The more frequently we discuss Social Security with our clients - which is often - the more we realize just how complicated Social Security can be. In particular, we have found that Spousal Benefits can be among the most confusing provisions in the Social Security system.
While you should not expect to understand Spousal Benefits fully after only a short reading, we do hope to shed at least a little more light on the topic. First, let's see how the Social Security Administration explains it:
"Even if you have never worked under Social Security, you may be able to get spouse's retirement benefits if you are at least 62 years of age and your spouse or ex-spouse is receiving or eligible for retirement or disability benefits.
If you begin receiving benefits at your full retirement age, your benefit can be equal to one-half of your spouse's full retirement amount."
In
other words, as a spouse, you are not only entitled to any benefits based on
your own earnings record, but a benefit based on your spouse’s earnings record,
whichever is greater. [Note: the spouse must have filed for benefits for you to
collect Spousal Benefits.] As a spouse, the most you can receive under Spousal
Benefits is 50% of your spouse’s Primary Insurance Amount (PIA).
Perhaps
a few examples will help clear things up. Let’s consider the case of Woodrow
and Edith Wilson.
Edith
is age 66 (her FRA) with a PIA of $1000. (Your PIA is the benefit you are
entitled to at your Full Retirement Age (FRA)). Woodrow is age 66 (his FRA)
with a PIA of $2400 and has filed for benefits.
If
Edith files for Social Security, she is eligible for her own benefit or a
spousal benefit. So here’s how it works: her benefit amount at age 66 would be
$1000. The most she could receive as a spouse is 50% of Woodrow’s PIA or $1200
($2400 x 50%). If we subtract her benefit from this figure, we get $200 ($1200
- $1000). This is her spousal benefit – she would collect $1200 total, but as
far as Social Security is concerned, she is getting $1000 of her own benefit
and $200 of a spousal benefit.
As
if it’s not confusing enough, let’s change things up and make Edith only 62.
Now if she files for Social Security, she’s still entitled to her benefit and a
spousal benefit. However, as she is not yet her FRA, BOTH benefits will be
reduced for every month before her FRA. At 62, her benefit would be reduced by
25%, so $750 ($1000 x 75%). Further, the spousal benefit would be reduced by
30%, so $140 ($200 x 70%). So, at age 62 she would collect a total benefit of
$890 ($750 + $140).
[We
won’t go into the formulas for the reductions here. Just know that if you file
for Social Security benefits before your FRA, your benefits are permanently
reduced.]
Believe it or not, we've only just scratched the surface. Once you fully understand Spousal Benefits, there are a number of strategies that married couples can apply. At Kemp & Associates, we want to help you understand the rules and, more importantly, make an informed decision on when to begin collecting Social Security to maximize your potential lifetime benefits. Contact us to learn more.
Sources:
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