Spousal benefit

The lower earning spouse has a choice: to claim a “spousal” benefit of up to 50% of the higher earning spouse’s benefit or to claim his own earned benefit. The higher earning spouse must be already collecting benefits before the lower earning one can qualify for a spousal benefit. And this spousal benefit will be reduced for every month under full benefit age. For example, if the spouse is already drawing a $1600, the lower earning spouse could qualify for $800 a month at full retirement age; or 75% of $800 ($600) if starting at age 62.

Surviving spouse benefit

A surviving spouse of a retiree drawing Social Security will receive 100% of that pension, with the following provisions:

• The survivor must be full retirement age. If not, the benefit will be reduced based on age.

• If the survivor is insured on her own record and the benefit of the deceased spouse is higher, the survivor will continue to receive her own benefit and also the difference between her benefit and the deceased spouse’s benefit.

Simply put, the surviving spouse will receive the greater of her benefit or the deceased spouse’s benefit, providing she is full retirement age.

Got those definitions? Good! Now for some Social Security strategies.

For clarity’s sake (and because it is this way in most families), I will refer to the higher earner as the man and the lower earner as the woman throughout the rest of this article.

Strategy of waiting

All Social Security benefits are greater when delayed. Because the spousal benefit is dependent on the higher earner’s benefit, the advantages are compounded. Say the higher earning spouse’s benefit is $2,000 at full retirement age. If his spouse also waits until full retirement age to start her spousal benefit, she will draw 50%, or $1,000, for a combined $3,000 monthly benefit. On the other hand, if the higher earning spouse starts his benefit at age 62, it will be reduced by 25% to $1,500. Because 50% of $1,500 is less than 50% of $2,000, this reduction also affects the spousal benefit. But if the spouse starts drawing at age 62, she won’t even receive the full 50% of the $1,500; her benefit will likewise be reduced by 25% from $750 to $562.50 for a combined benefit of $2062.50. Obviously, waiting can make a huge difference.

In the same way, waiting will also affect the surviving spouse benefit. In the above scenario, the surviving spouse benefit drops by $500 (from $2,000 a month to $1,500 a month) when the benefits start early. If you consider this benefit as a form of life insurance, a $500 per month decrease is substantial.

Should Spousal Benefit always be delayed until full retirement age?

Not necessarily. The age differential of the spouses should be considered. For example, if the husband is 70 and the wife is 62, she should consider beginning her spousal benefit at the reduced rate. Why? Because the husband is likely to die earlier and, at that time, her survivor’s benefit (based on HIS pension) would kick in. This is the same benefit she will receive whether she starts at age 62 or not, so she should consider bringing the extra money into the household now.

How to draw Spousal Benefit while waiting

Suppose the husband is full retirement age and wants to wait until age 70 before starting his benefits. Will the wife, who cannot draw the spousal benefit unless her husband has started his pension, need to wait until he is 70? Not if the couple takes advantage of voluntary suspension.

Here is how it works: The husband files for his benefit and the wife files for the spousal benefit. The husband then immediately requests a voluntary suspension of his pension. The wife will be able to collect her spousal benefit while the husband’s future benefit will grow by 8% annually. I like this strategy because the couple is bringing in “bonus” household income while the husband is patiently maxing out both his future pension and his wife’s future survivor benefit.

Another way to claim a Spousal Benefit while waiting

Suppose the husband wants to wait until age 70 to start his pension but his wife also qualifies for benefits based on her own work record. Think through this one with me: she could start her benefit and he could sign up for the spousal benefit while waiting until age 70 to start his own. At that point he switches to his own higher benefit. As in previous examples, this will increase the survivor’s benefit, but will do so while bringing extra income into the household. And the wife could also switch to a spousal benefit based on what the husband’s benefit would have been at age 66. This is very similar to having your cake and eating it too.

One caveat: the higher earning spouse cannot use this tactic if he is younger than full retirement age.

Summary

Social Security can be complicated, but you can make intelligent decisions if you understand these basics. This is your pension that you have paid into all of your working life. Make sure you maximize your benefits.

One more thing: Social Security rules change, so I strongly recommend that you check with the Social Security Administration with all of your questions.

Have you started receiving your Social Security benefits?  What strategies did you use?  Would you recommend to those who haven’t started yet?

photo credit: joguldi

In Part One of this two part series we discussed the following basics of Social Security: how it works, what is a spousal benefit, how does survivor’s benefit work and some things you should think about when considering whether to start receiving your social security benefit early.

In this post, I want to give you some strategies to help you maximize your benefits.

Social Security Strategies for Singles

Unless they have significant savings, or are unable to work because of health reasons, singles generally need to wait until full retirement age before drawing their benefits. Singles simply don’t have the advantage of a second income or a spousal benefit, and living as a single is nearly as expensive as a married couple. Whatever nest egg a single may have will be depleted quicker if they start their benefits earlier, both because they are drawing on it for a longer period of time and because they will need more of that nest egg by virtue of starting Social Security at a lower benefit level. Waiting is especially important for women. Why? Because of their longer life expectancies, they will more often live past the “break even point” (around age 78) when the larger delayed benefit will equal the total of the reduced benefits received by starting early.

Social Security Strategies for Married Couples

For clarity’s sake (and because it is this way in most families), I will refer to the higher earner as the man and the lower earner as the woman throughout the rest of this article.

Because (remember from Part One) the spousal benefit and the survivor’s benefit are based on the benefit of the top earner, married couples need to strategize their start dates in order to get maximum benefits. If the husband delays until full retirement age, he is putting his wife in position to draw his full benefit as a survivor benefit. If he waits until age 70, he is adding another 32% to the survivor benefit. And of course the larger his benefit, the larger her spousal benefit (maximum is 50% of his pension) will be.

Should Spousal Benefit Always be Delayed Till Full Retirement Age?

No. The ages of the spouses should be considered. For example, if the husband is 70 and the wife is 62, she should consider starting her spousal benefit at the reduced rate. Why? Because the husband is likely to die earlier and, at that time, her survivor’s benefit (based on HIS pension) would kick in. This is the same benefit she will receive whether she starts at age 62 or not, so she is better off bringing the extra money into the household now instead of waiting.

How Voluntary Suspension Can Help

Suppose the husband is full retirement age and wants to wait until age 70 before starting his benefits. Will the wife, who cannot draw the spousal benefit unless her husband has started his pension, need to wait until he is 70? Not if the couple takes advantage of voluntary suspension.

Here is how it works: The husband files for his benefit and the wife files for the spousal benefit (which will be less than 50% if she is under full retirement age). The husband then immediately requests a voluntary suspension of his pension. The wife will be able to collect her spousal benefit while the husband’s future benefit will grow by 8% annually. I like this strategy because the couple is bringing in “bonus” household income while the husband is patiently maxing out both his future pension and his wife’s future survivor benefit.

How the Top Earner Can Claim a Spousal Benefit While Waiting

Suppose the husband wants to wait until age 70 to start his pension but his wife also qualifies for benefits based on her own work record. Think through this one with me: she could start her benefit and he could sign up for the spousal benefit while waiting until age 70 to start his own. At that point he switches to his own higher benefit. As in previous examples, this will increase the survivor’s benefit, but will do so while bringing extra income into the household. And the wife could also switch to a spousal benefit based on what the husband’s benefit would have been at age 66. This is very similar to having your cake and eating it too.

One caveat: the higher earning spouse cannot use this tactic if he is younger than full retirement age.

The Second Chance Option

What if you claimed your benefits earlier than full retirement age and then later decide that you should have waited? The Social Security Administration has a plan just for you: you can repay all benefits, free of interest and then reapply for a bigger benefit later. You will need to also return any spousal benefits you have received.

Is this for you? One obvious advantage is that you (and your spouse if she receives a spousal benefit) will receive higher monthly pensions for the rest of your lives. Also, by bumping up the pension amount you have also increased the survivor’s benefit. Of course your health is a major consideration, but if poor health is not an issue, this option starts becoming quite attractive.

Of course the payment must come from a source that will not significantly affect your life. For example, you would not want to deplete your emergency fund, but if you were drawing interest from a nest egg while leaving the principle untouched, using this nest egg could be a consideration.

You would probably want your estate planner to help you crunch these numbers, but this do-over is certainly an option to consider.

Summary

Although Social Security can be complicated, you should be certain that you understand the basics so you can make intelligent decisions on what is right for your household. This is your pension that you have paid into all of your working life. Make sure you maximize your benefits.

Social Security Basics Overview

You can’t start before age 62, but the longer you wait to start, the larger your benefit will be. Full benefit is considered age 66 for those born between 1943 and 1954. Starting at age 62 will permanently reduce your benefit to 75% of what you could have drawn by waiting until age 66. And you can increase that another 8% per year if you keep waiting after age 66 up to age 70. For example, if your full benefit is going to be $1600 monthly at age 66, it will be 75% of that amount ($1200 monthly) by starting at age 62 or up to about $2176 per month by waiting until age 70. Note: these numbers do not include the annual cost of living adjustments, but those will be added to your benefits whether you start or wait.

How Does Spousal Benefit Work?

The lower earning spouse has a choice: to claim a “spousal” benefit of 50% of the spouse’s benefit or to claim the earned benefit as shown on the Social Security report received in the mail each year. The higher earning spouse must be already collecting benefits before the lower earning one can qualify for a spousal benefit. And this spousal benefit, like the earned benefit described above, will be reduced for every month under full benefit age. For example, if the spouse is already drawing a $1600, the lower earning spouse could qualify for $800 a month at full retirement age; or 75% of $800 ($600) if starting at age 62.

What About Survivor Benefits?

A surviving spouse of a retiree drawing Social Security will receive 100% of that pension, with the following provisions:

• The survivor must be full retirement age. If not, the benefit will be reduced based on age.
• If the survivor is insured on her own record and if the benefit of the deceased spouse is higher, the survivor will continue to receive her own benefit and also the difference between her benefit and the deceased spouse’s benefit.

Simply put, the surviving spouse will receive the greater of her benefit or the deceased spouse’s benefit, providing she is full retirement age.

Should I Start Early or Wait?

There is no “one fits all” answer, but these factors all affect your decision:

• How much savings do you have? Assuming you need to start tapping those savings when you retire, the earlier you retire, the bigger the nest egg will need to be. Besides, the decreased benefit of starting earlier will mean that you need more per year from these savings. Ideally, you would only tap the growth of your savings, leaving the nest egg alone. Will this fit your budget? Answer this question clearly before accessing your benefit.
• How is your health? I know this sounds morbid, but if you have good cause to believe you won’t live well into your 70’s, you may consider starting your benefit early. You don’t want to NOT tap into needed money if you seriously believe that waiting will cause you to miss out on the benefit
• Do you have other income streams? Remember: Social Security is meant as a supplemental income. Do you have other retirement checks coming in?
• Do you love your work? If so, keep on working. There is no reason to stop doing what you love just to start a benefit at a reduced rate.

There: you have some basics of Social Security and some things to think about if you are considering starting your benefit early.

Part Two will cover some strategies to make sure you maximize your benefits. See you then.