One of the simplest rules for Social Security spousal benefits is also one of the trickiest.
The rule is that, in order for a spousal benefit to be paid, the other spouse must have filed for his or her own benefit first.
Let’s say Bob and Betty are both 64 now. Typical of many boomer couples, Bob was the higher earner. Betty worked enough to qualify for Social Security on her own record, but her primary insurance amount (PIA), which is the amount she’ll receive if she files at her full retirement age (FRA), is less than half of Bob’s. Let’s say his PIA is $3,000 and hers is $800. If Betty files at her FRA she can receive her own benefit plus a spousal add-on of $700 to bring her total benefit up to 50% of Bob’s PIA, or $1,500.
But here’s the catch: she can’t get a spousal benefit until Bob files for his benefit first! And since he’s the higher-earning spouse, mathematically it may make more sense that he file at age 70 to maximize his own income while he is alive. This also gives Betty a higher survivor income benefit should he pre-decease her. If he files at his Full Retirement Age his monthly income will be $3,000. But, if he waits until age 70, it’ll be $3,840 – a 28% increase!
So, although Betty might want Bob to file now so she can start her spousal benefit, it may not make the most financial sense to do so. In fact, if this couple is trying to maximize their Social Security benefit, the strategy would most likely be for Betty to file for her own benefit at her Full Retirement Age, starting out with her own $800 monthly check, and for Bob to file for his maximum benefit at 70, where he’ll receive $3,840. Once Bob files, Betty can add on her $700 spousal portion bringing her total benefit up to $1,500. It is true that she is losing out on the spousal benefit while she is waiting for Bob to reach age 70. But the delayed credits he earns by waiting more than make up for the six years of forgone spousal benefits.
Let’s say you have a couple with differing ages. Dave is 58 and Dee is 62. His Primary Insurance Amount (PIA) is $3,000, hers is $800. Although spouses can claim spousal benefits as early as age 62, remember that Dee cannot claim her spousal benefit until Dave has filed for his own benefit. She can start her own reduced benefit at 62 and receive 70% of $800, or $560. But she can’t add on the spousal portion until Dave files. If he is 58 now, he’ll be 70 in 2033. Dee, being four years older, will be 74 in that year. So, one strategy might be for her to claim her own benefit at 62 and her spousal benefit at 74. At that time she can add on the spousal portion, which is half of Dave’s PIA ($1,500) minus her own PIA of $800, which equals $700. This amount would be added to her existing benefit giving her a total benefit of $560 + $700 = $1,260. Please note the following important points:
- Dee’s combined benefit is not 50% of Dave’s Primary Insurance Amount (PIA). That’s because she took her own benefit early. The $700 spousal add-on was added to $560, not $800. If she had waited until her Full Retirement Age to start her own benefit, the $700 add-on would be added to $800, giving her a total benefit of $1,500, which is 50% of Dave’s PIA. This is a common misconception.
- Also note that Dee’s benefit is 50% of Dave’s PIA, not 50% of his age-70 benefit amount. This is another rule that tends to trip people up. Spousal benefits are always a percentage of the worker-spouse’s PIA, that is, the benefit he would have received if he had filed for his benefit at his FRA.
- Also note that survivor benefits are different. A widow becomes entitled to a survivor benefit after her husband dies. If he had claimed at 70 (or anytime after FRA, really) she will step into his full benefit assuming it is higher than her own. This is true regardless of when she had claimed her own benefit. If Dave had claimed at 70 and was receiving $3,720 at the time of his death, Dee’s survivor benefit would be $3,720 whether she had claimed her own benefit at age 62 or at FRA.
One more note of a mechanical nature: When a strategy calls for the wife to add on her spousal benefit at the same time the husband files – say she takes her own benefit at 62 and will be adding on the spousal benefit at age 74 as in the Dave and Dee example above – make sure the worker-spouse (Dave in the example) files first. He can apply for his retirement benefit online. Once his application has been processed and he gets his benefit verification letter, the wife can apply for her spousal benefit. She can also file online and will specify the same effective date as the husbands’. The Social Security Administration will not contact Dee to tell her she is now entitled to a spousal benefit. She must proactively file for that benefit.
Please understand that these are examples of how different claiming strategies can impact certain families. Your own claiming strategy will require a more comprehensive look at your unique circumstances, including pensions, savings, portfolio value, tax-rates and health status. So, Social Security planning is not a “one-size-fits-all” kind of a proposition. Every family will have a unique choice. And, unfortunately, most of the time, once you make your Social Security claiming decision it is irrevocable . . . and you absolutely want to do the right thing! So, before you make your decision, it might be a good idea to seek some advice, and, as Retirement Income Specialists, this is an area we have quite a bit of experience with. So, feel free to reach out to us for help!