As CPAs, it is essential to assist clients in making informed decisions about their retirement planning, particularly regarding Social Security benefits – and this knowledge will eventually become valuable for CPAs themselves. Improper timing can lead to thousands of lost potential dollars at a time when every dollar counts, and the consequences can last a lifetime.
While crafting a retirement plan, married couples have two primary options regarding Social Security: electing to claim benefits simultaneously or utilizing a ‘split strategy’ by claiming benefits at different ages.
Claim Social Security benefits simultaneously
Scenario 1 (Same Age, Same Earnings History)
If a couple earns the same amount of money and cannot subsist on just one Social Security income, it may make sense to start claiming benefits concurrently. To more easily keep track of things, let’s introduce a married couple, Greg and Jane. They are both 67 and have a similar earnings history and primary insurance amount (PIA – the maximum benefit afforded to an individual). Their limited options force them to claim benefits, but at least they can take comfort in receiving a total PIA.
Scenario 2 (Age Difference, Same Earnings History)
If a couple has an age difference, it could make sense to collect retirement benefits jointly. Let’s suppose that instead of being the same age, Greg is 67, and Jane is 62, meaning Jane has reached Early Retirement Age, and Greg has reached Full Retirement Age (FRA). In this case, if neither Jane nor Greg can delay claiming benefits, it may be logical to begin collecting simultaneously.
Scenario 3 (Age Difference, Different Earnings History)
Here it gets more complex. A spouse can start claiming benefits based on their spouse’s earnings record, but they will only receive 50% of their spouse’s PIA. If Greg’s monthly benefit is $2,000, Jane’s spousal benefit would only be $1,000 (if Jane starts claiming at her FRA). As a rule of thumb, it is only worth jumping ship to a spousal’s earnings record if the higher-earning spouse has a PIA twice that of the lesser-earning spouse.
In this scenario, let’s keep the same ages, but Greg has a PIA more than twice that of Jane. Rather than applying for her own benefits, Jane may apply for spousal benefits instead. Nonetheless, by retiring early at 62, she will take a hit on her monthly payouts, which comes out at about 33% of the spousal’s FRA benefit. For such a strategy to make sense, 33% of Greg’s FRA benefit must be worth more than Jane’s Early Retirement Age benefit (70% of her FRA benefit).
Utilize a ‘split strategy’
One partner delaying taking Social Security benefits quickly becomes a force multiplier in the total funds received over a lifetime, especially if one partner is a higher earner. With a split strategy, it may be easier for at least one partner to reach FRA or beyond.
Scenario 1: (Same Age, Same Earnings History)
Going back to Greg and Jane – let’s imagine that Greg decides to wait until Full Retirement Age to start taking benefits, but they could really use Jane’s benefits when she is 62. Yes, she’ll face a reduction penalty, but it is a necessary evil in this case. Jane starts taking benefits with a 30% reduction, and Greg waits until FRA or later to start claiming. As always, the longer one spouse can hold off (to the age of 70, that is), the more they will both make in the long run.
Scenario 2: (Same Age, Different Earnings History)
If one spouse has a higher PIA, it behooves the higher-earning spouse to delay until FRA or beyond. In this case, Greg has consistently earned more than Jane retires at 62, but Greg holds off until 70. At that point, Jane can start claiming his earnings record and receive half of his PIA. Even if Greg retires at 67, Jane will still get 50% of his PIA.
Scenario 3: (Different Age, Different Earnings History)
An age gap simplifies taking advantage of a higher-earning spouse’s PIA because the wait is shorter for one spouse to hit FRA or beyond. In this scenario, Jane is 62, and Greg is 67 at FRA. He is only three years away from maxing out his potential Social Security benefits. Jane starts claiming her own benefits, which will be reduced by 30%, while Greg delays a mere three years, at which point he will earn a 124% benefit. Then, Jane can move over to her husband’s earning record.
Key Considerations:
- Every year an individual delays retirement if their FRA is 67, they will earn an 8% increase in their PIA for life. Therefore, the higher-earners benefits will grow faster.
- A spouse can receive only 50% of their spouse’s FRA PIA, never 50% of anything beyond that. For example, in the last scenario, Grey will earn 124% of his PIA, and Jane will receive 50% of his 100% PIA, not 50% of his 124% PIA.
- Continuing to Work: Choosing to work and receive benefits before FRA means going through an ‘earnings test.’ If you earn over a certain amount, Social Security will want you to return a portion of the funds you received.
- For those born between 1943 and 1954, the FRA is 66. From 1955 to 1960, two months are added to each birth year. For example, the FRA for someone born in 1955 is 66 and 2 months.
- For those born in 1960 or after, the FRA is 67.
Other Factors
Health is also a big determiner in deciding when to begin receiving Social Security benefits. There may be circumstances where a higher earner may choose to apply for benefits first. For example, if a higher-earning spouse becomes ill and doesn’t believe they will live long enough to take advantage of a higher benefit.
Things get even more complex if we start discussing divorcee spousal benefits, survivor benefits, disability benefits, and caretaking of a minor. Lastly, tax burdens, medicare payments, and the kinds of retirement accounts play a prominent role in Social Security planning. That’s why it is vital to get in touch with an expert in Social Security optimization, someone who will not look at each piece separately but bring all the puzzle pieces together to form a coherent picture.
