social security maximization for the married

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Social Security Maximization for the Married

Even though the process might appear convoluted, there are key

factors to consider when optimizing Social Security benefits for your

spouse and yourself.

By Christine Benz | 08-12-10 | 06:00 AM | Email Article

Timing your Social Security start date so you can pocket the maximum benefit

over your lifetime is one of those financial-planning topics that makes your head

hurt (or mine, at least). I first discussed optimizing your Social Security benefits in

this article. Morningstar.com users, many of whom have firsthand experience with

navigating the tricky terrain of Social Security, weighed in with wisdom of their

own, so I urge you to read the comments that appear below that article.

Maximizing a Social Security

benefit during your own

lifetime is a headache unto

itself: You'll have to consider

your own income needs and

desired retirement start date,

and also make some

assumptions about your own

longevity and health. But

maximizing benefits during two

lifetimes forces married couples

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to multiply the decision-making by 2, and adds a few more variables into the mix

for good measure.

Here's an overview of the Social Security spousal benefit, as well as some of the

key considerations to bear in mind when deciding which route is the right one for

you and your spouse to take. (Note that I'm just scratching the surface of this very

complex topic.)

Spousal Benefit Basics

First, a brief overview of how Social Security works for married couples. Both

spouses are eligible to claim their own Social Security benefits based on their own

work histories. But spouses can also claim what's called a spousal benefit, entitling

one spouse to receive up to 50% of the other spouse's Social Security benefit. (A

spouse can only claim a spousal benefit if the other spouse is already receiving

benefits based on his or her own record.)

In the case of a spouse who hasn't spent many years in the workforce or who

generated a much smaller income than the other spouse, claiming the spousal

benefit is apt to be more profitable than claiming a Social Security benefit based on

his or her own earnings history. This calculator helps you calculate each partner's

Social Security benefit, whereas this one helps you see what a spousal benefit

would be. If a lower-earning spouse begins collecting his own Social Security

before the other spouse, his benefit will automatically step up to the level of thespousal benefit when the higher-earning spouse files for benefits. (That assumes

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that the spousal benefit is higher than the lower-earning spouse's own benefit.)

Social Security benefits may also be adjusted when one partner in a marriage dies.

At that point, the surviving spouse's benefit automatically steps up to the level of

the partner with the higher benefit. (The surviving spouse is not entitled to receive

both.) So, for example, if one partner is collecting Social Security based on his own

work history while his spouse is collecting the spousal benefit, the surviving

spouse's benefit would increase to the higher-earning spouse's level upon thatspouse's death.

Timing Is Key, Times Two

A previous article discussed timing of your Social Security start date, noting that

you'll receive a reduced benefit if you begin collecting Social Security before your

full retirement age. The same is true of the spousal benefit. So, for example, say a

62-year-old begins receiving Social Security before her normal retirement age of

66. (Click here to view normal retirement ages.) Not only will her own benefit be

docked if she chooses to collect Social Security based on her own earnings

history, but so will her spousal benefit, even if her spouse retires at his full

retirement age.

Optimization Strategies

It's also possible and often desirable for spouses to do both: claim Social Security

based on their own earnings histories and then take the spousal benefit later

on--or vice versa. One common approach mixes the spousal benefit with an

individual's own benefit. For example, say a lower-earning spouse begins to collect

Social Security benefits before the higher-earning spouse, thereby entitling the

higher-earning spouse to collect spousal benefits.

At a later date, when the higher-earning spouse has reached his normal retirement

age or even older, he can dump the spousal benefit and begin collecting his or her

own benefit at a higher level. That has the salutary effect of increasing the benefit

available to his wife upon his death, assuming he predeceases her. That's because,

as noted earlier, the higher benefit stays in place upon the first spouse's death.

A common version of this strategy is called the 62/70 split. Under this strategy,

the lower-earning spouse begins collecting benefits at age 62, at which time her

spouse files for the spousal benefit (assuming he is of full retirement age; if he's

not, he'll automatically receive whichever is higher--his own benefit or the spousal

benefit). When the higher-earning spouse reaches age 70, he then files for his own

benefits and bags the spousal benefit, thereby ensuring the highest possible payoutfor whichever spouse lives longer. An article in T. Rowe Price's Investor

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magazine models some different approaches to Social Security for married couples.

Yet another related strategy is called "file and suspend." Under this strategy, the

lower-earning spouse begins taking benefits based on his or her own work history

as early as possible, anywhere between age 62 and 66. The higher-earning spouse

can then file for receipt of Social Security benefits when he reaches his full

retirement age at 66, thereby entitling the lower-earning spouse to spousal

benefits. The higher-earning spouse can then suspend his own receipt of benefitsshortly thereafter and file for Social Security benefits again when he reaches age

70. This approach is complicated, but its attractions are several. It enables the

lower-earning spouse to qualify for spousal benefits earlier, and waiting until age

70 maximizes the payout during both spouse's lifetimes.

See More Articles by Christine Benz


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TomOviedo

Aug 12 2010, 7:48 AM

Flag

My wife and I are in our 40s. I max out every year in paying into

Social Security. The wife is a Realtor and could get close. However,

I have a real estate license as well and help her part-time. So her

business pays me a salary, which is not subject to SSI payroll tax

since cap at my job. That salary is somewhat flexible. So, should

she pay me more, saving the tax? Or pay herself more, maximizing

her own benefits?

RichardA

Aug 12 2010, 9:00 AM

Flag

Since SS taxes and benefits are highly progressive [the 'return' on

'contributions in the top third of the SSmaxTax is much much lower

than the 'return' on the bottom third] I would GUESS it would be

advantageous to take the income without the SS tax. You could run

the SS benefits estimator on the SSA web site to look at options.

Juris2

Aug 12 2010, 9:10 AM

Flag

There are more contingencies than these articles have discussed. (1)

There's the situation in which only one of the spouses has paid any

significant amount into SS over the years. Let's say that's the wife.

If she retires this year at age 66, her 66 year-old husband can get a

50% spousal benefit, and then, if he outlives her, her full benefit

upon her death. In this kind of setup, there are definite incentives to

wait at least til age 66 (normal retirement age for this cohort).

There is no option available for the husband to collect SS on his own

at age 62 or age 66, and for her to get a spousal benefit based on

that.

(2) The comments on the earlier articles have been instructive but

have largely overlooked the current debt situation of a household. If

they are paying a lot of interest on car loans, home loans, or other

loans -- even credit card debt -- taking SS "early" (well at least

earlier) to get out of debt, perhaps before actual retirement from

work, can have additional value than just replacing income from

other sources.

martinweil

Aug 12 2010, 12:23 PM

Flag

Per the 62/70 strategy, it is my understanding that once a recipient

takes early benefits, all future benefits, including spousal, will be

subject to the same haircut applicable at the time that early benefits

were first taken. This makes taking benefits before full retirement

age very disadvantageous except in duress or where there is astrong expectation of an early demise.


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drbrownie

Aug 12 2010, 7:20 PM

Flag

Christine, Thanks again for another important article. This is a

complicated subject and I would like to hear more from you on the

topic. Juris2, I have a good friend who may be in a similar situation.

His wife just retired at age 60 after 35 years with a state university.

I think the university was outside of SS so it is my understanding

that she does not qualify for SS benefits. In any case, I'll have them

do a bit of research as it could be very important as to when he

starts his SS. Thanks for the heads-up!

blueh2o

Aug 12 2010, 8:11 PM

Flag

FWIW: My wife and I are taking early benefits. I started 1 year

before her and now collect spousal benefits based on her benefits.

Every nickel goes into a conservative mutual fund (Vanguard High

Yield Dividend). Plus I calculate my taxes both with and without the

SSA money. When my wife turns 66 (or maybe 70) we'll cash in the

mutual fund, repay SSA (hopefully, if the government doesn't screw

the economy into the ground), and then restart the benefits at the

new higher level.

Two points. One, again hopefully, we keep the gains on the

investment of SSA funds over the years when we repay to do a

restart. Also, note that you can file for a refund of the taxes paid

(hence keeping the double tax returns via TurboTax) on the SSA

payments. The second point is if I die before then at least my wife

can keep whatever I collected. If we had waited to start collecting

and I died she wouldn't get any of that money. I look at it as a

minor level insurance policy. And, since she's the high earner, if she

dies I'm going to get stepped up to her level and will keep the

monies collected on her behalf.

I don't see the point of waiting to collect - if you can afford NOT to

collect - since you can repay the money received and restart your

benefits. Just don't spend the money you collect in the meantime.

And hope the government doesn't screw the economy.

zosa12

Aug 12 2010, 8:13 PM

Flag

My wife took SS at 62 with the thought that she would receive 50%

of my full benefit when I turn 66. She is one year older than me.

This contradicts what I've read in this article where you state that

her spousal benefit will be cut. Either you are wrong or there is a

whole lot of mis-information out there on this subject including

Money magazine.


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RichardA

Aug 12 2010, 8:39 PM

Flag

blueh2o : "note that you can file for a refund of the taxes paid"

_______

Don't do that without first checking the other option; you can take a

tax credit for the taxes paid OR take a tax DEDUCTION for the

amount paid back.

In my case taking the tax deduction was far more beneficial, and Iwas able to use it to offset the income from converting a big chunk

of Traditional IRA change to Roth.

stockvapors

Aug 13 2010, 8:29 AM

Flag

50% of America is divorced and a lot of those people are remarried.

So, it seems that there is a piece missing. The impact of an ex that

elects to take the spouse share of SS at age 62. What happens to

the new spouse when they reach 62? Can the ex then switch to their

own SS and let the new spouse take the spouse benefits? Is there a

penalty in that for anyone...ie reduced benefits for ex or new

spouse?

blueh2o

Aug 13 2010, 8:30 AM

Flag

@RichardA: good idea, we'll do that when the time comes. Mostly I

wanted to make the point that it is very helpful to complete the

annual tax returns each year, done with and without SSA when it is

time to claim the refund/credit/deduction. Don't wait and try to

recreate the returns when one is ready to repay.

BTW I really like the idea of using the deduction to convert IRA to

Roth. Hope they are both still around in a few years. :-)

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