Journey Into Retirement

I’M BACK!!!!

Well, it has been a little over a year since my last post (October 2015).  I actually took the retirement plunge in May 2014 and have been a bit lax maintaining this blog.  Truth be told, it was much easier to come up with content and perspectives prior to my retirement as I was in the planning phase.  I am now living in retirement versus just planning for it.

Surprisingly, I still get considerable traffic on the blog and requests for notification of posts.  There is clearly interest in the topics I have posted.  So, I have decided to make another run at maintaining this blog with an important alteration.

I will still make posts on retirement planning topics as I think about and research them.  However, as I have entered retirement, I have gained a whole new perspective.   Before they jump over the retirement cliff, many people wonder what’s at the bottom?  Will retirement be like a bungee jump or a fall to your death – metaphorically speaking.  This is a valid topic for this blog.

So, let’s proceed with a planning topic that can affect people either before and after retirement:

WHAT YOU SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS FOR YOUR SPOUSE

Probably the most important question in retirement is what you can expect your income to be.  If you have a spouse, this equates to the combined household income for both of you.  It can get very complicated, but in this blog post I want to discuss the topic of spousal Social Security income.

First, some Social Security basics:

• To qualify for Social Security benefits, you need to have earned 40 “credits.” To get a credit you need to earn a certain minimum income.  For example, in 2016, you got one Social Security credit for each $1260 you earned up to a maximum of four credits for the year.  Generally, if you have worked 10 years, you will have the credits you need to qualify for benefits.  Your actual benefits are calculated based on your earnings history.
• If you have not worked, you can still collect benefits based on your spouses work history if you are at least 62 years old. I will discuss this in more detail further down.  However, one important point – the benefit is reduced if you file to collect before your full retirement age – usually somewhere between 66 and 67 years of age.

How does Social Security work for a spouse?   Let’s look at a common situation:

Your spouse retires at the same time or after you do.  During the course of both of your work histories, you have earnings that were substantially greater than his or her’s.  What will your spouse collect at retirement?

The Social Security Administration will calculate benefits for your spouse based on their earning’s history.  However, they will also calculate what is called the PIA (Primary Insurance Amount) for you.  The PIA is the amount YOU would collect if you retired at your full retirement age (let’s say 66 years).    How do your benefits affect your spouse?  The way it works is that if your spouse retires at his or her full retirement age, they will get the greater of either their normal benefit based on their own work history or 50% of your PIA.

Note that the caveat is that your spouse retires at their full retirement age.  What will they get if they retire early?  Of course, generally (but not always) you need to be at least 62 years old to collect any Social Security benefit.  The full amount is reduced if you retire before your full age.  However, how much of a reduction would you expect?  Let’s assume, for the purposes of this example, that your monthly PIA benefit is $1341 (the average monthly benefit paid in 2016) and that your spouse’s full retirement age for the purposes of Social Security is 66.  Refer to the table below to determine how your spouses benefit would be determined:

Let’s review this table.  If your spouse retired at age 62, they would receive 75% of their benefits based on their own work history or 35.2% of your PIA (whichever is greater).  This reflects the fact that your spouse took early retirement.     The policy of Social Security is to reduce the monthly benefit if you retire early because you have longer to collect.  If your spouse waited until their full retirement age, they would receive the greater of 100% of their benefit based on their own work history or 50% of your PIA.

If your spouse worked beyond their full retirement age, their benefit based on their own earning history would continue to increase at 8% per year until age 70.  However, this is  different for the “50% PIA” option.  The benefit based on your PIA would not increase beyond the point when your spouse reached their full  retirement age.  At retirement, Social Security would compare the amounts based on your spouse’s own work history and 50% of your PIA.  They would award your spouse the greater of the two.

There are three major takeaways from the table:

• First, your spouse’s Social Security income is the greater of their benefit based on their own work history or that based on your PIA. The PIA is based on your full retirement age benefit, even if you retired early.  When you filed for benefits does not seem to matter in terms of what your spouse will collect.
• Second, If you retire early, your Social Security benefits will be reduced by a set amount for each year of early retirement. The same is the case for your spouse whether the Social Security benefit is based on their earnings or your  PIA.  There is a clear benefit for your spouse working until at least their full retirement age.  Beyond the obvious income implications of when you retire, you should be aware that you are unable to collect Medicare benefits until you reach 65 years of age.  This is a major consideration for most people.
• Here is a final wrinkle. If you continued to work beyond your full retirement age, you would get an increment in Social Security benefits (about 8% more each year) until you reach age 70.  The same is true for your spouse in regards to their benefit based on THEIR work history.  However, your spouse’s benefit amount based on your PIA only increases until your spouse reaches their full retirement age.   After that, it is frozen at 50%.  Of course, their benefit based on their own earning history will increase if they keep working until they are age 70.   Let’s say for example, that your spouse decides to forego retirement until age 70, their benefit would be the greater of the benefit based on their work history accruing until age 70 or 50% of your PIA.  Of course, your PIA is calculated at the time of your spouse’s retirement, which could increase somewhat because of the inflation adjustments to Social Security benefits over time.

Timing is everything since the “50% PIA” benefit is available only if the higher earner has filed for Social Security benefits before the lower earner.  In the past, there has been what is called a “file and suspend” option” to get around this.  With this option, the higher earner files for Social Security benefits, but immediately petitions to suspend those benefits.   This made the lower earner eligible for the 50% PIA rule.   However, this option no longer exists.  Just keep this in mind.

This all might sound very complicated, mainly because it is.  However, it is to your benefit that you get a handle on Social Security income before you retire.  Knowing what you have to work with and whether it will be enough is a critical component of retirement planning.