Chris Stein, CFP®
Earnings Test and Spousal Benefits
We had a great question regarding the earnings test and spousal benefits from our email box this week:
“I am 66 (FRA), the higher earner, and plan to delay taking my benefit until 70. We think my wife, age 64, should file so that I can take spousal benefits. At my age 70, I’d switch to my own benefit. My wife’s reduction for early claiming, and her salary between now and age 66 (her FRA), will reduce the payout she receives to virtually zero. So, when SSA recalculates her benefit at FRA, because she had received zero months of benefits, SSA will reset the benefit to what it would have been at FRA anyway. The upshot is that I’d get to take a spousal benefit for four years that I wouldn’t get otherwise. Is that right?”
This is a very common and valuable strategy for those who are grandfathered in to filing a restricted application. A restricted application is when you are allowed to claim only a spousal benefit, while leaving your own benefit untouched to grow in the background. To file a restricted application you must be at least your FRA and must be born before January 2, 1954. This reader meets both of those requirements.
The Bad News
The news is not as good from here… He mentions that his wife will continue to work and earn enough to “reduce the payout she receives to virtually zero.” He is referring to the Earnings Test. In 2018 the earnings limit for those under FRA is $17,040. This means that if you are under your FRA and earn more than the limit, your benefit will be reduced $1 for every $2 over the limit. What this reader is missing is that the earnings test applies to her benefit and any other benefits paid on her record. So the spousal benefit for which he will apply will be subject to the earnings test from her earnings.
This does not mean they should not pursue this strategy. Depending on the amount of her earnings and the amount of the SS benefits, it may make perfect sense to claim as he described. However, the amount received may, or may not justify the approach.
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