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Married couples and those who have been married in the past have choices when it comes to Social Security spousal benefits.
Married couples have more choices than couples who are divorced and many more choices than those who have never been married at all. When you have more choices, it is easy to get confused.
The deeming rule
The important thing to remember when it comes to spousal benefits is what the Social Security Administration calls the deeming rule. This rule says that when you file for benefits — either your own benefit or a benefit you qualify for from a spouse — you automatically file for both benefits at the same time.
Here is an example.
- Bob and Mary are married and the same age.
- Bob will have a benefit of $3,000 a month at his full retirement age of 67, based on his work record.
- Because of her late entry into the workforce, Mary will have a benefit of $1,000 a month at her full retirement age of 67.
- Both Bob and Mary start their benefits at 67.
- Bob receives $3,000 a month.
- Mary receives $1,000 a month from her work record.
- In addition, Mary also receives $500 a month from Bob’s record (which does not reduce Bob’s benefit at all).
Why does Mary get $500 in addition to her set benefit?
Spousal benefit calculation
As the spouse who earned less, Mary is entitled to 50 percent of Bob’s benefit minus what she collects directly based on her own work record. This is the so-called spousal benefit.
So, Mary’s spousal benefit equals:
- Half of Bob’s benefit ($3,000 x 50 percent) = $1,500
- Minus her own benefit = $1,000
- For a total of $500
And, by virtue of the deeming rule, she will receive both her own benefit ($1,000) plus the spousal benefit from Bob ($500) when she files for Social Security.
So, Mary’s overall Social Security payment adds up to $1,500.
But that calculation could change.
The higher Mary’s benefit from her own work record, the less she will get from Bob. And if her direct benefit is greater than 50 percent of Bob’s benefit, she would receive no additional money.
So, adjusting the example above:
- If Mary’s benefit was $1,200, then the benefit from Bob would only be $300 a month (50 percent of Bob’s benefit ($1,500) minus her own benefit ($1,200) = $300).
- If Mary’s benefit was $2,000 a month, she would not collect any spousal benefit from Bob because she is $500 over the 50 percent limit.
The Social Security Administration always pays the worker’s own benefit first and then calculates to see if there are any spousal benefits to be paid as a supplement. Because of the deeming rule, Mary cannot split or defer her spousal benefits.
Timing considerations
Spousal benefits for a married couple are based on the relationship between the full retirement age benefits of both spouses.
In this case, the full retirement age difference is $500. If Mary elects to file before her full retirement age, her own benefit will be reduced for early filing. The spousal benefit will remain at $500 a month but her early filing benefit will be less than $1,000 so the combined amount will be less than $1,500. Remember that as her own benefit increases, the amount of the spousal benefit decreases.
Think of the spousal benefit as a “bridge” to the 50 percent rule. The maximum spousal benefit is always capped at 50 percent of the higher earner’s benefit. Said another way, the spousal benefit is paid as a way to reach that 50 percent amount.
The other thing to consider is that the spousal benefit is not triggered until the higher benefit worker starts their own payments.
In this case, what if Bob wanted to wait a year or two past his full retirement age and earn delayed retirement credits. Then Mary would have to wait until Bob files to see the spousal benefit increase in her own check. (Related: Social Security strategies for married couples)
This makes it difficult when a married couple with large differences in their full retirement age benefits try to maximize their Social Security.
- Does it pay for both to defer a year or two?
- Should one start early and the other defer?
- How much does longevity play into the forecasting model?
With all these moving parts, it is very difficult to develop a maximizing strategy without the help of software tools and a financial professional. These tools are available and can provide a married couple with many choices to evaluate. And a financial professional can help them find a solution that might be a good “fit” into their plans for income in retirement.
Divorced couples
Divorced couples have fewer choices with spousal benefits than they did in the past.
Again, the deeming rule is the culprit here. In addition, to qualify for spousal benefits, there are some extra requirements for divorced couples.
- The first requirement is that you must have been married for 10 years or longer before the divorce.
- The second requirement is that you must be divorced for two or more years if your ex-spouse is not currently collecting benefits.
- The third requirement is that you must be single.
The deeming rule is applied, and your own benefit is always paid first. If your own full retirement age benefit is less than 50 percent of your former spouse’s full retirement age benefit, then you might qualify for some supplementary spousal benefits from your ex-spouse.
A key thing to remember is that the benefit paid to your ex-spouse is based on his or her record and not reduced by spousal benefits paid to someone else. (Related: Social Security benefits & filing options for ex-spouses)
The ex-spouse does not need to know that you could, are, or one day might, be collecting from their record. That discussion is between you and the Social Security Administration.
Conclusion
Spousal benefits can be an important part of a good retirement plan. They provide a limited, inflation-protected benefit that can increase over time. However, they should not be confused with survivor benefits. Survivor benefits are calculated in totally different ways. Survivors have many more choices on how to file for those benefits but someone has to die before those options are available. (Learn more: Social Security spousal and survivor benefits: Different and not equal)
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