Maximizing Spouses’ Social Security Benefits

Most people make the wrong decisions about their Social Security benefits and in doing so leave a lot of money on the table. Married couples have the most flexibility and options. When a couple coordinates their Social Security retirement benefits, they increase by tens of thousands of dollars the amount of lifetime income they receive. Remember, Social Security is guaranteed, indexed for inflation, and can serve as remarkably inexpensive life insurance. Social Security planning should be receiving far more attention than most people give it.

First you need to determine if you have some flexibility in deciding when you begin benefits. You receive full retirement benefits if wait until at least age 66 to receive retirement benefits, and the amount of benefits increases by 8% each year that you wait through age 70 to begin receiving benefits.

You can begin receiving benefits at age 62 in most cases, and most people begin taking their benefits before 66. When you need the income before 66, you should go ahead and begin the benefits. But when beginning Social Security before 66 isn’t essential, give careful thought to delaying. Unless you’re making at least 8% on your investments, it usually makes sense to draw down your other accounts in order to delay Social Security.

Now, let’s look at how spouses can coordinate benefits.

A married person can receive the higher of his or her own Social Security retirement benefits and half of the other spouse’s full retirement benefits (the amount payable at age 66), whichever is higher. Social Security is supposed to automatically calculate this when you apply. To receive one half of your spouse’s earned benefit, the other spouse must have applied for retirement benefits. When the other spouse hasn’t applied yet, you can receive only your own earned benefit until the other spouse applies.

One caveat is that if you apply for benefits before age 66, you won’t receive the full benefit whether it is your own earned benefit or half of your spouse’s. It will be reduced, and the earlier you begin benefits before 66 the greater the reduction. The maximum reduction, by beginning benefits at 62, is 25%.

Here are a few strategies that can increase the lifetime incomes of married couples. Let’s assume that the husband is the higher-earning spouse and the spouses are the same age.

Suppose the wife begins drawing Social Security retirement benefits at age 62. She’ll receive less than her full earned benefit, because she’s beginning benefits early. She can’t receive benefits based on her husband’s benefit amount, because he hasn’t applied for benefits yet.

The husband waits until age 66 to apply for benefits. But he doesn’t ask for benefits based on his earning record. Instead, he restricts his application to one for spousal benefits. This is important, because if he doesn’t restrict the application, Social Security will pay the higher of his earned benefits and half his wife’s benefits. So, he’ll begin receive half his wife’s benefit at 66. He won’t receive half of the lower benefit his wife’s been receiving. Because he waited until at least age 66, he’ll receive half of his wife’s full benefit, the amount she’d have received if she waited until age 66 to begin benefits.

Later at age 70 the husband can apply to receive retirement benefits based on his own earnings record, and this will be the maximum amount he can receive. In addition, his wife now can receive benefits of half her husband’s benefits if that’s higher than her own earned benefit. If the husband chose to begin retirement benefits at age 66, the wife then could begin receiving the higher of her own benefit and half the husband’s benefit at that point. (Because the wife began benefits before age 66, whichever benefit she receives will be reduced.)

Having the husband wait until age 70 to begin benefits also acts as life insurance. When a spouse dies, the surviving spouse for the rest of his or her life receives the higher of her earned benefit and the amount her husband was receiving at the time of his death. If she receives her late husband’s benefits, it won’t be reduced, though the wife began receiving her benefits early. So, by maximizing his own lifetime benefit the husband also maximizes his wife’s benefits after his death.

Now, suppose one or both spouses began receiving Social Security benefits early and now realizes that wasn’t the best move. There still are options.

When a person’s been receiving Social Security benefits for less than 12 months, there’s an opportunity for a complete do-over. He or she can repay the benefits received and begin the benefits again at a later date. The repayment must be made within 12 months of when benefits first were claimed.

The other option, which can be done at any time, is for the person to suspend the benefits. When you suspend benefits before age 70, you’ll receive the delayed retirement credit for each month you delay resumption of the benefits until age 70. You won’t receive additional credits for delaying receipt past 70. And you can’t go back and get credit for the months you received benefits before suspending them.

One key point with married couples is that you both can’t collect half of the other spouse’s earned benefit at the same time. One spouse has to actually be claiming retirement benefits on his own record for the other to collect the spousal benefit.

But there is another option. Suppose when the spouses turn 66 the husband, higher earning spouse in our example, files for retirement benefits. After they’re approved, he immediately suspends the benefits. Because he filed for retirement benefits, the wife can begin receiving the 50% spousal benefit. She can file a claim restricting her benefits to spousal benefits, leaving her own earned retirement benefit to continue to increase. The husband can wait until age 70 to remove the suspension of his benefits and begin receiving the maximum benefit. The wife, on reaching age 70, can apply for benefits on her own earnings record and receive the higher of her own benefit and half her husband’s. But note the husband won’t be receiving any benefit payments until age 70.

There are many Social Security options for spouses. No one is right for everyone, so you need to start early and plan for the one that seems best for your situation.

RW February 2013.