Most strategies on Social Security planning focus on maximizing a couples total lifetime benefits based on coordinating spousal benefits. However, while spousal benefits are crucial to SS retirement planning, dont be surprised if clients, or even colleagues, are not familiar with them.
When the SS insurance system was implemented in the late 1930s its authors recognized the need to provide insurance both to workers as well as non-working or low-paid spouses (typically the woman at that time). This ensured that the non-working spouse would have some benefits regardless of whether they were still married to the worker, divorced or even a survivor should the worker die before them.
Spousal benefits guarantee that a person, no matter what their work history, can collect SS benefits based on the work history of the primary working spouse as long as that spouse qualifies and has filed for SS benefits. The spousal benefits are available once the couple has been married at least for one year. It is irrelevant whether the spouse applying for spousal benefits ever worked a Social Security paying job for even one day in their life.
SPOUSAL BENEFIT CALCULATIONS
Two important concepts contribute to the determination of spousal benefits: age and the workers primary insurance amount. All the following examples assume the spouse has no work history of their own.
The primary insurance amount is the amount that a worker is eligible to receive at their full retirement age, which is sometime in their 66th year for workers born before 1960. An estimated future primary insurance amount is listed on page 2 of the SS Statement, which all workers can generate on SSA.gov. (Note that these are only estimates. The exact value of the payments will be calculated when one actually files for benefits.)
The spousal benefit will always be between 35% and 50% of the workers primary insurance amount depending on the age at which the spouse applies for benefits. If the workers PIA was $1,600 per month, the spouse would be eligible for 35% of that (or $560 per month) if the spouse applied for benefits at the earlier possible filing age of 62. If the spouse waited till they were 66 or older, their benefit would be 50% (or $800 per month.) Between 62 and 66 proportional amounts apply.
Importantly, a spouse cannot file for benefits until the worker has already applied for their own benefits, the earliest age being when the worker is 62 years old. If a spouse is younger than the worker this is typically not a problem since the worker probably will have already filed for benefits by the time the spouse is first eligible (also 62). On the other hand, if the spouse is, say, 10 years older than the worker, the spouse would have to wait until at least age 72 at which time the worker is 62 and is finally eligible to file for benefits.
Of course, today typically both spouses work and qualify for SS retirement benefits based on their own work history. When one of a working couple files for retirement benefits, the Social Security Administration will automatically pay them the higher of the benefit based on their own work history or their spousal benefit. Both spouses cannot claim spousal benefits on each other. One will always file first and, by definition, is filing based on their own work history. The second one may collect spousal benefits or not depending on which is higher.
There are a number of SS filing strategies which may be used to optimize a couples total lifetime SS benefits. These entail integrating spousal benefits by using creative ways to sequence the filings. The two most common strategies, file-and-suspend, and suspended filing will be discussed in future blogs.
Paul Norr is a financial planner in Thousand Oaks, California and writes about planning and retirement. His website is www.paulnorr.com
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