Maximize Social Security Benefits as a Married Couple – Part 1

Calculating Your Benefits and Deciding When to Apply

This is the first article of a three-part series to help married couples maximize the total amount of Social Security benefits they will receive in their lifetimes.

Why focus on maximizing Social Security benefits?  Doing a little thoughtful planning now will lead to more immediate income, higher lifetime benefits and greater security in old age.  Married couples have many considerations when it comes to maximizing the amount of benefits they receive.

Know How Benefits Are Calculated

First, it is important to understand how social security benefits are actually calculated.  Earned income has a big impact on how large a person’s Social Security benefit will be.  In regards to married couples, careful consideration needs to be given to each person’s earned income and the amount of years they were in the workforce.

Benefits are based on a person’s 35 years of highest earnings up to the taxable maximum.  The taxable maximum is the amount of earnings on which one person actually pays Social Security taxes.  In 2011 the taxable maximum is $106,800.  Social Security taxes are not paid on income earned above that amount.

At age 62, each year’s earnings are indexed for inflation and the highest 35 years of earnings are tallied.  Only the highest 35 years will count, even if the person worked more than 35 years.  If the number of years worked is less than 35 years then missing years will be filled in with zeros.  Given this information, it is easy to see why working a few more years may help increase the amount of benefits.

After accounting for the top 35 years of indexed earnings, all 35 years are totaled and divided by 35 to arrive at an average indexed monthly earnings, or AIME.  The AIME is an important number because it is used in calculating a person’s primary insurance amount, or PIA.  The PIA is the actual amount of benefit a person can receive.  There is a three-part formula to calculate PIA.  There are three calculations that each represents a specific “bend point” where lower amounts of AIME are multiplied by a higher percentage.  This allows lower income earners to receive a higher percentage of benefit based on their lower AIME.  These criteria are adjusted each year, and the 2011 terms are as follows:

• The first $711 of your AIME is multiplied by 90%
• The next $3,577, or the amount between $711 and $4,288, is multiplied by 32%
• The amount over $4,288 (Your AIME – $4,288 = X) is multiplied by 15%

The three numbers calculated at each bend point are then added together and rounded to the next lowest dime.  This is the amount received at full retirement age, or FRA.  This number represents the full, unreduced PIA.  Full retirement age is determined by birth year.

When to Apply for Social Security to Receive the Most Benefits

The age at which someone applies for Social Security benefits will have a huge impact on monthly income and the total amount of benefits received.  This decision will also have a major impact on the maximum amount of benefits a person’s spouse would receive in their lifetime as well as the amount of survival benefits paid out to a widow or widower.  Deciding when to apply for Social Security benefits is one of the most important aspects of Social Security and retirement income planning.

Anyone approaching age 62, which is when early eligibility begins, is probably wondering if they should apply as early as possible and get as much as they can, or if they should delay benefits until full retirement age or age 70 to get the higher benefit amount.

Applying for Benefits Early

What would happen to an applicant between the age of 62 and 65?  At age 62 the benefit will equal 75% of the person’s PIA.  The reduction for taking early benefits is called the actuarial reduction.  Actuaries calculate the reduction amount based on average life expectancies.  The effect on the system is the same whether people take their benefits early or wait until full retirement age.  However, the effect on an individual will depend on how long they live.  Someone taking early benefits will receive a lower benefit for the remainder of their life.  If that person ends up living longer than average, they will receive less in total benefit than if they would have delayed receiving benefits until full retirement age or later.

Applying for Benefits Between Full Retirement Age and Age 70

Full retirement age can mean age 66 or 67, depending on birth year.  At this point an individual can receive the full, unreduced primary insurance amount or decide to delay benefits past full retirement age. If benefits are delayed, then delayed credits are earned.  For each year that benefits are delayed, the benefit will increase by 8% a year up to age 70.  After age 70 credits are no longer delayed.  Delayed credits are calculated on a monthly basis and can apply anytime between full retirement age and age 70, and recipients earn a prorated credit for delaying.  The highest benefit will be achieved by waiting until age 70 to start benefits.

Primer on Spousal Benefits

Individuals who are married and have little or no earnings history can receive a spousal benefit that equals half of the working spouse’s primary insurance amount (PIA).  When the working spouse applies for Social Security benefits, the non-working spouse can apply for spousal benefits.  If the non-working spouse applies for the spousal benefit at full retirement age, the benefit will equal half of the working spouse’s PIA.  If he or she decides to apply for a spousal benefit at age 62 then the benefit will be 35% of the working spouse’s PIA.

What If Both People Are High Earners?

Two high income earners can still take advantage of spousal benefits.  Consider this example.  Let’s say Mary had a high-paying career and has a PIA of $2,000.  She decides to apply for her benefit at age 66, her FRA.  Her husband Mark can apply for his spousal benefit at age 66 and get an income of $1,000 a month.  Mark would delay applying for his own benefit and would let it grow by earning delayed credits.  Once Mark turns 70, he would switch from the spousal benefit to his own, higher benefit.

Coordinating the spousal benefits is extremely complex and provides many opportunities for married couples to maximize their combined benefits.  The next part of this series will go into greater detail about strategies married couples can use to ensure they receive maximum benefits and make certain that a widowed spouse receives the highest survival benefits possible.

The Bottom Line – Some Considerations and Resources

If you are approaching retirement and want to make a sound decision about your Social Security benefits, here are some things to consider:

• What is your estimated benefit at age 62, full retirement age and age 70?  Here are some great calculators from the Social Security Administration.
• How is your health?  Are you in great health or do you have some health concerns?
• What is your life expectancy?  Do people in your family tend to live a long time?  Is there family history of disease or illness?  See the Social Security Administration’s life expectancy calculator here.
• Consider how Social Security benefits will fit in with your retirement income plan.
• Get help running multiple benefit scenarios to help you make the right choice of when to apply for benefits.

The focus of your benefits planning should be to maximize your income so that you and your spouse receive the highest amount of income during your lifetimes.

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Neither Woodbury Financial Services, Inc. nor its representatives offer tax or legal advice. For assistance with these matters, please consult your tax or legal advisor.  While this information has been checked with sources believed to be reliable, the accuracy cannot be guaranteed. This information is intended for general education only, and investors should carefully consider their personal situation and circumstances. Securities and Investment Advisory Services offered through Woodbury Financial Services, Inc. Member FINRA, SIPC and Registered Investment Adviser. PO Box 64284 St. Paul, MN 55164 (800)800-2638.