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Baby Boomers Don't Leave Money on the Table. Part 3: Social Security Spousal Benefits

Part 3. Social Security Spousal Benefits.

In retirement planning, an overlooked source of income is the Social Security spousal benefit. During your lifetime, your spouse may collect social security benefits based on your earnings or benefits based on his or her earnings. If your spouse has low earnings or has never worked, the spousal benefit will most likely be higher than his or her own benefit. The same rule applies to you. You may collect spousal benefits based on your spouse's earnings rather than collecting your own benefit. You and your spouse also have the option of collecting spousal benefits and then collecting your own benefits at a later age. Before filing for benefits, both you and your spouse should review the following: 1) the benefits that you are entitled to collect based on your earnings at various ages; 2) the spousal benefits that both of you are entitled to collect, based on the earnings of the other spouse; 3) your plans to continue working before or after full retirement age (currently age 66); and 4) some options for filing, such as "file and suspend", which allows your spouse to start collecting spousal benefits while you continue to work. Analyzing these options will enable you and your spouse to maximize the benefits that both of you can collect.

Your spouse's benefit is one-half of the amount that you are entitled to collect at full retirement age (currently age 66). Your spouse may start to collect the spousal benefit as long as your have filed for benefits. The age at which you file for benefit will not affect the amount that your spouse is entitled to collect, although the age at which he or she starts to collect benefits will affect his or her spousal benefit. When your spouse applies for benefits, he or she can collect his or her own benefit or one-half of your benefit - whichever is more.

Example 1. One Spouse Works. Jack is the working spouse and Joan has been at stay at home mother who has never worked. At full retirement age, Jack is entitled to collect $2,000/month. Joan is entitled to collect $1,000/month (50% of Jack's benefit) if she waits until full retirement age. Their total benefit if both start to collect at age 66 will be $3,000/month. If Joan files for benefits earlier, her spousal benefit will be reduced.  At age 65, Joan may collect 45.8% ($916), at age 64, she may collect 41.7% ($834), at age 63,  she may collect 37.5% ($750) and at age 62, she may collect 35% ($700).

Example 2. Both Spouse's Work. Both Jack and Joan worked, but Jack decided to be a stay at home dad, so Joan could continue working as a full time attorney. Jack returned to work when the children were older. At full retirement age, Jack is entitled to collect $800, based on his earnings. Joan is entitled to collect $2,400/month at full retirement age, based on her earnings. Jack has the option of collecting his spousal benefit, which will be $1,200/month at age 66 (50% of Joan's benefit), or he may collect his own benefit, which will be $800/month at age 66. In this case, Jack will opt to collect his spousal benefit and Joan will collect her own benefit. Their total benefit if both collect at age 66 will be $3,600/month.

Example 3. Both Spouses Work.

Jack has worked full time as an architect and Joan has worked full time as an attorney. Jack's benefit at age 66 will be $2,100/month and Joan's benefit at age 66 will be $2,400/month Neither one of them will opt to collect spousal benefits. They will collect more if both of them collect their own benefit. If both start to collect at age 66, their total benefit will be $4,500/month.To be eligible for spousal benefits, you and your spouse must be legally married for at least one year.

The definition of spouse includes a common law spouse, as long as you reside in a State that recognizes the marriage as legally valid. After the recent Supreme Court decision, all couples in same sex marriages are entitled to the spousal benefit. Couples in civil unions and domestic partnerships may qualify for this benefit. In these case, the Social Security Administration will have to make a ruling to determine if spousal benefits are available. Your former spouse or spouses may also collect spousal benefits based on your earnings, as long as you and your former spouse were married for at least ten years before you divorced and your former spouse has not remarried. Your former spouse may apply for benefits before you file.

 

If you continue to work after full retirement age, you can file for benefits but defer collecting until a later age. You may file for benefits as early as age 62, so that your spouse may start collecting his or her spousal benefit. This option, referred to as "file and suspend" or "file and defer," allows your spouse to collect his or her spousal benefit, based on your earnings, while you continue to work and defer collecting your benefit.

Example 4. Jack and Joan both work. Jack has the lower paying job. At full retirement age, Jack is entitled to collect $800/month, based on his earnings, and Joan is entitled to collect $2,400/month, based on her earnings. Jack retires at age 66, but Joan continues to work. Jack has the option of collecting his spousal benefit, which will be $1,200/month at age 66 (50% of Joan's benefit), rather than collecting his benefit. Joan must file for benefits so that Jack can collect his spousal benefit. When she files, Joan may defer collecting her benefit. It makes sense for Joan to file and suspend, because her earnings will reduce or eliminate her benefit. When Joan stops working, she will start collecting her benefit.

The benefits that your spouse is entitled to collect after your death will be addressed in Part 4 of this series. The pros and cons of "file and suspend" will be covered in more detail in Part 5 of this series, and the consequences of continuing to work after full retirement age will be analyzed in Part 6 of this series. A thorough knowledge of all of your filing options will ensure that you and your spouse maximize the benefits that both of you are entitled to collect.

 

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