Social Security tends to be a big part of most people's retirement plans, but it's also one of those things you: 1) receive no education about while in school, 2) pay little attention to during your work life (except perhaps to complain about what is taken out of your paycheck) and 3) is suddenly thrust upon you when you decide to retire.
In other words, with no prior education on the matter, at a certain age you are supposed to make a decision that will literally affect the income you receive for the rest of your life.
Don’t blame your high school: How many teenagers can imagine what it’s like to be 30 years old much less 60? Honestly, would you have paid any attention to details about a program that would have virtually no impact on you until 50 years later? Geez, that’s half a century in the future! (Sorry...I just realized how depressing that sounds.)
Then one day you look in the mirror and you’re there. So, you dutifully head to the Social Security website to try to educate yourself. This should be your first stop to set up a private account and find out your actual benefits amount. Of course, if you begin receiving it before you are Full Retirement Age (66 for those born from 1943 to 1954), you will receive less than this; wait until you are 70 and it will be at least 32% more.
If you have never been married, this is about as complicated as the decision will get about when to claim Social Security: The age at which you decide to start receiving your checks determines your monthly benefit.
However, when you throw marriage, divorce, re-marriage or widowhood into the mix, you significantly ramp up the complexity of the claiming decision. The age you start your benefit doesn’t just affect you, it affects the survivor benefit your spouse will receive if you die first. How and at what age each spouse chooses to file for benefits can make a big difference in the total benefit you receive as a couple.
Here’s a twist on the usual scenario: Jill is four years older than Jack. Though Jack’s job paid considerably more than Jill’s, each is eligible for a benefit based upon their own earnings history. Full Retirement Age (FRA) for both is 66.
|Benefit at FRA||
Jack intends to work until he is 66 (FRA) and then file for Social Security. Jill wants to file for Social Security as soon as she can. She knows that by starting at age 62 (four years prior to FRA) her benefit will be reduced by 25% to $600. She cannot receive a “spousal” benefit based upon Jack’s higher earnings record because she is not entitled to this until he files to begin Social Security benefits himself.
Eight years later, Jack and Jill head to their local Social Security office. Jack will file to begin his benefit and Jill will make sure that hers is increased to reflect the fact that she is now entitled to a spousal benefit.
The maximum spousal benefit someone can receive is 50% of what their partner is entitled to at FRA. In this case, Jill’s would be $1,000.(1) However, she will not receive this amount because she began collecting her own Social Security benefit before she was Full Retirement Age.
According to Social Security spokesperson Dorothy Clark, Social Security first calculates the additional benefit Jill would be entitled to if she had waited until FRA to file: $1,000-$800=$200. This is the extra amount (over her own benefit) that she is entitled to as Jack’s spouse.
The $200 is then added to the benefit she is receiving on her own record. Of course, this was reduced because she started collecting it at age 62: $200+$600=$800. “Since she chose to receive a reduced benefit before her full retirement age on her own record, she is not entitled to the full spouse’s benefit rate of $1,000,” explains Clark. (Note that, for simplicity sake, the numbers uses in this scenario do not take into account annual cost-of-living increases.)
Lesson: If Jill delayed claiming Social Security until she was FRA, her benefit would be $200/month higher ($1,000). As a couple, Jack and Jill would receive $2,400 per year more in income. In general, it would take 10 years or less for Jill to “break even"; from that point on, on a cumulative basis, benefits begun at age 66 would continue to pull ahead of those taken at age 62 by an increasingly large margin.
1. Spousal benefits do not earn “delayed retirement credits.”
Ms. Buckner is a Retirement and Financial Planning Specialist and an instructor in Franklin Templeton Investments' global Academy. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content.
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