Money Watch, a personal finance column that runs every Saturday, features a financial planner from the National Association of Personal Financial Advisors answering reader questions about saving, protecting and growing your money. To submit a question, e-mail USA TODAY personal finance reporter Christine Dugas at email@example.com.
Q: I retired at 62, three years ago. My wife is 59 and works part time. It is a little tight financially. She is wondering if she could collect her Social Security income of about $300 at age 62 and then at 66 collect one-half of my Social Security payment of about $1,400. It's hard to plan ahead without knowing the best way to take advantage of Social Security benefits.
A: Social Security planning for couples is tricky business, and one misstep could result in the loss of thousands of dollars in benefits. There are some strategies that married couples can use to maximize their Social Security retirement income. In some cases, it may be beneficial to switch between receiving a benefit based on your own work record and receiving a spousal benefit.
In your particular case, however, if your wife applies for benefits in three years, at age 62, she doesn't have a choice. Social Security rules dictate that when applying before full retirement age, or FRA, she will be given whichever benefit is higher. This is called "deemed" filing, where she is "deemed" to be applying for the highest benefit she is entitled to.
The good news for you is that your wife's spousal benefit at age 62 is higher than drawing on her own work record and then switching to your work record. Based on our assumption that you began drawing Social Security at age 62, your wife's benefit is estimated to be about $653 monthly.
BENEFIT INCREASE: 2013 rise expected to be 1% to 2%
But, there may be a better way. Even though things are financially tight right now, if you can balance your budget without drawing benefits, it may be beneficial for her to delay until her FRA of 66. Here's why: If she begins drawing benefits at age 62, she will receive 35% of your basic Social Security benefit (called primary insurance amount, or PIA), which is about $653.
By waiting until her FRA, her benefit increases to 50% of your PIA, or about $933. This is nearly a 43% increase in benefits!
Additionally, since the annual cost-of-living adjustment will be applied to a higher base amount, the compounding effect will result in even higher benefits later on, and ultimately a more secure long-term retirement.
In fact, if you apply a 2% annual cost-of-living adjustment to the benefits, by drawing now she will receive a total of $190,394 over the next 20 years.
By waiting, she will receive nothing for the first four years, but will receive a total of $208,685 over the next 16 years. Waiting a few years will provide an additional $18,291 to the retirement budget when you need it most, later in retirement.
When deciding when to apply for benefits, take into consideration not only your current financial status, but also your health, family history of longevity and life expectancy. Social Security is designed to be a guaranteed income for life, and your goal should be to receive the most advantageous long-term payout for your family.
If you should decide to receive benefits now, another risk to consider is the potential for a reduction in benefits because of her income from work. Since your wife is still employed, her benefits may be reduced or withheld because of earned income. In the years prior to the year a person reaches full retirement age, one dollar in benefits will be withheld for every $2 earned over $14,640 in 2012. After her full retirement age, she can earn as much as she would like with no reduction in benefits.
And for other retirees, those older than FRA, there are a couple of approaches that may increase the lifetime Social Security payout:
Claim and Suspend. If you are FRA, you can file for benefits and then suspend them until a later date. At age 62, your spouse can then start receiving spousal Social Security checks based on your work history, while the value of your future payments continues to increase. This plan works best for couples with very different earnings histories, where the higher-earning spouse would like to keep working and the lower-earning spouse wants to retire and would be better off with the spousal benefit than his or her own.
Claim now, claim more later. If you and your spouse are ready to retire, and have reached FRA, you may be able to achieve a long-term gain in payments by initially claiming spousal benefits, allowing your own benefits to grow, and then switching to your own benefits later. You will receive lower monthly checks in the early stages of retirement in exchange for higher payments later. This strategy works if your benefit at FRA is higher than your spouse's but not so much higher that your spouse would be better off with the spousal benefit. That's an important difference between the "claim and suspend" strategy. This is also a good strategy if your spouse is in good health, and you expect him or her to live a long life.
Social Security rules and strategies are extremely complex, and very often require the services of a financial planner who understands all the nuances. Before making a decision that could affect your financial health for the remainder of your life, consider seeking guidance from a competent financial professional.
Scott McLeod, NAPFA-Registered Financial Advisor
Brown Financial Advisory, Fairhope, Ala.
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