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Challenging Three Mistaken Beliefs About Spousal Retirement Benefits from Social Security

Good to Know

earth

The earth is flat. At least that’s what the mistaken belief was during the middle ages.

If you told someone that the earth is flat today, you could get a laugh (or a raised eyebrow doubting your sanity).  Yet, some of those who would laugh at the prospect of a flat earth today could be carrying around their own potentially serious mistaken beliefs about Social Security benefits.

disclaimer

This blog is intended to raise awareness and as educational information only; it is not intended for and should not be used as individual client advice.  Each client’s needs and fact pattern are influenced by many factors that are out of scope for this blog. In addition, one blog cannot begin to cover the vast number of Social Security regulations. Clients should contact their Financial Advisor or CFP® professional for specific recommendations customized for their specific needs.

This is the first in a series of blogs that will challenge the untruths and half-truths that can rob our clients of $60,000 or more of Social Security benefits.  The robber is not some sinister government agency but the client’s own mistaken beliefs.

We believe the best way to make this information real for you is to focus upon specific people: specific kinds of Social Security beneficiaries.  In a series of separate blogs, we will address the issues of spouses, children, parents and the covered worker themselves.  It’s been said that no Social Security topic is wrapped in more confusion than spousal benefits. That’s a great place to start so today we will focus upon three mistaken beliefs, including:

  1. Spousal retirement benefits should be taken at age 62 to receive more benefit payments.
  2. Spousal retirement benefits should be taken at age 70 to receive larger benefit payments.
  3. Spousal retirement benefits depend upon when the covered worker claims benefits.

But first, let’s identify the players and definitions:

PLAYERS, DEFINITIONS AND EXPLANATIONS
PLAYER/DEFINITION EXPLANATION
Covered worker (CW) An individual who works in covered employment (employment for which Social Security taxes are withheld from the worker).
Fully-Insured covered worker Generally, a covered worker with 40 credits of work history.

One credit = $1,360 (2019, as indexed) in earnings.

A maximum of four credits may be earned per year.

Spouse of covered worker (SCW) A person legally married to the covered worker.
Spousal benefits are generally most important to a SCW that either has lower average earnings than the covered worker or chose to work inside the home (if children are involved, the author would argue that this 24/7 endeavor can be a tougher job than working outside of the home).
Qualified spouse of covered worker

A spouse of the covered worker is qualified if three requirements are met:

  1. The covered worker is currently receiving a Social Security Retirement benefit.
  2. The SCW is at least age 62 (exceptions apply).
  3. The spouses are currently married and have been married for at least one year.
Claiming ages

The age at which a qualified person claims a benefit from the Social Security Administration. Retirement benefits may be claimed early, on-time, or late.

  • Early Retirement Age – generally, as young as age 62
  • On-Time: Full Retirement Age
    • The age at which a covered worker receives 100% of his or her Primary Insurance Amount – the age ranges from 65 to 67 based upon the covered worker’s birth year
  • Late: Delayed Retirement Age
    • Any claiming age after full retirement age
    • Example: Full retirement age is 67 for workers born in or after 1960.
Primary Insurance Amount (PIA) The monthly retirement benefit a fully-insured covered worker is eligible to receive at his or her full retirement age. Social Security benefits are calculated based upon a varying percentage of PIA.
Spousal Benefit

A qualifying spouse of a covered worker (SCW) is entitled to the greater of their own retirement benefit (calculated based upon their own Social Security earnings) OR as much as 50% of the covered worker’s PIA.
Example:

  • Assume SCW’s own monthly retirement benefit is $500.
  • Assume covered worker’s PIA is $2,400.
  • SCW in entitled to a total monthly retirement benefit of up to $1,200 (50% of $2,400).
  • Technically, the SCW receives their own benefit of $500 PLUS a spousal benefit of $700 for a total benefit of $1,200.

Mistaken Belief #1 – Spousal Retirement Benefits Should Be Taken at Age 62 to Receive More Benefit Payments.

Correction #1: This claiming age choice may result in a LIFETIME reduction of over one-third of the spousal benefit.

The chart below is a stark illustration of how $350/month ($4,200/year) in spousal retirement benefits can be lost when the SCW claims a spousal benefit at age 62 instead of waiting until full retirement age.

Chart Assumes:

  • Covered worker’s Primary Insurance Amount (PIA) is $2,000/month.
  • Full retirement age for spouse of covered worker is age 67.
    • Spouse of covered worker claimed spousal benefits at age 62.
    • Spouse of covered worker did not work outside of the home.

Caveats to Correction #1:

  • The dollar amount of the spousal benefit amount is not the only factor in the claiming age decision.
  • A key factor in the claiming age decision is the life expectancy of the SCW.
    • Long life expectancy - consider waiting until full retirement age to claim

Short life expectancy - consider claiming early

Mistaken Belief #2 – Spousal Retirement Benefits Should Be Taken at Age 70 to Receive Larger Benefit Payments

Correction #2: This claiming age choice may result in the loss of 4 years (or more) in spousal retirement benefits.

This mistake is not a lifetime mistake but can be equally painful.  Remember that the SCW can claim a spousal benefit at any age beginning with age 62.  However, NO INCREASE IN SPOUSAL BENEFITS is payable to a SCW who claims a spousal benefit after his or her full retirement age. Put another way, the maximum monthly spousal benefit amount available to a SCW occurs when he or she claims spousal retirement benefits at his or her full retirement age.  Here’s how $60,000 in spousal benefits can evaporate if the SCW waits until age 70 to claim:  

This mistake is not a lifetime mistake but can be equally painful.  Remember that the SCW can claim a spousal benefit at any age beginning with age 62.  However, NO INCREASE IN SPOUSAL BENEFITS is payable to a SCW who claims a spousal benefit after his or her full retirement age. Put another way, the maximum monthly spousal benefit amount available to a SCW occurs when he or she claims spousal retirement benefits at his or her full retirement age.  Here’s how $60,000 in spousal benefits can evaporate if the SCW waits until age 70 to claim:  

The confusion here comes from the fact that the covered worker, NOT the spouse of the covered worker, receives a delayed retirement credit for each year the covered worker delays claiming benefits beyond the covered worker’s full retirement age, up until age 70.

  • For example, a covered worker with a $2,000 PIA can receive an increased annual benefit (called a “credit”) of up to $160 (8% of PIA) for each year of delay from full retirement age until age 70.
  • We will address the delayed credit opportunity in a future blog.

Mistaken Belief #3 – Spousal Retirement Benefits Depend Upon When the Covered Worker Claims Retirement Benefits

Correction #3: The covered worker’s claiming age generally does not affect the spousal benefit.

The spousal benefit to the SCW is calculated without regard to the covered worker’s claiming age.  The chart below summarizes this concept:

Impact of Covered Worker’s Claiming Age Upon the
Retirement Benefit for the Spouse of the Covered Worker
Covered Worker’s
Claiming Age
Spousal Retirement Benefit to
Qualifying Spouse of Covered Worker*
Early (age 62) 50% of Covered Worker’s PIA
On-time (full retirement age) 50% of Covered Worker’s PIA
Delayed (until age 70) 50% of Covered Worker’s PIA

*Assumes SCW did not work outside of the home.

Congratulations!  You can now effectively dispel the three most common mistaken beliefs about Spousal Retirement benefits from Social Security.  In the spirit of giving you more than promised, here’s a little lagniappe (pronounced “lan-yap,”  which means something extra):

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  • A spouse of the covered worker can receive a spousal benefit even if under age 62 if caring for a child of the covered worker.  The child must be under age 16 or disabled. The term “child” is to be interpreted broadly and includes natural child, step-child, adopted child and more.
  • Special, more generous rules may apply to SCWs born before January 2, 1954.  We will peel back the layers of this particular onion in a future blog. If you need more information now, contact a Social Security expert and ask about Deemed Filing and Restricted Application.

We conclude with a question to test our effectiveness in this blog:

Social Security Knowledge Test Question

Jack and Jill, both age 67, have been legally married to each other for 30 years.

  • Jack’s and Jill’s full retirement age is 67.
  • Jack’s PIA is $1,000 and Jill’s PIA is $2,500.
  • They are both fully insured for Social Security Retirement benefits.
  • Jill has not claimed benefits and intends to delay claiming until age 70.

If Jack claims Social Security Retirement benefits today, how much will he receive?

  • $2,500
  • $1,250
  • $1,000
  • $500

Be sure to stay tuned.  In our next blog, we’ll decipher and simplify concepts that could provide even greater long-term benefits than the spousal retirement benefits revealed in this blog.