How to Fine-Tune Your Client's Social Security Claiming Strategy
A pre-retiree presented three scenarios for claiming spousal benefits. He understood most of the rules, but the devil's in the details.
Some clients get under the hood and tinker with their various Social Security strategies. Then, they turn to their financial advisor for confirmation and any missing information.
Here is an example of an engaged pre-retiree I heard from via email. He wanted confirmation of his Social Security assumptions and calculations. It’s great when clients are fully engaged, willing to dive into the details, and open for help connecting the dots.
A Spousal Benefits Question
“I am particularly interested in the filing strategies for married couples,” Joe wrote (not his real name). “I have a question regarding spousal benefits that I was hoping you could answer/confirm.”
He continued: “I’d like to summarize my understanding and ask my questions in the form of a hypothetical situation.”
Let’s assume the married couple, both born in 1960, are trying to decide when to claim Social Security. Full retirement age (FRA) for each is 67, and their primary insurance amount (PIA) benefits are:
- $2,400/month — husband
- $800/month — wife
Joe calculated three scenarios to look at possible claiming strategies.
Scenario 1: Husband and Wife Both File at FRA
“If they each claim at FRA, his benefit is $2,400 and hers is $1,200, composed of her own $800 plus a $400 top-up. Correct so far/?” Joe asks.
Joe’s initial thought is correct, but with one timing detail. If she is older, say born in January, and his birthday is in August, she will have to wait for the spousal top-up until Joe claims in August at his FRA. Spousal benefits are only available once the higher-earning spouse claims their benefit.
Scenario 2: Wife Files Early, Husband Files at FRA
“By claiming early at 62, the wife’s own retirement benefit will be a reduced amount, to about $560/mo,” Joe estimates in his hypothetical scenario. “Then, when the husband files at 67, his benefit is $2,400/mo and the wife’s increases to $960/mo, composed of her reduced $560 plus the same top-up of $400. Did I get that right?”
Joe almost is correct, but again, there is a timing caveat. When the wife claimed her own benefit, she was deemed to file for all her eligible benefits. This means she also claimed her spousal benefit even though she can’t yet collect it.
Once the husband claims, her spousal top-up will be added. If she is younger than her FRA when her husband claims, she’ll get a reduced spousal top-up.
What they might consider is for the husband to claim at the wife’s FRA. That way she’ll get her full $400 spousal benefit tacked on to her reduced worker payment. And he will get a slightly higher monthly benefit with some delayed retirement credits.
Scenario 3: Wife Files at Age 62, Husband Delays Until 70
The last scenario Joe wanted help with was if the wife claims at 62 and the husband files at 70, when his benefit reaches about $2,980 a month.
“Do I understand this correctly? Her benefit would remain at $960/mo, even though he’s getting a much bigger benefit?” Joe wanted to know.
Yes. Only workers get the 8% per year delayed retirement credits. Spousal top-ups are calculated on the higher earner’s PIA, regardless of when they claim.
Even though the wife must wait longer to receive her spousal top-up, this strategy protects the surviving spouse. After the first spouse dies, the widow(er) continues to receive the highest benefit amount of $2,980, plus any cost-of-living adjustments.
Furthermore, say the husband dies between his FRA and 70, but hadn’t started collecting his benefit. In this case, the wife will receive the amount he would have received as of the day he died, including any delayed retirement credits.
Last Note
It’s clear that Joe understood a lot of the technical rules for married couples, but the devil’s always in the details. Exact birthdates and claiming order between spouses make a difference.
Joe appreciated the additional dots that needed to be connected and felt he was in better command of his and his wife’s claiming strategies.
— More by Marcia Mantell on ThinkAdvisor: