By Joe Elsasser
If you’re like many Americans, you might be planning on using Social Security as a key income stream in retirement, which is why it’s important to be aware of all the benefits that may be available to you. For instance, in addition to (or often instead of) your own retirement benefits, if you're married you may be able to access a spousal benefit which can be up to 50% of your spouse’s, or even an ex-spouse’s, full retirement age benefit. In addition, upon the first death, the survivor, or even a divorced surviving spouse, may be able to access a survivor's benefit which is generally the higher of your own benefit or the benefit of the deceased. Here are some tips for crafting a Social Security strategy when multiple benefits are available to you.
A spouse is entitled to the higher of the benefit on their own earnings record or 50% of the benefit on the spouse’s earnings record. For example, if Philip was the higher wage earner and his full retirement age benefit is $2,000, his spouse, Patrick, would be eligible for $1,000 when he reaches full retirement age.
There are some substantial differences between spousal benefits and benefits on your own record. Spousal benefits are reduced on a faster schedule than benefits on your own earnings record. If your full retirement age is 66 and you elect retirement benefits at 62, you will get 75% of your full benefit. If you take a spousal benefit at age 62, you only get 70% of your full spousal benefit. Also, spousal benefits don't get delayed credits. For each year you delay your own benefit past full retirement age, you get an additional 8% per year. That doesn't happen with a spousal benefit.
Spousal benefits aren't just available to people who are currently married. They're also available to divorced spouses who qualify. You have to have been married for 10 plus years, cannot be currently married, and the benefit amount you'd receive works the same way a spousal benefit works. Your ex can actually be remarried, but in order for you to qualify for this benefit, you must not be remarried.
The main difference when filing for divorced spousal benefits is if you were divorced less than two years, you'd have to wait until your ex files in order for you to receive a benefit. But if you've been divorced for at least two years you're considered independently entitled, which means you can file whether or not your ex has filed.
The biggest challenge in planning for divorced spouse benefits is that you may not know when your ex will file, and it may have an impact on you. So, there are a few things to consider.
· If your ex files late, will that create a survivor benefit for you or not?
· If you're ex files early, whose survivor benefit will you count on?
· If your ex files early, will that benefit be greater than your own benefits? You should pay attention in case a survivor benefit later becomes available.
Your benefit will not be affected by your ex’s current spouse or any dependents.
Planning for the survivor benefit is critically important. At the death of the first member of a couple the survivor generally receives the higher of his or her benefit or the benefit of the deceased. So, if you're the higher wage earner, claiming early reduces not only your own benefit, but also the survivor benefit. The most common mistake we see is when a husband (who is older than his wife and the higher wage earner) claims benefits early, because he's not sure how long he'll live. If he claims at age 62, he will have reduced the survivor benefit by roughly 38%. About 98% of survivor benefits are paid to women, and 80% of women survive their husbands, on average, 14 years. That's a long time to have to live on dramatically reduced benefits.
A restricted application is a technique that’s only available to people who were born prior to January 2, 1954. Here’s how it works. Maya files at age 63. When Michael reaches full retirement age, he files a restricted application for only spousal benefits. Which means he only wants to take his spousal benefit based on Maya's earnings. This allows his own earnings record to continue to earn delayed retirement credits until age 70. Then at age 70, Michael switches to his own benefit of $3,750 a month. The restricted application allowed Michael to collect $769 per month for 48 months while still getting all of the benefits of his own delay. That's over $36,000!
Many retirees need the cashflow from Social Security to come in sooner due to liquidity challenges or a health situation. If you need cash flow sooner, it can often make sense to do what we might call a split strategy. One member of the household claims early, and one claims late. The higher wage earner still delays, but the lower wage earner claims early in this strategy to ensure that the surviving member of the couple receives the highest possible survivor benefit. This gets cash flowing into the household sooner, and potentially reduces the strain on other assets.
There are a variety of considerations for situations where you may have multiple benefits. If you're married, remember that basic breakeven analysis just doesn't work for couples. And the key to maximizing household benefits is really understanding the future impact of survivor benefits. It also makes sense to identify any spousal benefits that may be available. And if cash flow is necessary sooner, consider a split strategy. You want to make sure you identify any possible spousal or survivor benefits. And for people who are widowed, you definitely want to coordinate the timing of retirement and widow benefits. There are a variety of options to consider, and which claiming techniques will be ideal for you can vary significantly. A good financial advisor can help you determine which strategy will be best suited for you given your unique situation.
About the author: Joe Elsasser
Joe is the founder and president of Covisum®, a financial tech company focused on creating software that improves lives through better financial decisions. Covisum helps financial advisors serving mass-affluent clients in or near retirement and powers some of the nation’s largest financial planning institutions.