How Can a Married Couple Maximize Their Social Security Benefits?

Making decisions about claiming your Social Security benefits can feel daunting- there are lifetime consequences!  When you complicate the process by needing to coordinate the decision for a married couple, this only increases the pressure to get it right. Given that Social Security is essentially a pension that adjusts for cost of living every year, it is an integral tool for every retiree’s financial plan.  To help you determine what strategy might be best for you and your spouse, we will review the basics of Social Security benefits, different claiming options and strategies to coordinate two sets of benefits.  

Basics of Social Security Benefits 

At its core, the amount you receive in Social Security benefits is determined primarily by your work history. The Social Security Administration (SSA) calculates your benefits based on your Average Indexed Monthly Earnings (AIME), which is derived from your 35 highest-earning years. If you have worked for less than 35 years, the SSA will include zeroes in the calculation, which can decrease your overall benefit amount. Therefore, ensuring a robust work history is essential for maximizing your future benefits.

Once your AIME is established, the SSA applies a specific formula to determine your Primary Insurance Amount (PIA). The PIA is the monthly benefit amount you will receive if you claim your Social Security benefits at your Full Retirement Age (FRA). The FRA varies depending on your birth year, typically ranging from ages 66 to 67 for those born in 1960 or later- use this chart to determine your own FRA.

Social Security benefits are adjusted every year to reflect an increase in the cost of living as measured by the Consumer Price Index. These adjustments help to ensure benefits retain their purchasing power despite inflation.  

Claiming Options Impacting Lifetime Benefits  

Timing of Claims- Early vs. Delayed 

One of the most critical decisions you and your spouse will face is whether to claim your Social Security benefits early, take them at full retirement age, or delay your claims. This decision can significantly impact your financial health throughout retirement, especially considering the nuances of each partner’s work history and life expectancy.

Claiming Social Security benefits as early as age 62 provides immediate income, which may be necessary for couples with limited retirement savings to cover living expenses. However, it is essential to recognize that early claims result in reduced monthly benefits for life. For instance, if one spouse has a Primary Insurance Amount (PIA) of $1,500, claiming early could mean receiving only about 70-75% of that amount or $1,050-1,125. This reduction can have long-term implications, especially if one partner anticipates living well into their 80s or 90s.

On the other hand, delaying Social Security benefits until age 70 can substantially increase the monthly payout due to the accumulation of delayed retirement credits. Delaying a claim can increase a benefit by up to 8% per year after reaching FRA, leading to a more robust financial cushion in the later years of retirement. In the example where one spouse has a PIA of $1,500, delayed claiming can increase your benefit by 124-132% of that amount or $1,860-$1,950. This strategy not only ensures higher monthly income for the spouse who delays but also enhances the survivor benefits available to the longer-living spouse.

Spousal Benefits 

One of the key components when evaluating benefits for married couples is understanding spousal benefits. If one spouse has a significantly higher earnings history than the other, the lower-earning spouse may be eligible for spousal benefits, which can be as much as 50% of the higher earner's PIA.  When you apply for spousal benefits, you’ll also be applying for benefits based on your own work history.  If you’re eligible for benefits based on your earnings, and that benefit amount is higher than your spousal benefit, that’s what you’ll get.  If it’s lower, you’ll get a “combination of the two benefits that equals the higher amount” according to the Social Security Administration.

To claim spousal benefits, the lower-earning spouse must be at least 62 years old. However, claiming spousal benefits early results in a reduction in monthly payout, which is why timing is so crucial. Ideally, the lower-earning spouse should consider waiting until their full retirement age to receive the maximum benefit.  You will not receive any additional benefit for delaying beyond FRA so there is no incentive to file for spousal benefits later than your own FRA.  The worker whose history the spousal benefit is based on must also have filed for their own benefits.    

Strategies to Maximize Benefits 

After fully understanding your specific claiming options, it is critical to consider how to coordinate your claiming strategy with your spouse to maximizes lifetime benefit and help protect against risk of an early death.  When evaluating which strategies may work best for you and your spouse, be sure to consider each of your primary insurance amounts, your full retirement ages and your life expectancies.  

One Spouse with a Substantially Smaller Benefit  

Let’s examine the case where both spouses have enough of an earnings record for each to qualify for their own benefit.  However, one of the spouses only worked part-time or had a more variable work history and so their own PIA is less than what they would earn from claiming the spousal benefit.  Depending on their ages, the couple might want to consider having the spouse with the significantly lower benefit claim their own benefit at FRA and then have the higher earning spouse delay claiming their benefit until 70.  At this time the lower benefit spouse’s monthly payments would be adjusted to reflect claiming their higher spousal benefit amount (or 50% of the higher earner’s PIA).  This allows the couple to collect some income in early retirement, while also maximizing the higher earner’s benefit and providing greater financial security for the surviving spouse if they were to die.  

Example: 

Mary has her own PIA of $1,000/mo at FRA and her husband John has a PIA of $3,000/mo at FRA.  Her spousal benefit would be $1,500/mo based on 50% of John’s PIA at FRA.  Mary can elect to claim her own benefit of $1,000/mo starting at FRA, while John delays claiming his benefit until age 70.  Then, when John starts claiming his benefit with delayed retirement credits of $3,720/mo at age 70, Mary’s monthly payments will increase by $500 due to her spousal benefit so that her total monthly benefit is $1,500.  If John passed away, Mary would receive the higher benefit amount of $3,720/mo rather than simply her own benefit.  

One Spouse with a Somewhat Smaller Benefit 

Another potential scenario for a married couple is where the two spouses have earned different benefit amounts, but the lower earner’s benefit is still above their spousal benefit.   In this case, the claiming decision typically comes down to whether one or both spouses should consider delaying benefits.  We generally recommend that at least the higher earner consider delaying until age 70 if the couple has sufficient assets to supplement income in early retirement.  This is because if the higher earner passes away, the surviving spouse (lower earner with lower benefit) will receive the full benefit amount of the higher earner including the delayed retirement credits.  If the couple have significant retirement assets and are concerned about longevity risk, then they may want to consider having both delay claiming.  It can be helpful to determine the breakeven age for a strategy like this- meaning the age at which delaying benefits will pay off in a larger lifetime benefit amount.           

Example:

Patrick has his own PIA of $1,750/mo at FRA and his wife Susan has a PIA of $3,000/mo at FRA.  In this case, Patrick’s spousal benefit would be $1,500, and therefore, his own benefit at FRA would be higher by $250/mo.   If Patrick and Susan are similar ages, Patrick could choose to claim his benefit at FRA which would provide some initial retirement income for the couple while Susan, as the higher earner, delays claiming her benefit until 70.  Their total monthly benefit amount would be $5,470 not factoring in cost-of-living adjustments.  This would also mean that if Susan died, Patrick would get her higher total benefit amount.  If both Patrick and Susan decided to delay claiming until 70, their total monthly benefit amount would be $5,890- more than if Patrick claims at FRA but they would lose out on 3 years of Patrick’s benefit payments.  Typically, this strategy will win out if the couple anticipates a long life expectancy.  

Spouses with Relatively Equal Benefits 

If both spouses have reasonably similar benefit levels, it may make sense to have both spouses delay claiming until 70.  For couples with higher levels of assets entering retirement, such as 401ks, IRAs, and taxable accounts, this can be a good strategy given they have sufficient resources to live on prior to claiming Social Security benefits.  They may also wish to consider tax planning strategies such as completing Roth conversions and therefore would benefit from keeping other taxable income very low.  

Factoring in Life Expectancies 

One other consideration is the predicted life expectancy of each spouse.  If there is significant longevity risk for one or both spouses, then delaying claiming benefits until age 70 would be likely to produce a higher lifetime benefit payout.  If either spouse has a medical diagnosis that may lead to a substantially shorter life expectancy, this may be a good case to consider claiming benefits at FRA or perhaps even claiming early at age 62.  

Role of Taxes 

The IRS uses a formula to determine if your benefits are taxable, which involves adding half of your Social Security benefits to your other sources of income, including wages, interest, dividends, and pensions. If your combined income exceeds certain thresholds, a portion of your Social Security benefits may be taxed.  The portion of your benefits that is subject to tax is added to your other income and taxed at your ordinary income tax rate, which can vary significantly based on your total taxable income.

• Combined income is defined as your adjusted gross income (AGI) + nontaxable interest + half of your Social Security benefits.

• For single filers, if your combined income exceeds $25,000, you may be required to pay taxes on up to 50% of your benefits. If it exceeds $34,000, up to 85% may be taxable.

• For married couples filing jointly, the thresholds are $32,000 and $44,000, respectively.

It is helpful to consider ways to lower taxable income in retirement as that will help to reduce your total level of Social Security benefits that are taxed.  One strategy that many folks find beneficial is to complete some level of Roth conversions in early retirement to reduce their total pre-tax IRA value and subsequently their required minimum distributions.   For those who can afford to delay claiming their benefits, this can allow for more good years to complete more Roth conversions.  Check out our post on paying yourself in retirement to learn about more considerations.  

Tools & Resources 

There are many tools available to help you assess your claiming and benefit options.  Here are some to help start your review:   

• The best first step is to be sure to have the most recent benefits information for you and your spouse.  You can login to the Social Security Administrations website to find this information: https://www.ssa.gov/prepare/get-benefits-estimate.  
• You can find many different calculators available on the ssa.gov website once you you’re your specific benefit information: https://www.ssa.gov/benefits/calculators/.  

In order to get more personalized and expert advice, you should consider working with a financial planner.  A financial planner can help you analyze different claiming strategies to see which are most likely to provide you with the maximum lifetime benefit as a couple and how they fit into your overall retirement plan.    

Liz Alf is the Principal of Clerestory Advisors and fee-only CERTIFIED FINANCIAL PLANNERTM located in Minneapolis, MN.  She is a member of the National Association of Personal Financial Advisors (NAPFA) the Fee Only Network and Wealthtender.  She enjoys serving clients with on-going financial planning and investment management services.