Your financial future: Which spouse should work longer?
Social Security is one of the most important retirement assets.
This government program provides the base for many seniors’ retirement income. Today, we will only be discussing the retirement element of SS. The amount of Social Security benefits someone receives is calculated by a combination of lifetime earnings and the number of years that someone worked. Sometimes, a third factor is marriage status.
SS uses the 35 highest earning years of a worker’s record. If they have less time, zero earning will be credited to make up 35 years. Since SS contributions go up to $160,200 of income in 2023, benefits are the same for all maximum earners. Wage earners above this amount continue to pay into Medicare, but not SS.
To receive 100% of your benefit, you must have reached full retirement age (FRA). For anyone born before 1954, that is 66. Anyone born in 1960 or later must be 67. For the five years between, the age increases by two months. You can begin to collect retirement benefits at age 62, but you will receive a lower amount. It is a reduction of around 6.5% for each year before FRA. This reduction will last for the rest of your life.
You can collect benefits based on your own work record, or possibly the record of a spouse.
The Social Security Administration always considers your own work record first. If you have been married for at least nine months, you may be able to get an additional spousal add on to your own. This spousal benefit can be up to half of your mate’s benefit. You must have reached your own full retirement age to get the full amount. If you will receive more than the spousal benefit from your own work record, you will not receive any additional money.
Now we are going to look at a very important aspect of SS dealing with survivor benefits.
Upon the death of one spouse, the survivor is most likely going to suffer a loss of income. This is because one Social Security check will stop coming. The good news is it will be the smaller of the two the family has been receiving. If you have been fortunate enough to receiving a pension, this often reduces in half or ends with the death of the recipient.
Usually, it is best for the highest wage earner to wait before starting SS benefits. If someone born in 1960 starts receiving benefits at age 62, they will get less than 30% of their full benefit. If they wait until age 70, they will get 124% of their full benefit. By waiting, they get bigger checks, but receive fewer of them. Calculating a break-even point is a little more complicated because it must consider things such as the cost-of-living adjustment and possibly the earnings test.
This can be very important to a surviving spouse. As an example, Tom is a maximum wage earner who is now 62. If he waits to start his benefit at age 70, upon his death at 84, his wife Sue would receive an annual adjusted income of about $82,000. If Sue should live another 12 years, she will receive more than $1 million in survivor benefits.
This is $500,000 over and above the amount she would have received if her own benefit was half of his. This is a huge difference.
Long time unmarried couples should consider the impact of survivor income after the first death and make decisions accordingly. In traditional couples, survivor benefits may be a big reason for the higher wage earner to delay starting their benefit.
Make sure that your family has a plan to deal with this important area of financial planning.
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.