Maximizing Social Security retirement benefits is one of the more important actions a married couple can take.
It’s also a goal many couples have difficulty achieving.
Lifetime income can increase by 5 figures… tens of thousands of dollars, and even more, when Social Security benefits are claimed at the optimum time, or close to it.
Yet, the apparently simple rules for claiming benefits become complicated as a couple sorts through the options and tries to decide on claiming strategies.
There’s a lot of confusion over the tricky rules about spousal benefits.
In each couple, there’s likely to be one spouse with higher lifetime earnings, and therefore a higher Social Security benefit.
The lower-earning spouse is paid either his or her own earned benefit or 50% of the higher-earning spouse’s benefit (known as the spousal benefit), whichever is higher.
Technically, the lower-earning spouse receives his or her own benefit plus a supplement or add-on that increases the total benefit to 50% of the higher-earning spouse’s benefit.
But there are a couple of tricks in the rules, and those tricks often trap couples into lower lifetime benefits than they could have had.
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The first trick is that the spousal benefit is available to the lower-earning spouse only after the higher-earning spouse files to claim his or her retirement benefits.
Suppose Max and Rosie Profits both are age 64. Max earned more than Rosie and is still working.
Under current estimates, if Max claims benefits at his full retirement age, he’ll receive $3,200 per month. Rosie is estimated to receive $1,200 per month if she claims benefits at full retirement age.
The $1,200 Rosie is entitled to is less than half of Max’s $3,200 benefit.
So, at full retirement age, she’d like to receive $1,600 (half of Max’s benefit) instead of her own $1,200 benefit.
In fact, Rosie wants to file for benefits now and begin receiving monthly cash flow, even if it is less than she’d receive at full retirement age.
But Rosie can’t receive half of Max’s full retirement age benefit until Max files to claim his benefits.
So, if Rosie claims benefits before full retirement age, she’ll receive only her own earned benefit, reduced for claiming before full retirement age.
The spousal benefit isn’t available until Max claims his benefit. It is important for Max to wait until age 70 (or at least as long as possible) before claiming his benefits.
That’s because after one spouse dies, the surviving spouse receives only one benefit.
Two Social Security benefits were coming to the household while both spouses were alive.
But after one spouse passes away, one Social Security benefit stops. In most cases, the surviving spouse will receive the higher of the two benefits the couple were receiving.
That’s why Max should wait until age 70 to claim benefits.
The couple should want the surviving spouse, whomever it is, to receive the highest possible benefit after the other spouse passes away.
I’ve talked to a number of surviving spouses who wish the higher-earning spouse had delayed claiming benefits.
The lifetime guarantee of inflation-indexed benefits is significant for many couples, especially after one spouse passes away, and is especially important as the years go by.
After full retirement age, the monthly benefit increases 8% for each year a person delays claiming benefits through age 70.
That’s a significant increase in lifetime income, and becomes more significant as compounded inflation-indexing increases the monthly benefit over the following years.
Another point that’s not fully understood is that the spousal benefit is 50% of the other spouse’s full retirement age benefit, even if the higher-earning spouse delays claiming benefits until age 70.
In the example above, after Max claims his benefits at age 70, Rosie won’t receive 50% of the amount Max begins receiving at age 70.
Instead, Rosie’s benefit will be increased so that it equals 50% of what Max would have received if he had claimed benefits at his full retirement age.
Since Max is 64 today, his full retirement age (which also is known as the normal retirement age) is 66 years and six months.
Another important point is that after Max claims his benefits, Rosie’s benefit won’t increase to 50% of Max’s full retirement benefit if Rosie claimed her benefit before reaching her full retirement age.
Since Rosie also is 64 today, her full retirement age is 66 years and six months.
If she wants to claim her benefits today, they will be reduced from her full retirement age benefit of $1,200.
When Max claims his benefits and Rosie qualifies for spousal benefits, the fact that she claimed her own benefits before full retirement age will reduce her spousal benefit to less than $1,600 (half of Max’s full retirement age benefit).
People often confuse the rules for spousal benefits and those for survivor’s benefits.
If Max dies sometime after claiming his benefits at age 70, Rosie will receive whatever benefit Max was receiving at his death.
Unlike the spousal benefit, her survivor’s benefit will reflect the higher benefit Max received by waiting to claim.
Also, though Rosie claimed her own retirement benefit before her full retirement age, that won’t reduce her survivor’s benefit.
The survivor’s benefit will be the full amount Max was receiving at his death, regardless of the age at which Rosie claimed her own benefits.
Rosie shouldn’t count on Social Security to tell her when she’s entitled to a higher benefit, either after Max files for his retirement benefits or after he passes away.
Social Security is supposed to do that but often doesn’t. Rosie will have to know to file for the higher benefits.
When Max decides to claim his retirement benefits at age 70, Rosie shouldn’t file to claim her higher spousal benefit right away.
She should wait until Max has filed his claim and received the letter from Social Security indicating the claim is accepted and the benefits are about to be paid.
If Rosie files before that, her claim is likely to be rejected and she’ll have to reapply after Max’s benefits are formally approved.