Married couples can often boost their lifetime Social Security benefits with the strategic use of the spousal benefit. Whether only one spouse worked or both did, there's a place for the spousal benefit in any couple's retirement planning.
Couples have two key claiming strategies to boost the power of the spousal benefit, which is worth up to 50% of a spouse's monthly benefit. One is called "file and suspend," in which the higher earner immediately suspends his benefit so the lower earner can take a spousal benefit. The other is known as "restricting an application," in which the higher earner files for a spousal benefit, even though his own benefit is larger.
Both strategies enable a beneficiary to delay his own retirement benefit, allowing it to earn 8% annual delayed retirement credits until age 70. To use these strategies, a beneficiary must be full retirement age.
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With these strategies, couples can get the best of both worlds. "You get some income in your sixties and you let the higher earner's benefit grow to the maximum," says Judith Ward, senior financial planner for T. Rowe Price.
A major goal is to maximize the higher earner's benefit. If the higher earner dies first, the lower earner will qualify for a survivor benefit worth up to 100% of the higher earner's benefit. But it doesn't really matter which spouse dies first, because the higher earner's benefit "will last until the second spouse dies," says William Reichenstein, a professor of finance at Baylor University, in Waco, Tex., and a principal of consulting firm Social Security Solutions.
The difference between the size of the couple's benefits is key in determining which spouse takes what benefit when. "The amount of the benefit itself and who's the higher earner matter," Ward says. Even a few dollars' difference in benefit amounts between the two spouses can be important over the long term.
When to Employ Which Strategy
We asked Reichenstein to run the numbers for three hypothetical couples to show the different ways the spousal benefit can be used to maximize lifetime benefits. In each case, the higher earner is delaying his benefit until 70, and the lower-earning spouse is waiting until full retirement age to claim the spousal benefit. (If she claims before full retirement age, the benefit will be less than 50% of the other spouse's benefit.)
The spouses in each hypothetical couple are the same age. The wives are expected to live to 90, while the husbands are expected to live to 85. We assume the husbands are the higher earners, each with a full retirement age benefit of $2,200. The wives' full retirement age benefits vary. (Results could change if the spouses are not the same age.)
Disparate earners. In this case, the wife's full benefit is $500. Couples whose benefits differ widely have a relatively easy claiming decision. If the low earner has little or no earnings, the higher earner can file and suspend, says Thomas Wiggins, a certified financial planner with Rehmann Financial, in Farmington Hills, Mich.
A spouse can't claim a spousal benefit until the other spouse claims his. With this strategy, the higher earner files for his benefit and then suspends it. That enables the lower earner to claim a spousal benefit. And by suspending, the higher earner can allow his own benefit to grow until he collects it later -- perhaps at age 70.
This is the best strategy for this couple, Reichenstein says, because the wife's spousal benefit of $1,100 is much larger than her own retirement benefit. Even if she delayed her own benefit until age 70, it would only be $660. The strategy also provides the couple with $350 more per month between the ages of 66 and 70 than if the wife had claimed her own $500 benefit and the husband had restricted his application to get a $250 spousal benefit.
At age 70, the husband will get $2,904 (plus cost-of-living adjustments) -- $704 more than if he had claimed his own benefit at 66 without suspending. And the wife will continue getting her $1,100 spousal benefit.
Unequal earners. In this scenario, the wife's full benefit is $1,000. As the gap between benefit amounts shrinks, the best strategy is not clear-cut. It's critical to calculate all possible strategies.
Say the wife claims her $1,000 benefit and the husband files a restricted application to receive a $500 spousal benefit. That gives the couple $1,500 a month. At age 70, the husband takes his boosted benefit of $2,904, and she switches to a spousal benefit of $1,100, for a total of $4,004 a month.
But Reichenstein says the couple can do better with another strategy. At age 66, the husband files and suspends his benefit. The wife restricts her application to a spousal benefit, enabling her own benefit to grow. (If she had simply claimed a spousal benefit without restricting her application, she would not be able to allow her own benefit to grow.) They will get $400 less a month for the first four years. But the couple ends up doing better, Reichenstein says, because the wife "can grow her own benefit past her spousal benefit."
At age 70, both spouses switch to their delayed benefits -- hers of $1,320 a month and his at $2,904. That gives them a total monthly benefit of $4,224. This strategy increases the couple's total lifetime benefits by $20,400. The lesson: Couples should consider this route if the lower earner's benefit with delayed retirement credits exceeds her spousal benefit, Reichenstein says.
Equal earners. In this case, the wife's full benefit is $2,000. For couples with a narrow benefit gap, the best strategy may be for both spouses to delay their benefits, with one spouse restricting an application to a spousal benefit at full retirement age. Since both spouses in this case are the same age, the one receiving the higher spousal benefit should file a restricted application.
The husband files and suspends his benefit. The wife files a restricted application for a spousal benefit of $1,100 a month. That will give the couple $52,800 for the four years they have to wait to switch to their boosted benefits. At age 70, he switches to his boosted benefit of $2,904 and she steps up to her delayed benefit of $2,640. That gives them $5,544 a month.
When deciding how to best employ the spousal benefit, consider using online tools to run the numbers. One tool is T. Rowe Price's free Social Security Benefits Evaluator (www.troweprice.com/socialsecurity). For more personalized help, you can use a paid service such as Reichenstein's Social Security Solutions (www.socialsecuritysolutions.com).
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