Importance of Timing: Social Security Strategy for Married Couples
Securing at least one steady source of income is an important - and oftentimes overlooked - component to retirement planning. Even more important is the diversification of income streams in case one or more of them dries up. After all, it’s never wise to put all of a client’s eggs in one basket.
While Social Security remains one of the most dependable streams of income, there are several different scenarios that come into play when advising married couples. To remain successful, advisors must be knowledgeable about the Social Security benefit requirements as well as their clients’ retirement resources. If client resources are sufficient without Social Security benefits, the advice provided should pivot.
Four Proven Strategies to Maximize Social Security Retirement Income
Four of the most common Social Security strategies for married couples and individuals involve maximizing their benefits by:
Working for a longer period of time (this can be full-time or part-time)
Downsizing wherever possible
Finding ways to spend less money in general
Deferring Social Security benefits
While all four strategies can increase the optimization of a client’s retirement resources, two require a client to spend less and one calls for increased time in the workforce. But the clear winner is Social Security deferment, as it actually increases the benefit amount your clients receive. The longer an eligible individual waits before claiming receipt of retiree benefits the higher the monthly benefit. If planning on using Social Security as part of a married client’s income stream there are a few details to note.
A Little Background About Eligibility and the Replacement Rate
As it was founded, the Old-age, Survivors and Disability Insurance program (OASDI) commonly referred to as Social Security benefits, provided a basic level of monthly income to workers and their families. When an individual reaches full retirement age, they have the option of receiving Social Security benefits or deferring their benefits and continuing to work. The benefit amount received by an individual is intended to replace a percentage of their wage-indexed income and can be estimated using the Social Security Administration’s Quick Calculator.
Benefits can be paid to retirees as early as age 62 but if they choose to wait until age 70 to receive benefits, payments can increase by as much as 8 percent per year.
Generally speaking, the replacement rate increase correlates with the length of deferment. Consider the replacement rate example of a couple who both earn $60,000 per year, that decide to defer their benefits while continuing to work full time:
At age 62, Social Security replaces 23 percent of their pre-retirement earnings
At age 66, Social Security replaces 32 percent of their pre-retirement earnings
At age 70, Social Security replaces 45 percent of their pre-retirement earnings
Maximize Social Security with Timing:
The timing of retiree benefits is one of — if not the — most important strategy to consider. Just as location is key in the real estate industry, timing is key for married couples wishing to use Social Security as a retirement income source. This is important regardless if one individual or both individuals are eligible.
1) Timing and the Spousal Benefit Approach
The “spousal” benefit approach is the best approach to take when only one of the individuals is eligible to receive benefits. When the individual has reached full retirement age, they can claim benefits. The spousal benefit approach cannot begin until the worker has made this claim. Once claimed and provided the spouse has already filed for benefits, the spousal benefit can begin.
The eligible individual is entitled to up to 50 percent of the spouse’s benefit (depending on the age at which benefits are claimed - benefit amount will be 30 percent less if you claim at age 62, the first opportunity to do so). As soon as the spousal benefit is triggered, the other benefit should be immediately suspended until age 70, thus significantly increasing benefits payouts.
2) Timing When Both Spouses Are Eligible
If both spouses are of age and eligible for benefits, both should initially claim, but benefits should be taken based on the lower-earning spouse’s benefit amount. Then, once the spouse with the higher benefit amount reaches the age of 70, the couple should switch to the higher earner’s benefit to receive maximum income per month.
3) When Couples Have Divorced
If a couple has been married for 10 years or more and divorces, the Social Security spousal benefits strategy may be employed in the same way as above. For divorced clients who will receive the lesser amount, they should begin to claim as soon as full retirement age has been reached. Then, once they have reached age 70, switching to the maximum worker’s benefit (i.e. that of the client’s former spouse) will increase their monthly and overall income.
4) Special Timing Considerations Regarding Widows and Widowers
It’s of utmost importance that life expectancy is taken into consideration when advising married couples. In the event that one individual dies, the surviving spouse will receive the higher of the couple’s two Social Security retirement benefits. If the spouse with the higher Social Security benefits dies, the surviving spouse will inherit their benefit. But if these benefits were claimed early, the surviving spouse will end up with the lower benefit for the rest of their lifetime.
While Social Security remains a reliable source of annuitized retirement income, advisors must have a comprehensive understanding of total client resources before choosing which timing strategy to suggest.
According to the Centers for Disease Control and Prevention, people are living longer than ever with the average life expectancy in America reaching 78.8 years. This makes it even more important to understand your resources because your decisions now will impact your financial plans for many more years and maybe even decades.