This coming January will see the first baby-boomers turning 66, a pivotal age in the world of Social Security benefits.
For all of those born in 1946 through 1954, the age 66 is called full retirement age (FRA), the age at which the eligible worker is entitled to start collecting 100 percent of the Social Security benefit earned. Starting to collect before age 66 will result in a permanent benefit reduction.
Waiting until age 70 to start collecting will result in a permanent benefit of 132 percent of the FRA figure. Between the ages of 66 and 70, the FRA benefit is prorated from 100 percent to 132 percent.
In addition to benefits due workers based on their earnings histories, two other types of benefits are relevant to married retirees: spousal benefits and survivor's benefits.
Survivor's benefits apply when the spouse with higher monthly benefit dies. Upon the death of the higher earner, the survivor begins receiving this higher benefit and forfeits his or her lower benefit. If the survivor has a government pension, then Social Security survivor's benefits may be reduced.
Spousal benefits apply in situations in which the Social Security benefit of lower-earning spouse is zero or less than half of that of the higher-earning spouse. While there are exceptions, generally speaking a husband and wife together can collect benefits based on the combination of their own individual work histories or 150 percent of the benefit of the higher earner, whichever of those two options is higher.
Because benefits calculations are actuarially based, the age at which a husband or a wife elect to start collecting, whether worker benefits or spousal benefits, will affect the actual benefit amount.
Here's why age 66 is so critical in planning the Social Security claims process for married couples: From age 62 up to age 66, an eligible claimant must accept the higher of his benefit or 50 percent of his spouse's benefit. At age 66, an eligible claimant can choose between her own or half of her spouse's benefit, even if the spousal benefit is lower than her own earned benefit.
Why would anybody voluntarily elect to receive a lower benefit than that to which he or she is entitled? Because beginning at age 66, unclaimed Social Security benefits continue to accumulate at the rate of 8 percent a year till age 70. This accumulation is called delayed retirement credits.
So a married couple who desire to maximize their combined Social Security benefits would choose a path like this: At age 66 his monthly benefit is $2,200. She is the same age and her earned benefit is $1,500. At her FRA she claims her full earned benefit of $1,500 and he claims his spousal benefit, which is $750. He holds off switching to his own benefit until age 70 when it reaches $2,900 and delayed retirement credits cease.
Excluding any inflation adjustments or the effect of new earnings from employment after age 66, this couple at age 70 will receive combined monthly Social Security benefits of $4,400 for life; at the death of one, the survivor will receive $2,900.
The importance of January 2012 is that baby boomers now have a choice between worker benefits or spousal benefits (this choice is not allowed before age 66) and for each year thereafter for the next four years unclaimed benefits rise by 8 percent. So by delaying the claim for the higher earner and by utilizing the higher earner's spousal benefit between ages 66 and 70, the couple will substantially increase its lifetime benefits and provide better protection for the wife, if she is the lower earner and the second to die.
If you are eligible and interested in post-66 Social Security benefits strategies, be sure to consult an experienced independent planner or Title 2 technical expert or claims representative at Social Security. Some Social Security claims decisions are irrevocable and could, unbeknownst to you, reduce your maximum lifetime benefits.
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Donald E. Askey, a Certified Financial Planner™ professional and president of Provident Advisory Group, is a registered fee-only adviser, headquartered in Newburyport. For questions, visit www.providentadvisory.com.