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!
Remember …
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?
Related Posts:
1) Social Security Benefits – The Kid Picked Last for Dodgeball
2) Retirement Income Planning with Author Daniel Solin
3) A Better Way to See If You’ll Run Out of Money During Retirement
Photo Credit: Zazzle
I have seen this before…seems like something valuable to know. If you search for “social security file and suspend”, you will get a lot of articles about it. Also, one clarification about not taking it early: it’s not just that the payments are reduced for the rest of your life, it’s how much they are reduced. 8% a year is a lot. Some private pension schedules have much smaller reductions per year for early payments, so in some cases it may be worth it to take those early because if you annuitized that extra year of payments it would be greater than the yearly payment reduction.
Thanks SB! That is exactly how I also found out about this. As I was researching Social Security, I came across a number of sites that highlighted this strategy. It was even on Social Security’s own site.
That is a very strong point you make – this is the amount of money you’ll be stuck with for the rest of your life! (minus the small changes for inflation adjustments) If I’m elderly and out of employment capital (not able to work anymore), why wouldn’t I want to increase my cash flow as much as possible?! That is why I think it is important to understand how these things work. As I show in the example, it can make quite a difference.
I hadn’t but it is something to consider for sure. It is so far off for me though that while this is a good example now I bet it changes a lot before I retire.
If the rules do change, me and my Excel worksheet will be ready for it! 🙂
I believe this is the strategy that my Mom & Stepdad are currently using themselves. I agree that it does take a few times to read through to adequately understand it. It’s so far off for me, that I am sure it will change quite a bit when I am ready to retire…that is if Social Security is still available. 🙂
Hi John and welcome to the site. That’s great to hear that your parents are already taking advantage of this. Mine are also getting close to the age where they will want to start thinking about this; hence my attention to the subject. The rules really weren’t clear to me until I laid it out on paper and walked through an example of how it would work. I find for most things you don’t really understand them until you try to apply it to something practical.
I’m going to be completely honest: I started reading this post, then quickly glanced at the rest of it with only one thought in my mind: I’m 24 and I am fairly confident social security will not exist when I retire. All the money I pay towards social security is essentially a sunk cost to me.
I share your same concern, but my feeling is a little more optimistic. You, me, and the rest of the U.S. would grab our pitch forks and torches to go raise hell if they suddenly canceled Social Security after we’ve been paying into it for the last 30 years or so. So while its no secret that its in trouble (even SS’s own website admits this), I don’t think it can go away completely unless: 1) Some completely radical substitute is offered such as a new privatized retirement plan similar to a 401k or IRA, or 2) Some war or natural disaster strikes forcing us to divert the funds to that effort which leaves the program on the back-burner and is eventually forgotten.
I had not heard of this strategy, but it’s an interesting one. Being that I am 31 I am not sure it matters because like DC said SS will probably be gone or much much different in 30 years.
So many doubters! I totally agree that 30 years is a long time and the face of things could be much different (whether SS even stays SS or morphs into some other type of plan). I guess if nothing else, use this information on your parents or elderly family members by helping them to make the most of the funds they are entitled to receive.
Wow, I didn’t even know those benefits exist! Thank you for the great tips;-)
You’re very welcome Maria. I hope you can use this info to help out those you know.
Since my husband is a teacher, he will hopefully get a state pension and won’t get social security except for the jobs he had before teaching, so I guess I could be the sugar momma. That’s if we even get social security. I hope to be a slumlord by then with tons of rentals so it won’t matter. I would love to see what SEO hits you might get on this one.
Ha! I’ll have to remember to send you my SEO keyword analysis for “slum lord”. Knowing the Internet, its probably already taken by someone! 🙂
DON’T EVEN get me started on state pensions! My wife (also a teacher) was recently told that their whole pension plan was being re-structured by law, and we are not happy about the changes! In fact, I have a whole multiple post series coming up all about it where we try to figure out which of the options is the best one to take. It could be interesting for you and your hubby to read …
Wow…I know this stuff and I’m confused. 🙂 I appreciate you trying to walk me through it though.
So, to make sure I understand correctly, the spouse is only eligible for HALF of their spouses SSI when they reach 67? So, if they took it at 62 they’re not eligible for half?
Correct. At age 62, IF you take the spouse benefits, it will only equal about 32% of the spouse’s actual benefit. As you get closer to age 67, the value will gradually move upward to 50% until finally it stops. But the real kicker is that if you take your spouse benefits anytime between 62 and 67, you’re stuck with it for life! That’s why its important to wait until age 67 when you’re given the option to take your own benefit, delay it, then you’re allowed to take the spouse benefit while your benefit decreases. Read here: https://www.ssa.gov/retire2/applying6.htm#a0=0
I’d be happy to send you my spreadsheet that goes through the calculations.
It’s a number game. Our government hopes that odds are against us to cash in on our SS once we reach a certain age. For those of us who were born after 1960, it’s the magic number 67. Every decade, the age bar is raised as we live longer. Great post.
Hope they don’t raise it to 90 by the time I get there! 🙂
Allow me to point out a major flaw with this plan. It doesn’t take into account life expectancy. This plan is great if you have ample other retirement funds to live off of until age 70, but then what when you get there? What do you need all that money for at age 70? How many 70 year-olds do you know who are living it up, having a good time and making good use of their riches? Check out this math…
According to CDC, average life expectancy in the US is about 78 years. (https://www.cdc.gov/nchs/fastats/lifexpec.htm)
From your example, if you wait until age 70 to get 4854 per month, times 12, times 8(years) you will have collected 465,984 until death.
If you start at age 62 and get 2740 per month, times 12, times 16(years) you will have collected 526,080 until death.
Assuming you had the funds available from other sources anyway to wait until age 70, you would have plenty to make up the difference and live on for those 8 years if you collected early. I think the only way your plan makes sense (and you would have to run the numbers to be certain) is if you plan to live well into your 80’s.
For me, I’m taking the money as early as possible. You just don’t know when you’re going to die!
Very good counter-points Matt! Let’s talk:
You are very wise to account for life expectancy. I certainly can’t disagree with the simple algebraic nature of your math. If we die when the statistics say we’re supposed to go, then yes, we should have taken the lower payout while the getting was good.
The problem is exactly what you said – we don’t know when we’re going to die. Suppose your one of those lucky SOB’s who lives to be 100! Well now you’ve shot yourself in the foot for taking the lower payout. In all my money designs, I’m always going with a worst case scenario. Where some people assume an 8% return on their investments, I’m assuming a 6% return. Where some people will withdraw 4% from their nest egg, I’ll be taking out 3%. And where some people assume they’ll only live to 78, I’m going to assume that I’ll live to be 100! Like any good machine, the more safety factors you put in place will ensure its functionality later on.
The other large factor you’re not considering is that when you finally do die, your spouse continues to get a percentage of your benefit. If you take the lower payout, then your spouse will be left receiving next to nothing after you pass away. Even if you don’t need the money to be maxed out, your surviving spouse might care!
Your comment about 70-year-olds living it up makes me laugh! My wife’s grandparents had the time of their lives all throughout their 70’s! Every weekend they went on a bus trip to the casino and hotel, took a trip to another state to visit their relatives, and went on all kinds of other outings! While a lot of people have this atypical image of only being able to afford dog food for dinner in retirement, they were on the opposite end of the spectrum! I realize this may not be normal. But I know that I want to be just as active and busy as they were.
Even if you don’t plan to use the money for yourself, think of all the good things you could do with a higher payout. Paying for college for your grand-kids, helping your kids with debts or affording a house, giving the money away to your favorite charity or cause. Your money can be used for so much more than just yourself – it can really make a difference in the lives of others you love and care about.
Living to 100 is a “worst case scenario,” for you? I would think the worst case in this scenario would be dying at 70 or 71, right after you start collecting your benefits. I see what you’re saying though. You make some really good counterpoints to my counterpoints.
It really comes down to health and making this a guessing game. If you live well into your 80’s or beyond, your method will be better in the long run. If you live an average life (die at 78), or die early, then my way works out better. This is why Social Security sucks! Let me have my money and invest it myself and hand it down to whomever I want when I die… rather than being stuck in a stupid social program.
Despite your arguments, I think I will still take mine early (assuming good health and a long outlook on life). I just want to be able to control my money and investments for that much longer, an extra 8 years. In my case, I think I could invest the lower payout into something that would create an even bigger payout than if I’d waited until age 70. For example, rental real estate or websites (if I’m still in the website game at that age).
Good discussion here. I wonder if my wife and I could half use your strategy. She is almost 7 years younger than me. She could wait until age 70 because we will have plenty of investment and SS income to live on from me. I’ll be her sugar daddy!
Ha, I see what you mean about living to 100. Let me re-phrase that: It would be a worst case scenario in terms of stretching all of your retirement finances out for that long. For example, it will much harder to make your 401k last until 100 as opposed to age 78.
I can totally identify with your reason for wanting to take the money early. Actually, I was in the same camp as you about 2 years ago. My thinking was “take it while the getting is good!” Obviously I’ve reconsidered that position, but I realize that everyone has their own unique situation and that there are a lot of other good arguments for taking it early. I think health is the big concern. If you know your family has a history of problems or you’ve got things going on that you know about, then you might have more than one reason to go in early.
Wow, 7 years difference! Good for you! Depending on the gap between your incomes, she may actually be better off just taking your spouse benefits for life (as long as half your full benefit is greater than her full benefit).
I plan to look at my social security as a transfer of wealth tax. There are discussions of taxing all income, plus “means testing” which means when you pay in if you save too much money outside you will get nothing back. I figure anything I gain on social security will be a bonus.
If America gets to the point of a means testing, I’m afraid we’ll be living with Socialism. And that’s when I’ll be retiring aboard! 🙂
A couple of “technical” notes:
1) Prior to FRA (full retirement age) you cannot choose between the two. You’ll be given the highest amount and you’re right, it’s locked in for life. Also, as a point of clarification, you get 100% of your earned benefit PLUS whatever’s necessary to equal 50% (maximum). Semantics.
2) After FRA (age 67 in your example) you do NOT file and suspend; you file a “restricted application” for spousal benefits. BUT, you can only do this if, as you mentioned your spouse has applied for his/her benefits already. Basically, one person files and suspends, the other person files a restricted application for spousal benefits only. Or, alternatively, one person could file for full benefits and the other person could file a restricted app.
3) I didn’t see the plan to have one person file and suspend and the other file a restricted app? That way “BOTH” of you could get the highest benefit at age 70! I wonder what your calculators would say doing that?!
Overall great advice – the only other thing I’d add is that the SSA people are generally dumb when it comes to advanced strategies. If and when you (or your readers) go to file, don’t be bullied by the SSA people. They generally get it wrong! Great article!
Thanks for tidying this up Josh! I appreciate the attention to details and extra information.