(This article is based on a portion of the new book, Making Social Security Work for You: Advice, Strategies, and Timelines That Can Maximize Your Benefits by Emily Guy Birken.)
Understanding exactly how you and your spouse should coordinate your filing strategies for Social Security benefits feels a little like trying to learn Mandarin without a teacher or a dictionary — it’s overwhelming and frustrating.
In particular, married couples need to understand the spousal Social Security benefits available to them so they can be on the same financial page in retirement.
Here are the three most important issues married couples need to understand:
1. Know Your Excess Spousal Benefit
The first thing to know is how Social Security spousal benefits are calculated. An apology in advance: Social Security makes this a little bit like alphabet soup, as you’ll soon see.
Prior to the Bipartisan Budget Act of 2015, some spousal benefits could be equal to 50 percent of your spouse’s Primary Insurance Amount or PIA (defined as the full amount of money a beneficiary is entitled to each month upon reaching Full Retirement Age, which is between 66 and 67, depending on when you were born.)
Though coordinating benefits with your spouse is no longer as complicated as it was before Congress eliminated the “file and suspend” strategy, there are still timing considerations to think through.
Now, however, the spousal benefit is calculated as the Excess Spousal Benefit or ESB, which is determined using the following calculation:
50 percent of spouse’s PIA – your PIA = your ESB
The ESB is then added to the qualifying spouse’s Social Security retirement benefits.
Here’s an example that might help. Nancy and Owen are a married couple nearing retirement. Nancy’s PIA is $1,000 a month and Owen’s is $2,400 a month. Their Excess Spousal Benefits would be calculated as follows:
50 percent of Owen’s PIA – Nancy’s PIA = Nancy’s ESB. Put another way, it’s 50 percent of $2,400 – $1,000 = $200.
50 percent of Nancy’s PIA – Owen’s PIA = Owen’s ESB. Put another way, it’s 50 percent of $1,000 – $2,400 = -$1,900. Since Owen’s ESB is negative, it is treated as $0.
So for this couple, Nancy could potentially receive $1,200 in monthly Social Security benefits (her $1,000 plus her $200 excess spousal benefit) if she files at the right time.
2. Recognize When Excess Spousal Benefits Are Available
Knowing how to calculate your or your spouse’s ESB is just the beginning. You also need to understand if, when and how an ESB is available to you.
First, you need to remember that an Excess Spousal Benefit is only available to a spouse whose Primary Insurance Amount would be less than 50 percent of the other spouse’s PIA. Translation: many couples with similar incomes will not be eligible for spousal benefits.
If you are eligible for an Excess Spousal Benefit, you will only receive it once your spouse has applied for his or her benefits. So if you file for Social Security before your spouse does, you won’t receive your Excess Spousal Benefit even if you are eligible for it.
Finally, the calculation of how much you will receive for your Excess Spousal Benefit changes depending on your age. If you file before Full Retirement Age (FRA), your total benefit amount will be calculated as follows:
(Your PIA – a reduction amount) + (Your ESB – a reduction amount) = Your total benefit when filing before FRA
The formulas for determining the exact reduction amounts are complex and change depending upon the beneficiary’s birth year. For example, say Nancy applies at 62 at the same time Owen applies for his benefits. This is how her total benefit is calculated:
(Nancy’s PIA – 25 percent reduction amount) + (Nancy’s ESB – 30 percent reduction amount) = Nancy’s total benefit at 62. In real numbers, it would be ($1,000 – $250) + ($200 – $60) = $890.
On the other hand, if you file after reaching your Full Retirement Age, you will be eligible for extra money through what are known as Delayed Retirement Credits which are equal to approximately 8 percent per year. Then, you will either receive your retirement benefit plus your Delayed Retirement Credits or your retirement benefit plus your Excess Spousal Benefit —whichever one is larger.
In Nancy’s case, if she applies for benefits between her Full Retirement Age (66) and age 69, she will receive $1,200 per month. If she applies at 69 she will receive $1,240 per month. At 70, her benefits will grow to $1,320 a month (her PIA of $1,000 plus her Delayed Retirement Credits of $320).
3. Timing Your Benefits With Your Spouse
Though coordinating benefits with your spouse is no longer as complicated as it was before Congress last year eliminated what was known as the “file and suspend” strategy, there are still timing considerations couples need to think through while planning when to take their Social Security benefits.
In general, the longer you wait to file, the higher your monthly benefits will be.
In a world where everyone was independently wealthy, we would all wait to take Social Security benefits until reaching age 70, which is the point at which retirement benefits stop accumulating Delayed Retirement Credits. But in the real world, most couples need at least one Social Security benefit check during the stretch between age 62 (the earliest you can start claiming benefits) and 70.
If one spouse is eligible for an Excess Spousal Benefit, here are the best options for optimizing total benefits without both spouses waiting to claim until age 70:
The ideal situation is for the lower earner to file at Full Retirement Age while waiting for the higher earner to reach 70 before filing for benefits.
In Nancy and Owen’s case, this timing strategy would net them a monthly benefit of $1,000 for the period between Nancy’s Full Retirement Age and Owen’s 70th birthday. Once Owen turns 70, Nancy will start receiving $1,200 per month, since her Excess Spousal Benefit will kick in now that Owen has filed for benefits and Owen will receive $3,168 per month, making their total monthly benefit $4,368 or $52,416 a year.
If a couple can’t afford to live on the lower earner’s check between Full Retirement Age and age 70, the higher earner should file at Full Retirement Age while waiting for the lower earner to reach age 70 to file benefits. (This will likely eliminate the Excess Spousal Benefit, however, since the lower earner will receive Delayed Retirement Credits).
If a couple can’t wait to start taking Social Security until both spouses reach Full Retirement Age, the lower earner should file first while waiting for the higher earner to reach Full Retirement Age.
For example, if Nancy files at 62, she and Owen will receive $750 per month until he reaches Full Retirement Age and files for his own benefits. At that point, his filing triggers her Excess Spousal Benefit of $200, making her monthly benefit $950. His benefit will be $2,400, making their combined monthly benefit $3,350 or $40,200 a year.
If a couple can’t afford to wait for the higher earner to reach Full Retirement Age, it still makes sense to have the lower earner wait to file until Full Retirement Age, since that will still provide that person with a higher monthly benefit than if both spouses file early.
For example, if Owen files at 62, he and Nancy will receive $1,800 per month until she reaches Full Retirement Age and files for her own benefits. Her monthly benefit (which will include her Excess Spousal Benefits since Owen has already filed) will equal $1,200. This will bring their combined monthly benefit to $3,000 or $36,000 a year.
The Payoff for Penciling Things Out
Take the time to calculate how the Excess Spousal Benefit will affect your total monthly benefit amount at various points in your Social Security journey. Both you and your spouse will be glad you did.