Opinions run rampant when you start discussing Social Security. Some say you should take it as soon as possible, while others believe waiting until 70 is the savviest path. The pessimists believe it will go bankrupt in 15 years, while the trustees themselves point out that we can still pay out 75% of benefits in a worst-case scenario.
That's why this article is important: There's very little debate about the fact that no one wants to make this Social Security mistake in 2017.
That mistake -- simply put -- is not carefully planning out when you and your spouse will be claiming Social Security benefits. Here, ignorance is not always bliss: Making some missteps can leave your widowed partner in a financial pinch after you're gone.
Social Security loopholes close, simplifying choices
Because of a bipartisan budget deal that was enacted last year, the last of the loopholes that couples could use to "game" the Social Security system were closed. As a result, we are left with three key facts to consider.
Let's consider a married couple, Robin and Pat. Robin is the higher-earning partner, while Pat has a lower-earning work history.
- Pat has the option to claim Social Security benefits from Pat's own working record, or receive spousal benefits based on Robin's earnings history.
- Pat can only claim spousal benefits once Robin files for retirement benefits. Pat's spousal benefit will be 50% of what Robin receives -- up to Robin's full benefit.
- When Robin passes away, Pat can start getting Robin's benefit as a survivor benefit, in place of the spousal benefit or retirement benefit Pat received before.
How these three factors will affect you and your spouse depend upon your financial situation once you hit age 62 and can claim Social Security, and what type of income you will have once the higher-earner -- passes away.
While there are several ways this could play out over time, I'll discuss three examples for how couples can approach Social Security timing.
Option 1: Take the money and run
Obviously, if you both need the money from Social Security as soon as possible to help make ends meet, then you should file as soon as you turn 62. The same holds true if one or both of you is miserable in the line of work you're in, and would do just about anything to get out.
There's no reasonable benefit to put off happiness until tomorrow to endure misery today...especially when your days are numbered. Numerous studies have shown that once you enter retirement, positive feelings skyrocket, and negative ones plummet.
Here's what a study by Merrill Lynch and Age Wave found last year.
The key here was that the study was representative of the American populace in every way -- including income in retirement. Simply put: If you can make ends meet, then many will experience more joy from the freedom of retirement than a little added income.
Option 2: Hold off...for a while
Again, let's turn to Robin and Pat. Say they did a decent job of saving for retirement, but they'll still rely on Social Security to make ends meet.
Because Pat stayed at home to raise the kids, Pat will be relying on her Robin's earnings record to claim spousal benefits. And because Robin actually enjoys work, Robin plans on working until reaching at least full retirement age.
That's because once Robin hits full retirement age -- which is between 66 and 67 for those born in 1943 or later -- Pat's spousal benefits max out. While Robin's potential benefit would continue to climb until age 70, spousal benefits stop increasing at full retirement age. This works out to be the best of both worlds for the couple -- Robin continues to work in a satisfying job for the time being, while the pair will together be getting enough for Social Security to make ends meet.
Option 3: An additional life insurance policy
Let's say that, for whatever reason, the couple knows that Pat is going to have a lot of expenses in retirement -- perhaps for a medical condition that isn't life-threatening, or charitable giving. Pat had a long career to establish an earnings record, though it wasn't as high as Robin's. Also, assume that Pat expects to live longer than Robin.
Given this situation, the couple might decide on a two-pronged approach:
- Pat will claim benefits immediately at age 62, giving the couple some cash to help keep them afloat, while not having to tap into the nest egg all at once.
- Robin will put off claiming Social Security until age 70 -- when benefits can be as much as 32% higher than at full retirement age. This means that when Robin passes away, Pat will be getting the maximum possible benefit from Social Security. That's why I refer to it as a life insurance policy.
You'll likely fall in the gray area between these examples
This article isn't meant to be an exhaustive guide for how you should coordinate your Social Security payments. Instead, it is meant to illustrate the variables at play, and the myriad of options you have in approaching this decision. The most important thing is that you understand your choices, consult your partner, and make your decision with eyes wide open.