Social Security Strategies for Couples, Part 2

In last week’s column, we met Fred and Wilma, a married baby boomer couple planning to retire next year. Using a strategy called “File-and-Suspend” Fred was able to give Wilma the ability to collect Social Security benefits based on his work record instead of her own, which resulted in a bigger monthly check.

Fred, waited four more years--until age 70--to start receiving Social Security. Based on an assumed cost-of-living (COLA) increase of 3% each year plus the minimum Delayed Retirement Credit (DRC) of 8%, Fred’s annual benefit increased 11% each year he postponed collecting Social Security himself.  As a result, his benefits were nearly 49% higher than he would have received at his full retirement age (FRA) of 66.

This sounds attractive, but it’s not the only technique available to a couple wishing to maximize their joint Social Security income. Let’s see how Wilma and Fred would fare if they took a different approach.  Again, here are the relevant 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 or a spousal benefit before she has reach her FRA (66), the amount will be reduced. Likewise, Fred’s maximum spousal benefit is $400 a month. He will only receive this amount if he waits until age 66 to file for it.

-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. 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.

-For each year past your FRA that you postpone starting Social Security benefits, the amount you receive will increase a minimum 8%--this is called your “Delayed Retirement Credit” (DRC). In addition, your benefit also receives the annual Cost-of-Living (COLA ) adjustment Social Security determines each year based upon inflation.

A key concept to understand about Social Security is that, just as you are penalized for beginning to receive benefits before you reach your full retirement age, you are rewarded for postponing the start of benefits. If you wait until you have at least reached your FRA , you get more benefit options, such as the ability to file to “restrict the scope” of your application. This enables you to file only for a spouse benefit, thereby allowing the benefit you’re entitled to based upon your own work record to increase, thanks to annual DRCs + COLAs.

Scenario No. 2:

Next year, Wilma files for Social Security based on her own record, but because she is only 63 years old, her benefit will be 20% less than what she would receive if she waited until reaching her FRA of 66.

She is not eligible for a spousal benefit because Fred hasn’t filed yet.

Wilma’s monthly check: $640.

Since Fred has reached his FRA, he files for Social Security, but restricts the scope of his application and applies only for a spousal benefit based upon Wilma’s work history. This amounts to $400.

Total monthly income at ages 63 and 66: $1,040- compared to $750 under the File-and-Suspend approach in last week’s example.

Four Years Later

According to Social Security spokesperson Kia Green, by only taking a spousal benefit at his FRA, the benefit Fred is entitled to based upon his own work history “can earn DRCs.” It will also earn the COLA each year. Assuming he waits until age 70 to file for this, his monthly check will grow to $2,971. This is the same as under Scenario No. 1.

Wilma’s Social Security check, which is solely based upon her own earnings record, will receive the 3% COLA each year. Four years later, this will have increased to $699 a month.

However, now that Fred has filed for his own Social Security, Wilma is finally eligible to file for a spousal benefit based upon his record. If Wilma had waited until her full retirement age to file for Social Security, she would be entitled to 50% of what Fred’s benefit would have been at his FRA, or $1,000.(1)

However, starting Social Security before reaching your Full Retirement Age reduces both the benefit she receives on her own earnings, as well as her spousal benefit. With the addition of what she’s entitled to as a spouse, Wilma’s monthly check will be $824.

Total income as a couple at ages 67 and 70: $3,795.

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It’s important to recognize that this is how the math worked out given the assumptions in the hypothetical case of Fred and Wilma. The outcome would change- perhaps significantly- if their ages or benefit amounts were different than those in this example.

For instance, if the Social Security benefit Wilma earned were a lot smaller. Or if the ages of the couple were different.

While there is a wealth of information- including calculators at Social Security’s website- it does not allow a married couple to test out different scenarios that integrate the benefits earned by each spouse.

Green stresses that, whether you’re married or not, before pulling the trigger on how you want to take Social Security benefits, “a person should contact their local Social Security office for more information.”  I agree wholeheartedly. Moreover, money isn’t the only consideration. Health issues, age differences, income need, etc. have to be factored into your decision. Make an appointment with a counselor at your local Social Security office who can review your options.

A mistake can result in less income for the rest of your life.

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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