Determining the right time to claim Social Security benefits can be complex, especially for married couples. Often, couples are misinformed or may simply misunderstand how the decision to claim or defer their benefits can impact their long-term financial well-being. They may not fully grasp the pitfalls of claiming their benefits too early, the impact of deferring benefits or the nuances of selecting a spousal benefit over an individual one.

There's no one-size-fits-all strategy for determining the best time to claim Social Security benefits. It will depend on a number of factors: your marital status, financial situation, tax exposure, health and retirement goals. But understanding the intricacies of how your Social Security benefit is determined can help you make thoughtful, informed decisions about how best to maximize it and ensure your financial security well into your retirement.

Considerations for Individuals

How much money you receive in Social Security benefits depends largely on two factors:

  • Your lifetime earnings. The primary insurance amount is based on the average indexed monthly earnings for the 35 years of your career in which you earned the most money.
  • The age you claim your benefit. You can claim a reduced Social Security benefit as early as age 62. Claiming the benefit prior to your full retirement age (see Exhibit 2) will result in a reduction of the primary insurance amount. Waiting until after you reach your full retirement age will increase it. You can claim the maximum benefit if you wait until age 70.

Your full retirement age is determined by the year you were born:

For an individual born between 1943 and 1954 with a full retirement age of 66, claiming Social Security benefits at the earliest possible age (62) would decrease the primary insurance amount by 25%. Conversely, waiting to claim benefits until age 70 can increase the primary insurance amount by 32%.

This is because the government offers individuals delayed retirement credits, an increase of two-thirds of 1% to the primary insurance amount for every month benefits are unclaimed beyond the full retirement age — an 8% increase every year. The Social Security Administration applies an annual cost-of-living adjustment as well.

An individual who delays claiming benefits all the way to age 70 will enjoy a benefit 75% larger than someone who claims it at age 62. Clearly, it may be in your best interest to delay claiming benefits as long as possible. However, when making such a decision, family longevity — rather than the longevity of the individual or their spouse — should be taken into account. If either the individual or their spouse has a family history of longevity, it could be advantageous to collect the delayed retirement credits as they could yield a significantly higher benefit over time.

Considerations for Married Couples

When a married individual reaches their full retirement age and files a claim for benefits, their spouse becomes eligible for a spousal benefit. This allows the spouse to claim a benefit of up to 50% of the primary claimant's benefit. This benefit cannot be claimed before age 62, however, and if the spouse were to claim it prior to their own full retirement age, the amount would be reduced.

It's possible that the spousal benefit could be significantly greater than the spouse's individual benefit. Ultimately, whichever is higher is what will be granted. For spouses who never worked and did not pay into Social Security, or who earned much less than the primary claimant, the spousal benefit is a great deal.

Imagine a couple, Henry and Lilly, who have both reached age 66, their full retirement age. Henry, the higher-earning spouse, is entitled to a primary insurance amount of $3,000 a month. Lilly's primary insurance amount is only $1,100 a month as she spent a number of years out of the workforce, raising their children and volunteering for non-profit organizations. Her spousal benefit, however, would entitle her to an amount equal to half of Henry's primary insurance amount: $1,500 a month.

Unlike the primary claimant's benefit, which can increase 8% annually when deferred after full retirement age up until age 70, a spousal benefit is not entitled to those credits.

In addition, the spouse cannot collect a spousal benefit while the primary claimant defers. While those factors may appear to provide a disincentive to delay initial receipt of benefits in the short term, a primary claimant may still provide a higher overall benefit by increasing the amount available to his spouse as a potential survivors benefit. The survivors benefit does enable a surviving spouse, after death of a primary claimant, to take over a higher benefit amount at the first spouse's death including all deferral credits earned by a primary claimant. So when Henry chooses to defer and earns credits through age 70, Lilly would be entitled to receive his higher benefit after his death.

Restricted Application

Spousal benefits cannot be claimed while a primary claimant is deferring their benefit — unless the spouse qualifies for what's known as a restricted application.

Qualified spouses who wish to claim the spousal benefit in 2019 can file a restricted application with the Social Security Administration. This would allow them to claim their spousal benefit during the primary claimant's deferral period while also delaying their own individual benefit. Their individual benefit would earn delayed retirement credits and cost-of-living increases in the meantime.

A "qualified spouse" is one who was born before 1954 and has reached their full retirement age. This option will not be available for those who reach full retirement age after 2019.

To return to the previous example, assume that Henry claims his full retirement benefit at 66 with $3,000 as his primary insurance amount. Once he files for his benefit, Lilly would become eligible to receive a spousal benefit. If he were to defer, she could only collect her own benefit, not a spousal benefit.

However, if Henry were to begin receiving his benefit, Lilly is then able to collect the spousal benefit providing her the $1,500 a month based on Henry's benefit. In addition, since Lilly was born before 1954, she can use a restricted application to enable her to receive only the spousal benefit at age 66 while deferring her own individual benefit, which will increase up until age 70.

While it may not have made sense for her to defer at the $1,100 a month benefit in our previous example, it may be a wise option if Lilly had higher earnings and a higher primary insurance amount — say $2,500 — at age 66. By employing the restricted application strategy, she could collect the $1,500-a-month spousal benefit between ages 66 and 70 and then switch to begin her own individual benefit, which, thanks to the credits she earned by deferring, would be $3,300 per month (132% of $2,500).

Considerations for Divorced Individuals

A divorced person who is at least 62 years old, is not married and has been divorced for at least two years can choose to receive a higher benefit based on their ex-spouse's earnings record as long as the ex-spouse is entitled to receive Social Security benefits.

The spousal benefit for a divorced person is half of the ex-spouse's primary insurance benefit. However, the benefit does not include any delayed retirement credits the ex-spouse may have earned by deferring their own benefit.

Though a divorced person cannot claim their ex-spouse's benefit if they are married again, they may once again claim it if the subsequent marriage ends in death, divorce or annulment. Divorced claimants may also file a restricted application, provided they fit the criteria.

Conclusion

Before reaching full retirement age, it's important to evaluate individual benefit amounts and any potential spousal benefits in order to fully understand the impact that a particular course of action can have on your future wealth. It's also important to note Social Security's status as a significant topic in political and public policy debates. The details laid out in this paper could change due to legislative or economic changes that could result in lower benefit payouts, higher taxes or both. Working with a knowledgeable wealth advisor can help you factor in these complexities and determine the best strategy for your specific situation.

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