Social Security Maximization for the Married

http://news.morningstar.com/articlenet/article.aspx?id=348271

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Social Security Maximization for the Married

Even though the process might appear convoluted, there are key factors to consider when optimizing Social Security benefits for your spouse and yourself.
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By Christine Benz | 08-12-10 | 06:00 AM | Email Article

Timing your Social Security start date so you can pocket the maximum benefit over your lifetime is one of those financial-planning topics that makes your head hurt (or mine, at least). I first discussed optimizing your Social Security benefits in this article. Morningstar.com users, many of whom have firsthand experience with navigating the tricky terrain of Social Security, weighed in with wisdom of their own, so I urge you to read the comments that appear below that article. Maximizing a Social Security benefit during your own lifetime is a headache unto itself: You'll have to consider your own income needs and desired retirement start date, and also make some assumptions about your own longevity and health. But maximizing benefits during two lifetimes forces married couples

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About the Author Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success . Follow Christine on Twitter: @christine_benz and on Facebook. Contact Author | Meet other investing specialists

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Social Security Maximization for the Married

http://news.morningstar.com/articlenet/article.aspx?id=348271

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to multiply the decision-making by 2, and adds a few more variables into the mix for good measure. Here's an overview of the Social Security spousal benefit, as well as some of the key considerations to bear in mind when deciding which route is the right one for you and your spouse to take. (Note that I'm just scratching the surface of this very complex topic.) Spousal Benefit Basics First, a brief overview of how Social Security works for married couples. Both spouses are eligible to claim their own Social Security benefits based on their own work histories. But spouses can also claim what's called a spousal benefit, entitling one spouse to receive up to 50% of the other spouse's Social Security benefit. (A spouse can only claim a spousal benefit if the other spouse is already receiving benefits based on his or her own record.) In the case of a spouse who hasn't spent many years in the workforce or who generated a much smaller income than the other spouse, claiming the spousal benefit is apt to be more profitable than claiming a Social Security benefit based on his or her own earnings history. This calculator helps you calculate each partner's Social Security benefit, whereas this one helps you see what a spousal benefit would be. If a lower-earning spouse begins collecting his own Social Security before the other spouse, his benefit will automatically step up to the level of the spousal benefit when the higher-earning spouse files for benefits. (That assumes

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Social Security Maximization for the Married

http://news.morningstar.com/articlenet/article.aspx?id=348271

that the spousal benefit is higher than the lower-earning spouse's own benefit.) Social Security benefits may also be adjusted when one partner in a marriage dies. At that point, the surviving spouse's benefit automatically steps up to the level of the partner with the higher benefit. (The surviving spouse is not entitled to receive both.) So, for example, if one partner is collecting Social Security based on his own work history while his spouse is collecting the spousal benefit, the surviving spouse's benefit would increase to the higher-earning spouse's level upon that spouse's death. Timing Is Key, Times Two A previous article discussed timing of your Social Security start date, noting that you'll receive a reduced benefit if you begin collecting Social Security before your full retirement age. The same is true of the spousal benefit. So, for example, say a 62-year-old begins receiving Social Security before her normal retirement age of 66. (Click here to view normal retirement ages.) Not only will her own benefit be docked if she chooses to collect Social Security based on her own earnings history, but so will her spousal benefit, even if her spouse retires at his full retirement age. Optimization Strategies It's also possible and often desirable for spouses to do both: claim Social Security based on their own earnings histories and then take the spousal benefit later on--or vice versa. One common approach mixes the spousal benefit with an individual's own benefit. For example, say a lower-earning spouse begins to collect Social Security benefits before the higher-earning spouse, thereby entitling the higher-earning spouse to collect spousal benefits. At a later date, when the higher-earning spouse has reached his normal retirement age or even older, he can dump the spousal benefit and begin collecting his or her own benefit at a higher level. That has the salutary effect of increasing the benefit available to his wife upon his death, assuming he predeceases her. That's because, as noted earlier, the higher benefit stays in place upon the first spouse's death. A common version of this strategy is called the 62/70 split. Under this strategy, the lower-earning spouse begins collecting benefits at age 62, at which time her spouse files for the spousal benefit (assuming he is of full retirement age; if he's not, he'll automatically receive whichever is higher--his own benefit or the spousal benefit). When the higher-earning spouse reaches age 70, he then files for his own benefits and bags the spousal benefit, thereby ensuring the highest possible payout for whichever spouse lives longer. An article in T. Rowe Price's Investor
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magazine models some different approaches to Social Security for married couples. Yet another related strategy is called "file and suspend." Under this strategy, the lower-earning spouse begins taking benefits based on his or her own work history as early as possible, anywhere between age 62 and 66. The higher-earning spouse can then file for receipt of Social Security benefits when he reaches his full retirement age at 66, thereby entitling the lower-earning spouse to spousal benefits. The higher-earning spouse can then suspend his own receipt of benefits shortly thereafter and file for Social Security benefits again when he reaches age 70. This approach is complicated, but its attractions are several. It enables the lower-earning spouse to qualify for spousal benefits earlier, and waiting until age 70 maximizes the payout during both spouse's lifetimes. See More Articles by Christine Benz

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Social Security Maximization for the Married

http://news.morningstar.com/articlenet/article.aspx?id=348271

TomOviedo Aug 12 2010, 7:48 AM Flag

My wife and I are in our 40s. I max out every year in paying into Social Security. The wife is a Realtor and could get close. However, I have a real estate license as well and help her part-time. So her business pays me a salary, which is not subject to SSI payroll tax since cap at my job. That salary is somewhat flexible. So, should she pay me more, saving the tax? Or pay herself more, maximizing her own benefits?

RichardA Aug 12 2010, 9:00 AM Flag

Since SS taxes and benefits are highly progressive [the 'return' on 'contributions in the top third of the SSmaxTax is much much lower than the 'return' on the bottom third] I would GUESS it would be advantageous to take the income without the SS tax. You could run the SS benefits estimator on the SSA web site to look at options. There are more contingencies than these articles have discussed. (1) There's the situation in which only one of the spouses has paid any significant amount into SS over the years. Let's say that's the wife. If she retires this year at age 66, her 66 year-old husband can get a 50% spousal benefit, and then, if he outlives her, her full benefit upon her death. In this kind of setup, there are definite incentives to wait at least til age 66 (normal retirement age for this cohort). There is no option available for the husband to collect SS on his own at age 62 or age 66, and for her to get a spousal benefit based on that. (2) The comments on the earlier articles have been instructive but have largely overlooked the current debt situation of a household. If they are paying a lot of interest on car loans, home loans, or other loans -- even credit card debt -- taking SS "early" (well at least earlier) to get out of debt, perhaps before actual retirement from work, can have additional value than just replacing income from other sources.

Juris2 Aug 12 2010, 9:10 AM Flag

martinweil Aug 12 2010, 12:23 PM Flag

Per the 62/70 strategy, it is my understanding that once a recipient takes early benefits, all future benefits, including spousal, will be subject to the same haircut applicable at the time that early benefits were first taken. This makes taking benefits before full retirement age very disadvantageous except in duress or where there is a strong expectation of an early demise.

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Social Security Maximization for the Married

http://news.morningstar.com/articlenet/article.aspx?id=348271

drbrownie Aug 12 2010, 7:20 PM Flag

Christine, Thanks again for another important article. This is a complicated subject and I would like to hear more from you on the topic. Juris2, I have a good friend who may be in a similar situation. His wife just retired at age 60 after 35 years with a state university. I think the university was outside of SS so it is my understanding that she does not qualify for SS benefits. In any case, I'll have them do a bit of research as it could be very important as to when he starts his SS. Thanks for the heads-up!

blueh2o Aug 12 2010, 8:11 PM Flag

FWIW: My wife and I are taking early benefits. I started 1 year before her and now collect spousal benefits based on her benefits. Every nickel goes into a conservative mutual fund (Vanguard High Yield Dividend). Plus I calculate my taxes both with and without the SSA money. When my wife turns 66 (or maybe 70) we'll cash in the mutual fund, repay SSA (hopefully, if the government doesn't screw the economy into the ground), and then restart the benefits at the new higher level. Two points. One, again hopefully, we keep the gains on the investment of SSA funds over the years when we repay to do a restart. Also, note that you can file for a refund of the taxes paid (hence keeping the double tax returns via TurboTax) on the SSA payments. The second point is if I die before then at least my wife can keep whatever I collected. If we had waited to start collecting and I died she wouldn't get any of that money. I look at it as a minor level insurance policy. And, since she's the high earner, if she dies I'm going to get stepped up to her level and will keep the monies collected on her behalf. I don't see the point of waiting to collect - if you can afford NOT to collect - since you can repay the money received and restart your benefits. Just don't spend the money you collect in the meantime. And hope the government doesn't screw the economy.

zosa12 Aug 12 2010, 8:13 PM Flag

My wife took SS at 62 with the thought that she would receive 50% of my full benefit when I turn 66. She is one year older than me. This contradicts what I've read in this article where you state that her spousal benefit will be cut. Either you are wrong or there is a whole lot of mis-information out there on this subject including Money magazine.

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Social Security Maximization for the Married

http://news.morningstar.com/articlenet/article.aspx?id=348271

RichardA Aug 12 2010, 8:39 PM Flag

blueh2o : "note that you can file for a refund of the taxes paid" _______ Don't do that without first checking the other option; you can take a tax credit for the taxes paid OR take a tax DEDUCTION for the amount paid back. In my case taking the tax deduction was far more beneficial, and I was able to use it to offset the income from converting a big chunk of Traditional IRA change to Roth.

stockvapors Aug 13 2010, 8:29 AM Flag

50% of America is divorced and a lot of those people are remarried. So, it seems that there is a piece missing. The impact of an ex that elects to take the spouse share of SS at age 62. What happens to the new spouse when they reach 62? Can the ex then switch to their own SS and let the new spouse take the spouse benefits? Is there a penalty in that for anyone...ie reduced benefits for ex or new spouse?

blueh2o Aug 13 2010, 8:30 AM Flag

@RichardA: good idea, we'll do that when the time comes. Mostly I wanted to make the point that it is very helpful to complete the annual tax returns each year, done with and without SSA when it is time to claim the refund/credit/deduction. Don't wait and try to recreate the returns when one is ready to repay. BTW I really like the idea of using the deduction to convert IRA to Roth. Hope they are both still around in a few years. :-)
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