Social Security benefits occupy a unique position in the financial lives of retirees. The benefit payments represent an income stream that is free of default, investment, inflation and longevity risk (the risk of outliving your financial resources). In other words, regardless of economic and market conditions, Social Security pays an annuity that will increase with inflation and continue for as long as you or your spouse live.
Workers and spouses who qualify for Social Security retirement benefits can elect to receive them at any age between 62 and 70. The longer the delay, the higher the monthly benefit will be. For example, the benefit at age 66 will be 33 percent higher than at age 62, and delaying until 70 will result in a benefit 76 percent higher than if claimed at age 62. That means if you receive $1,000 a month at 62, you’d get $1,333 at 66 and $1,760 at 70. After 70, there is no additional incentive to continue delaying.
For singles, deciding when to start collecting Social Security is pretty straightforward and boils down to having sufficient financial assets to spend in lieu of benefits and the age to which they expect to live. The decision gets more complicated for married couples, however, since in addition to what they get from their own work history, they may also qualify for spousal and survivor’s benefits based on their spouse’s earnings. The optimal timing decision for each partner then depends upon a number of factors including each spouse’s age, earnings history, expected lifespan and other financial resources.
Because the timing of Social Security benefits for married couples is complex and has important implications for retirees, researchers have tried to construct a framework for optimizing that decision. Much of this research has focused around opportunities to utilize the right mix and timing of worker, spousal and survivor benefits. If executed properly a coordination of benefits can result in a significantly higher Social Security income over the couple’s lifetime.
However, even with all the outstanding research completed to date there is no single set of rules that couples can follow to reach the decision that is right for them. There are a myriad of different claiming strategies and choosing the right one will depend upon each couple’s unique circumstances, retirement priorities, and assumptions about the future. An approach that is effective for one couple will often prove ineffective for another.
In order to intelligently coordinate benefits to optimize their Social Security income, every couple should be able to answer the following questions:
· Do you need the income or can you rely on other assets until you start collecting?
· Do you understand the rules on claiming worker, spousal and survivor benefits?
· Who is the higher earning spouse?· Until what age do you and your spouse plan to work and how will that affect benefits and taxes?
· Who will reach full retirement age (FRA) first, and by how many years?
· Who has the longest expected lifespan?
· Which one of you should receive spousal benefits?
· Have you explored the possibility of switching strategies? For example, a spouse who reaches FRA may begin receiving spousal benefits (while delaying their own) and then switch to benefits based on his or her own work history at a later date?
· How will the selection of your or your spouse’s beginning date affect the level of survivor’s benefits for the other?
For most Americans, Social Security plays an important role in maintaining a secure and comfortable retirement. In general most couples would benefit from selecting a strategy that maximizes joint lifetime income from Social Security. Identifying that strategy however, is not a simple task, especially for married couples. Nevertheless, doing your research and communicating with your spouse can help you make an informed decision and reap enormous benefits.
John Spoto is the founder of Sentry Financial Planning in Andover and Danvers. For more information, call 978-475-2533 or visit www.sentryfinancialplanning.com.
This article is for general information purposes only and is not intended to provide specific advice on individual financial, tax, or legal matters. Please consult the appropriate professional concerning your specific situation before making any decisions.