Social Security and Retirement Planning – Married Couples By Keith S. Kogachi, CPA/PFS
The August 2012 issue of Planning Advisory included an article on the importance of Social Security benefits as part of total retirement income. This issue focuses on married couples and how the analysis of certain situations can become involved and complicated. The planning process will often involve a quantitative analysis and there are tools (calculators) available to assist married couples in addressing their specific situations. For example, AARP provides a Social Security calculator for married couples at its website; aarp.org. However, these calculators should only serve as an aid to support your own research and analysis. You are urged to confirm your understanding of the rules and options with the relevant authorities and experts; the Social Security Administration (website ssa.gov) and your personal financial advisor, respectively.
For married couples, a major goal is to maximize Social Security retirement benefits as one unit. From a quantitative perspective, the financial analysis can become complex due to differences in earnings, ages and individual retirement goals as well as other factors such as personal health and current and future financial obligations. Before addressing specific situations we will first cover some planning options and benefits available under Social Security that are relevant to married couples. These include benefits available to non-working or lower earning spouses, the ability to file and suspend payments of Social Security benefits, delayed retirement credits and full retirement age (FRA).
Non-working Spouse or Lower Earning Spouse
A spouse who has not worked or a spouse with low earnings compared to the earnings of his or her spouse can be entitled to as much as 50% of the working or higher earning spouse’s full retirement benefits1. The amount of the spousal benefit may be reduced should the non-working or lower earning spouse decide to receive retirement benefits before reaching full retirement age or FRA (refer below for explanation of full retirement age). Depending on the required FRA which can range from age 65 to 67 based on year of birth, a non-working or lower earning spouse at age 62 can receive from 37.5% to 32.5%, respectively, of the working or higher earning spouse’s unreduced benefits2. Finally, only one spouse can apply for spousal benefits3.
Suspending Social Security Benefits
In addition to the benefits available to non-working or lower earning spouses described above, is the ability to apply or file for Social Security benefits and to suspend the payments of such benefits4. Filing for benefits and then suspending the benefit payments can be done only at FRA and before age 705. As is the case for spousal benefits, only one spouse can apply for and suspend payment of benefits6.
Delayed Retirement Credits
Delayed retirement credits are the yearly rate of increase in Social Security benefits for each year retirement benefits are delayed beyond the FRA up to age 707. For those born in 1943 or later, the yearly rate of increase is 8.0%8. These credits can total a maximum of 32% from age 66 to age 70. Delayed retirement credits are limited up to age 70. Delaying retirement benefits could also increase retirement benefits due to higher lifetime earnings if you continue to work until age 70.
Full Retirement Age (FRA)
Full retirement age (FRA) is the age at which you qualify for full or unreduced retirement benefits9. For those born before 1937, the FRA is age 65. The FRA increases for those born after 1937 up to age 67 for those born in 1960 and therafter10. For those retiring at the earliest age permitted of 62, retirement benefits will be reduced. For example, if your FRA is 67, your retirement benefits will be reduced by 30% at age 62. The reduction in benefits is reduced each year until age 66 (reduction of 6.7%) which is the year prior to FRA of 67 in this example. These reductions are generally permanent.
Situation 1 – Non-working and Working Spouse
In this situation, we have a non-working spouse and a working spouse. In general the non-working spouse will claim for spousal benefits (50% of the working spouse’s benefits) at the non-working spouse’s FRA. The non-working spouse can only file for the spousal benefits if the working spouse has reached FRA and has filed for such retirement benefits. The working spouse after filing for retirement benefits would then immediately file to suspend payment of the working spouse’s benefits. The working spouse would then be able to accumulate delayed retirement credits which would increase the working spouse’s retirement benefits.
Points to Consider – The non-working spouse can file for spousal benefits as early as age 62 (assuming the working spouse has reached FRA) but the amount of benefits will be reduced as discussed above. A simplified way to determine whether to begin receiving spousal benefits at age 62 or at FRA involves calculating the age at which the total benefits received beginning from age 62 or at FRA (say for example age 66) are approximately equal (the “breakeven age”). In the years after the breakeven age, since the annual retirement benefit amount determined at FRA of 66 exceeds the annual retirement benefit amount determined at age 62, the resulting total amount received from the retirement benefits determined at the FRA of 66 will always be higher than the total amount received from the retirement benefits determined at age 62. This simplified method of analysis does not consider cost of living adjustments made by Social Security. Further, this simplified approach does not consider the earnings from the investment of the retirement benefits. Once the breakeven age is determined a key factor in the decision process, as noted in a Social Security publication on receiving retirement benefits11, is your personal health and family longevity. This may be an important consideration if, due to personal health and/or family longevity the life expectancy age is less than the breakeven age. In this situation, careful consideration should be given to receiving spousal benefits at age 62 (or any age between 62 and FRA) at a reduced benefit amount rather than waiting until FRA. As noted in the Social Security publication referred to earlier, other factors such as current cash needs, plans for employment in retirement, other retirement income sources, anticipated future financial needs and obligations and future Social Security benefits should also be considered. Finally, the difference in ages can have a significant impact on the amount of benefits (i.e. smaller differences in age results in a higher total benefit).
Situation 2 – Both Spouses Have Earnings
In this situation, both spouses have earnings. Accordingly, the planning process becomes more complex depending on the differences in earnings and ages. As previously noted above, other factors such as personal health/family longevity, current cash needs, employment plans, etc. remain as relevant considerations for situations where both spouses have earnings.
For this situation, the difference in age is less than 5 years with the higher earning spouse the first to reach FRA of 66 (lower earning spouse is 62). Similar to situation 1, the higher earning spouse would file for retirement benefits at FRA and immediately suspend the retirement payments. The lower earning spouse who also has an earnings record with Social Security would file for Social Security benefits at age 62 at a reduced benefit. When the lower earning spouse reaches FRA, the lower earning spouse would now file for spousal benefits. Remember, a spouse is entitled to 50% of the other spouse’s retirement benefits; in this case 50% of the higher earning spouse’s benefits. Again, subject to a quantitative review, the goal of this strategy is to maximize the lower earning spouse’s benefits at FRA of 66 by filing for spousal benefits. The spousal benefit amount will be higher compared to the benefit amount determined using the lower earning spouse’s own earnings record at either age 62 (at a reduced amount) or at FRA of 66. The higher earning spouse would begin to receive benefits at age 70 at a higher amount due to the delayed retirement credits earned from age 66 to age 70 and also possibly due to a higher earnings record established by working from FRA of 66 until age 70. The overall result (considering both spouses) should maximize the total retirement benefits as one unit. Finally, as noted in Situation 1, other factors should also be considered before adopting this strategy (i.e. personal health/family longevity, current cash needs, plans for employment, age difference between spouses, etc.).
As noted above, since both spouses have earnings, the analysis can be involved and complex. For example, another possible option for the situation discussed in the previous paragraph, depending on the difference in earnings, would be for the higher earning spouse to file for spousal benefits instead of the lower earning spouse. The higher earning spouse would file for retirement benefits upon reaching age 70. As in the preceding example, the higher earning spouse would accumulate delayed retirement credits. The lower earning spouse would file for retirement benefits at age 62 at a reduced amount if this reduced amount is still higher than the amount received for spousal benefits at FRA.
Points to Consider – For the situations described in the preceding paragraphs, a decision has to be made as to whether the higher earning spouse should file for spousal benefits rather than the lower earning spouse. Remember, as previously noted, only one spouse can file for spousal benefits just as only one spouse can file for and suspend benefit payments. The above described situations involving couples who both have Social Security earnings illustrate just some of the possible options under the rules of Social Security. The analysis can be become more complex if combinations of different retirement ages (i.e. both retire at 62, both retire at FRA, both retire at age 70, one retires at 62 and the other at FRA and so on) are analyzed to determine the maximum retirement benefits as one unit. The results of these combinations would be affected by be the difference in earnings and age as well as the need to address other financial and nonfinancial goals.
This article has not addressed the tax issues regarding Social Security benefits and you are advised to consult with your tax advisor to address the tax impacts of Social Security benefits to your personal financial situation.