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July 13, 2014

Married couples and Social Security benefits tricky

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. 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 will 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 coordinating benefits can result in a significantly higher Social Security income over the couple’s lifetime.

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