Your Financial Future: Social Security and married couples
This week, we will continue our discussion about Social Security.
Last week, we discussed three different ways to qualify for Social Security. We are not discussing disability benefits or children benefits in this column. Most married couples will receive two Social Security checks. If both partners in the marriage had a similar work record and they earned about the same income each year, they have an opportunity to receive two good-sized checks each month. How they should claim these checks depends on their age and income needs.
The two most important figures in Social Security planning are full retirement age and primary insurance amount. Full retirement age depends on the year you were born in. Everyone born in 1954 and before must be age 66. Anyone born in or after 1960 must be 67. In between, it goes up two months from age 66 until it reaches 67. Some people can take advantage of planning strategies to receive more lifetime income.
Last year, two important changes were made as part of the budget bill. To be able to file a restricted application, you have to be age 62 by the end of last year. To file and suspend, you have to be 66 by this April 29. Let’s discuss when these strategies were used and what changes the law makes.
If both parties in a couple reach 66 by April 29, and have not yet started collecting Social Security, they have several choices. If they both had a primary insurance amount of $2,000, they could both file and each collects $2,000. Another option would be for one to file for their own and the other would file a restrictive application just for spousal. The second person would receive $1,000 each month. Why would they want to receive less? Because the one receiving less would see their benefit grow by 8 percent each year until age 70. This would be worth about $2,640 at 70. You would than give up your spousal benefit and receive the higher balance. When one person passes away, we know one of the benefits will disappear. The good news is it will be the smaller one. Delayed credits, which is what the 8 percent increases are called is available as a survivor benefit, but not a spousal benefit. This scenario can still happen to everyone where both parties in the marriage were 62 by last Dec. 31.
Anyone younger than 62 at the start of the year cannot file a restrictive application. This means when they file for benefits, they will be filing for all benefits and don’t have a choice to pick which one they want. First, the Social Security Administration will see how much you qualify for on your own work record. If you are less than full retirement age, you will be penalized. Then they will look to see if you are entitled to any additional benefits from spousal or survivors. If so, you will receive some of the difference on top of your own. Even people who were 62 before Jan. 1, 2016 will be deeming, filing for all benefit if they file before reaching full retirement age.
To still have the right to file and suspend, you have to be 66 by this April 29 and not already collecting Social Security. Every year you wait after full retirement age, your benefit will increase by 8 percent. There were two areas were file and suspend might be used if you make the final date. One is, if you were delaying credits and then find out that your health is deteriorating, you can collect a lump sum from the date you did the filing. The other use was for the larger wage earner to file and suspend which would let the spouse collect while both of their benefits continued to rise. Anyone who would qualify for this benefit and is not yet receiving Social Security needs to file to protect this right before April 29, after this date it will not be available unless you take action.
People who were married for at least 10 years, who have not remarried, may be able to collect spousal or survivor benefits on an ex. This will have no financial effect on the ex or any new spouse that they might have. No approval is needed from your former spouse.
It is also important to remember the income tax that will be paid on Social Security. Depending on your other income, there could be no taxes or 50 percent or 85 percent of this income could be taxable. Sometimes you can control this tax by reallocating the source of your income. The Social Security office can answer basic questions, but they do not give advice on how to maximize your benefit. The idea of Social Security maximization is to receive the largest amount of dollars from SS. This means calculating the point where you balance receiving Social Security for fewer months but receive the most dollars. Simple break even analysis often does not predict the right outcome. Work with an advisor who understands this important asset.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.