In recent blogs, we have covered many considerations when deciding how and when to claim benefits under Social Security and Medicare. Today we are starting a look at married couples, whose decision making is more complex than is the same process for singles. Couples have an obligation to consider each other’s futures when planning benefits filing. More options are available, and errors can be costly. The objective, however, remains the same; maximize lifetime benefits.
In order to explain the possibilities, we have divided married couples into general categories for simplicity. Today we’ll cover one of the more common situations. Next week we’ll add even more complexity.
Case A: Married couples of similar ages, both qualified for Social security participation. This situation is relatively common these days, as the two-earner household has been ubiquitous for a few decades. A popular claiming strategy when their individual Social Security benefits are relatively equal is to merely have both spouses file for their own individual benefit at their own Full Retirement Age (FRA).
When a couple has more annual retirement income than they will need without receiving full benefits from each spouse, there are alternative claiming options that increase future benefits. A common method of claiming Social Security benefits in this situation is to have one spouse (often the oldest) file at FRA, and have the spouse, upon attaining his or her FRA, claim spousal benefits, which are half of the first claimant’s monthly benefit.
Filing only spousal benefits allows the younger spouse’s (as yet unclaimed) individual benefit to increase 8% annually until age 70. At that time, the second spouse files for his or her full benefit, now much larger than before. We will illustrate this strategy with a simple “Dick and Jane” example.
Dick is three months older than Jane, and they each have an FRA of 66 years old. At FRA, Dick’s monthly benefit would be $2,000, and Jane’s would be $1,800 at her own FRA. They have sufficient income to not require the entire $3,800 monthly, but wish to receive as much as possible while maximizing lifetime benefits.
At FRA, Dick files for monthly benefits and begins receiving $2,000 monthly. Three months later, Jane reaches her FRA, but files only for spousal benefits. Her benefit is exactly one-half of Dick’s, or $1,000 per month. During this period, Jane’s not-yet-claimed monthly benefit rises 8% per year, and there is no other impact on either spouse’s benefit.
Four years later (at age 70), Jane claims her own benefit, which is now about $2,376 per month, having increased 8% annually for 4 years. Dick continues to receive his $2,000 per month (we have ignored cost of living increases), and the couple’s total benefit is now $4,376 monthly. Jane did not give up four years of benefit, but rather took less than her FRA benefit during that period. This added substantially to the couple’s income for their later years, when the higher number will most likely be more beneficial.
This week’s example is common, but other situations abound, and will be covered in upcoming weeks.
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