Should You Split Up With Your Spouse In Retirement?

August 19, 2014

Some couples could benefit from a split strategy in retirement but I don’t mean breaking up with your loved one.  The Wall Street Journal‘s MarketWatch blog recently highlighted a split strategy for couples when deciding on the best time to take Social Security benefits. One spouse (the lower income earner) takes benefits as early as possible, which is at age 62.  The other spouse would wait until age 70 to take their own benefit but at their full retirement age (66 to 67 – depending on your year of birth) would claim the spousal benefit based on the lower income earning spouse.

This goes against the common advice of waiting even beyond your full age since your benefit increases by about 8% each year until you reach age 70.  This is typically known as maxing out your benefit.  However, if both you and your spouse pass away early on in retirement, neither of you ever see the full benefit of postponing your benefits.

The other issue with postponing benefits until age 70 is that you will need to draw from your retirement nest egg to tide you over for your income until you begin receiving your Social Security checks.  T Rowe Price recently did an analysis of various scenarios for a couple and found that over time, the couple who took the Social Security benefit early for the lower earning spouse ended up having to take about $142,000 less from their retirement accounts as supplemental income compared to both spouses waiting until age 70.  You can run your own Social Security analysis on T Rowe Price’s Benefits Evaluator.

Unfortunately, as many as 80% of retirees start to take their benefit early, before their full retirement age.  For couples, this could ultimately reduce the surviving widow’s benefit by almost half.  As an example:  $39,000 if the higher earner waits to age 70 vs. $22,000 in Social Security income if both spouses claimed benefits at age 62.  By postponing at least the higher earner’s benefit, this couple would need $300,000 to $400,000 less from their own retirement savings to generate the same retirement income to make up the difference from the lower Social Security benefit.

So don’t be too quick to grab your benefits early. Instead, consider the strategy of splitting as a couple to balance out postponing for the maximum benefit and taking cash in hand as early as possible. Otherwise you could be leaving extra retirement income on the table.