Social Security is part of the bedrock of retirement security in the United States. For one-third of all retirees, Social Security represents nearly all of their retirement income. For two-thirds of retirees, Social Security makes up more than half of their retirement income. Overall, Social Security represents nearly one-third of all retirement income for retirees. A recent Gallup research study showed that roughly 57 percent of retirees indicated that Social Security is a “major” retirement income source.
The importance of the system is obvious as is the need to understand the best claiming strategies.
Many people are familiar with how their own Social Security benefits work – but fewer are aware of how spousal benefits work. And spousal benefits can be complex with numerous claiming options and factors to consider.
The concept is simple, though: If you’re married, you’re generally entitled to a spousal benefit. Even if you never paid into Social Security, you might be entitled to spousal benefits based on your spouse’s work history. This recognizes the important role non-working spouses play in raising families.
The spousal benefit amount will be half of what your spouse may receive at full retirement age. However, if you were to collect benefits between age 62 and your own full retirement age, the benefit would be reduced. Additionally, if you’re working and collect spousal benefits prior to full retirement age, the benefits could be subject to a forced suspension of benefits due to the earnings test.
What About My Own Work History?
Deferring Doesn’t Count
Additionally, spousal benefits aren’t adjusted for deferring benefits past your own full retirement age. And, spousal benefits don’t increase if your spouse defers past full retirement age. Simply put, you don’t benefit from any deferral credits or increases in spousal benefits past full retirement age. (However, deferring benefits could still increase a survivor benefit).
In order to qualify, apply for, and collect spousal benefits while married, you must be age 62 or older and your spouse must have collected benefits. The internet is full of articles talking about file-and-suspend claiming strategies. This strategy doesn’t trigger spousal benefits anymore. Instead, benefits must be collected to trigger the ability for a spouse to file for spousal benefits.
In Action: Claiming Spousal Benefits
Let’s take a look at a simple scenario involving married couple Jane and John. John never worked, but Jane worked for 35 years under Social Security. Jane has a projected $2,000 monthly Social Security benefit at her full retirement age of 66. Assuming Jane and John are both exactly age 62 and Jane is contemplating retirement in the next few years, they meet with an advisor to figure out the best course of action and factors to consider for claiming benefits.
If Jane were to claim now at age 62, her benefits would reduce for early claiming. She’d only receive 75 percent of her promised $2,000 monthly benefit – or $1,500 a month for life. John would be entitled to $1,000 – half of Jane’s primary Social Security benefit at her full retirement age. But since John would also be claiming early at age 62, it’d reduce his benefit.
Spousal benefits reduce by 25/36 of 1 percent for each month before normal retirement age, up to 36 months early plus an additional 5/12 of 1% (5% per year) for each month beyond 36, up to as early as age 62. Under the reduction formula, John would see his benefit reduce by 30 percent for claiming four years early. His $1,000 monthly benefit would now be $700.
The calculation is more straightforward if instead of claiming at age 62, John and Jane waited to claim until full retirement age at 66. John would receive $1,000 and Jane would receive $2,000.
The next question is whether or not Jane should defer out benefits past full retirement age. Past full retirement age, she’d enjoy 8 percent increases in her benefits each year for four years up until age 70. This would end up being a 32 percent increase in benefits. So Jane would get $2,640 a month for life at age 70. However, John would still just get $1,000 a month as the deferral would have no impact on his spousal benefit.
While Jane’s larger benefit is nice to have, the downside is now they missed out on payments from ages 66 to 70 for both benefits. Roughly, this would have been $48,000 for John and $96,000 for Jane. And because John couldn’t receive benefits until Jane claimed hers, the additional lost benefits by John during this time makes deferring benefits less attractive.
In order for Jane and John to benefit from deferring benefits until age 70, either one of them would have to live well into their late 80s or early 90s. Which, nowadays, is more likely than you might expect. For someone alive at age 65, you have a 27 percent chance of living to 90. As such, with a couple, it is more likely than not that one of the two will live to 90. So, it might still be a good strategy to defer out Jane’s benefit to 70.
If Jane were to die first, John would receive survivor benefits equaling the higher of their two benefits. The benefits of deferring one spousal benefit isn’t lost if that spouse dies earlier than expected. In fact, this survivor aspect of benefits needs to be considered when claiming Social Security. By deferring the larger of the two benefits, you create a larger income stream that will pass on to the surviving spouse at the death of the first spouse. This can be an incredibly valuable planning strategy.
For instance, if Jane were to die first after collecting her $2,000 a month Social Security benefit, John would then be eligible for $2,000 a month as a surviving spouse. However, his $1,000 benefit would now essentially be gone.
As you can see, the decision of when to claim Social Security is complex. The ages of the spouses, the existence of other benefits, other income sources like pensions or IRAs, the life expectancy of the spouses, the need for income and tax issues can all impact the decision.
Social Security claiming decisions should never be made in a silo and without considering the impact on the overall retirement plan. If you’re concerned about the complexity of claiming spousal benefits or your own Social Security workers benefits, meet with a fiduciary financial advisor. They can review your benefits, the claiming strategies available and help you find the options that fit best into your situation. The decision is too important to make on a whim. The decision to claim now or later could be the difference from having a financially secure retirement or running out of money later in life.
by Paul B. Burkhalter Managing Partner of Morgan & Weisbrod, Board Certified in Social Security Disability Law.