A case study in claiming Social Security spousal benefits.

Social Security claiming strategies have become more important than ever when planning for retirement. New laws, regulations and the increase in longeveity mean it’s not a cut-and-dry process for all. The following is an actual case study from my practice that represents strategic thinking when planning to claim Social Security for your clients. Names have been changed.

Facts: John Jones (age 66) and Ann Jones (age 62) have been married for 30 years and are planning for their retirement. John is the general manager of a car dealership and intends to continue working until age 70. Anne has spent most of their married life at home caring for their three children, but put her accounting background to work part-time for a local business. 

THEIR Plan: John, whose primary insurance amount (PIA) is $2,400, intends to wait to file for benefits until age 70. Ann, after reading an article online about spousal benefits, has decided to take her own benefit at age 62 and trade it for the larger spousal benefit at full retirement age (FRA). Ann’s PIA is $800, but by taking early at 62, she will receive a 25 percent reduction in benefits and will therefore receive $600 per month. Based on the article, she anticipates that when John files, she will be entitled to the ‘spousal benefit’ she read about, which equates to half of his PIA, or $1,200. 

The Result: We come across scenarios like this regularly and there are a couple of critical points to make as it relates to the types of spousal benefits that exist and how they can be accessed.

First and foremost, in an instance like this Ann is not subject to the deemed filing rule, which requires an applicant to take all benefits then available, because John will not be filing for his benefits until his age 70. Therefore, when Ann files, she will receive a permanently reduced benefit based only on her work record. 

Ann correctly understood that at the time of John’s filing, she will be eligible to receive spousal benefits based on his record. Unfortunately, however, their plan was flawed in that her benefit will not double from her reduced benefit of $600 to what she understood to be the spousal benefit of $1,200, or 50 percent of John’s PIA. While this is a common misperception that can confuse clients and advisors alike, she cannot “trade” her retirement benefit for the larger “spousal only” benefit at the time of her husband’s filing. 

Ann’s base benefit will always be the $600 reduced personal benefit. This is an extremely important point and what is meant by the reference in Social Security Administration documents to a worker’s benefit being “permanently reduced“ for taking early. She will be entitled to an increase in benefits at the time of John’s filing as she will then be entitled to some spousal benefit based on his record. 

That portion of her benefit will be calculated as [$1,200 (50 percent of John’s PIA) minus $800 (Ann’s full PIA)] = $400. Therefore, subsequent to John’s filing, Ann will continue to receive a single check from SSA, but it will represent two separate payments: $600 based on her personal record and $400 of spousal benefit based on John’s record for a total benefit amount at her age 66 (which is when John reaches at 70) of $1000 per month. This is $200 less per month than she anticipated!  

This simple example shows the importance of a clear understanding of how Social Security rules work and the impact they can have on the financial future of retirees. As a result, consumers are strongly encouraged to seek the counsel of financial advisors who have been trained in the intricacies of Social Security to ensure they receive the most accurate advice possible.