put a cap on the amount of money you can earn and still receive a benefit.  Remember, this only applies when you are under your Full Retirement Age. How it works, depends on which you group you fall into:

• Beneficiaries who will reach FRA after the 2020 - You will be limited to $18,240 annualized or $1520/mo.  For every $2 you earn over that threshold $1 will be withheld from your benefit.

• Beneficiaries who will reach FRA during 2020 - You have a much more generous threshold of $48,600 annualized or $4050/mo.  Now for every $3 you earn over the threshold $1 dollar will be withheld from your benefit.   And you only need to consider the months before your birthday.  So, if your birthday is in March, you only have to be concerned with income earned in January and February.  

• Beneficiaries who reached FRA before 2020 -Congratulations! You have no restrictions on the amount of money you can earn while still receiving your full benefit.  

What if you plan to retire in 2020?  Well if you permanently stop working at any point in 2020 you can receive your benefit for the rest of the year with no issues.  

What about other retirement income like pensions, IRA’s or rental property?  Fortunately, these do not impact your Social Security benefit with regards to the Earnings Test.  Only earnings that you are required to pay FICA/Self Employment tax on are counted towards your income for the earnings test.  

This is not a penalty.   Once you now longer have earned income over the threshold, your benefit will be recalculated factoring in any benefit that was withheld.

 Spousal Benefits

If you are married, you will need to consider how to coordinate your benefit with your husband.   Thanks to an amendment passed in 1939, you are entitled to 50% of your husband’s  benefit if you apply at your FRA.  If you were born after January 1, 1954, you will automatically receive the higher of your own benefit or your Spousal benefit when you apply.  

Example: John’s PIA is $2000.  Sally’s FRA is 66.  Sally can claim $1000/mo in spousal benefit if she applies at age 66.  If she applies early, her spousal benefit will be reduced.   

You must be at least 62 years old to claim a spousal benefit (although technically this would be called a Spousal Add-On) and your husband must have already claimed his benefit.

A spousal benefit can still be subject to the Earnings Test.  The age of the spouse with earnings is what is important here.  So, if the spouse that has earnings is under FRA you need to apply the earnings test rules we discussed earlier.  

Key Point- it does not matter when your husband files.  Spousal benefit will not be reduced for your husband filing early or increased if he delays.   

Savvy Spousal Strategy

For anyone born on or before January 1, 1954 there is a savvy strategy you will want to be aware of. If you qualify for your own benefit and a spousal benefit, at your Full Retirement age, you can elect to restrict your benefit to your spousal.   You can then let your own benefit delay and receive the 8% credits we spoke about early.  You will need to be clear about this when talking to anyone at the SSA.  This option is phasing out and many are no longer familiar with it.  

Example: John’s PIA is $2000.  Sally’s PIA is $2000.  At her FRA of 66 Sally can restrict her benefit to her Spousal.  She will receive $1000/mo until age 70 at which time she can switch to her own benefit.  Thanks to the 8% credits (and assuming no COLA) her benefit will now be $2640.  

Divorced Spousal Benefits

Divorced spousal benefits work in much the same way as spousal benefits.  There are a few things to note.  To qualify you must have been married (to the same spouse 😉) for at least 10 years, be currently unmarried and your ex-husband has to be at least 62 years old.

IMPORTANT NOTE: If the divorce occurred more than 2 years ago, your ex-husband does not need to have filed for his benefit for you to receive a divorce spousal benefit.  Your ex will not be notified AND it will not affect his benefit!

Example: Dick and Jane are divorced.  They were married at least 10 years and Jane is currently unmarried.  They are both over 62.  Dick’s PIA is $2400.  

When Jane reaches her FRA (let’s assume 66) she can file for a divorced spousal benefit.  She would receive 50% of Dick’s PIA or $1200/mo.   If she chose to file for this benefit early, it would be reduced depending on her claiming age.  

In this scenario Dick’s benefit is not impacted.  He will not be alerted to the fact the Jane is drawing off his record.  As a matter of fact, Dick’s current wife’s benefit will not be affected.  She can still draw spousal benefit if she qualifies.  Dick’s other ex-wives’ benefits will not be affected either.  If they were married to him for 10 years, are 62 or older and unmarried they too can claim a divorced spousal benefit!

I know what you are thinking….uh? Yeah, me too.  

 Savvy Divorced Spousal Strategy

Just like with a spousal strategy, there are opportunities to plan your divorced spousal strategy if you were born on or before January 1, 1954.  In this case you could again restrict your benefit to your divorced spousal and let your own benefit grow at 8% per year until age 70.  

In this case, unlike with the Spousal Strategy, your ex-husband does not have to file you to do this.   And they can do the same thing off your record if they qualify!!  No wonder the system is struggling! 

Survivor Benefits

When your husband or ex-husband dies, there are certain situations where you will qualify to receive a survivor benefit.  

The amount of that benefit depends on two things.

• When the deceased spouse originally claimed their benefit. This is the “original” benefit

• When the widow claims their survivor benefit- This is the “actual” benefit.

So, you can now see that your husbands claiming decision, not only can impact your finances during his lifetime, but could also impact your survivor benefit.

You are eligible to claim a survivor benefit as early as age 60.  If you are disabled, you can claim as early as age 50.  If you claim early, just as with your own or spousal benefit, you will receive a reduced amount.  

One unique rule is you must have been married for at least 9 months.  Do not ask me why.  Also, if you are not currently married and you qualify for a divorced spousal benefit, you also qualify for a divorced-spouse survivor benefit.  

If you do get remarried pay close attention to your age.  If you get remarried before age 60 you no longer qualify for divorced spousal or divorced-spouse survivor benefit.  If you remarry after age 60, you could still be eligible for divorced-spouse survivor benefit, assuming you meet all the other requirements.  

So, how much will you get?

Well you will receive the higher of your husband’s benefit at the time of his death or your own current benefit, but not both.  In other words, you keep the higher benefit amount and lose the lower one.  

Example: Bill and Eileen are married.  They are both age 68.  Bill’s benefit is $3,000.  Eileen’s benefit is $1500.  Their combined monthly benefit from Social Security is $4500.   Bill dies. Eileen loses her $1500/mo benefit and keeps Bill’s $3000.  Her monthly income from social security is cut by 33%.  This may or may not be a concern but is something to plan for.  

Savvy Survivor Benefit Strategy

Although it’s not something you want to think about you need to have a plan on how you will coordinate your survivor benefit and your own benefit.  If you husband passes after your age 70, there really is nothing to plan.   You simply get the higher benefit.   

If you are between age 60 and 69 you will have decision to make.  You could start drawing your survivor benefit as early as age 60 and then delay your own benefit until age 70 to take advantage of the delayed credits.   If your own benefit is higher at age 70, you can then switch over.  You could also take your own benefit at age 62 and delay your survivor benefit until your FRA.  You do not earn delayed credits on Survivor benefits, so there is no need to delay past FRA.

The decision you make will be highly dependent on the rest of your overall situation.  You need to consider all options and make a decision that is best for you individually.  Unfortunately, there is no cookie cutter answer.  

Keep in mind that the earnings test we discussed earlier can still apply to Survivor Benefits if taken before FRA.

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I pay a tax each year I work to qualify for Social Security, so my benefit isn’t taxed, right?

Well, that depends.   The IRS has developed what they call Provisional Income to determine if and what amount of your benefit will be taxable.

Provisional Income = Adjusted Gross Income+ ½ of SS benefits+ tax-exempt interest

You then must check a fancy chart to find your filing status, where your provisional income falls and finally the amount of your benefit subject to income tax.  See fancy chart below. 

As you can see, you don’t get much room before 85% of your benefit becomes taxable.  The good news is, armed with this information you can coordinate your income strategy to reduce provisional income.  How do we do this? By having income, we can pull from that does not show up in your provisional income.  In fact, it’s possible (although difficult) to have $1,000,000 in yearly income and still pay 0% in tax on your social security.

Obviously, the earlier you start this process the better.  That doesn’t mean that you can’t improve your situation even if you are already drawing.  It’s important to work with a knowledgeable financial planner and tax advisor to come up with the best strategy for you. (Hint: If your current advisor hasn’t brought this to your attention, they are doing you a great disservice.)

 Let’s wrap things up

 Why is Social Security important to women? Because women tend to live longer than men and Social Security provides an income you can’t outlive. (Remember our friend Ida May?) You need to know your FRA and your PIA to make any informed decisions. And finally, you would be wise to consider ways to maximize social security and minimize taxes within the context of your overall retirement income plan.  

 So, I’m sure that most of you feel like Social Security Claiming Strategy experts at this point!  For those of you that don’t, we are here to help.   Let’s set up a time to discuss your situation and see if there is anything we can do to improve it.  If you are 50 years old or older now is the time to start making these plans.  

 Click the link below to schedule a 15-minute phone call with us.  We will quickly review your situation and see if it makes sense for us to talk more.  There is no cost or obligation.  If you’ve made it to this point in the article, you understand how important this can be, so what are you waiting for?  Click the link below now!

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1. https://www.ssa.gov/news/press/factsheets/women-alt.pdf
2. https://leanin.org/women-in-the-workplace-2019?gclid=Cj0KCQjwzZj2BRDVARIsABs3l9IZ6monsca1UvuWTfUBLOEMP_bnyN7uaW44bjsNlYYirjXqt_qMYlsaAtHmEALw_wcB