James addresses a common concern for a couple approaching retirement through a listener’s question. Listener Rob plans to collect Social Security early at 62, raising questions about his wife’s retirement.
Understanding Social Security strategies to avoid potential losses during retirement is important.
James explains the intricacies of spousal benefits, detailing how they are calculated based on the primary earner's full retirement age benefit.
Key Takeaways:
-Wait until full retirement age to maximize spousal benefits
-Primary earner must start to start collecting for the spouse to be eligible
-Nuanced calculations involving the spouse's own retirement benefit
Questions Answered:
When should a spouse collect Social Security spousal benefits?
How are spousal benefits calculated?
Timestamps:
0:00 - A listener’s question
3:00 - Two SS options
5:17 - Spousal benefit amounts
7:24 - When spouses can collect
8:55 - Spousal + primary benefits
11:59 - Implications of collecting early
14:16 - The good news
16:00 - The key takeaways
Create Your Custom Strategy ⬇️
James addresses a common concern for a couple approaching retirement through a listener’s question. Listener Rob plans to collect Social Security early at 62, raising questions about his wife’s retirement.
Understanding Social Security strategies to avoid potential losses during retirement is important.
James explains the intricacies of spousal benefits, detailing how they are calculated based on the primary earner's full retirement age benefit.
Key Takeaways:
-Wait until full retirement age to maximize spousal benefits
-Primary earner must start to start collecting for the spouse to be eligible
-Nuanced calculations involving the spouse's own retirement benefit
Questions Answered:
When should a spouse collect Social Security spousal benefits?
How are spousal benefits calculated?
Timestamps:
0:00 - A listener’s question
3:00 - Two SS options
5:17 - Spousal benefit amounts
7:24 - When spouses can collect
8:55 - Spousal + primary benefits
11:59 - Implications of collecting early
14:16 - The good news
16:00 - The key takeaways
Create Your Custom Strategy ⬇️
Today we're going to be taking a look at a couple who are preparing to retire, but they have some big unknowns looming over their heads, specifically around social security spousal benefits. The husband has been the primary breadwinner for their whole life in the wife estate at home, raising the children, and they don't know how they should max my social security given this information. So they have a lot of unknowns around social security and the reality is, if they collect the wrong way, specifically around spousal benefits, it could end up costing them tens of thousands of dollars over the course of their retirement. So in today's episode of Ready for Retirement, I'm going to break down their options and I'm going to teach you everything you need to know about social security spousal benefits, so you can maximize your retirement lifestyle.
Speaker 1:This is another episode of Ready for Retirement. I'm your host, james Kanol, and I'm here to teach you how to get the most out of life with your money. And now on to the episode. So let's jump right into the question. This question comes from a listener named Rob, and Rob says the following. He says Hi, james, I've been watching your YouTube videos and listening to your podcasts and I really appreciate your detailed explanations and specific scenarios. They've been a tremendous help as I start to finalize my retirement plan. I'm currently 52 years old and my wife is 50. We are planning our retirement strategy, which will consist of a combination of employer 401k, roth, ira, personal investments in social security. But I need some guidance to determine the optimal age for my wife and I to begin drawing from social security. My wife is a stay at home mother, so she will not be eligible for her own individual retirement benefits and will be planning to take the spousal benefit. My primary insurance amount at full retirement age, which is 67 for me, is $3,654, but I was planning to begin collecting social security at 62 to reduce the draw from my retirement account, so my reduced benefit at age 62 would be $2,540. For the spousal benefit, I understand that my wife's maximum benefit is 50% of my full retirement benefit. However, if I retire prior to my full retirement age and my wife waits until her full retirement age, which is 67, would she still be eligible for 50% of my full retirement age benefit or would she be limited to 50% of my reduced benefit? For example, if I retired age 62, my benefit will be $2,540. If my wife waited until age 67, would she be eligible for 50% of my full retirement age benefit, which is half of $3,654 or $1,827, or would she receive 50% of my early retirement benefit, which would then be half of $2,540, which comes out to $1,207. Thank you, rob. Well, rob, thank you for your question.
Speaker 1:This is an aspect of spousal benefits that most people are very confused about. So, when it comes to maximizing your retirement and maximizing your social security, it's not enough to know how do you maximize your own benefit. It's also one of the implications of the way I collect my benefit in terms of what my spouse is ineligible for in terms of a spousal benefit. So on, today we're going to address your specific question, but I also want to unpack this for everyone listening who is wondering about how do you maximize spousal benefits, given overview of how do spousal benefits work and then understanding that in that context, how do you then maximize it related to, or relative to, your total retirement picture? So, as we jump into this, let's start with a few things that you need to notice right off the bat.
Speaker 1:Number one when you are going to collect Social Security, you're eligible for one of two different types of options. You can either collect your own retirement benefit, which is based on your earnings record. So how much do you pay into Social Security? Social Security takes a look at your 35 highest years of earnings to help you determine what's called your primary insurance amount, which is the amount that you are eligible for at your full retirement age, which is, for most of you, going to be somewhere between age 66 and 67. You're eligible for that on the one hand, or you're eligible for what's called a spousal benefit, and we'll talk about how much that is later on. But a spousal benefit is saying maybe you didn't pay a whole lot into Social Security, maybe you're raising a family, maybe you weren't working.
Speaker 1:Whatever the case might be, you are eligible for a spousal benefit, which is a benefit that's based upon your spouse's earnings record, not your own earnings record. So if you are currently married, you are eligible for spousal benefit if you've been married for at least one year. So you can't just go get married and immediately turn on a spousal benefit. You have to have been married at least a year to be eligible for spousal benefits. And if you're divorced? So if you were previously married but are no longer married, you are still eligible for a spousal benefit, but you have to have been married for at least 10 years. So you can't be married for a month, get divorced and be eligible for a spousal benefit based on your ex-spouse's earnings record. You have to have been married for at least 10 years.
Speaker 1:If you are widowed, then you're actually eligible for something called survivor benefits. So survivor benefits are even higher benefits as the full earnings record or the full benefit of your deceased spouse and if you're widowed, this could be if you were married at the time of your spouse's passing, or if you were divorced and you were married for at least 10 years and that spouse then or that ex-spouse then passes away. So survivor benefits are something entirely different. I just want to make that very clear as we start to go through this. Survivor benefits are hugely important, but we're going to be specifically talking about how do you max my spousal benefits on today's episode.
Speaker 1:So let's assume that you're listening and listening to say, okay, I am eligible I think based upon what you're saying for a spousal benefit. I've been married for over a year to my spouse. I don't have the real strong earnings record on my own, meaning I personally have not paid in a whole bunch to social security, but my spouse has. How much am I eligible for? Well, you're eligible for up to 50% of your spouse's primary insurance amount, PIA. If you're unsure what your PIA is, it's simply your benefit that you are eligible for at your full retirement age, or, in this case, your spouse's benefit that they are eligible for at their full retirement age. That's called your primary insurance amount, and as a spouse of a worker and when I say worker, I mean the person who's benefit we're basing this off of as a spouse of the worker, you are eligible for up to 50% of their primary insurance amount. So, for example, let's assume that, in this case the worker, so if you're the spouse and the worker is the person who has paid into social security, let's assume, at age 67, their full retirement age amount is $2,000. Well, if they turn 67 and you turn 67, so they're collecting their benefit of 2000, you are eligible for $1,000 per month, which is half of their benefit at 2000 or half of their benefit at age 67.
Speaker 1:Now let's assume, though, because this is a common question, what if your spouse doesn't collect at 67, they wait until 70 to collect, because they get what are called delayed retirement credits. Well, those delayed retirement credits would take that $2,000 per month benefit that they could have collected at age 67, and would have turned it into $2,480 by age 70. So if they wait until age 70 and collect, they're now collecting $2,480, but your spousal benefit is still based upon their primary insurance amount, which again is their benefit at age 67 in this example, not their benefit at 70. So even if your spouse waited until 70 to collect, you would still be basing your spousal benefit. So I should say, even if the worker waited until age 70 to collect the spouse, your benefit would still be $1,000 per month in this example. It would still be half of the $2,000 per month that they would have been eligible for at age 67, not the $2,480 that they'd be eligible for at age 70 in this example. And that's because spousal benefits do not earn any delayed retirement credits like your normal retirement benefits do.
Speaker 1:Now, another thing to note based upon this example is your spouse or the worker must be collecting their benefit in order for you, the spouse, to be eligible for a spousal benefit. So if we go back to that example, let's assume you and your spouse and your spouse is the worker, so you and the worker are both 67, but the worker is going to wait until age 70 to collect benefits. Well, that's great for them. The workers benefits are going to go up every single year because they're earning delayed retirement credits, which maximizes at age 70, but you, the spouse, you are not able to collect a spousal benefit until they first collect. So if they are not collecting their retirement benefit, you are not eligible to collect a spousal benefit.
Speaker 1:Years ago there used to be something called file and suspend, where the worker could file for benefits but then suspend them until, typically, age 70. And what that would allow for is the spouse could then say okay, the worker has filed, so I can now collect a spousal benefit. So while they're filing and suspending, you begin collecting a spousal benefit, but they wait until 70 to collect theirs. That rule is no longer in place. That's been amended. This was done several years ago, but some people still have questions about it. So for those of you listening who have not collected yet, if your worker has not collected benefits yet, then you as a spouse cannot collect a spousal benefit.
Speaker 1:Now here's one other thing to note with this, and this may seem like a small trivial detail, but it actually matters when it comes to determining what type of a benefit you'll get or how much that benefit will be, is that? It's important to realize that 50% of your spouses or the worker's primary insurance amount, that's your max spousal benefit. So technically, what you're actually collecting is your own retirement benefit plus any excess spousal benefit. Let's take a look at what I mean. Let's go back to that example Of the workers earning $2,000 per month as a primary insurance amount, so that's their benefit at their full retirement age.
Speaker 1:You are eligible if your earnings record is zero. So assume you've never paid into social security, so the worker could collect $2,000 per month. You as a spouse, your benefit would be $0 per month because you never paid into social security. You would be eligible for the max spousal benefit, which is $1,000 per month, in this case half the $2,000 per month that the worker is eligible for.
Speaker 1:Now that, let's change his assumptions. Let's assume that the worker's benefit is still $2,000 per month, but you as a spouse, you actually have paid into social security, not a ton, but you have paid in some years and you are actually eligible for $600 per month based upon your earnings record. So in this case you would collect if you went to collect spousal benefits. Technically, what you're getting is $600 per month of your own retirement benefit, plus an excess spousal benefit of $400 per month to bring you to that full $1,000. So technically it's the same benefit. You're both getting $1,000 per month, whether you had $0 of your own retirement benefit or the $600 per month of your own retirement benefit. But here's why it's important to know that.
Speaker 1:Going back to the previous example, let's assume, like we talked about you and the worker, so you, the spouse, and the worker are both 67, but the worker says you know, I'm going to wait until age 70 to collect my own benefits. Well, if you have $0 of earnings record, you have to wait until they turn 70 to collect a spousal benefit, which you would then get 50% of what they would have received at age 67. Well, what if you didn't have $0 of retirement benefits but you had the $600 per month of your own retirement benefit that you are eligible for with Social Security? Well, in that case you could collect the $600 per month at your full retirement age because that's your retirement benefit. So you're now starting to get something on a monthly basis. Then, at age 70, once your worker, once the your spouse, who's a worker, collects their own benefit, then you are eligible to add on the spousal benefit, in which case the excess spousal benefit in this case is $400 per month, and that bumps you up to $1,000 per month. So, like I said, it seems like that's just a little detail because at the end of the day, you're still getting the same exact dollar amount once you're fully collecting. But it is important to note that part of a spousal benefit is actually what you are personally eligible for based upon your retirement record, and the other part is the excess spousal benefit that is based upon your spouse's earnings record that you're not eligible to collect until they are beginning to collect their own benefit. All right, so what we've talked about so far is how does a spousal benefit work, assuming that you and your spouse are waiting at least until full retirement age to collect? Now let's talk about what if you're collecting early, so we can start to work into Rob's question. Or addressing Rob's question, which is what if he is a worker, collects his own benefit early, how would that impact his wife or the spouse in this case and her ability to maximize her spousal benefit? So, before we address Rob's question, let's understand the general reduction in spousal benefits, so you can collect a spousal benefit early, you don't have to wait until full retirement age.
Speaker 1:However, in the same way that if you collect your own retirement benefit early, you're accepting a reduction or you're locking in a reduction, the same thing is true for a spousal benefit. So every year, for the first three years that you collect early and what I mean by that is if you're at full retirement, his age is 67, the first three years before that. So collect at 66 or 65 or 64, you are reducing your benefit by 8.3% or so. Now it actually happens on a monthly basis. So it's not as if you take these giant step backs every year, as much as every month. That's a prorated amount of that. But for every month before your full retirement age, up to 36 months or up to three years, every year that you collect early, you're reducing your benefit by about 8.3% per year, but of course that's prorated on a monthly basis Any years before that.
Speaker 1:So I'm talking about age 67. So if you collect at age 66, you accept an 8.3% reduction. If you collect at age 65, you are accepting a 16.6% reduction. If you collect at age 64, you're accepting a 25% reduction in your spousal benefit. Then at age 63 and 62,. So the two years prior to that that you could collect your benefit is then reduced by 5% per year.
Speaker 1:So you can collect a spousal benefit as soon as age 62, but you are going to have some reduction in benefits. That's if you are collecting early as a spouse. What if and this is to address Rob's specific question what if the spouse waits until their full retirement age but the worker collects early? If you remember, rob said look, I have this real strong benefit at my age 67, but I'm probably going to collect at 62. Is my spouse, is my wife, still eligible to collect a full spousal benefit if she waits until 67, or will she be penalized because I, as a worker, am collecting early? So here's the good news to you, rob, and to everyone who is in a situation similar to Rob's, who is planning to collect their own benefit early but wants to maximize the spousal benefit.
Speaker 1:As I said before, when it comes to spousal benefits, they're based on the primary earner's full retirement age benefit, regardless of when the primary earner actually begins to collect their social security benefit. So in Rob's case, if his wife waits until her full retirement age, which is age 67, to claim these spousal benefits, she would be eligible for 50% of Rob's full retirement benefit, not the reduced benefit that he would receive at age 62. So, if you recall the numbers, at age 67, rob would have been eligible for $3,654, but at age 62, that $3,654 benefit would be reduced to $2,540. So the good news is for Rob's wife is, if she does wait until 67, she would be able to collect half of the higher benefit, half of the $3,654. So in this case she would be eligible for the $1,827 benefit per month, not half of the reduced benefit. So this calculation, it's not actually impacted by when Rob decides to collect. It's entirely impacted by when the spouse begins to collect or, in this case, rob's wife. So, rob, to answer your question directly as we're going through this, your wife would be good to maximize her benefit at age 67. Now, when I say she'd be good to do that, it's not a recommendation that she does that. Of course don't know Rob's entire financial picture, but if you are looking to do this, your wife would be eligible for half of your full retirement age benefit, even if you went ahead and collected at age 62.
Speaker 1:So, in summary, as we're going through this, because spousal benefits can get a little complicated. Here's a key takeaways that you need to remember. Number one if you want to maximize a spousal benefit, the spouse has to wait until full retirement age. At full retirement age they're eligible for up to 50% of the workers primary insurance amount, which is the workers benefit at their full retirement age. Secondly, you need to wait until the workers collecting to be eligible for a spousal benefit or to be eligible to collect a spousal benefit. It doesn't matter how old you are. If the workers not collecting their benefit, you cannot collect your spousal benefit.
Speaker 1:Next thing to take away is, as I mentioned, this seems like a small detail but can actually be quite important is that you need to understand that your spousal benefit is actually the combination of your own retirement benefit plus any excess spousal benefit. It's still going to cap out at 50% of the workers primary insurance amount or their benefit at their full retirement age. But when you understand that part of it is your own earnings record and part of it is your workers excess spousal benefit, that can help. In situations like we use as an example, where they're waiting longer to collect, maybe you can start collecting your own benefit, even if it's reduced, and then later switch not switch, but add on the excess spousal benefit to get up to a full 50% of their benefit.
Speaker 1:And then the final takeaway here is you need to make sure you need to be very careful to understand that maximizing social security income isn't necessarily the same as maximizing social security within your plan. What I mean by that is the temptation very often is to look at social security and say, okay, based upon my expected life expectancy, based upon my spouse's expected life expectancy, because it's a little redundant. But life expectancy, what option? Meaning at what age that we collect, what's going to put the most dollars in our pocket? When we simply look at this like a math problem, the problem with that is it's not taking into account the impact on investments, the impact on taxes, the impact on personal preferences. And to really truly understand the optimal social security strategy, you don't want to just look at what's going to put the most social security income in your pocket. You want to look at which option is going to be most beneficial to your plan as a whole when you start to consider the impact it has on your withdrawals, on your investments, on your tax situation, on longevity, on safety. All these other aspects need to be considered as well. That being said, it is very important to understand how spousal benefits work so that you can know what you need to do to maximize those.
Speaker 1:So, rob, thank you very much for your question. I think this was a good, healthy conversation for a lot of people, because I think this is a question a lot of people have. Thank you, as always, for all of you who are listening. If you're enjoying this episode, if you're enjoying this podcast and you're watching on YouTube, please go ahead and like this and subscribe to make sure that you don't miss future episodes. If you are listening to this on Apple Podcasts or Spotify, would really appreciate it if you would leave a five star review if you have been enjoying this and it's helped in any way. That being said, thank you for listening and I'll see you all next time.
Speaker 1:Hey everyone, it's me again for the Disclaimer. Please be smart about this. Before doing anything, please be sure to consult with your tax planner or financial planner. Nothing in this podcast should be construed as investment tax, legal or other financial advice. It is for informational purposes only. Thank you for listening to another episode of the Ready for Retirement podcast If you want to see how Root Financial can help you implement the techniques I discussed in this podcast, then go to rootfinancialpartnerscom and click start here, where you can schedule a call to one of our advisors. We work with clients all over the country and we love the opportunity to speak with you about your goals and how we might be able to help. And please remember nothing we discuss in this podcast is intended to serve as advice. You should always consult a financial, legal or tax professional who's familiar with your unique circumstances before making any financial decisions.