Wednesday, January 21, 2015 |
Joe Alfonso, GoLocalPDX Contributor
I often hold Social Security workshops in my community at which I explain how the system works and discuss various strategies for maximizing one’s benefits.
Almost invariably I meet attendees, usually women, who chose to claim early Social Security retirement benefits with the intent of later switching to a larger full spousal benefit upon reaching full retirement age (FRA). Sadly, and much to their dismay, I inform these folks that they cannot make this switch and that, in fact, their decision to claim an early benefit has made it impossible for them to ever claim a full spousal benefit.
This outcome can be avoided with good planning. The following are the key rules to know regarding spousal benefits that can guide you to make the correct claiming decision for your situation.
Who Can Claim a Spousal Benefit?
Married couples, and even divorced individuals, can claim a spousal benefit based on the FRA retirement benefit of their current or former spouse. Currently married spouses need to have been married for at least one year and the non-claiming spouse needs to have already filed for their own retirement benefit. The claiming spouse can file for a spousal benefit as early as age 62, but since this is before FRA, the spousal benefit will be reduced or not even payable as a result of the early claim.
Divorced claimants need to have been married at least 10 years to their former spouse and be currently unmarried. The former spouse must be at least age 62 but, unlike the case for currently married couples, need not have actually filed for a retirement benefit if the marriage ended at least 2 years before the claim for a divorced spousal benefit.
Only one currently married spouse may claim a spousal benefit at a time; either or both divorced spouses can claim a divorced spouse benefit on their former spouse as long as they meet the other rules noted above.
How Much Is a Spousal Benefit Worth?
A full spousal benefit is worth 50% of the non-claiming spouse’s FRA retirement benefit, known as the “primary insurance amount”, or PIA. It does not matter when the non-claiming spouse actually filed for their own retirement benefit. Therefore, even if your current or former spouse is receiving a reduced benefit as a result of early claiming or an increased benefit as a result of delaying past FRA, your spousal benefit will not be affected because it is based on the retirement benefit the non-claiming spouse was entitled to at FRA. And as noted above, in the case of divorced spouses, it does not even matter if the non-claimant is collecting a benefit or not as long as he is age 62 and the marriage ended at least 2 years ago.
The factor that determines whether you receive a full or reduced divorced spouse benefit is the age at which YOU claim it. Claiming at your FRA entitles you to a full divorced spouse benefit, again valued at 50% of the non-claimant spouse’s PIA. There is no credit for delaying a spousal benefit beyond FRA.
What Happens If You File For a Spousal Benefit Early?
You can file for benefits as early as age 62 but because this is before your FRA, they will be reduced. In fact, if you file for benefits before FRA, the Social Security Administration will first require you to take your own retirement benefit, reduced for early claiming. If your PIA is less than 50% of your spouse’s PIA, you will then be paid an additional spousal benefit based on the difference between the PIAs, but this spousal benefit will also be reduced for early claiming. The total combined benefit in this case will always be less than a full spousal benefit, which again is 50% of the other spouse’s PIA if claimed at FRA.
If your PIA is greater than 50% of your spouse’s PIA, then all that you will receive when applying early is a reduced retirement benefit. You will never be paid a spousal benefit and your own retirement benefit will be permanently reduced.
I hope that you can see how your options are limited if you claim before your FRA.
Early claiming, in addition to permanently reducing your benefits, also prevents you from taking advantage of the income maximization strategies only available at FRA. Early claiming in particular impacts your ability to claim a spousal benefit while delaying a higher retirement benefit so that the retirement benefit can continue to grow until age 70; this strategy is only possible after FRA via a “restricted application” instructing the SSA to pay out a spousal benefit, even though it is less than the retirement benefit, so that the retirement benefit can grow an additional 8%/year until age 70. At age 70 you would switch to your own retirement benefit which by then would have grown by as much as 32%. You would continue to collect this maximized benefit until you die or until you qualify for an even higher survivor’s benefit on the death of a higher earning spouse.
This is clearly a complicated area. It is critical to understand your claiming options and the pros and cons of each based on your specific circumstances before making a decision whose impact on lifetime retirement income can total tens of thousands of dollars.
A version of this article originally appeared in the Business Section of GoLocalPDX