today we're going to be taking a look at a couple who are preparing to retire but they have some big unknowns looming over their heads specifically around Social Security spousal benefits the husband has been the primary bread winner for their whole life and the wife has stayed at home raising the children and they don't know how they should maximize Social Security given this information so they have a lot of unknowns around Social Security and the reality is if they collect the wrong way specifically around spousal benefits it could end up costing tens of thousands of dollars over the course of their retirement so on today's episode of ready for retirement I'm going to break down their options and I'm going to teach you everything you need to know about social security spousal benefits so you can maximize your retirement lifestyle so let's jump right into the question this question comes from a listener named Rob and Rob says the following he says hi James I've been watching your YouTube videos and listen to your podcasts and I really appreciate your detailed explanations and specific scenarios they've been a tremendous help as I start to finalize my retirement plan I'm currently 52 years old and my wife is 50 we are planning our retirement strategy which will consist of a combination of employer 401K Roth IRA personal Investments and Social Security but I need some guidance to determine the optimal age for my wife and I to begin drawing from Social Security my wife is a stay-at-home mother so she will not be eligible for her own individual retirement benefits and will be planning to take the spousal benefit my primary Insurance amount at full retirement age which is 67 for me is $3,654 but I was planning to begin collecting Social Security at 62 to reduce the draw from my retirement account so my reduced benefit at age 62 would be 2,54 $ for the spousal benefit I understand that my wife's maximum benefit is 50% of my full retirement benefit however if I retire prior to my full retirement age and my wife Waits until her full retirement age which is 67 would she still be eligible for 50% of my full retirement age benefit or would she be limited to 50% of my reduced benefit for example if I retired age 62 my benefit will be $2,540 if my wife waited until age 6 7 would she be eligible for 50% of my full retirement age benefit which is half of $3,654 or $1,827 or would she receive 50% of my early retirement benefit which would then be half of $2,540 which comes out to $1,270 thank you rob well Rob thank you for your question this is a an aspect of spousal benefits that most people are very confused about so when it comes to maximizing your retirement and maximizing Social Security it's not enough to know how do you maximize your own benefit it's also what are the implications of the way I collect my benefit in terms of what my spouse isn't eligible for in terms of a spousal benefit so on today we're going to address your specific question but I also want to unpack this for everyone listening who is wondering about how do you maximize spousal benefits give an overview of how do spousal benefits work and then understanding that and in that context how do you then maximize it related to or relative to your total retirement picture so as we jump into this let's start with a few things that you need to know just right off the bat number one when you are going to collect Social Security you're eligible for one of two different types of options you can either collect your own retirement benefit which is based on your earnings record so how much do you pay into Social Security Social Security takes a look at your 35 highest years of earnings to help you determine what's called your primary Insurance amount which is the amount that you are eligible for at your full retirement age which is for most of you going to be somewhere between the age 66 and 67 you're eligible for that on the one hand or you're eligible for what's called a spousal benefit and we'll talk about how much that is later on but a spousal benefit is saying maybe you didn't pay a whole lot into Social Security maybe you're raising a family maybe you weren't working whatever the case might be you are eligible for a spousal benefit which is a benefit that's based upon your spouse's earnings record not your own earnings record so if you're currently married you are eligible for spousal benefit if you've been married for at least one year so you can't just go get married and immed turn on a spousal benefit you have to have been married at least a year to be eligible for spousal benefits and if you're divorced so if you are previously married but are no longer married you are still eligible for a spousal benefit but you have to have been married for at least 10 years so you can't be married for a month get divorced and be eligible for a spousal benefit based upon your ex spouse's earning record you have to have been married for at least 10 years if you are widowed then you're actually eligible for something called survivor benefits so survivor benefits are even higher benefits it's the full earnings record or the full benefit of your deceased spouse and if you're Widow this could be if you were married at the time of your spouse's passing or if you were divorced and you were married for at least 10 years and that spouse then or that exp spouse then passes away so survivor benefits are something entirely different and I just want to make that very clear as we start to go through this survivor benefits are hugely important but we're going to be specifically talking about how do you maximize spousal benefits on today's episode so let's assume that you're listening to this and you say okay I am eligible I think based upon what you're saying for spousal benefit I've been married for over a year to my spouse I don't have a real strong earnings record on my own meaning I personally have not paid in a whole bunch to Social Security but my spouse has how much am I eligible for well you're eligible for up to 50% of your spouse's primary Insurance amount Pia if you're unsure what your Pia is it's simply your benefit that you are eligible for at your full retirement age or in this case your spouse's benefit that they are eligible for at their full retirement age that's called your primary Insurance amount and as a spouse of a worker and when I say worker I meaning the person whose benefit were basing this off of as a spouse of the worker you are eligible for up to 50% of their primary Insurance amount so for example let's assume that in this case the worker so if you're the spouse and the worker is the person who has paid into Social Security let's assume at age 67 their full retirement age amount is $2,000 well if they turn 67 and you turn 67 so they're collecting their benefit of 2,000 you are eligible for $11,000 per month which is half of their benefit at 2,000 or half of their benefit at age 67 now let's assume though because this is a common question what if your spouse doesn't collect at 67 they wait until 70 to collect because they get what are called delayed retirement credits well those delayed reement credits would take that $2,000 per month benefit that they could have collected at age 67 and would have turned it into $2,480 by age 70 so if they wait until age 70 and collect they're now collecting $2,480 but your spousal benefit is still based upon their primary Insurance amount which again is their benefit at age 67 in this example not their benefit at 70 so even if your spouse waited until 70 to collect you would still be basing your spousal benefit so I should say even even if the worker waited until age 70 to collect the spouse your benefit would still be $1,000 per month in this example it would still be half of the $22,000 per month that they would have been eligible for at age 67 not the $2,480 that they'd be eligible for at age 70 in this example and that's because spousal benefits do not earn any delayed retirement credits like your normal retirement benefits do now another thing to note based upon this example is your spouse or the worker must be collecting their benefit in order for you the spouse to be eligible for a spousal benefit so if we go back to that example let's assume you and your spouse and your spouse is the worker so you and the worker are both 67 but the worker is going to wait until age 70 to collect benefits well that's great for them the workers benefits are going to go up every single year because they're earning delayed retirement credits which maximize at age 70 but you the spouse you are not able to collect the spousal benefit until they first collect so if they are not collecting their retirement benefit you are not eligible to collect spousal benefit years ago there used to be something called file and suspend where the worker could file for benefits but then suspend them until typically age 70 and what that would allow for is the spouse could then say okay the worker has filed so I can now collect a spouse benefit so while they're filing and suspending you begin collecting a spousal benefit but they wait until 70 to collect their that rule is no longer in place that's been amended this was done several years ago but some people still have questions about it so for those of you listening who have not collected yet if your worker has not collected benefits yet then you as a spouse cannot collect espousal benefit now here's one other thing to note with this this may seem like a small trivial detail but it actually matters when it comes to determining what type of a benefit you'll get or how much that benefit will be is that it's important to realize that your the 50% of your spouses or the workers's primary Insurance amount that's your max spousal benefit so technically what you're actually collecting is your own retirement benefit plus any excess spousal benefit let's take a look at what I mean let's go back to that example of the worker is earning $2,000 per month as a primary Insurance amount so that's their benefit of their full retirement age you are eligible if your earnings record is zero so assume you've never paid into Social Security so the worker could $2,000 per month you as a spouse your benefit would be $0 per month because you never paid into Social Security you would be eligible for the max spousal benefit which is $1,000 per month in this case half of the $2,000 per month that the worker is eligible for now though let's change those assumptions let's assume that the worker's benefit is still $2,000 per month but you as a spouse you actually have paid in to Social Security not a ton but you have paid in some years and you are actually eligible for $600 per month based upon your your earnings record so in this case you would collect if you went to collect spousal benefits technically what you're getting is $600 per month of your own retirement benefit plus an excess spousal benefit of $400 per month to bring you to that full ,000 so technically it's the same benefit you're both getting $1,000 per month whether you had $ Z of your own retirement benefit or the $600 per month of your own retirement benefit but here's why it's important to know that going back to the previous example let's assume like we talked about you and the worker so you the spouse and the worker are both 67 but the worker says you know I'm going to wait until age 70 to collect my own benefits well if you have $ Z of earnings record you have to wait until they turn 70 to collect spousal benefit which you would then get 50% of what they would have received at age 67 well what if you didn't have 0 of retirement benefits but you had the $600 per month of your own retirement benefit that you are eligible for with Social Security well in that case you could collect the $600 per month at your full retirement age because that's your retirement benefit so you're now starting to get something on a monthly basis then at age 70 once your worker once the your spouse who's a worker collects their own benefit then you are eligible to add on the spousal benefit in which case the excess spousal benefit in this case is $400 per month and that bumps you up to $11,000 per month so like I said it seems like that's just just a little detail because at the end of the day you're still getting the same exact dollar amount once you're fully collecting but it is important to note that part of a spousal benefit is actually what you are personally eligible for based upon your retirement record and the other part is the excess spousal benefit that is based upon your spouse's earnings record that you're not eligible to collect until they are beginning to collect their own benefit all right so what we've talked about so far is how does a spousal benefit work assuming that you and your spouse are waiting at least until full retirement age to collect now let's talk about what if you're collecting early so we can start to work into Rob's question or addressing Rob's question which is what if he is a worker collects his own benefit early how would that impact his wife or the spouse in this case and her ability to maximize her spousal benefit so before we address Rob's question let's understand the general reduction in spousal benefits so you can collect a spousal benefit early you don't have to wait until full retirement age however in the same way that if you collect your own retirement benefit early you're accep a reduction or you're locking in reduction the same thing is true for a spousal benefit so every year for the first three years that you collect early and what I mean by that is if your full retirement's age is 67 the first 3 years before that so collect at 66 or 65 or 64 you are reducing your benefit by 88.3% or so now it actually happens on a monthly basis so it's not as if you take these giant step backs every year as much as every month it's a prated amount of that but for every month before your full retirement age up to 36 months or up to three years every year that you collect early you're reducing your benefit by about 8.3% per year but of course that's per rated on a monthly basis any years before that so I'm talking about age 67 so if you collect at age 66 you accept an 8.3% reduction if you collect at age 65 you are accepting a 16.6% reduction if you collect at age 64 you're accepting a 25% reduction in your spousal benefit then at age 63 and 62 so the two years prior to that that you could collect your benefit is then reduced by 5% per year so you can collect a spousal benefit as soon as age 62 but you are going to have some reduction in benefits that's if you are collecting early as a spouse what if and this is to address Rob's specific question what if the spouse Waits until their full retirement age but the worker collects early if you remember Rob said look I have this real strong benefit at my age 67 but I'm probably going to collect at 62 is my spouse is my wife still eligible to collect a full spouse will benefit if she waits until 67 or will she be penalized because I as the worker and collecting early so here's the good news to you Rob and to everyone who is in a situation similar to robs who is planning to collect their own benefit early but wants to maximize a spousal benefit as I said before when it comes to spousal benefits they're based on the primary earners full retirement age benefit regardless of when the primary earner actually begins to collect their social security benefit so in Rob's case if his wife Waits until her full retirement age which is age 67 to claim the spousal benefits she would be eligible for 50% of Rob's full retirement benefit not the reduced benefit that he would receive at age 62 so if you recall the numbers at age 67 Rob would have been elig eligible for $3,654 but at age 62 that $3,654 benefit would be reduced to $2,540 so the good news is for Rob's wife is if she does wait until 67 she would be able to collect half of the higher benefit half of the 3654 so in this case You' be eligible for the $1,827 benefit per month not half of the reduced benefit so this calculation it's not actually impacted by when Rob decides to collect it's entirely impacted by when the spouse begins to collect or in this case Rob's wife so Rob to answer your question directly as we're going through this your wife would be good to maximize her benefit at age 67 now that when I say she'd be good to do that that's not a recommendation that she does that of course don't know Rob's entire Financial picture but if you are looking to do this your wife would be eligible for half of your full retirement age benefit even if you went ahead and collected at age 62 so in summary as we're going through this because spousal benefits can get a little complicated here's the key takeaways that you need to remember uh number one if you want to maximize a spousal benefit the spouse has to wait until full retirement age at full retirement age they're eligible for up to 50% of the workers's primary Insurance amount which is the workers benefit at their full retirement age secondly you need to wait until the workers collecting to be eligible for a spousal benefit or to be eligible to collect a spousal benefit doesn't matter how old you are if the workers not collecting their benefit you cannot collect your spousal benefit next thing to take away is as I mentioned this seems like a small detail but can actually be quite important is that you need to understand that your spousal benefit is actually the combination of your own retirement benefit plus any excess spousal benefit it's still going to cap out at 50% of the workers's primary Insurance amount or their benefit at their full retirement age but when you understand that part of it is your own earnings record and part of it is your workers's uh excess spells will benefit that can help in situations like we use as an example where they're waiting longer to collect maybe you can start collecting your own benefit even if it's reduced and then later switch not switch but add on the exas spousal benefit to get up to a full 50% of their benefit and then the final takeaway here is you need to make sure you need to be very careful to understand that maximizing social security income isn't necessarily the same as maximizing Social Security within your plan what I mean by that is the temptation very often is to look at Social Security and say okay based upon my expected life expectancy based upon my spouse's expected life expectancy guess it's a little redundant but life expectancy um what option meaning at what age that we collect what's going to put the most dollars in our pocket when we simply look at this like a math problem the problem with that is it's not taking into account the impact on investments the impact on taxes the impact on personal preferences and to really truly understand the op optimal Social Security strategy you don't want to just look at what's going to put the most social security income in your pocket you want to look at which option is going to be most beneficial to your plan as a whole when you start to consider the impact it has on your withdrawals on your Investments on your tax situation on longevity on safety all these other aspects need to be considered as well that being said it is very important to understand how spousal benefits work so that you can know what you need to do to maximize those so Rob thank you very much for your question I I think this was a good healthy conversation for a lot of people because I think this is a question a lot of people have thank you as always for all of you who are listening if you're enjoying this episode if you're enjoying this podcast and you're watching on YouTube please go ahead and like this and subscribe to make sure that you don't miss future episodes if you are listening this on Apple podcast or Spotify would really appreciate it if you would leave a f star review if you have been enjoying this and it's helped in any way that being said thank you for listening and I'll see you all next time once again I'm James canol founder root finan and if you're interested in seeing how we help our clients at root Financial get the most life with their money be sure to visit us at www. root Financial partners.com
