Spousal Social Security

Investing Strategies Retirement Investing
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I have a good friend who is fairly wealthy and has a high dividend income from a closely held family business in which he is a shareholder, (but only as shareholder…he has never been employed by this business). Both he and his wife will soon be 65. He was the primary bread winner of his own, separate small business…a high earner…during their 40 year marriage. His wife worked here and there, part time, but never earned big money. He plans to wait until age 70 to take Social Security because he doesn’t really need it and and the “longevity insurance” factor is more important to him than taking the money earlier. Not that either are a big deal. He’ll still get new luxury cars every few years with or without Social Security.

That being said, the question is what should his wife do? Is there any advantage or disadvantage for her to take SS now or soon on her own work record, as small as it is? Will she be penalized if she does that when he takes his at age 70 and she claims on his record? What’s the most efficient long term strategy for them. Both have longevity in their families and are in good health.

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Daryll44: "I have a good friend who is fairly wealthy and has a high dividend income from a closely held family business in which he is a shareholder, (but only as shareholder…he has never been employed by this business). Both he and his wife will soon be 65. He was the primary bread winner of his own, separate small business…a high earner…during their 40 year marriage. His wife worked here and there, part time, but never earned big money. He plans to wait until age 70 to take Social Security because he doesn’t really need it and and the “longevity insurance” factor is more important to him than taking the money earlier. . . . .

That being said, the question is what should his wife do? Is there any advantage or disadvantage for her to take SS now or soon on her own work record, as small as it is? Will she be penalized if she does that when he takes his at age 70 and she claims on his record? What’s the most efficient long term strategy for them. Both have longevity in their families and are in good health."

First, if neither spouse is yet 65, but will be soon, then I presume that each has a 1957 birthday. Full Retirement Age (FRA) for those born in 1957 is 66 years and 6 month. If W takes her SS benefits before FRA her benefit will be reduced for taking it early. I am uncertain what effect, if any, that has on a later claim by her for spousal benefits.

Second, if W worked here and there does she have sufficient quarters to qualify her for her own benefits? Or will she be taking only spousal benefits.

The only way to do the comparison right is to know FRA benefit amount for each and their respective ages.

I suspect that if she qualifies for her own benefit, and both have current good health and expected longevity, the optimal (maximizing SS benefits collected) is for both to wait until age 70.

If her personal benefit is not that large and less than half her spouse’s benefit, then I suspect that W staring SS at her FRA probably is not far behind the optimal case.

A good financial planner has software that runs this analysis quickly.

Regards, JAFO

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That being said, the question is what should his wife do? Is there any advantage or disadvantage for her to take SS now or soon on her own work record, as small as it is? Will she be penalized if she does that when he takes his at age 70 and she claims on his record? What’s the most efficient long term strategy for them.

If she has sufficient past quarterly earnings to have her own PIA (the amount she’ll receive if she begins her benefit at her Full Retirement Age), when she begins her benefit Social Security will determine whether her own benefit is greater than her spousal benefit and pay the greater of the two, but both benefits will be considered used, so she cannot later switch. If spousal benefit is greater, there is no advantage to delaying it past her FRA, but spouse must have began their benefit first. If her benefit is greater then she will get 8% per year (.67% per month) increase if she delays her own benefit past her FRA up to age 70 when it will stop increasing.

BruceM

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If she has sufficient past quarterly earnings to have her own PIA (the amount she’ll receive if she begins her benefit at her Full Retirement Age), when she begins her benefit Social Security will determine whether her own benefit is greater than her spousal benefit and pay the greater of the two, but both benefits will be considered used, so she cannot later switch. If spousal benefit is greater, there is no advantage to delaying it past her FRA, but spouse must have began their benefit first. If her benefit is greater then she will get 8% per year (.67% per month) increase if she delays her own benefit past her FRA up to age 70 when it will stop increasing.

BruceM

What if the primary earner wants to wait until age 70 to collect? I’m pretty sure that the spousal benefit for the wife will be greater than what she’ll get on her own record.

In other words, what is the optimal overall strategy for this couple, assuming that they prefer to get the maximum longevity insurance value.

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What if the primary earner wants to wait until age 70 to collect? I’m pretty sure that the spousal benefit for the wife will be greater than what she’ll get on her own record.

No, the spousal benefit, while married and alive, maxes out at 50% of the higher Spouse’s benefit PIA. Remember, Delayed Retirement Credits do not increase the spouse’s PIA…DRCs increase the benefit. Delaying the max 50% of PIA spousal benefit will not increase the 50% benefit except for cost of living increases each year.

In other words, what is the optimal overall strategy for this couple, assuming that they prefer to get the maximum longevity insurance value

That is a complex question. Delaying benefits to age 70 based on higher earners greater PIA will result in a higher benefit to the surviving spouse ASSUMING the higher PIA spouse dies first. This is a reasonable assumption if the higher PIA spouse is much older or predisposed to dying early. But the cost of delaying benefits to age 70 means no $$ coming in from SS during this period…$$ that could have been accumulated and invested.

Like most Financial Planning questions, it depends on assumptions made, financial needs, life expectancy and willingness to accept risk.

BruceM

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First, each spouse needs to go to https://www.ssa.gov/myaccount/ & set up an account.

Then, plug her earnings record into this calculator. It’s much more intuitive & user friendly than SSA’s version. https://ssa.tools/calculator.html

Also, have them read this article: https://www.kitces.com/blog/why-it-rarely-pays-for-both-spou…

TL;DR version- yes, lower earning spouse will earn a smaller spousal benefit by claiming early. Roughly 10% lower than if she waited until 66 yr & 6 months, her Full Retirement Age (FRA).
https://www.aarp.org/retirement/social-security/questions-an…

Exact math- https://www.ssa.gov/oact/quickcalc/early_late.html
“In the case of early retirement, a benefit is reduced 5/9 of one percent (5/9* 0.01= 0.00555) for each month before normal retirement age, up to 36 months.” She’s 18 months early, so 18 x 0.00555= 0.0999 or 10% reduction.

That reduction is forever. When she draws spousal benefits after DH takes SSI at 70, she will get a plus up calculated from her own theoretical benefit at FRA (66.5) + her spousal benefit. The two numbers together can’t exceed 50% of husband’s benefit at FRA.
Note- DH gets delayed retirement credits by waiting until 70, but spousal benefits are capped at 50% of his FRA number, not his age 70 number.

Example. DW FRA benefit= $500/month. DH FRA benefit $2000/month.
If they both took SSI at FRA, she would get 500 (her benefit) + $500 (spousal benefit to get her to 50% of DH’s FRA number)= $1000, or 50% of DH’s $2000 FRA benefit.

By claiming 18 months early at 65, her benefit is now cut by 10%, so $450/month.
When DH draws SSI at 70, DW gets the same $500 spousal plus up she would have gotten at age 66.5, but her total benefit is only $950 because her benefit is reduced forever.
It’s a building block technique & she shortened the height of her ‘block’ by claiming early.

Important note- Spousal benefits can’t happen until higher earning spouse draws his benefit, so it’ll just just her benefit from 65 to 70.

Also- DH’s 128% larger (3.5 years x 8% credit/yr) age 70 benefit becomes the couple’s survivor benefit. Whoever dies first, the survivor draws DH’s benefit. Basically the lower earning spouse’s benefit stops.

As the Kitces article points out, it rarely pays for lower earning spouse to wait.

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Also, have them read this article: https://www.kitces.com/blog/why-it-rarely-pays-for-both-spou…

There are several interesting items to note in that article. One that’s easily missed is that the downside in delaying SS then dying early is much less than the upside in delaying SS and living long. So, just the math shows asymmetric benefit in delaying. Beyond the math, if you “guess wrong,” dying early means you left money on the table, spending your own assets that would have gone to your heirs. But, claiming early and living a long time means you personally bear the downside of having less money each month.

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One that’s easily missed is that the downside in delaying SS then dying early is much less than the upside in delaying SS and living long.

Not so for the surviving spouse, particularly if their earnings was significantly less than the primary earner who dies.

IP

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One that’s easily missed is that the downside in delaying SS then dying early is much less than the upside in delaying SS and living long.

Not so for the surviving spouse, particularly if their earnings was significantly less than the primary earner who dies.

If you look at the curve in the linked article, there really is a lot more upside on the right than downside on the left.

If you feel that Kitces didn’t look at the scenario you are using, you probably looked at the FRA vs. age-70 numbers. Take another look at age-62 vs. either FRA or age-70 numbers. I think you’ll find that taking at age 62 will have a lot more upside for the “oldster” than downside for the early mortality.

I guess I wasn’t completely clear that the “taking early” I looked at was age 62, not FRA. My own calculations show that taking at age 62 is undesirable, and 67 (my FRA) vs 70 is highly dependent on assumptions. So, I can wait until I’m 66 and recalculate then to see if waiting past age 67 appears to be better for me. At that point, I’ll have five more years that are history rather than assumption. Of course, we know that delaying past FRA only increases one’s own benefit and not the spousal benefit.

Another thing I’ve noticed in others’ calculations is just “money paid out by social security,” with no interest rate over time. But of course, the real situation is that there’s a time-value cost to using one’s own money to pay the expenses that social security would cover but isn’t paying due to delaying. And even though my model has a value for that, it’s 99.9% certain to be wrong. Plus I don’t know if it’s wrong to the upside or downside, although I purposely tried to make it conservative.

Also, maybe your results are different than mine because of the assumed numbers. I skewed mine to reflect that I’d rather leave money on the table due to an early death than have less money by living into my 90s.