Think Twice (At Least!) Before Claiming Social Security Benefits Early
by Suzanne Hornick | Sep 23, 2016
Social Security benefits are often confusing. You might say that “understanding Social Security” is an oxymoron! We recently received a client question regarding the complicated topic of a spouse’s Social Security claiming strategy before Full Retirement Age (FRA). The question was could his spouse start taking her own benefit early at age 62 and then switch to one-half of his at age 66?
Each person who qualifies for Social Security is eligible for the greater of either their own benefit or 50% of their spouse’s benefit. However, it is little understood that when someone files for their own benefit – at any age – the spousal benefit becomes “supplemental.”
The supplemental benefit is calculated based on FRA amounts and is the difference between 50% of the other spouse’s FRA benefit and the filer’s own FRA benefit. If that person files early (before FRA), then their benefit is reduced. Therefore, the total of the early filer’s reduced benefit plus their supplemental spousal amount will be forever less than the original 50% FRA amount they could have received.
Let’s look at an example to see how this works. Consider a hypothetical couple, Karen and Burt, who are both 62. Karen’s retirement benefit at age 66, her full retirement age (FRA), is $400 a month. Burt’s age 66 (his FRA) benefit is $2,000. Karen’s maximum spousal benefit is $1,000 at 66 (that is half of Burt’s age 66 retirement benefits). Burt plans to file for retirement benefits at 66, at which point Karen will be eligible to claim spousal benefits.
Karen knows that she can claim retirement benefits early at age 62 and get $300/month (75% of the $400 she could get at her FRA). She also believes that at her FRA she can switch to her spousal benefits and get $1,000. She is wrong on this last count. By claiming spousal benefits at her FRA, she can get the full spousal supplement, but that will not bring her up to $1,000.
Here is how the full spousal supplement is determined. It equals 1) a person’s maximum spousal benefit at their FRA ($1,000 for Karen) minus 2) that person’s retirement benefit at FRA ($400 for Karen). By claiming spousal benefits at her FRA, after claiming $300 in retirement benefits at 62, she gets a full spousal supplement of $600 (= $1,000 – $400). This brings her total benefit, at FRA, up to $900, not the $1,000 she was expecting.
Source: www.socialsecuritychoices.com
|
Conclusion: It rarely makes financial sense to do this. It results in a permanent reduction in benefits even after adding the spousal benefit. If a couple are both long-lived, the lost dollars will add up.
If you have a unique situation and could use the expertise of a Certified Financial Planner, contact us!
