Although Social Security has been around for more than seven decades, most Americans admit they really don’t have a basic understanding about the rules that affect the size of their retirement benefit.
Social Security is pretty straightforward provided you’ve never been married and accumulate at least 40 quarters working in jobs where federal employment tax (FICA) was deducted from your paycheck. When you reach your “full retirement age” (FRA) you will receive a benefit based upon the amount you paid into the system.(2) If you begin receiving Social Security benefits prior to your FRA, your benefit will be reduced. (3) For every year (starting with your FRA year) that you postpone the start of Social Security, you will receive “delayed retirement credit” (DRC). Your annual benefit will be increased 8% each year plus each year’s cost of living increase (COLA)- until you reach age 70.
However, things get complicated very quickly when you are married- especially if both spouses have worked and qualify for Social Security. While most couples simply want to know how they can maximize the total Social Security income that they receive, this is easier said than done. For one thing, not only can you file for Social Security based on your own work history, you can also file for a benefit based on what your spouse earned. (If you’re divorced, you may be eligible for a benefit based on your ex-spouse’s record.)(4)
With Social Security, timing is everything. Should both members of a couple file for benefits in the same year, or would it make more sense for one spouse to start before the other? Which one? If Spouse ‘A’ begins before his/her FRA, how might this affect the benefit that Spouse ‘B’ is eligible to receive? What if Spouse ‘A’ waited to file until s/he reached FRA? Although getting a bigger monthly check sounds good, postponing the start of Social Security until you reach age 70 means you’ll collect benefits for fewer years. Nonetheless, why should certain married individuals consider this option?
And that’s just the tip of the iceberg. Here’s the problem: If you make the wrong choices, they affect the amount of Social Security income you will receive for the rest of your life.
Take this couple, we’ll call them Wilma and Fred. Here are the important facts:
Current Age: Wilma, 62
Full Retirement Age (FRA): 66
Benefit at FRA: $800/month
Current Age: Fred, 65
Full Retirement Age (FRA): 66
Benefit at FRA: $2,000/month
A few things to keep in mind:
-The maximum “spousal” benefit you can receive is 50% of what your partner is entitled to at her/his FRA. In this example, Wilma’s maximum spousal benefit is $1,000–half the amount Fred would receive if he filed for Social Security at age 66. However, if Wilma files for her own and/or a spousal benefit before she has reach her FRA (66), the amount will be reduced. Likewise, Fred’s maximum spousal benefit is $400/month.
-If you file for a spousal benefit before reaching your FRA, you are deemed to be filing for a benefit based on your own record, as well. That is, prior to your FRA, you cannot apply for just a spousal benefit in order to allow your own to earn DRCs. However, once you reach your FRA, you can.
-You cannot apply for a spousal benefit until your spouse has filed to begin receiving Social Security.
Wilma and Fred are planning to retire next year. They’ll need some extra monthly income, so they’re thinking of having Wilma apply for Social Security. Fred would postpone filing for benefits until he is 70 because this would result in substantially more income. (Assuming the COLA is 3% for each of the next four years, by age 70 Fred’s benefit would increase to $3,036/month- 50% more than what he would receive at his FRA.)
Scenario No. 1:
Next year Wilma files for Social Security based on her own record. Since she is 63 years old, her benefit will be 20% less than what she would receive if she waited until reaching her FRA. (3)
She is not eligible for a spousal benefit because Fred hasn’t filed yet.
Total Social Security income as a couple: $640/month.
Option No.1: “File-and-Suspend.” Social Security created this strategy specifically for this situation. Here’s how it works: Now that Fred has reached his FRA, he files for Social Security benefits to begin and then immediately tells Social Security to stop them. This allows his benefit to earn delayed retirement credits. However, the fact that Fred filed means Wilma is now entitled to a spousal benefit.
Since she is below her FRA, Wilma’s spousal benefit will be reduced to 37.5%- instead of 50%- of Fred’s FRA amount, or $750. She does not get this in addition to her own benefit. Instead, she will receive whichever benefit is higher- the one based on her own work history or her spousal benefit. Thus, Wilma will receive a benefit of $750/month. (Technically, $640 of this is earmarked as coming from the payroll tax Wilma paid herself.)
Total Social Security income as a couple: $750/month.
Four years later:
Fred turns 70 and requests that his Social Security benefits resume. Thanks to DRCs, his monthly check will be $3,036.
Annual COLAs of 3% mean that Wilma’s monthly check will have grown to $844.
Total Social Security income as a couple: $3,880/month.
Next week: An alternate option for Wilma and Fred that would result higher total income.
