Money Matters

Getting the most out of Social Security

CorrespondentJune 27, 2010 

Q: I'm 66 and my wife will soon be 62. I love my work, plan to work until age 70 and delay my Social Security benefits until I retire.

For most of our married life, my wife stayed at home, raised our children, took care of the house and supported me in my career. She did work outside the home for a brief period before we had children and is eligible for a small amount of Social Security based on her own earnings.

We want to maximize the Social Security benefits in our old age because we both come from families with a history of living well beyond age 90. Even though we don't need the extra income while I'm working, she would like to begin taking her benefit at age 62. We know this will have an impact on the amount of benefit she will receive, but once I start taking my Social Security, she can switch to a higher spousal benefit, correct?

That's kind of correct but not the complete story.

For those born between 1943 and 1954, full retirement age for Social Security benefits is 66. Benefits will be reduced by 25 percent if they are taken at age 62. It's nice that you can continue to work and delay your Social Security benefits.

As you probably know, this will increase your full retirement benefit by 8 percent for each year you delay after your full retirement age. There is no benefit of delaying past age 70. Delaying benefits to age 70 will not only give you a higher benefit during your lifetime; it will also provide your wife with the highest survivor benefit should you die before she does. This higher amount will also be of benefit as cost of living adjustments (COLAs) are calculated.

If your wife applies for her Social Security benefits before her full retirement age, her benefits will be reduced by 25 percent. This will affect the amount she will receive when she applies for a spousal benefit even if she waits until her full retirement age.

The following example, not accounting for COLAs, may be helpful: Your wife's primary insurance amount (PIA) is $600 and she begins her benefits at age 62. Her benefit is reduced by 25 percent, so she will receive $450. At age 66 she applies for a spousal benefit. Your PIA is $2,000, so her full spousal benefit would be $1,000. Her PIA is subtracted from this amount ($1,000 - $600), which gives her a spousal benefit of $400. The $400 is now added to her existing benefit of $450 giving her a total benefit of $850, not $1,000.

When determining spousal benefits, only your PIA (full retirement age) benefit is used, not your delayed benefits. If you predecease her, she will switch from her own/spousal benefit to a survivor benefit that will be the same as you were receiving before death which includes your delayed benefit.

You and your wife need to take taxes as well as the reduced benefits into account before she decides to take her benefits before full retirement age. It's a bit more complicated; but in general, if your income is more than $32,000 and less than $44,000, half of Social Security benefits will be subject to taxes. If your income is more than $44,000, 85 percent of Social Security will be subject to income tax.

As with most things in life, deciding when to take your Social Security is a gamble. If you think you will live a long time, you are better off delaying benefits. If you think you have a relatively short life span, you may be better off taking benefits as soon as you are eligible.

Holly Nicholson is a certified financial planner in Raleigh. Reach her at www.askholly.com or P.O. Box 99466, Raleigh, NC 27624. She cannot answer every question.

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