While there is plenty of negative news about the long-term solvency of Social Security, it is simply too important of a program to let it fail. For many, Social Security will make up a substantial source of their income in retirement. It is in every retiree’s best interest to learn how to maximize their benefits.
When maximizing Social Security benefits, it’s important to distinguish between a single individual and a married couple. The analysis for a single individual is more straightforward. The only benefit that needs to be evaluated is the retirement benefit. The analysis for married couples is more complex.
Retirement benefits are designed to be actuarially equivalent for individuals with average mortality. That is, if you live to about age 80, then your cumulative benefits are about the same regardless of the age at which you start receiving them. If you live beyond that age, you are better off delaying benefits. If you don’t live beyond that age, you are better off claiming early. Of course, no one can predict when they will die, but by factoring in personal health, family history and average life expectancies, you can make an informed decision. In addition to the break-even age, there are other factors that should be considered.
First, as people get older, their life expectancy gets longer. According to the Social Security Administration, a 65-year-old man has a life expectancy of 84.3, and a 65-year-old woman has a life expectancy of 86.6. Right out of the gate, the average individual who lives long enough to claim Social Security is expected to live beyond their break-even age.
Second, Social Security is a hedge against longevity risk — or outliving your assets. Benefits are paid for life. According to the Social Security Administration, about 25 percent of 65-year-olds will live past age 90, and 10 percent will live past age 95.
In addition to the factors listed above, married couples need to consider the different benefit options available to them. Married couples can qualify for a retirement benefit on their own record or a spousal benefit on their spouse’s record.
Generally, a spouse is entitled to the higher of her retirement benefit on her own record or half of her spouse’s benefit. A spouse who files for a retirement or spousal benefit before full-retirement age, or FRA, cannot restrict the application to only one type of benefit, but rather, is deemed to have filed for both and receives the higher of the two benefit amounts.
After a spouse reaches FRA, she can restrict the application to one type of benefit. This means that she can file for one type of benefit at FRA and the other benefit later. This flexibility allows her to file for the spousal benefit at FRA and then switch to her retirement benefit at a later time — thus earning delayed retirement credits on her record.
For illustration, let’s assume a hypothetical couple named John and Jane. John is age 66 (his FRA) and is entitled to a monthly retirement benefit of $1,500. Jane is age 66 (her FRA) and is entitled to a monthly retirement benefit of $2,000.
If John claims his retirement benefit now, he will receive $1,500 per month. This will also allow Jane to claim a spousal benefit. Because she is FRA, she can limit her application for benefits to the spousal benefit — in this case, $750 per month.
At age 70, Jane could switch to her retirement benefit. As a result of delaying her retirement benefit, it will have increased at a rate of 8 percent per year, or 32 percent since she delayed for four years, and equal $2,640 per month.
In this illustration, Jane was able to take advantage of her spousal benefit while also earning delayed retirement credits. This is just one example of many strategies that can be executed to maximize benefits for married couples.
Unfortunately, the rules governing Social Security benefits are complex. A Certified Financial Planner can help evaluate the different claiming strategies to ensure you are making an informed decision. Go to the Financial Planning Association’s to find a CFP near you.
Certified Financial Planner Aaron Leatherwood is an adviser at Comprehensive Personal Financial Advisors and serves on the adjunct faculty at the College for Financial Planning.
