Social Security: Making up for lost time

A few weeks ago, I had the pleasure of speaking at a retirement income conference in southern California, sponsored by two groups promoting financial literacy for women: WomanSage and Women Investing in Security and Education. One of my hosts, who chauffeured me to several events, said that she had personally benefited from my advice. I was thrilled. The woman, who asked to remain anonymous, is 67 and self-employed. She plans to keep working and hadn't expected to collect any Social Security benefits until they were worth the maximum amount at age 70. Her husband is 71, retired, and collecting his Social Security retirement benefits. "I had planned to wait until 70 to collect, but then I read your columns and realized I was missing out," she told me as we drove to dinner to meet the board members of both sponsoring groups. She had already reached the magic age of 66 — and done nothing. Recently, she contacted the Social Security Administration and filed a restricted claim for spousal benefits. That entitled her to half her husband's full retirement age benefit amount while allowing her own benefits to continue to grow, accruing delayed retirement credits worth 8% per year between ages 66 and 70. At 70, she will switch to her own retirement benefit which will be worth 132% of her full retirement age amount, plus any intervening annual cost-of-living adjustments. But she was frustrated that she had missed out on a year's worth of spousal benefits. Luckily, she asked if she was entitled to any retroactive benefits. In fact, she was. Social Security can pay a lump sum of up to six months of retroactive benefits beginning at full retirement age. She was happy with the news but asked the Social Security representative why they didn't send her a letter telling her she was missing out on benefits. "We don't do that," the rep told her. Normally, when one collects retirement benefits, accepting a lump sum reduces the amount of the future retirement payments. For example, if she applied for her own retirement benefits at 67 and accepted a lump sum payout worth six months of retroactive benefits, her future benefits would be computed as if she collected at 66 and six months, rather than 67. In that case, she would have earned just 4% of delayed retirement credits instead of 8%. But because she was restricting her claim to spousal benefits, which are never worth more than 50% of her husband's full retirement age benefit, collecting a lump sum made perfect sense. So she received a lump sum payout of six months' worth of spousal benefits and will continue to collect her full spousal benefits until she switches to her own enhanced benefit at 70.