Now we will meet three married couples, the Johnsons, the Wilsons and the Davises.
Throughout the years, they have remained married and are nearing retirement. They want to understand how to maximize their Social Security benefits so that they will never run out of money.
Married people are eligible for spousal benefits if they are 62 or over, have been married at least a year and one spouse has to have filed for their own retirement or disability benefits. If one spouse was eligible to file and suspend their benefit and did so before April 30, 2016, then their spouse, once full retirement age, could restrict their application to spousal benefits.
Each of the women turned 63 this year and the men are 66. To illustrate how to maximize the survivor benefit, our ladies will live until 95 and our gentlemen until 85.
For this illustration, we are not including any Cost of Living Adjustments (COLA) which are the yearly raises received by Social Security recipients. Historically these have ranged from 0% - 14%. Remember, adding COLAs will magnify these numbers, making them bigger.
The main difference between each woman’s scenario is their Primary Insurance Amount (PIA). This is the estimated benefit that they would expect to receive at their Full Retirement Age (FRA). It is based on the highest 35 years of earnings as applied to a formula. Each husband has the same PIA of $2,600.
And although the Bipartisan Budget Act of 2015 made several changes to Social Security claiming rules, it grandfathered in anyone born before Jan 2, 1954 to be able to restrict their application to spousal benefits and then switch to another later if it would result in a bigger benefit.
That's what we'll illustrate here.
Meet Robert and Linda Johnson
Robert and Linda were married in 1975 and are close to retiring. Linda was primarily a stay at home mom who has a low earnings history, thus her Social Security PIA is $500.
They have several options for claiming, including both starting right away, both delaying a couple years or some combination. If they wanted to maximize their lifetime benefit and provide the largest survivor benefit at the first death, they would take advantage of the spousal strategy called filing a restricted application.
Linda would file on her own record right now, so that Robert could restrict his application to his spousal benefit at the same time. For 4 years her benefit is $400/mth and his is $250/mth for an annual total of $7,800. They would need to have other income during this time to live on. Then when Robert is 70, he will switch to his own increased benefit and Linda will be able to add the spousal add on to hers.
His benefit becomes $3,432/mth (increased from $2,600) and hers is now $1,200/mth for an annual total of $55,584. At Robert's death at age 85, Linda will retain the higher of the two benefits, which is Roberts at $41,184. By him having delayed his own benefit until age 70, his annual income and the survivor benefit increase by $9,984/yr. Over their lifetime, their combines benefit totals $1,455,936, and that's not including any COLAs. That's a powerful argument for delaying.
Meet Gary and Barb Davis
Gary and Barb lived a similar life to Robert and Linda, but Barb worked part-time most of her life, so her full retirement benefit and PIA is $1,200. They are healthy and have other savings and are interested in optimizing their Social Security benefit so they never run out of money.
To do that, they do the same strategy as Robert and Linda also filing a restricted application early on.
Barb would file on her own record right now, so that Gary could restrict his application to his spousal benefit at the same time. For 4 years her benefit is $960/mth and his is $600/mth for an annual total of $18,720. They would probably need to supplement their income during this time from other work or savings.
Then, when Gary is 70, he will switch to his own increased benefit and Barb will be able to add the spousal add on to hers. His benefit becomes $3,432/mth (increased from $2,600) and hers is now $1,060/mth for an annual total of $53,904.
At Gary's death at age 85, Barb will retain the higher of the two benefits, which is Gary's at $41,184/yr. By him having delayed his own benefit until age 70, his annual income and the survivor benefit increase by $9,984 a year. Over their lifetime, their combined benefit totals $1,472,736, and that's not including any COLAs.
Meet Bill and Pat Wilson
Bill and Pat had equally strong careers and they both have almost the maximum Social Security benefit or PIA of $2,600. Depending on their health and other savings, they are evaluating if they should start benefits early or later.
They like the idea of maximizing their benefits and delaying so that the survivor benefit is as high as it can be so the survivor will never run out of money. But they also want to balance their early retirement goals of travel and financial help to their grand kids.
When they completed an analysis, to maximize their benefit they would do the following. Pat would claim on her own record right away at 63. Since Bill is full retirement age, at the same time he would file a restricted application and file for his spousal benefits on Pat's record. Then at 70 Bill will claim on his own increased record.
The numbers look like this. Pat is starting early at 63 so her benefit is reduced to $2,080 but by filing, Bill can get half her PIA which is $1,300, for an annual total of $40,560. They do this for 4 years until Bill is 70. When he switches to his own retirement benefit it is now $3,432/mth and together with Pat's their annual income is $66,144, from Social Security alone.
They have this steady income until Bill's death at 85, at which time Pat retains the higher of the two benefits, which is his, and she will continue to receive $41,184/yr. This is $9,984 a year more than she would have received if Bill had not delayed starting his own benefit. Their lifetime total benefit tops $1,755,936.
Social Security is truly a million dollar benefit.