Don’t Delay

James McGlynn

I HAD LUNCH RECENTLY with a longtime friend—a 66-year-old retiree. I asked him how he’s generating income since he hasn’t filed for Social Security and doesn’t have a pension.

He said that, for now, he’s just drawing down his savings. I know his wife is three years older and her lifetime earnings were much lower than his, so I asked him if she’d filed for Social Security. He proudly said that she hadn’t—because she expects to live to age 90, like her mother.

What he didn’t know: Because the Social Security benefit based on his wife’s own earnings record is less than half of his benefit as of his full Social Security retirement age (FRA), it probably didn’t make sense for her to delay her own benefit beyond her FRA.

Why? Let’s start with the basics: His wife’s spousal benefit is a maximum 50% of his FRA amount. Her benefit would be reduced if she receives benefits—whether it’s benefits based on her own earnings record or his—before her FRA. What if she claims after her FRA? That’ll increase the benefits based on her own earnings record. But it won’t increase her spousal benefit. Moreover, she can’t receive that spousal benefit until her husband claims his benefit.

Got all that?

Many retirees delay benefits until age 70, thinking that’s the prudent course, given the chance they’ll live to a ripe old age. But in many cases, it’s best to file at your FRA if your spouse is entitled to a much larger Social Security benefit.

Let’s continue with the example of my friend and his wife. Suppose his Social Security benefit at FRA is $3,000 a month, while his wife’s benefit at FRA is $1,000 based on her own earnings record. To keep things simple, we’ll also assume her FRA is age 66, and we’ll ignore Social Security’s annual cost-of-living adjustment. Also, keep in mind that my friend’s wife is three years older.

If she’d claimed her own benefit at her full retirement age of 66, she would have started receiving $1,000 a month. By delaying until age 70, her benefit beginning at that age would be $1,320 a month. But remember, three years later, when her husband turns 70 and claims Social Security, she’d be eligible for spousal benefits, which would be worth $1,500 a month.

In other words, by delaying her benefit based on her own earnings record until age 70, she’d receive a total of $47,520 over the next three years, while she could have collected $84,000 over seven years if she’d begun her own benefit at her full retirement age of 66.

The bottom line: Many people assume that delaying benefits until age 70 is always the best solution. But they fail to consider that the value of the spousal benefit is often larger than the lower-earning spouse’s individual benefit, and thus that individual benefit disappears when spousal benefits become available.

When I explained to my friend that his wife should have filed at her FRA, I also told him that there’s still time for his wife to act—and there’s a sweetener for doing so. What’s that? After folks reach full retirement age, those filing for benefits can opt to collect a six-month lump sum as though they’d filed six months earlier. Even my friend thought that was pretty generous.

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