A Different Look at Spousal Social Security Benefits

With the wave of Baby Boomers reaching Social Security milestone ages each day, more couples are getting confused about the optimal strategy for taking Social Security benefits.  There are some good websites out there that can help you try to maximize the best strategy for your situation.  Additionally, many financial planners and other finance professionals are either well prepared to handle such questions OR they are getting up to speed as quickly as possible.  

The financial press has done a good job of highlighting the two most popular options for you: file and suspend and file for a restricted benefit.

My purpose today is to discuss a strategy that many couples may face.  Can a spouse take their benefit, based on their own earnings, at age 62 and then opt for the spousal benefit at age 66?  If they can, how do you calculate the benefit at each period?   

The first thing that has to be considered is whether or not the spouse is still working?  If they are still working at age 62 and earning more than $14,640 then it likely does not make sense.  This is because Social Security will deduct $1 for every two dollars that you earn in excess of $14,640 in years leading up to your full retirement age (FRA) and will deduct $1 for every $3 earned in excess of $38,880 if you reach your full retirement age this year.

For clarification, the Social Security Administration determines the full retirement age as the year in which you can get your Social Security benefit without it being subject to a reduction.  It happens to be age 66 for individuals born between January 2, 1943 and January 1, 1955. 

Let’s review a scenario that I saw recently where a husband, Jim, and wife, Peggy, are both 62 years old.  Jim is still working but Peggy has effectively retired. 

Options

Peggy has two options with regards to claiming Social Security benefits:  (1) take Social Security benefits based on her own work record or (2) take Social Security benefits based on her spousal benefits which are equal to ½ of Jim’s benefit at his full retirement age (subject to a reduction if she takes them prior to her full retirement age).  Peggy can NOT take spousal benefits until Jim has started his benefits.  Jim is still working and making more than $14,640 so it does NOT make sense for him to start claiming his Social Security benefit merely so Peggy can file for a spousal benefit. 

If Peggy takes her own benefit at age 66 – her full retirement age – she is projected to have a benefit of $8,000/year.  If Peggy opts to take her spousal benefit at age 66 she is projected to have a benefit of $13,500/year.  Remember she can’t take her spousal benefit at age 62 because Jim has not filed for his benefits.  However, she can take her benefits now – at age 62.  If she does so, then the Social Security Administration will reduce her benefit by 25% to $6,000/year. 

Social Security allows each spouse to take the higher of their own benefit or ½ of their spousal benefit.  Theoretically, you are supposed to receive the higher of the two when you file for benefits unless you file a restricted application – which can only be done once you reach your full retirement age.  Filing for a restricted application is a useful strategy that allows you to claim your spousal benefit while delaying your personal benefit (and allowing your personal benefit to continue increasing).   Peggy doesn’t have access to her spousal benefit because Jim has not filed for his benefits yet.  In other words, if Peggy files for benefits now she is only able to receive her benefits of $6,000/year. 

If Peggy files for her benefits now and Jim waits to begin his benefits until age 66 – his full retirement age – what happens to Peggy's benefits at the time that Jim files?  Does she get to step up to her full spousal benefit of $13,500 (adjusted annually for inflation)?  Is she forever locked into her early, reduced benefit of $6,000/year (adjusted annually for inflation)?  The answer is NO to both of the above.  In this particular instance, at age 66, Peggy would receive a step up to a higher benefit, but not her full spousal benefit.  Here is how the calculation would work:

      1)    The Social Security Administration would look at the difference between Peggy’s benefit at her normal retirement age and her spousal benefit at her normal retirement age.  In this instance, Peggy’s benefit at age 66 is $8,000 and her spousal benefit at age 66 would be $13,500 – making the different $5,500. 

      2)    The Social Security Administration would add the difference of $5,500 to her benefits that she initiated at age 62 – which were $6,000/year.  Therefore, at Peggy’s age 66 she will start to receive $11,500/year for the rest of her life.  From age 62 to age 66, she will receive $6,000/year. 

So being able to utilize the spousal benefit in this instance helps increase the wife’s benefit but should she do it?  You can only truly know the best utilization of Social Security benefits after both the husband and wife have passed away. 

The best way to utilize Social Security benefits depends on your life expectancy, your spouse’s life expectancy, the rate of inflation over the coming decades, the rate of return that your money could earn elsewhere, and whether your present situation demands that you need to take your Social Security benefits early.  A good financial planner can help you determine the best and most appropriate way to utilize your Social Security benefits.