When it comes to Social Security, what you don’t know can cost you. For example, many couples don’t fully understand their options and miss years of benefits for which they are entitled.
As a financial advisor in Greenville, SC and a Registered Social Security Analyst with the National Association of Registered Social Security Analysts, here are some frequently asked questions that address Social Security strategies for married couples:
Q: Why Would a Couple Want to Stagger Retirements?
A: Everyone’s situation is different. For this purpose, let’s disregard issues like wanting to work later or retire early, and concentrate on the financial aspects.
It can make sense for a spouse with a higher income to continue working while allowing the other spouse to retire first. This strategy allows the younger spouse, if age 62 or older, to start collecting Social Security benefits while the other spouse postpones, thereby increasing the other spouse’s eventual benefit.
Bear in mind that your benefits will be taxed if you, as a couple, earn threshold amounts of income. In 2021, 50 percent of your Social Security benefits would be taxable if you earned between $25,000 and $34,000, and 85 percent thereafter. You would eventually recoup these taxes, but it might take up to 15 years once your reach your full retirement age.
Nonetheless, this strategy allows the younger spouse to receive some benefits, and the couple may be able to leave their retirement accounts untouched. The working spouse has income that can continue to be contributed to a retirement account. Thus, staggering retirements lets you earn limited benefits while preserving your retirement nest egg.
Q: What is the Split Strategy, and How Can it Help Increase Our Social Security Income?
A: First, some necessary background.
The Social Security Administration (SSA) keeps track of your income each year because it collects Social Security taxes on that income (unless the worker has a job that is exempt from those taxes). Each income record is completely individual and separate from that of a spouse.
The benefit you eventually earn from Social Security is based on your lifetime earnings. Specifically, the SSA calculates your average indexed monthly earnings during the 35 years in which you earned the most.
The calculation yields the worker’s Primary Insurance Amount (PIA), which is the benefit collectible when the worker reaches full retirement age (between age 66 and 67, based on your date of birth).
Your actual benefit amount depends on when you claim benefits. At the earliest possible claiming (age 62), you’ll collect only 70.2 percent of your PIA. The benefit increases each year you delay your claim up to age 70.
Your spouse is entitled to a percentage (32.5 to 50 percent) of your PIA. Social Security will pay out the greater of the claiming spouse’s personal benefit or spousal benefit. Spousal benefits are available if you’ve been married for at least one year, you are already collecting retirement benefits, and are at least 62 years old.
Now, back to the split strategy.
The split strategy is one in which spouses begin claiming at different ages. In this strategy, the spouse with the lower PIA claims first, allowing the higher earner’s benefit to increase by postponing claiming. The reason for this arrangement is that the higher earner’s increase in benefits over time will be worth more than those for the lower earner.
Furthermore, if the higher earner’s benefits will, at time of claiming, be more than twice that of the low-earner’s, the lower earner can claim spousal benefits that exceed those based on the higher earner’s earning record.
“Boris” is 64 years old, and his PIA once he reaches age 67 will be $3,000 per month. He plans to retire at age 70. The PIA of his wife, “Natasha” (age 62), would be $1,300 per month at age 67. She decides to claim benefits at age 62 and receives $912.60 per month.
Fast forward to Boris’ 70th birthday. Due to cost-of-living increases, Natasha has been collecting $1,000 per month. She now claims spousal benefits and begins receiving $1,500 per month, which is half of Boris’ PIA. Natasha had to wait to claim the spousal benefit until Boris filed his claim.
Boris and Natasha thank their financial advisor for explaining how to extract more Social Security benefits by using the split strategy.
Q: How Will Restricted Application Help with Our Social Security Benefits?
A: If either spouse was born before January 1, 1954, you are grandfathered into a benefit known as “restricted application.” This is a strategy in which one spouse makes a spousal benefit claim, based on the other spouse’s work record.
Here’s another example:
“Harry” is 62 and claims Social Security benefits worth $1,200 per month. “June” is 67, meaning she has attained her full retirement age. June plans to delay claiming her Social Security benefits until age 70. June can, however, file a restricted application and receive a spousal benefit of $600 per month based on Harry’s work record, even though Harry isn’t collecting yet.
The beauty of this strategy is that June’s $600 per month spousal benefit does not affect Harry’s benefit, nor will it affect her personal benefit when she claims it at age 70. Moreover, the amount she will eventually collect will be increasing at the rate of 8 percent a year (the case for anyone who delays receiving benefits for the years between their full retirement age and age 70).
In this case, if June claimed her personal benefit at age 67, her benefit would be $2,000. By waiting until age 70, the monthly amount grows to $2,480.
Had Harry and June not known about restricted application, they would have missed out on $7,200 a year for three years.
One small consolation: When June finally submits her claim a few months before her 70th birthday, the SSA informed her that she could retroactively collect the spousal benefit, but only for the 12 months preceding her reaching age 70.
Social Security can be trickier than it may seem, especially for couples. Check out our new guide, Navigating Social Security, and lean on the Certified Financial Planners and Registered Social Security Analysts at Global View to help ensure you take advantage of everything you have coming to you, leaving nothing on the table. Given that this is just a fraction of the services that a financial advisor can provide, why wait another day to start a conversation?
If you’re currently looking for a financial advisor in the Greenville, SC area, contact the team at Global View to see how we can help. Global View has offices in and around Greenville, SC, and helps families with their retirement planning in the Carolinas as well as nationwide.