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Personal Finance: Women and Social Security

Wednesday, February 04, 2015

 

Social Security is a gender neutral system.  Benefits are payable to any worker who qualifies as a result of their work history.  In the case of married couples, either spouse can claim a spousal benefit (though not both simultaneously) and either is entitled to a survivor benefit on the death of the other spouse.

In spite of the Social Security system’s gender neutrality, there are several reasons why women in particular stand to benefit more from prudent benefit claiming decisions, both as individuals and as spouses in a marriage.  The following are some key factors that make the Social Security claiming decision especially critical for women.

Women Tend to Earn Less than Men

Statistically women as a group earn approximately 77 percent of what men earn for full-time employment in spite of significant gains in recent years.  In addition, married women tend to have shorter work histories as a result of leaving the work force due to pregnancy or in order to care for children or other family members.  As a result, women on average receive lower Social Security benefits than men given that Social Security retirement benefits are based on total career earnings.

Women Live Longer

The average life expectancy at age 65 for a woman is 20 years, compared to 17 years for a man (Society of Actuaries Simple Life Expectancy Calculator).  As a result, women need their retirement income to support their needs for a longer time.

Women Are More Likely to Be Single in Retirement 

Compared to men, women are more likely to be single, widowed or divorced in retirement.  Single women must rely entirely on their own sources of income, including Social Security, in retirement.  Divorced women may qualify for spousal or survivor benefits based on their former spouse’s employment record but must have been married for at least 10 years to qualify, in addition to meeting other requirements.  

Given the above realities, what can women do to increase their income security by utilizing the Social Security system to best effect?

  • Improve Your Earnings Record: Social Security retirement benefits are based on a formula that averages your highest 35 years of career earnings upon which you paid Social Security taxes.  If a woman has low earning or zero-earning years in her past, a guaranteed way to increase her retirement benefit is to return to the work force, if possible.  To the extent a woman earns more upon returning to the work force than in prior years, her Social Security retirement benefit will automatically increase.

 

  • Encourage a Husband to Delay His Social Security Retirement Benefit: As noted above, women tend to have lower Social Security retirement benefits and live longer than their husbands.    Given that the higher retirement benefit survives the first death in a marriage and becomes the surviving spouse’s benefit for life, it is important for wives to encourage their husbands to maximize their typically higher retirement benefit by delaying it, preferably to age 70.  This can be done via advanced claiming strategies such as file and suspend and results in an 8%/year retirement benefit increase.  For higher earning husbands who delay their retirement benefit to age 70 and whose full retirement age is 66, delayed credits will increase the retirement benefit by 32%, creating additional income while both spouses are living and a higher survivor benefit upon the death of one.

 

  • Take Advantage of Divorced Spouse Benefits: Given that more women are single in retirement due to divorce than men, it is important for divorcees to understand the rules for claiming Social Security spousal or survivor benefits as a former spouse.   If a previous marriage lasted at least 10 years and a divorcee has not remarried, she may be entitled to a divorced spouse benefit on the record of her former husband.    Similarly, a divorcee who has not remarried before age 60 may be entitled to a survivor benefit on the record of a deceased ex-spouse, again as long as the previous marriage lasted at least 10 years.  It is an unfortunate reality that many divorcees are not aware of their rights as former spouses and fail to contact the Social Security Administration to claim these valuable benefits. 

 

  • Coordinate Multiple Benefits to Optimize Income: It is possible for a woman to be entitled to her own retirement benefit, a spousal benefit and a survivor benefit.  Knowing which of these benefits to claim at what time and how is critical in order to take full advantage of them to maximize lifetime income.  The rules for coordinating benefits are complex and easy to get wrong so working with an adviser with expertise in Social Security planning is a good idea.

 

Social Security planning is critical for everyone but even more so for women given their greater longevity and the financial challenges they face.  As a woman, actively seek to maximize your Social Security benefits using the strategies outlined above.  Doing so will go a long way to improve your retirement security by tapping into this unique source of guaranteed lifetime retirement income.

Readers with questions on personal finance and Social Security can email Joe Alfonso at [email protected].

Joe Alfonso, CFP®, ChFC, EA regularly writes on financial topics and is an expert on Social Security planning. He is founder of the Fee-Only financial planning firm Aegis Financial Advisory in Lake Oswego, Ore., and is the principal advisor for the firm. Joe is a CERTIFIED FINANCIAL PLANNER™ professional and an Enrolled Agent, admitted to practice before the IRS to represent taxpayers at all administrative levels for audits, collections, and appeals. He is a member of The National Association of Personal Financial Advisors (NAPFA).

 

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