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Maximizing Social Security Benefits for Married Couples

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Copyright 2012- Rajiv Nagaich

This is an often overlooked planning opportunity for many retirees who may be in too much of a hurry to start their own benefits. The planning opportunity discussed here is for married couples and not single claimants. This does not mean that there is no planning opportunity for single claimants around social security benefits – indeed there is – but it is limited to timing the benefits.

Under the current Social Security rules, married individuals are entitled to a retired worker benefit based on their own earnings and/or to a spousal benefit equal to one half of their spouse’s benefit claimed at the Full Retirement Age1. If a married individual claims before the Full Retirement Age, the Social Security Administration assumes that the individual is claiming both types of benefits, compares the worker and spousal benefits, and awards the highest. Upon reaching the Full Retirement Age, individuals can choose which benefit to receive. As a result, married individuals can claim a spousal benefit at 66 and switch to their own retired worker benefit at a later date. This approach allows a worker to begin claiming one type of benefit while still building up delayed retirement credits, which will result in a higher worker benefit later.

In the past, providing these benefit options for spouses was not particularly valuable, since those who postponed benefits beyond the Full Retirement Age were giving up expected lifetime benefits. With the recent advent of an actuarially fair delayed retirement credit, lifetime benefits are roughly the same whether claimed at the Full Retirement Age or at age 70. As a result, the availability of benefit options has real value for couples today, thereby inevitably increasing the cost of the Social Security program.

What the rules allow one to do is to claim spousal benefits instead of one’s own benefits until a later age and then claiming a higher benefit later. Let us look at an example of how this might work: Husband- age 68, Wife-age 66. Both are considering retirement, and the husband would like to retire now and start his Social Security benefits immediately, which would be $1,600 per month. The wife could also start her benefits at age 66, at $1,297 per month. Husband is full retirement age, which means that the wife does not have to take her $1,297 per month now. She can, instead, go to Social Security and ask that she be awarded spousal benefits based on her husband’s work record, which will be 50% of his total benefits, or $800 per month. Taking spousal benefits instead of her own benefits will allow the wife’s own benefits to continue to increase. The wife’s own $1,297 per month will increase to $1,712 per month if she starts the benefits at her age 70 because for each year she delays taking her own benefits beyond her full retirement age the benefits increase by 8% (assuming she is born 1943 or later – or 2/3rd of 1% per month.3)

There are many reasons to delay retirement, particularly for women. Women generally live longer than men and have lower benefits than men for the most part. At the death of a spouse, the surviving spouse has the ability to take the higher of the two benefits, his/her own or the deceased spouse’s benefits. It only makes sense to take the latter. Finally, with all of the above in mind, it does make sense to consider delaying the benefits, especially if the family can delay the larger of the two benefits (in our example above it would mean delaying the husband’s benefits). Financially, sometimes this simply is not feasible. Hence, the need to look at all the alternatives available and to make a decision that will serve not only the immediate needs, but future needs as well.

My counsel is guided by some retirees who come to me in their later years wishing they had never started the early retirement because they lived longer than they had expected and now their incomes significantly handicapped their ability to live a comfortable life. As with most things, there is no one right answer or wrong answer, it is an answer that has consequences. Any answer is the right answer so long as you understand the consequences of the decision and can live with it.

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