Maximize Social Security Benefits as a Married Couple – Part 2

Maximizing Spousal and Survival Benefits

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

The Basics of Spousal Benefits

Coordinating spousal benefits is one of the most complicated areas of successful Social Security benefits planning.  Overlooking the implications of carefully planning both spouses’ benefits could cost the household a significant amount of lost income.

There are some assumptions made in this article based on demographic research.  One assumption is that the life expectancy of a man is shorter than a woman’s.  There is also research that shows a high percentage of married women earn less over their lifetime than their husbands.  It is also assumed that a majority of the time women end up receiving survival benefits when the husband passes away. Here are the basics of spousal benefits:

• If a wife files for her benefits at full retirement age (FRA) she is able to take a spousal benefit that is equal to 50% of her husband’s primary insurance amount, or PIA.  The calculation of PIA was discussed in the first article of this series.  Basically, PIA is the benefit amount a person would receive.  It can fluctuate based on how much income a person earned in their lifetime and at what time a person decides to apply for Social Security benefits.
• If a wife files for her benefits at age 62, she is only able to receive a benefit that is 35% of her husband’s PIA.
• The above two rules still apply to divorced spouses if the marriage lasted for at least 10 years and the recipient is currently unmarried.

There are two issues that married couples need to focus on regarding Social Security planning.  The first is how the couple plans on maximizing benefits while they’re both living.  The second is how to maximize the amount of survival benefits a widow will receive.

How to Maximize Benefits While Both People Are Alive

There are a couple of strategies that can help married couples increase their income during their living years.  It’s important to keep in mind that all situations are different and all married couples approaching retirement should take the time to run multiple case scenarios to determine what is best for them.  For the purposes of this article it is assumed that both individuals are in good health and have managed to accumulate some retirement income resources over the course of their working years.

One strategy for maximizing income is called “file and suspend”.  This means that the higher income earning spouse would file for their Social Security benefit at full retirement age so that the other person can start receiving a spousal benefit.  The higher earning spouse would then suspend his or her benefit to start earning delayed credits until age 70.  At that time the higher earning spouse would turn on his or her own, higher benefit.

The second strategy is called “claim now, claim more later.”  In this scenario the lower earning spouse will apply for benefits.  The higher earning spouse will then apply for a spousal benefit at full retirement age and delay applying for his or her own benefit.  At age 70 the higher earning spouse would then switch over to his or her own, higher benefit.

Both of these strategies only work at full retirement age.  It should also be apparent that planning is absolutely crucial in both scenarios.  The goal is to find the strategies that will allow a married couple to receive the maximum amount of benefits.

As a rule of thumb, it may be a good idea for the highest income earner in the marriage to delay Social Security benefits until age 70 because this will give the couple the highest income while they’re both alive and the highest death benefit when one passes away.

Providing the Highest Survival Benefits to a Widow(er)

If a typical married couple fits the “typical” profile, then chances are that the woman will outlive the man.  Generally speaking, it’s also common that the husband will have earned more income over his lifetime than his wife.  The keyword is “typical,” and there are definitely situations where either one or both of those assumptions will be false.  For this scenario, the assumption is that this is a typical married couple.

The Center for Retirement Research at Boston College published a brief entitled When Should Married Men Claim Social Security Benefits.  In the brief the author explains that most married men actually claim benefits at age 62 or 63 despite the fact that they are usually the higher income earner and will live shorter lives than their wives.  The brief also mentions the social issue of low income widows and that retirement income security could be significantly improved if married men delayed taking their benefits.  Here are the basics of survival benefits:

• When a spouse passes away the widow(er) can decide to keep his/her own benefit or they can choose to claim a survivor benefit equal to the spouse’s monthly benefit.
• The amount of the survivor benefit is ultimately decided by when the deceased spouse started taking benefits.
• Survivor benefits can be claimed at age 60, or age 50 if disabled, but are reduced up to 28.5% if claimed before the recipient’s full retirement age, or FRA.
• A high majority of survivor benefits go to women and most wives are younger than their husbands, live longer (by seven years on average), generally earn less and start taking their own Social Security benefits at a younger age.
• Most widow(er)s will rely on claiming the higher survival benefit in place of their own benefit.
• A widow(er)’s benefit will stop if he/she switches to a survivor benefit.  This represents a loss of income in most scenarios.
• If a widow(er) gets remarried before age 60, he/she is disqualified from receiving survivor benefits.

In general a husband should attempt to delay applying for benefits until full retirement age, and ideally age 70, to maximize the amount that will be paid to his surviving spouse.

Complex Survival Benefits Scenarios

What should a widow(er) do if his/her earned benefit is lower than the survival benefit?  Ideally he/she would wait until full retirement age to receive the full survival benefit, which would equal 100% of the spouse’s benefit at time of death.  The widow(er) would be savvy to go ahead and claim his/her own benefit at age 62 to have income until full retirement age and then switch to the larger survival benefit at full retirement age.

What should a widow(er) do if their earned benefit is higher than their survival benefit?  A high-income earning widow(er) may decide to go ahead and start taking a survival benefit at age 60 and then delay his/her own benefit and earn delayed credits until age 70.  Once he/she reaches age 70, the widow(er) can switch over to his/her own, higher benefit.

Proper Planning = Maximum Benefits

Coordinating spousal and survival benefits can make anyone’s head spin.  Married couples approaching retirement should take the planning of their Social Security benefits very seriously.  Not doing so could cost the couple significant lost income and resources.

Resource:  When Should Married Men Claim Social Security Benefits? By Steven A. Sass, Wei Sun, and Anthony Webb.  From the Center For Retirement Research At Boston College.

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.