Calculating Spousal Social Security benefits

[question everything]

Someone asked on the advice column of the WSJ and thought it was interesting

My wife is 62, and I am 64. She worked for about 12 years and has 40 Social Security credits, but she also spent many years raising our children while I worked. Her primary Social Security amount is about $685 a month, while mine is about $3,050. I intend to defer collecting my own benefits until I attain age 70. If my wife starts collecting her benefits now, will that reduce the amount of her spousal benefit that she will be eligible for when I retire?

In a word: yes.

Here’s how the math works:

If your wife waits until her full retirement age to claim Social Security — and let’s assume, for the moment, that you have already filed for benefits — she will get a “combined benefit.” That means she will get her own $685 benefit, plus a spousal benefit. That spousal benefit amounts to whatever is needed to get your wife to half of your benefit. In your case, she would receive an additional $840, which would leave her with a monthly payout of $1,525. (Which is 50% of $3,050.)

Now, let’s return to your original question, where your wife begins collecting Social Security today, at age 62, and you (for the moment) are still waiting to file. As I’m sure you know, the earlier a person claims benefits, the smaller the benefit. At 62, your wife will receive about $490 a month. This becomes her “base” benefit.

First, still assuming that your wife has already filed, if you claim your benefit after your wife reaches her full retirement age, your wife will get the same $840 spousal benefit mentioned above. (Note: Social Security will calculate this number based on your expected benefit at your full-retirement age.) And the $840, in this case, will be combined with the $490 that your wife has been receiving—for a total of $1,330.

Second, if you claim your benefit before your wife reaches her full retirement age, the Social Security Administration will reduce her spousal benefit (set initially at $840) by an amount depending on the number of months before she reaches her full-retirement age. That figure will be added to the $490 base your wife is already receiving.

The point: In both scenarios, your wife doesn’t reach the $1,525 benefit that she would receive if she waits until her full retirement age to begin collecting Social Security.

https://www.wsj.com/articles/where-to-check-up-on-the-health-of-your-pension-plan-11591278517 (subscription)

[underpants]

1. Glenn Ruffanach

Thanks. Bookmarking.

[JoeOtterbein]

2. Thanks!

I'm bookmarking for my wife!

[Journeyman]

3. Interesting article. Thanks for posting . . .

[rickford66]

4. Everyone should go in for an interview a year before they want to retire.

Relying on an advice column might be OK, but why not get the options from the SS office directly. We made appointments and went right in a year ahead. Then when we were both ready for Medicare, I happened to get "retired" so we went in and found out all the options we had. Signed up for Medicare, SS and payments for our adopted son who was still in HS.

[question everything]

5. Same here. Actually, we went when I reached my retirement age

Got a letter so decided to just visit the office. Wanted to compare spousal benefits with direct ones.

On the way there I read the letter again and it said to either apply online or.. make an appointment. oops

We were lucky. Met with an excellent agent who spent an hour with us, doing spreadsheets calculations. I don’t think we would be able to do it now.

A year later we told a family member to do the same - spreadsheet to figure out whether waiting to 70 would make much sense. It did not. Good move as they decided, a year or two later to leave the job and start collecting benefits.

[rickford66]

6. It's the only way to know all your options.

We had the added situation where my late wife was British and never worked long enough to collect on her own. Plus having the young son at our age. Our real luck was getting retired just the month before my 65th birthday. My medical from work ended the last day in Sept. and my Medicare started the first day in Oct. even though my bday is the 20th. Also, a lot of people are confused about losing some SS if they also work. Best to ask in person about everything.

[PoindexterOglethorpe]

7. Pretty good example of why collecting at the earliest possible age is often

a very bad idea.

I keep on seeing stuff on line about why you should start collecting at age 62. WTF? If I'd started collecting at age 62 I'd be getting around $800/month right now. Instead, by waiting to age 70, I'm currently getting $1551/month. That difference is huge.

I honestly don't know anyone who started collecting at age 62 who didn't regret that decision a few years later when they realized how small that amount really was. All of them could have continued working, earning at least as much as the SS benefit would have been, while letting that benefit grow.

[progree]

9. Depends on how long one expects to live. Considering inflation and investing the early money

I figured breakeven was about age 84 -- if I lived past 84 I was better off (higher net worth) by delaying taking it. Otherwise I was better off taking it early and investing the early money. (Or actually my heirs are better off in an early croak scenario where I had started taking SS early). Then considering taxes some more, I concluded that the breakeven age for me (and my heirs ) is 81.

One parent died at 81 and the other at 80. There are health factor reasons why I expect the same fate as opposed to living longer according to what the insurance tables say.

My gut extinct was to delay, so I did. To me, waiting for the higher monthly payout was sort of like longevity insurance -- as protection from the economic risk of living a lot longer than expected.

Then I gave my farm away to Population Connection in return for a charitable gift annuity. That totally upended everything: Having higher income in the 6 year window of 2016 - 2021 by taking Social Security would allow me to take a bigger charitable tax deductions for those 6 years (tax deductions for property contributions are limited to 30% of AGI, and only for 6 years).

Anyway, that made what was before a tossup decision into a decision to begin taking ASAP and I ended up beginning taking it at age 65 1/3.

My tax guy was a big believer in taking it early -- besides the breakeven age consideration -- to have the money when you are young enough to enjoy it. That might be a consideration for some, but for me, in the early years, I have enough to do what I want to do even without Social Security income.

[PoindexterOglethorpe]

11. The break even point is a LOT earlier than age 84.

Don't know how you came up with that number, but most of the time it's age 78. And even that strikes me as suspect, as the yearly increase in SS, when it occurs, is a percentage, not a flat number. So the higher the base number you start with, the higher the increases are. I suspect that in about five years, taking SS later is far more advantageous than is generally understood.

More to the point, living a long time is far more realistic than most people understand. They look at expected life span from birth as being an absolute, but it's not. The longer you live, the longer you are likely to live. A man who today has just turned 65 will probably live to age 84. A 65 year old woman today will probably live to age 86. That's a decade beyond the "break-even" point for SS. Clearly, if no one in your family lives past age 70, or if you have some sort of a life-shortening condition, then taking SS early is a good idea. But for the average person, not so much.

I will again repeat that everyone I have personally known who took SS at age 62 expressed regret within a very few years, because the payout that seemed so appealing back then was now a whole lot less than they needed to live on.

[progree]

12. Yes, it's 78 (IIRC) if you don't consider investment return or inflation

I did some spreadsheet scenarios with different investment returns on the early money (actually the entire stream of SS income in the various scenarios out to different assumed ages of death), and different inflation assumptions.

And then as I said, the charitable deductions -- limited to the 2016-2021 period and based on my AGI, turned the decision for me.

And yes, I'm well aware that it's a percent difference for each year of delay, not a flat dollar difference. And that everything goes up with inflation on a percentage basis, not a flat dollar basis. I'm an engineer, so I'm not challenged by concepts like percentages. As a planning engineer in an electric utility, I was constantly analyzing economic decisions to pick the best plan. So this isn't my first rodeo.

And yes, I gave a lot of consideration to my life expectancy as I indicated. And yes, I'm fully aware that what matters for life expectancy is my life expectancy at the age I would be making the decision to begin taking SS, not my life expectancy at birth.

I'm not saying my decision is the right decision for everyone or even for most people.

I don't expect I'll be expressing regret in a few years, I don't know why I would.

I will in several years if I outlive my breakeven age that I figured based on my inflation and investment return and special tax situation. But I won't deeply regret it because I did a ton of reading and a ton of analysis of it. And went over it with my tax guy just to make sure I wasn't missing something obvious or making some profound error.

[PoindexterOglethorpe]

13. Inflation has been remarkably low in the past several decades.

And while the COLA for SS isn't as good as it should be, at least it's there. Until 1975 there was none. Whatever you got when you started collecting, was it. People would talk about living on a fixed income, and they were right.

Here's an interesting chart of the COLAs for SS. https://www.ssa.gov/OACT/COLA/colaseries.html

Notice how relatively low it's been in the past decade.

You clearly had circumstances a lot different from many people, and did give it a lot of thought.

But still, a lot of people underestimate by a lot how long they are likely to live. As well as how long the break even point is. Most of us should outlive our parental generation by at least half a decade, possibly a lot longer, especially if that generation all smoked, which is highly likely.

There's a very interesting book out there, Get What's Yours by Laurence Kotlikoff, Paul Solman, and Philip Moeller It's all about maximizing your Social Security. They cover lots and lots of scenarios. I recommend it highly.

[progree]

14. I looked at recent inflation data as well as longer term inflation data in coming up with

the inflation scenarios I used in my analysis. Anyway, the breakeven year was not all that sensitive to a reasonable range of estimates of inflation.

And yes, I'm well aware that life expectancy has been increasing, and my decision was not based solely on my parents' longevity. I gave more consideration to insurance longevity tables. I'm not going into a recitation of my health status in order to win an argument over a decision I made 3 years ago. And as I said, my decision turned over my rather unique tax situation. But thank you for your concern.

[PoindexterOglethorpe]

15. i want to apologize for seeming to argue with you.

That was not my intention and I am sorry that it came across that way.

Again, I apologize for poorly chosen words on my part.

[alwaysinasnit]

8. Believe it or not, AARP is one of the best sources I've found. I had gone to an interview and the

representative provided inaccurate info, so beware.

[littlemissmartypants]

10. Bookmark. SS benefits. nt

[PoindexterOglethorpe]

16. There's also a book out there,

Get What's Yours: The Secrets to Maxing Out Your Social Security by Laurence Kotlikoff, Paul Solman, and Philip Moeller which I highly recommend.

Social Security, especially decisions about when to claim it, can be hideously complicated. There's a lot of very good information in that book. If you were never married it's simple. The only decision is to exactly when to start taking it. For anyone who was ever married, or who is currently married, it's a bit trickier.