Social Security for Couples
How to plan one’s Social Security benefit by couples is one of the most difficult in the Social Security world. Some guidelines can be helpful, but without a detailed analysis one cannot develop much confidence in the plan. Unfortunately, most free public tools have serious errors in them.
First issue is a common misunderstanding about Spousal benefits. Most people understand this to be 50% of the primary worker’s benefit. But that’s not exactly correct.
The true spousal benefit is equal to 50% of the primary worker’s Primary Insurance Amount (PIA) minus the spouse’s PIA. The Spousal benefit is actually your own benefit plus the true spousal benefit. This difference is very important due to how the penalties and Delayed Retirement Credits work.
Some people incorrectly assume that they can start their own benefit early, accepting the early reduction in benefits (i.e., penalty). They believe that later they can step up to a full 50% of their spouse’s benefit. But understanding the above calculation shows that is not the case. Their own reduction will persist into the effective Spousal benefit.
For example, assume the two PIAs for the couple are $2,400 and $500. The second person begins benefits early and receives only $400 each month. This person will not transition into $1,200 at a later time. The true Spousal benefit is half the other PIA, or $1,200, minus his or her own PIA of $500. So the true spousal benefit is $700. So even if this person can wait until their Full Retirement Age (FRA) to begin Spousal benefits it will not be $1,200, but $1,100 ($400 + $700). If Spousal benefits are also started early the $700 might be reduced to $600 making the full benefit only $1,000. (All these amounts chosen just to illustrate the principle with easy round numbers.)
What strategy should a couple follow? Even though it is too difficult to know a plan is optimum without sophisticated tools, there are some guidelines that will often get one close. A plan must consider not only individual benefits of each person, but Spousal benefits and Survivor benefits.
For an individual the breakeven age is typically just over age 80. Thus if one expects a long life then delaying benefits is usually more beneficial. Conversely, if a long life is not expected then it is usually better to start benefits early. But with a couple it is not necessarily your own life expectancy that is the key driving factor.
For the individual with the higher PIA, the consideration is the expected last-to-die life expectancy. If you expect one of you to live past the year in which the higher PIA person would reach 80 to 83, then delaying benefits to maximize DRCs is likely the better choice.
For the individual with the lower PIA, the consideration is the expected first-to-die life expectancy. If you anticipate that one of you is likely to die before the person with the lower PIA would reach age 80, then the lower PIA individual generally should start benefits early.
But all situations do not follow this general rule.
Due to the changes in 2015, Spousal benefits are no longer generally available unless the spouse is receiving benefits from Social Security. This presents an additional level of complication and sometime planning opportunity to coordinate benefits and earn DRCs. Figuring that out certainly requires good tools. The rules for “deeming” also changed in 2015. Now if you begin either your own or spousal benefits you are “deemed” (that is, considered) to have elected to begin the other benefit as well. (Individuals born on January 1, 1954 or earlier, are only subject to deeming before reaching Full Retirement Age (FRA).