Smart Strategies for Married Couples

Since Congress voted last year to end two Social Security loopholes, many married couples have been searching for other strategies to maximize their benefits.

For some couples, there still is time to take advantage of the loopholes—which have boosted retirement income for many couples by tens of thousands of dollars—before they disappear. And couples who already started taking advantage of the loopholes can continue to do so. (See the article Social Security Loopholes Ending from Bottom Line/Personal.)

For people who can’t start using the loopholes before they disappear, here are the best alternative strategies…

Best option for most couples: The spouse with the higher earnings history postpones claiming benefits, while the spouse with the lower earnings history starts collecting benefits as early as age 62. Your level of Social Security benefits depends, in part, on your earnings history and the age at which you start collecting benefits. Postponing the start of the higher earner’s benefits increases the size of that spouse’s future monthly benefits by 6% to 8% for each year of postponement, up to age 70. (There is no advantage to postponing the start of benefits past 70.)

Whether it pays to do this depends in part on how long the higher earner expects to live, making the choice difficult. But keep in mind that by postponing the start of the higher earner’s benefits, you also can increase the amount that the spouse with the lower earnings history ends up receiving—that’s because of “survivor benefits.” When one spouse dies, the surviving spouse can, in effect, opt to claim the deceased partner’s benefits. Because of that option, delaying the start of the higher earner’s benefits until age 70 typically will produce the highest total benefits for a married couple if either spouse lives to at least 83. Based on actuarial tables, it’s likely that for the typical married couple, if both reach age 65, at least one will live past 90. (Be aware that benefits claimed before full retirement age are subject to a Social Security earnings test, which could reduce or even eliminate benefits if the lower earner still is working and earning $15,720 or more.)

Example: Say a husband is entitled to monthly benefits of $2,000 if he starts collecting at age 62…or around $3,500 if he waits until age 70.* And say he decides to start collecting at age 70 and dies at 80, so he receives just $420,000 in total benefits, less than the $432,000 he would have received if he had started his benefits at age 62. But his wife lives to 90, so the combined benefits they receive from his account, including her survivor benefits, total $840,000—much more (a difference of $168,000) than the $672,000 they would have received if he had started at age 62.

Meanwhile, the wife started collecting Social Security benefits at age 62 based on her own earnings history and kept collecting those benefits until she switched to survivor benefits. That way, the couple receives at least some benefits while waiting for the higher earner to start collecting at age 70. (Of course, if the wife had not earned much at all, these benefits might be very small. If her benefits are much less than half the husband’s benefits, it might make sense for the husband to start collecting before age 70—more on that below.)

Possible alternative when the lower earner has an extremely low earnings history or no earnings history: Rather than waiting until age 70, the higher earner starts collecting benefits when the lower earner reaches “full” ­retirement age. One downside to waiting until age 70 to claim benefits, as the husband in the previous example did, is that under the new rules, the wife in the example could not claim spousal benefits based on the husband’s ­earnings unless the husband is collecting his benefits. (Under the old rules, the husband could file for benefits to allow his wife to claim spousal benefits, and then he could immediately suspend his own benefits, allowing his eventual monthly benefits to continue to increase in size.)

The new barrier to claiming spousal benefits is not a major problem if the wife has a significant earnings history of her own, but for couples where one spouse earned virtually all the income, it could mean that the low-earning spouse loses out on substantial benefits for many years. And be aware that although most Social Security benefits increase in size for each month you wait to claim them up to age 70, spousal benefits stop increasing once the spouse reaches what the government refers to as “full” retirement age, which is 66 for people born between 1943 and 1954.

That means it might make sense for the higher earner to start collecting his benefits when the low earner reaches full retirement age so that the low earner can start collecting spousal benefits at that point.

Example: Say the husband is the higher earner and is eligible to start collecting monthly benefits of $2,500 when he reaches full retirement age of 66…or $3,300 if he waits until age 70. Say his wife, who is the same age, did not have significant earned income during her working years. The husband chooses to start collecting his benefits at age 66…the wife starts collecting spousal benefits at age 66…and both live to 80. The couple receives a combined $630,000 versus just $594,000 if they had waited until age 70 to start collecting benefits.

However, in some cases, it might make more sense for the high earner to wait, possibly until age 70, even though that means the low earner sacrifices some spousal benefits. The correct choice depends on such factors as whether the couple has enough assets to tide them over and their expectations about their life spans. (If the high earner is at least four years older than the low earner, this is a nonissue—by the time the low earner reaches full ­retirement age, the high earner will have started his benefits anyway.)

Example: Say the wife in the example above lives to 90 rather than 80. As a result, the couple would have been better off waiting until age 70 to start collecting benefits, which would have meant the couple earned a total of $990,000 versus a total of $930,000 if the husband started at age 66.

Possible alternative when both partners are in poor health: Claim benefits as soon as possible. If health and/or family history strongly suggest that neither spouse is likely to live past his/her early 80s, the best way to maximize total benefits is for both partners to start their benefits as soon as possible, meaning at age 62 or immediately if they already are past age 62.

If You Have Dependent Children…

When a Social Security recipient has children who are unmarried and not yet 18, each of those children might be eligible to receive dependent benefits equal to as much as 50% of a parent’s full retirement age benefit. But under new rules that were part of legislation passed by Congress last year, the child can receive these “auxiliary” benefits only if a parent is receiving his/her own benefits. So the question is, should the parent claim at age 62 or as soon as possible after that to take advantage of these auxiliary benefits…or postpone benefits to age 70 based on considerations discussed above?

The answer depends in part on how many auxiliary benefit payments the family is likely to receive. If there is one child in the household who is just months away from 18 when the older parent turns 62, it almost certainly isn’t worth claiming early. But if there are multiple children in the household who will be eligible for benefits for many years, it very often makes sense. (A parent or other designated adult receives and controls the payments.)

Key details: The 18-year-old age ­limit is extended to 19 and two months if the child still is in high school. There is no age limit if the child is disabled, but the disability must have begun before age 22. If the child is younger than 16 and the spouse who is not starting his/her own benefits is providing child care, that spouse might be eligible to receive a spousal benefit. This is possible even if the spouse is not yet old enough to receive spousal benefits under normal circumstances. (Dependent grandchildren also may be eligible to qualify for dependent benefits, but there are extensive rules that restrict this eligibility.)

*Social Security amounts cited in this article are based on current levels. Actual benefits may increase each year based on a measure of inflation.

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