Social Security for Couples: It's Complicated
Figuring out when to collect benefits is trickier than you may think
(This article appeared previously on MarketWatch.com.)
Boomer couples are waking up to the need to maximize their Social Security benefits by using complex claiming strategies to get the most they are entitled to. Rather than go it alone, many are relying on new online tools and calculators, with names like “Social Security Maximizer.”
The problem: Some of the most basic tools can produce faulty recommendations.
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Or you can run the results by your financial adviser — assuming he or she has a clue about Social Security. (Not all do.)
What You Need to Know
Most of us don’t have such specific knowledge, of course, but this Social Security Administration life-expectancy calculator can give you a ballpark figure. Input your birth date and gender and it spits out “the average number of additional years” someone of your gender with your birthday can expect to live at: your current age, age 62, Full Retirement Age and age 70.
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Rules More Complex for Couples
For example, each spouse in a couple might have a choice of two benefits — either one based on his or her own earnings record or a spousal benefit. Ideally, someone who selects the spousal benefit can switch at some future date to his or her own benefit, which will have grown larger thanks to the delay in collecting it — a step that might help maximize a lifetime payout.
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- If you want to claim a spousal benefit, your spouse must file for his benefit first. Before you nudge your 63-year-old husband to claim, consider this: If he is the higher earner, it generally pays for him to delay claiming until 70. But there is a way for you two to have your cake and eat it too: Your spouse can file for his benefit and then suspend actually collecting it — using the “file and suspend” rule. Yet another important caveat: In order to suspend his benefit, your spouse must have reached his Full Retirement Age (the age at which he is entitled to take an unreduced Social Security benefit). That age varies by birth year, but for those born between 1943 and 1954, the full retirement age is 66. As a result, if you want to maximize your collective benefits, your spouse should typically file and then suspend at his Full Retirement Age and then resume collecting at 70, says Sharon Lacy, wealth planning manager at Bedrock Capital Management, a fee-only wealth management firm in Los Altos, Calif.
- If a wife, for example, wants a spousal benefit, she is entitled to half of her husband’s full retirement age benefit. But if she claims that benefit before her Full Retirement Age, it will be reduced; the exact percent of the reduction depends how old she is when she files the claim. On the other hand, spousal benefits do not increase if you wait until after your Full Retirement Age to claim, so there is no incentive for waiting.
- If you are entitled to both a spousal benefit and a benefit based on your own earnings, be careful about claiming a spousal benefit before your Full Retirement Age. If you claim early, the Social Security Administration will “deem” that you have filed for your own benefit. Here’s how it works: If at age 62, you qualify under your own work history for a reduced benefit of $600 a month but your reduced spousal benefit would be $750, you might assume you should file for your spousal benefit now and then switch to your own benefit later, when it has grown to more than $750. But under the “deeming filing” rule, Social Security will assume you are filing for your own reduced benefit of $600 and add on a $150 spousal benefit, says Marty Allenbaugh, a senior marketer at T. Rowe Price. As a result, you’d “lose the ability to apply for your own benefit at a later time,” when it will be bigger, says Allenbaugh.
Once you reach your Full Retirement Age, the “deeming filing rule” no longer applies. At this point, you can file a “restricted application” for a spousal benefit, leaving your own benefit on hold to grow larger.
This article is reprinted with permission from MarketWatch.com. © 2013 Dow, Jones & Co., Inc. All Rights Reserved.