When it comes to social security spousal benefits, one small mistake could prove costly. Knowing the rules can make all the difference come retirement when every dollar counts.
Here's what you need to know.
For spousal benefits, the Social Security Administration calls the person taking the benefit the “spouse” and the other the “worker”, even if both are eligible for retirement benefits based on their own work history. Typically, the spouse taking spousal benefits will receive 50 percent of the other spouse's primary insurance amount (PIA), defined as the benefit the spouse would receive at full retirement age. A general rule of thumb is that, all other things being equal, the spousal benefits will exceed the “spouse's” own benefits if their PIA is less than 50 percent of the “worker's” PIA.
“This rule is not perfect and age differences can have a substantial effect, so this may not be the best strategy in an all cases, especially depending on the goals of the recipients,” explains Neil Cooper, a senior financial analyst with T. Rowe Price.
For example, if a couple consists of two top earners, both 60, both delaying retirement until age 70, and both have a full retirement age of 55, generally the spouse with the lower PIA ought to claim the spousal benefits, but this can vary with age and specific strategy needed to match a specific goal. Suppose this couple both have the maximum PIA from 2012, $2315 per month. They would receive spousal benefits, in today's dollars of $1,256.60 per month, or $15,078 per year, for four years, for a total of $60,312 in extra income in their 60s, just by asking for it.
You may not have to wait until you're 62 to collect. If you are a widow or widower, you can collect at age 60, says Curtis Cloke, a financial advisor with Two Rivers Financial Group. If you are divorced from a former spouse whom you were married to for 10 years or more and you are not remarried, when the former spouse dies, you may be eligible to collect Social Security as early as 60.
However, you don't want to jump the gun. Just because you have reached your full retirement age doesn't mean you're eligible yet for spousal benefits, says Cloke. While you can apply for your Social Security benefit based on your own work record once you're 62, you cannot claim a spousal benefit until your spouse reaches his or her full retirement age and files for his or her benefits.
Don't miss opportunities
If a spouse did not work, they are still eligible for Social Security benefits equal to 50 percent of their working spouse's full retirement amount. When the working spouse dies, the surviving, nonworking spouse, is entitled to 100 percent of their deceased working spouse's retirement benefits, says Tom Corley, author of Rich Habits – The Daily Success Habits of Wealthy Individuals.
If you are divorced after a marriage of at least 10 years and not remarried and are at your full retirement age, you may be eligible to take benefits from your former spouse while allowing your Social Security benefit to be delayed for future higher payout. “In the event of multiple marriages, you get to pick from the best income record from all former marriages, as long as you were married for at least 10 years or more to each one,” says Cloke.
Understand file and suspend
A spouse cannot collect on their spouse's account until their spouse begins collecting. There is an exception, however. The working spouse can “file and suspend” (apply for Social Security benefits and then immediately apply to suspend collecting benefits). File and suspend is an option that becomes available to the worker at their full retirement age or any time after. What's the advantage of file and suspend? File and suspend allows the primary wage earner to apply for benefits, then suspend collecting, while allowing the other spouse to collect immediately and to continue collecting. The primary wage-earning spouse can wait to claim benefits until age 70. The upside of that is that it increases the future individual Social Security benefit.
A word of caution though about file and suspend, if spouses have earned similar amounts over their careers, the 50 percent spousal benefit might not add up to more money, and it may be better to draw individual benefits. The good thing is, if you go the file and suspend route and change your mind before you turn 70, you can reinstate your benefits.
It's not only about you
Most married couples consider their own longevity when determining whether it makes sense to delay or take Social Security early. In reality, since the Social Security received by the spouse with the highest benefit serves the surviving spouse at the first spouse's death, a couple should consider the longevity of the oldest surviving spouse and not just their own when determining the optimal choice for electing benefits, points out Cloke.
The bottom line? There's a lot to digest. “Don't make an assumption about Social Security spousal benefits without speaking to an expert. Bring Social Security into the overall financial plan and make your decisions in that context,” says James Mahaney, vice president strategic initiatives at Prudential Financial. Start your research here, ssa.gov and socialsecurity.gov.