In my last super entertaining post about Social Security benefits, I ended with a mention about how being married may not only entitle you to Social Security spousal benefits, but there’s a strategy that you could use to really maximize your benefits to full potential!
Here I will present the rules on using Social Security spousal benefits and walk through an example of how this will apply to my wife and I. Hopefully you’ll be able to go through the same exercise for you and your spouse!
How Social Security Spousal Benefits Work:
(For the following set of rules, these will only apply if you were born after 1960, you and your spouse both worked, and you’ve both got your 40 credits to be eligible for Social Security benefits.)
From age 62 to 66: Starting at age 62, you can take either your Social Security spousal benefits or your own work benefits. The spouse benefits are only an option as long as your spouse has also applied for Social Security.
The good news is that you automatically get the higher of the two. The bad news is that the younger the age you start, the higher the percentage your spousal benefits are reduced by:
• 62 is about 67.5 percent
• 63 is about 65 percent;
• 64 is about 62.5 percent;
• 65 is about 58.3 percent;
• 66 is about 54.2 percent;
And then there’s the really bad news! Once you go with one or the other, you can’t switch back! So choose carefully!
At age 67 and on: This is called “full retirement age”, and it is very important. This is both the age where you reach your maximum benefit and your spousal benefit is maximized as well.
• 67 is 50 percent (the maximum benefit amount).
Now here’s where it gets extra interesting: Once you’re at full retirement age, you’re given a special offer to take your Social Security spousal benefits, delay taking your own benefits, and then take them later at a higher and better rate!
Here’s how this works:
1) You apply for your own benefits and then immediately suspend them. This will allow your benefits to build into something called delayed retirement credits. The benefits increase at approximately 8% per year delayed.
2) While your own benefits are being delayed, you can take the spouse benefits offered on your spouse’s account.
3) Anytime up to age 70 when the delayed retirement credits cease, you can then switch back (once) to your own benefits.
This technique would be great if you want your own benefits to build up and be higher than your Social Security spousal benefits. Even if your own benefits were higher in the first place, you could still use this technique to make them even bigger!
Oh the benefits of being married!
Maximizing My Social Security Spousal Benefits:
Okay. If the above rules were confusing, you’re not alone. I had to read through them several times to make sure I got them. So let me illustrate these rules by walking you through an example of how this would apply to my money design using my wife and I as the subjects:
After using the online Estimation tool on Social Security’s website and interpolating the numbers against the benefits reduction percentages they list, here is what my wife and I can expect in terms of benefits if we both meet our goals and stop working at age 50. (I won’t bore you with the details of the calculations. If you’re dying to know how I came up with these numbers, email me).
Note that the Social Security spousal benefits stop increasing after age 67 (full retirement age) (that is why they are highlighted in yellow).
Since my wife is 3 years older than me, things get a little tricky in terms of who applies for Social Security first. So let’s put our charts on the same timeline.
At no time does either of our Social Security spousal benefits equal more than our regular benefits. So it would be foolish to take the benefits early because it would significantly reduce how much we’ll receive for the rest of our lives.
Therefore, the best thing to do is wait until we’re both age 67 or higher so we can take advantage of the best possible benefits. I’ve highlighted this in yellow.
Since we’re both 67 or older now, this means a few things for us:
1) She can apply for Social Security and receive $2,112 per month (thanks to delayed retirement credits).
2) I can also apply the same year as my wife. I “could” take my $2,211, but I want to let that grow until I get to age 70. So instead I will decide to delay my own benefit and collect her Social Security spousal benefits of $851 per month while my account grows. Thank you Sugar Momma!
3) Over the next 3 years, we’ll collect a combined income of $2,963 per month while we let my benefit accumulate delayed retirement credits.
4) Finally at age 70 when my delayed retirement credits cease, I’ll cancel taking her Social Security spousal benefits and claim my own benefit at $2,742 per month! That means we’ll be collecting a grand total of $4,854 per month!
Not too shabby for utilizing a little bit of patience and strategy!
Note that just like we mentioned in the previous post, Social Security tells us to expect about 75% of what the current calculators are estimating due to a projected shortage in funds upcoming. In addition, these figures will also be reduced by income taxes.
Readers – Have you ever heard of this strategy for using Social Security spousal benefits to delay and grow your own retirement benefits to maximum potential? What do you think about this strategy?
Photo Credit: Zazzle