Social security strategies for married couples with age difference

Dear Rusty: My wife is 63 and I’m 55. I’ve been the breadwinner for 37 years and draw almost $2,000 per month tax free from VA disability for life. I’m also still working until I’m 60 or 62, not sure yet, and will have a pension of about $1,900 per month. We have about $300k put away in retirement accounts. Since I still have a few years I haven’t really looked much into retirement. Is there anything you can recommend on how to go about Social Security with the age difference? Signed: Younger Husband

Dear Younger: With your VA disability benefit, your expected pension from work, your savings and your eventual Social Security benefit you are positioned better than many for your later retirement. You didn’t say whether your wife is already collecting Social Security benefits on her own work record, and that can be a factor in deciding when you should apply. This is because (from what you’ve told me) your wife will eventually be entitled to spousal benefits from your record.

To start, please note that your wife’s full retirement age (FRA) for Social Security purposes is 66 years and 2 months, while your full retirement age is 67. Your full retirement age is when you get 100 percent of what you have earned from a lifetime of working, but if you claim benefits earlier than your FRA, they will be reduced and if you wait beyond your FRA you can earn more.

When to claim your Social Security should always take several things into account - your health, your current (and future) financial needs and your expected longevity. You cannot claim your Social Security until you are at least 62 years of age, but if you claim at 62 you will incur a 30 percent cut in the benefit you would be entitled to at age 67, and that is a permanent reduction.

Assuming your wife will be eligible for a spousal benefit from your record, since she will have reached her FRA whenever you claim benefits she can get up to 50 percent of the benefit amount you are due at your full retirement age.

But if she claimed her own SS retirement benefit before her FRA, her spousal benefit will be somewhat reduced. Your wife cannot get her spousal benefit until you start collecting your Social Security so that may be a factor influencing the decision of when you should apply.

While that might suggest you should apply as soon as you’re eligible, you should also remember you will take a cut in benefits by claiming earlier than your FRA. You can maximize your benefit by waiting beyond your FRA to apply and earning delayed retirement credits which would yield a benefit 8 percent higher for each year you delay, up to age 70 when you could get 24 percent more than you’ll get at age 67.

However, delaying would mean your wife can’t collect her spousal benefit until you start your benefits, so you should weigh the loss of her spousal benefit against the increase you get by delaying (remembering that you would get the higher benefit for the rest of your life, which is where expected longevity comes into play).

And one other point: if you claim before your FRA and continue to work, you will be subject to Social Security’s annual earnings limit until you reach your FRA (exceeding the annual limit will cause Social Security to withhold some of your benefits).

So, as you can see, there are numerous considerations when it comes to deciding when you should claim your Social Security. I suggest you get a Statement of Estimated Benefits from Social Security. You can do that by contacting your local office (find it at www.ssa.gov/locator) or by creating your personal “My Social Security” online account at www.ssa.gov.

Your Statement of Estimated Benefits will show your estimated benefit at ages 62, 67 and 70, and you can evaluate which of those amounts is most beneficial, considering your financial needs, your wife’s potential spousal benefit, and your anticipated longevity.

Russell Gloor is a certified Social Security advisor with the Association of Mature American Citizens.

Q: When should I file for Social Security benefits?

Oh, how I wish I had a magic wand, because this straightforward question is among the hardest to answer. In fact, the entire Social Security system, which is intended to be fair and accessible, is mind-numbingly complex. The unfortunate result is that many retirees lose out on valuable benefits, generally because they choose to start to collect too early. So listen up.

The Basics

Most people are eligible to start collecting Social Security benefits at age 62. But if you wait until what the Social Security Administration calls your full retirement age (FRA), which is 66 for those born between 1943 and 1954, you’ll get a larger monthly benefit, known as your primary insurance amount (PIA).

Smart Move: If you were born before 1943 or after 1954, find your FRA on the Social Security Administration’s website, socialsecurity.gov.

After you reach your FRA, your monthly benefit will continue to increase until you reach age 70—at which time you max out. The rationale is clear: You can get a smaller payment for a longer amount of time or a larger payment for a shorter amount of time. In theory these two balance out over time, at least when looking at data for millions of people. But when you’re thinking about what’s best for one person or one couple, the averages don’t apply. Once you understand how the system works, you are in a position to make the best decision for your own situation.

Caution: The term full retirement age can be misleading. In general, your benefits will continue to increase until age 70.

What the Numbers Tell Us

A comprehensive study by economists John Shoven of Stanford University and Sita Slavov of Occidental College identifies the conditions when it is most advantageous to delay Social Security benefits. They conclude that gains from delaying are greatest:

• When interest rates are low
• For married couples relative to singles
• For single women relative to single men
• For two-earner couples relative to one-earner couples
• For a married couple, deferring the primary earner’s benefit as compared to deferring the secondary earner’s benefit.

Caution: Unless you’ve already filed for Social Security, you need to enroll in Medicare when you turn 65 (there’s a seven-month window, starting three months before your 65th birthday). Otherwise your medical and prescription drug coverage could be delayed, and you could face a penalty in the form of higher premiums. See Question 35 for details.

Think About Your Life Expectancy

According to the Social Security Administration, the typical 65-year-old today will live to age 83, one in four will live to age 90, and one in ten will live to 95. Women have a slightly higher life expectancy than men, and the odds are even better that one person in a married couple will outlive the averages.

Then consider that for a person born between 1943 and 1954, delaying the start date from age 62 to age 66 increases benefits by 33 percent. Delaying to age 70 results in an increase of 76 percent.

A break-even analysis shows you how long you have to live to increase your overall benefit. For example, let’s say that you’re entitled to a $1,000 monthly benefit at age 66. If you start collecting benefits at age 62, your monthly draw will be reduced to $750. If you hold off until age 70, your monthly benefit will increase to $1,320. Take a look at the following chart.

As these numbers show, if our 62-year-old lives beyond age 78, she will collect more by postponing the start of benefits to age 66. If she lives to age 83, which is the national average, she will collect the most by postponing her start to age 70.

Of course you can’t predict how long you will live. But if you’re healthy and longevity runs in your family, most likely you’ll increase your lifetime benefit by postponing your start date.

Look Before You Leap! According to the Social Security Administration, almost three-quarters of eligible workers file for benefits before their FRA. Before you file for Social Security benefits, be sure to calculate your benefits over your anticipated life span. Otherwise you could be losing out, big-time!

Think About the Current Interest Rate Environment

Every year that you delay collecting Social Security between the ages of 62 and 70, your monthly benefit will increase between 62⁄3 and 81⁄3 percent. If you were born between 1943 and 1954, and your FRA is 66, the numbers look like this:

Now compare these rates against the return you could get from a risk-free investment like U.S. Treasuries or an insured savings account. Clearly, the lower the prevailing interest rates, the more you stand to benefit over the long run by delaying Social Security. This is particularly true when you think about what economists call “real” interest rates, or the rate you earn after inflation.

As an example, let’s say you’re 64 and trying to decide whether to tap into your 401(k) savings or collect Social Security. If part of your 401(k) is invested in Treasuries, in 2013 you’re effectively earning no interest after inflation. You’ll get a better return by withdrawing those funds and allowing your Social Security benefit to grow.

Or let’s say that you’re considering buying a commercial annuity that will pay you for life. By instead choosing to delay Social Security, you are in effect buying an inflation-adjusted annuity from the U.S. government. The primary difference is that you most likely get a better rate. The lower the prevailing interest rates, the better the deal.

However, when the economy recovers and interest rates rise, this may not be the case. Shoven and Slavov conclude that delaying Social Security is most advantageous when real interest rates are 3.5 percent or lower.

Think About Your Income from Other Sources

If you don’t have enough savings and are dependent on Social Security income to pay for necessities, you may have no choice but to collect Social Security as soon as you can. But if you have savings or income from other sources, and can afford to postpone your start date, you will likely benefit by delaying.

Also realize that if you file for Social Security benefits before your FRA but you continue to work, and your earnings exceed certain limits, part of your benefit will be temporarily withheld. In 2013, if you file for benefits at age 62, $1 in benefits will be withheld for every $2 you earn above $15,120. In the year you reach your FRA, $1 is deducted for every $3 you earn above a higher limit, currently $40,080. Once you reach your FRA there is no earnings deduction, and you will get the money previously withheld in the form of a higher benefit.

If You’re Married, Compute Your Combined Benefit

This is where Social Security gets really tricky. As an individual, you try to maximize your lifetime benefit. But as a couple, your goal is to maximize your combined benefit over both of your lifetimes as well as survivor benefits. This involves analyzing your personal benefits as well as the potential to take advantage of spousal benefits.

Basic Rules for Spouses

• As a spouse, at age 62 you can choose to take a benefit based on your own earnings or a spousal benefit based on your spouse’s earnings. The only caveat is that to receive the spousal benefit, your spouse must have already filed.
• The spousal benefit is up to 50 percent of the earner’s benefit. The actual percentage depends on when you both file; if you both wait until FRA or later, you collect a higher benefit. For example, if a husband files early at age 62, his benefit would be reduced by 25 percent. If his wife waited until FRA to file for a spousal benefit, she would collect 50 percent of his reduced benefit. However, if the wife decided to take spousal benefits at age 62, her benefit would be reduced even more to 35 percent of his reduced benefit.

Smart Move: A husband or wife maxes out their spousal benefit (50 percent of spouse’s benefit) at FRA. There is no benefit to waiting longer.

• The impact on survivor benefits is similar. At FRA a widow or widower can collect up to 100 percent of their spouse’s benefit (or a reduced benefit starting at age 60). When someone opts to collect benefits early, his or her surviving spouse will also collect a reduced benefit. Conversely, when a person decides to delay benefits, he or she is providing their survivor with a larger benefit. See Question 34 for more details on Social Security benefits for surviving spouses.

If you are divorced but were married for at least ten years and are currently unmarried, you can still collect a benefit based on your ex’s record. See Question 32 for more details.

Unfortunately, unmarried couples don’t have spousal rights under Social Security. See Question 9 for more.

Social Security Strategies for Spouses

Working as a team, spouses have some choices that can significantly boost their combined benefit.

A warning, though: These types of strategies can get very complex, and their effectiveness depends on a number of variables, including the difference in ages and earnings records between the two spouses.

With the first strategy, sometimes called the “62/70 split,” the lower-earning spouse takes Social Security as early as age 62 and the higher-earning spouse postpones filing until age 70 to maximize his or her benefit. With this scenario, the higher earner has the option of receiving a spousal benefit as a bonus during the years that he or she is waiting to claim on his or her own record.

Alternatively, the higher earner could file for benefits at FRA and immediately suspend them. This strategy, known as “file and suspend,” allows the lower earner to collect a spousal benefit based on the higher earner’s record, potentially getting more than they receive on their own, while the higher earner’s benefits continue to grow. The higher earner then collects once their benefit has maxed out. A few notes on file and suspend:

1. You must be at least at your FRA to file and suspend.
2. Either spouse can file and suspend, but not both.
3. By suspending, you are not eligible to collect a spousal benefit.

The only way to determine if either of these strategies will work for your family is by crunching the numbers. Unless you are extremely facile with Excel spreadsheets and financial modeling, it is best to work with a financial advisor as you make your determination.

Talk to an Expert: If you’re married and want to maximize your joint Social Security benefits, I highly recommend that you consult with a financial advisor who has in-depth knowledge of the Social Security system.

Think About Your Tax Situation

What Uncle Sam gives, he also takes away in the form of taxes. Regardless of when you retire, up to 50–­85 percent of your Social Security income may be taxable if your modified adjusted gross income (MAGI) reaches certain levels. There is nothing to be done about this; simply be aware that your Social Security benefit may bump you up to a higher income tax bracket. (This could be another reason to delay.) See Question 25 for more about taxes in retirement.

Bottom line? The most common error people make when it comes to Social Security is starting to collect their benefit too early. Yes, it’s tempting to take the money and run. But before you do, carefully weigh your options. On further scrutiny, you are likely to find that you will get the best return on your money by postponing and allowing your monthly draw to increase.

Part IV: Maximizing Social Security and Medicare, Question 30

Additional excerpts

• I just retired. What’s the smartest way to draw income from my portfolio?
• How can I save for my kids’ college without derailing my retirement?
• Does it make sense to borrow from my 401(k) if I need cash?
• Should I be debt-free before I retire?
• My husband has no interest in our finances. How can I get him involved?
• I’m confused about how to divide my estate between my children, who have different needs and financial resources. Is it best to divide it into equal parts?
• My 20-something child has decided that she wants to move back home. I like my new empty-nest lifestyle, but I want to help her out. How can I balance these?

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