Social Security Maximization for the Married
Even though the process might appear convoluted, there are key factors to consider when optimizing Social Security benefits for your spouse and yourself.
Timing your Social Security start date so you can pocket the maximum benefit over your lifetime is one of those financial-planning topics that makes your head hurt (or mine, at least). I first discussed optimizing your Social Security benefits in this article. Morningstar.com users, many of whom have firsthand experience with navigating the tricky terrain of Social Security, weighed in with wisdom of their own, so I urge you to read the comments that appear below that article.
Maximizing a Social Security benefit during your own lifetime is a headache unto itself: You'll have to consider your own income needs and desired retirement start date, and also make some assumptions about your own longevity and health. But maximizing benefits during two lifetimes forces married couples to multiply the decision-making by 2, and adds a few more variables into the mix for good measure.
Here's an overview of the Social Security spousal benefit, as well as some of the key considerations to bear in mind when deciding which route is the right one for you and your spouse to take. (Note that I'm just scratching the surface of this very complex topic.)
Spousal Benefit Basics
First, a brief overview of how Social Security works for married couples. Both spouses are eligible to claim their own Social Security benefits based on their own work histories. But spouses can also claim what's called a spousal benefit, entitling one spouse to receive up to 50% of the other spouse's Social Security benefit. (A spouse can only claim a spousal benefit if the other spouse is already receiving benefits based on his or her own record.)
In the case of a spouse who hasn't spent many years in the workforce or who generated a much smaller income than the other spouse, claiming the spousal benefit is apt to be more profitable than claiming a Social Security benefit based on his or her own earnings history. This calculator helps you calculate each partner's Social Security benefit, whereas this one helps you see what a spousal benefit would be. If a lower-earning spouse begins collecting his own Social Security before the other spouse, his benefit will automatically step up to the level of the spousal benefit when the higher-earning spouse files for benefits. (That assumes that the spousal benefit is higher than the lower-earning spouse's own benefit.)
Social Security benefits may also be adjusted when one partner in a marriage dies. At that point, the surviving spouse's benefit automatically steps up to the level of the partner with the higher benefit. (The surviving spouse is not entitled to receive both.) So, for example, if one partner is collecting Social Security based on his own work history while his spouse is collecting the spousal benefit, the surviving spouse's benefit would increase to the higher-earning spouse's level upon that spouse's death.
Timing Is Key, Times Two
A previous article discussed timing of your Social Security start date, noting that you'll receive a reduced benefit if you begin collecting Social Security before your full retirement age. The same is true of the spousal benefit. So, for example, say a 62-year-old begins receiving Social Security before her normal retirement age of 66. (Click here to view normal retirement ages.) Not only will her own benefit be docked if she chooses to collect Social Security based on her own earnings history, but so will her spousal benefit, even if her spouse retires at his full retirement age.
It's also possible and often desirable for spouses to do both: claim Social Security based on their own earnings histories and then take the spousal benefit later on--or vice versa. One common approach mixes the spousal benefit with an individual's own benefit. For example, say a lower-earning spouse begins to collect Social Security benefits before the higher-earning spouse, thereby entitling the higher-earning spouse to collect spousal benefits.
At a later date, when the higher-earning spouse has reached his normal retirement age or even older, he can dump the spousal benefit and begin collecting his or her own benefit at a higher level. That has the salutary effect of increasing the benefit available to his wife upon his death, assuming he predeceases her. That's because, as noted earlier, the higher benefit stays in place upon the first spouse's death.
A common version of this strategy is called the 62/70 split. Under this strategy, the lower-earning spouse begins collecting benefits at age 62, at which time her spouse files for the spousal benefit (assuming he is of full retirement age; if he's not, he'll automatically receive whichever is higher--his own benefit or the spousal benefit). When the higher-earning spouse reaches age 70, he then files for his own benefits and bags the spousal benefit, thereby ensuring the highest possible payout for whichever spouse lives longer. An article in T. Rowe Price's Investor magazine models some different approaches to Social Security for married couples.
Yet another related strategy is called "file and suspend." Under this strategy, the lower-earning spouse begins taking benefits based on his or her own work history as early as possible, anywhere between age 62 and 66. The higher-earning spouse can then file for receipt of Social Security benefits when he reaches his full retirement age at 66, thereby entitling the lower-earning spouse to spousal benefits. The higher-earning spouse can then suspend his own receipt of benefits shortly thereafter and file for Social Security benefits again when he reaches age 70. This approach is complicated, but its attractions are several. It enables the lower-earning spouse to qualify for spousal benefits earlier, and waiting until age 70 maximizes the payout during both spouse's lifetimes.
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