Married couples: Social Security is complicated and don’t let anyone tell you otherwise. Is either of you (or both of you) close to retirement age? Are you wondering if you should start earlier or later? Before you decide, make sure you understand these two aspects of Social Security: “spousal benefit” and “surviving spouse benefit”. Let’s start with the definitions.
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.
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?