How Women Can Avoid Costly Social Security Errors

Half of women on Social Security depend on it for 90 percent of their income.

— -- For most Americans, Social Security benefits are a critical asset for retirement — an income stream for the rest of your life. The Americans who need these benefits most are women.

Women live longer than men, so they rely on Social Security benefits longer. During their working years, women earn less, so they have lower accumulated assets for retirement. Also, they are less likely than men to have a pension from their employer. As a result, women tend to have a greater need for Social Security. Nearly half of elderly unmarried women rely on these benefits for 90 percent or more of their total income.

As benefit amounts are based on lifetime earnings, the persistent gender pay gap means that women receive substantially lower monthly Social Security checks than men. In 2009, the average annual benefits of men totaled $15,620, compared with $12,155 for women.

So it’s especially critical for women to make the right choices to get the most out of the system that they’ve paid into through Social Security tax all of their working lives. Choosing wrong can cost you plenty in the long run.

Choosing right isn’t easy because the system is extremely complex. There are a lot of misconceptions about how Social Security works. For example, the government doesn’t just send you a check after you retire. To receive benefits, you must claim them according to myriad rules. Many of these rules can have a big impact on the amount of your ultimate cumulative retirement income.

To avoid errors and get the greatest benefits, it’s important to understand how the system works, including:

Every year you wait to claim until you’re 70, your benefits will increase by 8 percent (not including the compounding of these increases. (Benefits also increase over time from cost-of-living adjustments.) After 70 there are no more increases, so this is the longest you should wait to claim. How long you should wait after 62 to claim benefits depends on various factors, including your health. Regardless of their health, some people need to claim early because they need the money. If this isn’t a factor for you, it’s usually better to wait to get the increased benefit.

You can get a good idea of what your eventual benefits will be by visiting the Social Security Administration (SSA) website, creating an account and using the site’s estimator function. Identity thieves sometimes create accounts in the names of others. By creating an account as soon as possible, you can prevent this, as there can only be one account for your Social Security number.

  • The concept of full retirement age (FRA) — a designation by the Social Security administration. Your FRA depends on when you were born. For example, if you were born between 1943 and 1954, your FRA is 66.  You can determine your FRA by consulting the SSA website. For many people, claiming benefits at their FRA brings the greatest total benefits. But many others may need to claim earlier because of financial need. If you claim before your FRA and continue to work, your benefits will be reduced according to a formula. But if you wait until your FRA to claim, there’s no offset: Regardless of how much you earn from continuing to work, you will get the full benefits for claiming at that age. Understanding this dynamic is increasingly important in a society where people are living and working longer.
  • Coordinating with your spouse to determine the best time to claim for your mutual benefit.  Who files when can have a big impact on your combined benefits while you’re both alive and on those of the surviving spouse after one of you dies.
  • The rules on survivors’ benefits. Widowed people are eligible to receive benefits from their late spouses’ accounts. Surviving spouses are eligible for these benefits beginning at age 60, and disabled spouses, at 50. As women live longer than men, most survivors’ benefits go to women.
  • The potential benefits of a claim-and-suspend strategy. Using this strategy, married couples can receive greater combined benefits. Under claim-and-suspend, one spouse claims benefits and then suspends this claim to defer his or her own payments. This makes the other spouse eligible to get benefits on this claim immediately, provided that he or she is at least 62. As men often have greater benefits, this strategy usually provides the best advantage when the husband claims and suspends, allowing the wife to draw spousal benefits on his claims. Then, when she reaches full retirement age, the wife can claim her own benefits.
  • The eligibility of divorced people to make claims on their ex-spouses’ accounts. You can do this if you were married for at least 10 years. This is only an advantage if your ex-spouse’s account would provide greater benefits than your own. Again, as men tend to have larger account totals, this option tends to be more advantageous for women. Making this claim won’t limit the benefits your ex draws. He will still get his full benefits, as if you hadn’t made this claim.
  • Whether married or divorced, women should be aware that they won’t be eligible to receive their own benefits if they haven’t paid into the system out of qualified earnings. This can be a problem for women who haven’t worked enough outside their home because they’ve spent long periods caring for children — work that the government doesn’t acknowledge as qualifying them for benefits. Legislation to change the rules on qualifying work records to remedy this problem has been introduced in Congress, but to no avail so far.

    Because of this obstacle, it’s a good idea for these women to ensure that they get the required 40 quarters on the books by working before they have children, after their children are grown or both. This work record is cumulative, so every quarter counts, regardless of work interruptions to raise children. Assuring Social Security benefits is one among many reasons for women to seize their financial power by pursuing their own working lives, even if they don’t get started until middle age.

    Making the right Social Security choices requires investing a lot of time and effort to understand the rules and how they apply to your particular situation. Spending a few days on this can make a difference of tens — or even hundreds — of thousands of dollars in your lifetime benefits. In addition to visiting the agency’s website, you can request written materials explaining the rules or make an appointment to visit your local SSA office and talk to officials there; they can be quite helpful.

    These benefits are an asset that you’re probably entitled to, but to get them, you have to take control of your case, acting as your own agent and advocate. Many financial planners offer advice on this, and some qualified advisers who are knowledgeable on the subject do so for an hourly fee, which is usually the most affordable way. Whether you do all the research yourself or pay an adviser, making sure you get the greatest Social Security benefits possible is critical to maximizing your retirement income.

    Any opinions expressed here are solely those of the author.

    Laura Mattia is a partner with Baron Financial Group, and a fee-only financial advisor. She's a Certified Financial Planner professional (CFP®), a Chartered Retirement Plan Specialist (CRPS®) and a Certified Divorce Financial Analyst (CDFA™) and holds an M.B.A. in accounting/finance. Her Internet radio show is Financially Empowering Women™ with Laura Mattia. Having worked as finance professor at the Rutgers University Business School, Mattia is doctoral candidate in financial planning at Texas Tech University. Her research is focused on understanding why women are not as financially literate as men.