As couples start to think about their retirement, deciding when to start claiming social security benefits is a key question. Social security may not provide the largest part of your retirement income, but it’s a key piece of your retirement strategy because it’s predictable income with tax advantages.
Understanding the basics of social security is the first step to both maximizing your benefits and making a decision that fits with:
- Your budget
- Your lifestyle
- Your desire to retire
- Your overall financial plan
Married couples have even more options for strategies that can accomplish your goals. Thinking through the age that each partner will claim, and coordinating your dates, can help you get the most out of the benefit.
Social Security by the Numbers
The amount of your social security benefits are based on your earnings record. The Social Security Administration (SSA) uses your 35 highest-earning years. This is important because continuing to work at the end of your career when earnings are higher can replace years when earnings were lower or you were not in the workforce.
The requirements to be eligible are to be at least 62 years old and to have a work history of at least 40 quarters.
- Full retirement age (FRA) for most people is between ages 65-67, depending on your birth year.
- Early retirement starts at age 62 and goes until your FRA.
- Late retirement starts from your FRA and runs until age 70.
If you retire at 62, your benefits will be about 25-30% less than someone who retires at FRA. Those who delay past FRA will receive an 8% annual raise up until age 70. After age 70, there is no further increase for delaying benefits.
Adding Spouses to the Equation
If one spouse earns more than the other, there are options that can increase the benefit for the lower-earning spouse. Married couples are eligible for benefits based on their spouse’s work history as well as their own. The higher-earning spouse has to reach at least age 62 and file for benefits for this to apply.
It’s not a straight trade; only 50% of the other spouse’s benefit can be claimed. This amount is reduced in accordance with when the claiming spouse files. If you don’t wait until Full Retirement Age (FRA), the amount of the spouse’s benefit that will be available will be reduced.
This is different from the survivor benefit, which allows 100% of the deceased spouse’s benefit to the surviving spouse.
Thinking Through Different Scenarios
There are some moving parts to putting a strategy in place that maximizes each spouse’s social security benefit and fits in with your lifestyle and budget. A starting point is to look at four basic scenarios for claiming at different ages.
1) Both Spouses Claim Early – Each spouse starts their benefit at age 62. The amount of the monthly benefit will be lower, but if both spouses are high-earners, it may not make enough of a difference to delay. If you want to get a retired life started together, claiming as soon as possible and working through the choices to other areas of your budget may be the best solution. You also want to take overall health and family history into account. Waiting only works in your favor if you claim benefits for a much longer period of time, so the higher monthly benefit makes up for years when you didn’t receive anything.
2) Waiting Until FRA for Each Spouse – This increases the monthly benefit and maximizes both the spousal and the survivor benefits. However, unless spouses were born in the same year, this doesn’t provide the benefit of allowing you to get started on retirement together as soon as possible.
3) Delay Longer Than FRA for One Spouse – Depending on the ages of the spouses and who is the higher earner, being more strategic and delaying longer than FRA for one spouse may make sense.
Usually, the strategy is for the lower-earning spouse to claim first and before FRA, and the higher-earner to wait until age 70 or at some point between FRA and age 70. Because the higher earner’s base benefit is more than the lower earners’, the increase will be higher and more valuable and will likely more than outweigh the amount the lower earner sacrifices by retiring early.
4) Having One or Both Spouses Wait Until After FRA or Until Age 70 – As noted above, you don’t need to wait all the way until age 70 to claim in order to increase your benefits. Each year you delay claiming benefits after FRA means an increase of about 8%. This strategy can increase monthly benefits, spousal benefits, and survivor benefits.
If one person has gaps in employment or the last working years are significantly better remunerated than earlier years, this strategy can be beneficial. There are tax considerations as well. Up to 85% of social security benefits are tax-free, but if income reaches certain levels, more of your social security benefits may be subject to tax. If other sources of income are going to be taxable, such as 401(k) withdrawals, it may make sense to hold off on claiming social security as long as possible and use taxable sources of income to fund retirement while you wait to claim.
There are several strategies to consider when deciding when to claim social security. Factors that may influence your decision include: other sources of retirement income, health and longevity expectations, work status and marital status. For couples there are more options to consider. As you walk through this decision, it is important to keep the overall picture in mind as you weigh the tradeoffs of various options. If you would like to talk with a financial planner about what social security strategy is right for you, please schedule a call with us here.
This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original. The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
Advisory services offered through Financial Life Management, LLC – Doing Business As – SummitView Advisors, a Michigan registered investment adviser. The adviser may not transact business in states where it is not appropriately registered, excluded or exempted from registration. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment advisory services. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.