Hello again friends. The focus this time is on spousal benefits with ideas for maximizing overall Social Security benefits. First, let me acquaint you with some of the terminology used in this area. Primary Insurance Amount (PIA) is the amount of benefits you will receive upon reaching full retirement age. This amount appears on the upper right hand corner of the cover page and at the top of page two of your Social Security Statement. Full Retirement Age (FRA) is the age at which you will receive 100% of your earned retirement benefit. This age varies based on your birth year. Below is the current chart for FRA.Source: Social Security Administration
Also, I will make use of the gender neutral terms; LES (lower earning spouse), and HES (higher earning spouse). I will refer to your standard Social Security benefit as earned benefit.
The basics of the earned benefit are that if you retire at FRA you will receive 100% of the PIA. (Don’t you love these government acronyms?) If you file to receive your earned benefit during the time period from age 62 but prior to FRA, you will receive a reduced benefit. The amount of the reduction depends on the time interval between when you actually file and FRA. There is a formula for calculating this reduction but suffice it to say that the maximum reduction is 25% for people whose FRA is 66 and 30% for people with FRA at 67. Be aware, filing early for earned benefit will permanently reduce the amount of your benefit, disregarding the annual COLA (cost of living adjustment). In other words, your benefit will not be adjusted up when you reach FRA.
Conversely, you can increase your earned benefit by delaying receipt beyond your FRA. When you do this, you accrue delayed retirement credit (DRC). This credit builds progressively (8% per year) from FRA to age 70, at which time it will have maxed out at 132% of PIA for people whose FRA is 66. The maximum amount of DRC for people born from 1955 to 1960 or later, ranges from 130 2/3% to 124% of PIA. To get more details on how this affects you, go to the DRC chart on the Social Security website.
The spousal benefit is based on a differential between a percentage of LES’s PIA and HES’s PIA. In general, to receive a spousal benefit the filer must be 62 or above and the other spouse must have filed for earned benefits. As with the earned benefit, the filing spouse will receive a reduced spousal benefit due to initiating it before FRA. On the positive side, the spouse will start receiving a check, but this person’s earned benefit will be untouched and continue to grow to 100% of PIA at FRA. (It is not possible for both spouses to receive the spousal benefit at the same time.)
Principle factors in calculating spousal and earned benefits are the wage base (calculated using a formula that includes your 35 highest earning years) and FRA of each spouse. Your decision about when to start receiving Social Security benefits, of any type, is principally dependent on your financial need. Other important factors to consider are your assumptions about life expectancy based on current health, family history, and lifestyle. For example, a serious health matter could influence you to take benefits early regardless of your financial need.
The chart below represents the expected benefits of a married couple of equal age if they chose to retire at ages 62 (early), 66 (FRA), or 70 (full DRC).
- September 1, 1954 birthdate for both
- Annual salary, HES $150,000/yr., LES $50,000/yr.
- Social Security benefits statement at FRA, HES: $2,637, LES $2,129
- Expected life, HES 86, LES 88
This chart clearly demonstrates the benefit of delaying the receipt of the earned benefit to as close to age 70 as possible. Admittedly, this scenario doesn’t match the typical situation for most married couples, but it is useful for illustration purposes. While these benefits may look good, they may be improved through effective use of the spousal benefit. Doing this involves correctly utilizing the file and suspend and restricted applications. File and suspend means to file for earned benefits but to suspend actual payment until a later date such as FRA or age 70. Filing the application in this way enables the other spouse to file for the spousal benefit and allows the earned benefit to continue growing. A restricted application is one that directs the payment of only a specific type of benefit, (e.g. spousal). Let’s say that this couple can afford to not receive benefits until their FRA and is willing to have HES wait until age 70 to start receiving earned benefits. In this scenario the expected lifetime benefit increases to $1,419,600. This represents an increase of $153,700 over the projected lifetime benefits for both retiring at age 66 and is $43,000 above both retiring at age 70. The steps in executing this strategy are:
- Sept. 2020, LES (at age 66) files for earned benefits and suspends payment of them. This allows HES to receive spousal benefits while both LES’s and HES’s earned benefits continue to grow. Note, it is recommended that you download and print a copy of Social Security Legislative Bulletin 106-20 to take with you to the Social Security Office when you intend to execute a file and suspend application. The third bullet point of that bulletin specifically permits this activity. This Bulletin is available on the Social Security website.
- Sept. 2020, HES (at age 66) files a restricted application for spousal benefits. The restricted application is specific for the payment of just a spousal benefit and excludes earned benefits. LES’s earned benefits continue to grow.
- Sept 2021, LES (at age 67) files for earned benefits.
- Sept 2024, HES (at age 70) files for earned benefits.
I recently read that there are approximately 8,000 different scenarios for computing Social Security benefits for a married couple. Introducing modifications for disability, family, divorce, dependent children, dependent parents, etc… one can see how complicated and expansive this could get.
As stated in the previous article, my objective was to shed light on the financial consequences of not becoming familiar with important details about how Social Security actually works and to give you some basics on how to maximize your benefits. It is my hope that I have accomplished this objective. Below I have repeated the resource locations used in writing these articles and I have added a good website for use in developing and updating your Social Security plan.
Blankenship, Jim. A Social Security Owner’s Manual. 3rd. ed. Lexington: CreateSpace Independent Publishing Platform. 2014. Print.
Social Security Strategy: www.financialengines.com
Kent Butcher, MBA is Vice President & Chief Operating Officer as well as a Registered Investment Advisor Representative at UPAL.