Social Security Myth #4: Collecting a Spousal Benefit Reduces the Amount Your Spouse Will Receive
October 15, 2014One of the most valuable aspects of the Social Security formula is the accrual of spousal benefits for couples that have been married for at least one year at the time they file for benefits. However, some think of these benefits as a pool of money that somehow is split between the two of them. For this reason, they sometimes fall under the misconception that if one of them starts to collect a spousal benefit, the other’s benefit will be reduced.
If you believe this, I have good news for you. When a spouse receives a spousal benefit from Social Security, it will NOT impact the retirement benefits of the other person. The following is an overview of how spousal benefits work, along with some strategies you can use to maximize the amount of Social Security benefits that are paid over both of your lifetimes.
How spousal benefits work
Regardless of whether or not your spouse has paid into the Social Security system, he or she may be eligible for a spousal benefit starting at age 62. If your spouse files for benefits prior to their full retirement age, Social Security will automatically pay out the higher of their spousal benefit or their retirement benefit (if eligible based on their own work experience). If they wait until their full retirement age to begin collecting benefits, they have the choice of taking either a spousal benefit—typically equal to one-half of your full retirement benefit—or their own retirement benefit, if eligible.
For example, my wife Susan is a stay-at-home mom. She doesn’t have enough credits to be eligible for a retirement benefit, but she would be eligible for a spousal benefit starting at age 62. If she takes her benefit at age 62, she would receive less than if she waited until her full retirement age, which is 67.
File and suspend
Before Susan can begin to collect a spousal benefit, I would have to file for my own retirement benefit, but that doesn’t mean that I would have to take it right away. Instead, I could apply a strategy known as “file and suspend.” By suspending my retirement benefit after I file, I allow Susan to collect a spousal benefit while allowing my own retirement benefit to grow due to delayed retirement credits.
Continuing with the example from above, let’s assume Susan and I are the same age and that my benefit at full retirement age (i.e., 67) is $2,000 a month. By filing and suspending, I allow Susan to begin collecting $1,000 a month while my benefit continues to grow. If I wait until I reach age 70 to begin collecting my retirement benefit, my retirement benefit would grow to a little over $2,500 a month, so together we would bring in over $3,500 a month as a household.
Collect now and later
Now let’s mix things up a bit. Let’s assume Susan goes back to work and earns enough credits to qualify for a retirement benefit. In this scenario we can take advantage of a second strategy known as “collect now and later” or “spouse then switch.” Under this strategy, Susan would continue to collect a spousal benefit, then later on (typically when she reaches age 70), she can stop collecting her spousal benefit and switch to her own retirement benefit.
Building on the above example, let’s say Susan is entitled to $1,200 a month in retirement benefits when she reaches full retirement age (again, age 67). If she waits to collect her own retirement benefit, she would still be entitled to collect a $1,000 monthly spousal benefit. Then, at age 70, she could switch to her retirement benefit, which would have grown to over $1,500 a month. (Keep in mind that if Susan took benefits prior to her full retirement age she would not have the option and would simply receive the higher of the two.) Unfortunately, Social Security only allows one spouse to claim the spousal benefit so Susan and I could not both claim each other’s spousal benefit.
Benefit maximization
In the above example, Susan and I are the same age, but what if that were not the case? Let’s assume Susan is 10 years younger than me. Another strategy would suggest that I wait until age 70 to collect my highest eligible benefit.
The reason being that when I die, Susan would be eligible for the higher of her retirement benefit or her survivor benefit (I know, morbid, right?). If I died at age 72 while collecting $2,500 a month, Susan would be eligible for roughly $2,000 a month in survivor benefits. That’s almost $1,200 more than the $840 a month she could collect in retirement benefits at age 62.
Obviously all of these numbers are hypothetical, but they illustrate the different ways spouses can play off of each other’s benefits. The best one for you depends on your situation. To determine which strategy makes the most sense, contact the Social Security Administration or speak with a financial professional who specializes in retirement planning.