Chris Stein, CFP®
Searching For The Optimal Social Security Claiming Strategy
A reader from Idaho asks for advice on the optimal Social Security claiming strategy for himself and his wife.
"I plan on taking SS at my Full Retirement Age (FRA) in July 2022, at age 66 and 4 months. My wife earned far less in her life, so we have planned for her to opt for the 50% spousal feature at her FRA in May 2027, at age 66 and 10 months. My investment advisor (not a Social Security specialist) told me he has clients in our situation, where the "lesser" spouses claim their benefit at 62 1/2 (around $700 per month in our case), then switch to the 50% spousal feature at their FRA. He indicated that this is a lesser-known aspect. However, I have found nothing in the SSA documents or elsewhere supporting this. Can you clarify?"
Unfortunately, the strategy your advisor proposes is so "lesser-known" that it doesn't exist. This person appears not to understand fully how Social Security spousal benefits work.
Just to clarify, we have talked about this before, but it comes up all the time because it's different from most benefits. So I'm not surprised that uncertainty continues to exist.
Remember that the spousal benefit is made up of two parts. First comes the spouse's own benefit if one was earned. Then, the full spousal benefit is made up of her own earned benefit, plus what is called a "spousal offset." The offset is the amount needed to bring up her benefit amount to equal half of your FRA benefit.
Now, if her benefit is greater than your benefit – or even if it's just greater than half of yours – she won't get any spousal benefit because of how they pay. Social Security compares her benefit at her FRA with half of your benefit at your FRA. If there is a shortfall, they consider that to be the offset. But if there is no shortfall, they have no reason to pay a spousal offset.
Now, if your spouse had no retirement benefit of her own, the spousal benefit would make up the entirety of what she receives. Her portion would be zero, so the spousal offset would be equal to half of your retirement benefit at FRA.
I don't have all of the figures on your full FRA benefit, but you're asking the question because you've figured out that half of your benefit is larger than all of hers, so you know she will have some spousal benefit.
The problem with what the advisor is describing – and what he has apparently recommended to other clients – is that Social Security does not increase the spousal offset by what a spouse loses by claiming her own benefit early. Instead, she is reducing that first piece of the 2-part spousal benefit by claiming at 62.
In your wife's case, you mentioned her benefit would pay $700 a month at age 62. That is almost 30% lower than what she would receive if she waited for her FRA at age 66 and 10 months. I say "almost 30%" because people in her age range have FRAs that are not whole numbers, but rather fractions (66 years and 10 months in her case.)
For ease of calculation, if she were born one year later and if her benefit at age 62 would be around $700, her FRA benefit is right about $1,000. So, if half of yours is larger than $1,000, then your FRA benefit would be at least $2,000.
To make this easier to grasp, let's apply some numbers and pretend for a minute that your FRA benefit is $2,200 a month. That means half of it is $1,100. So if your wife waits until her FRA to claim her spousal benefit, first she'd receive her $1,000. Then Social Security would pay $100 as the spousal offset (the difference between half of your FRA, or $1,100, and her FRA of $1,000).
The offset figure itself is fixed. If your wife claims her benefit early (say at $700), when she eventually decides to apply for the spousal benefit, the offset will still be $100.
Instead of getting the $1,100 she would get if she claimed nothing until her FRA, she will only get $800. Social Security will still pay her the spousal offset; they're just not going to make her "whole." That's the problem with that strategy.
So, I'm glad you were questioning the advisor's knowledge of how the spousal benefit works. I can assure you it works as I described. Claiming your wife's own benefit early will permanently reduce her future spousal benefit.
Here's what claiming early does not reduce – and here's where people tend to get confused. If you claim your benefit early, it does not undermine what you will ultimately get as a survivor once your spouse passes away. That's because the survivor benefit is a standalone benefit. It's not made up of your own benefit plus an offset; it's just its own full benefit.
That might explain the advisor's misunderstanding. Someone said, "Oh, claiming early isn't going to affect one's survivor benefit," and this person took it to mean survivor AND spousal benefits. But, no, only the survivor benefit is protected from a reduction for claiming one's own retirement benefit early.
In summary and in answer to your question, if your wife were to follow the proposed strategy, she'd get the offset, but she would be undermining her total benefit by claiming her own benefit at age 62.