Heather Schreiber is someone who we hire as a consultant to help us with the many iterations of Social Security planning. She is our special guest on this week’s podcast, and she has talked to us about spousal benefits.
We actually had a client come to us this week who has a spouse, and they’re a little bit different in age. He told us to wait until he is 70 to take Social Security, but he wants his wife to take her benefits at 62.
He wanted to know one important thing: if he passes away, will she receive his benefit instead?
If you’re in the midst of retirement planning or trying to gain as much knowledge as you can to secure your retirement, you might need to know about spousal benefits.
What to Think About in a Scenario Like This
First, there are a few things that Heather recommends that we pay attention to in this scenario:
- There’s a disparity between the spouses’ income benefits
- He was waiting until he was 70 to receive more benefits
When you’re married and both spouses are collecting Social Security, if one spouse dies, the surviving spouse can step in and collect the higher benefit. If, for example, the spouse retiring at age 62 had higher benefits, she could continue taking her own benefits if her husband’s benefits were not higher.
If you take any benefit early, like in the example above, the benefit will be reduced because the spouse took it early.
Once the woman’s husband files for retirement, things can change slightly. The maximum spousal benefit you can receive is 50% of what the higher benefit spouse will receive. When her husband retires, she can step up and take her spouse’s benefit, which will be reduced.
She decided to retire early and will receive the difference between her greater spousal benefit and her reduced retirement benefit. Since the difference is added to the equation, she will receive slightly less than 50% of her spousal’s benefit.
However, she could receive survivor benefits, which does a few things:
- Allows her to receive 100% of her deceased husband’s benefits
- Receive 100% of delayed retirement credits
Of course, her spouse will be deceased at this point, which reduces income greatly.
Unfortunately, there is no simple answer to Social Security. Taking your benefits early will lower your lifetime income, but you’ll also have the freedom of being retired. When walking our clients through retirement planning, we find that 30% of a person’s income is often from Social Security.
Retirement Planning: Understanding Social Security Spousal Benefits
Spousal benefits are for married couples, and keep in mind that if your spouse dies, then we would transition to “survivor benefits.” However, when your spouse is retired, you can receive “spousal benefits.”
A few requirements must be met:
- You must be retired for a full year
- Spouse must file for benefits for the other spouse to collect
Often, a spouse who doesn’t have 40 earned credits will benefit from up to 50% of their spouse’s benefits. You may even have your own benefits if these benefits are higher.
With people living longer, it’s a challenge to make the critical decision on when to retire because there are pros and cons to retiring earlier or later.
While the government says that you’ll receive 50% of your spouse’s benefit, your spouse must wait until full retirement age to receive the maximum spousal benefit. An example can help you conceptualize this better:
- Spouse 1 has a full retirement age benefit of $2,000.
- Spouse 2 hasn’t earned their own benefits, and they can take up to 50% of their spouse’s benefits.
- If the working spouse takes retirement at 62, their full benefit may drop to $1,400, but the second spouse’s starting point is still based on the $2,000 amount.
- If the wage owner may wait until 70, they may receive $2,600 a month, but their spouse is still based at $2,000.
When the government says, “up to 50%,” this is when things get confusing. This figure is based on when the working spouse files for benefits. Let’s assume a stay-at-home mom takes her spousal benefit at 62. She will receive a reduced benefit.
The starting point for spousal benefits is always 50% of the higher-earning spouse’s full retirement age benefit.
A scenario would be:
- Stay-at-home mom is a little older
- Working spouse earns more and retires at 62
If the spouse who is a stay-at-home mom decides to take spousal benefits at full retirement, she will receive the full $1,000, even though her spouse may receive $1,400.
In this case, it may be beneficial for the stay-at-home spouse to wait until she reaches 67 to claim spousal benefits because she will receive $1,000 while her spouse receives $1,400.
There are a lot of strategies that we go through with our clients that look at when the optimal time to take Social Security is based on their unique situation.
What is a Restricted Application?
Restricted benefits are something we’re asked about a lot, and they work like this:
- Person 1 is entitled to their spousal and own benefit
- Can you claim your spousal benefit and allow your own benefits to continue gaining credit and take it later?
In the past, this was a viable strategy, but now this strategy is only available to people who will be 70 by January 1st of 2024.
If you’re 69 right now and have chosen not to take your benefits yet, you can file a restricted application, which allows you to take your spouse’s benefits (if they have claimed them) and wait to claim your benefits until you hit 70, allowing you to enjoy higher benefits as a result.
The folks that can use a restricted application are in a small group, but if you fall into this group, it’s important to contact us now.
Anyone who wasn’t born before January 1, 1954, can select only one type of benefit. You cannot allow your own benefit to grow like in the past. You’ll only be allowed to take your spousal benefit if it is greater than your own benefit, but this cannot happen until your spouse files.
However, the spousal benefit is always the “greater of the two,” meaning that if your spousal benefit is higher than your own benefit, Social Security will compare the benefits and give you the “greater of the two.”
We know that this can be very confusing for anyone reading this because it’s a complex topic. Feel free to contact us if you have any questions relating to spousal benefits and when to take Social Security.