Affect on Amount of Spouse’s Social Security Benefit
In Parts 2 and 3 of this series, we looked at two factors that can result in an increased reduction of reduced Social Security benefits resulting from commencement of receipt of benefits at age 62 instead of waiting until full retirement age (“FRA”): (1) receipt of employment income between age 62 and FRA in excess of Social Security Administration’s specified limit, and (2) income tax attributable to Social Security benefits. Part 3 included an example whereby an individual who is eligible to receive annual benefits of $24,000 at FRA 66 instead receives benefits of approximately $13,000, or 54%. The reduction of approximately $11,000, or 46%, is attributable to electing to begin benefits at 62 and being subject to these two factors.
In addition to reducing your benefit amount if you begin receipt at age 62, it’s important to keep in mind that you will also reduce your spouse’s benefit if he/she claims a benefit based on your earnings record. As a spouse, you can either claim a benefit based on your earnings record, or, alternatively, you can collect a spousal benefit equal to 50% of your spouse’s Social Security benefit. You cannot collect a spousal benefit until your spouse files for his/her own benefit. Furthermore, you must be age 62 to qualify to receive a spousal benefit. As a widow or widower, however, you can start receiving Social Security survivors benefits at age 60.
Continuing with our example and assuming there is no work-related reduction of benefits, if you wait until age 67 to begin receiving your benefit of $2,000 per month, your spouse is eligible to receive 50% of $2,000, or $1,000 per month, as a spousal benefit. This amount will be received provided your spouse waits until his/her FRA. As stated above, a spousal benefit can be received as early as age 62, however, it will be reduced for each month before the spouse’s FRA that he/she begins collecting benefits. If receipt of spousal benefits begins at age 62, the benefit amount could be as little as 32.5%, instead of 50%, of the spouse’s benefit.
Let’s assume that you begin receiving your benefit at age 62 when you’re eligible to receive $1,500 per month vs. $2,000 per month if you wait until age 67 to being collecting your benefits. Let’s further assume that your spouse receives a spousal benefit. He/she will receive 50% of $1,500, or $750, assuming that he/she waits until FRA to begin receiving his/her spousal benefit. This translates to a benefit reduction totaling $750 ($500 for you plus $250 for your spouse).
Suppose instead that you begin receiving your monthly benefit at age 62 and your spouse also begins receiving his/her spousal benefit at age 62. You will receive $1,500 per month and your spouse will receive 32.5% of your benefit, or $488, instead of $750 if he/she waited until FRA. This results in a benefit reduction totaling $1,012 ($500 for you and $512 for your spouse). Instead of receiving monthly benefits totaling $3,000 ($2,000 for you and $1,000 for your spouse) had you and your spouse waited until your respective FRA’s to begin collecting your benefits, your total benefits are instead reduced by $1,012, or 33.7%, to $1,988 ($1,500 for your and $488 for your spouse) as a result of both of you electing to receive your benefits at age 62.
As if the Social Security benefit commencement decision wasn’t complicated enough, factor in the affect on your spouse’s benefit, and your head is sure to spin. Part 5 will discuss how one’s health will affect the decision regarding the timing of commencement of Social Security benefits.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.