Whether you end up with a modest amount of savings for retirement or a very large nest egg, there’s a good chance Social Security will play a key role in your income. After all, those benefits are guaranteed to come your way every month for life.
Plus, Social Security benefits are eligible for an annual cost-of-living adjustment. Your savings aren’t guaranteed an inflation adjustment, which means you could end up losing out on buying power if your investments are too conservative.
It’s important to file for Social Security at the right age to maximize your senior benefits, but if you’re married, you need to think about your spouse’s financial needs as well as your own.
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Your filing age matters
The monthly Social Security benefit you receive in retirement is calculated based on your specific earnings history. The Social Security Administration takes your 35 highest-paid years of income into account when calculating your monthly payments.
But your filing age also plays a role in how much money Social Security pays you each month. And the sooner you file for benefits, the smaller those monthly payments are.
The earliest age to claim Social Security is 62. If you don’t wait until your full retirement age (FRA), your monthly benefits will be reduced. FRA is 67 for anyone born in 1960 or later.
You can also delay your Social Security claim past FRA for larger monthly checks. Each year you wait gives you an 8% boost until you reach the age of 70.
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Filing early could lead to a larger lifetime benefit
When you first sit down to review your Social Security claiming options, you might assume that filing at age 70 leads to the largest total benefit. But that’s not necessarily true.
Claiming Social Security at 70 makes your checks larger on a monthly basis, but not necessarily on a lifetime basis. If you don’t live past your early or mid-70s, for example, you could end up with a smaller total Social Security benefit if you wait until 70 or even FRA to file and only get to collect those monthly checks for a few years.
For this reason, if your health is not in good shape as you become eligible for Social Security, you may want to file for benefits early — even as early as possible. Although claiming Social Security at 62 with an FRA of 67 will reduce your monthly checks by 30%, you could actually end up with more lifetime income by signing up for benefits early.
Here’s the math. Say you’d get $2,000 a month in Social Security at age 67, but you sign up at age 62 and get $1,400 a month instead. If you live until age 72, you’ll get $1,400 a month, or $16,800 per year, for 10 years. That’s a total of $168,000.
Now, let’s say you wait until 67 to claim Social Security but only get to collect $2,000 a month for five years. That’s only $120,000 in total Social Security income.
Filing early can be risky when your spouse could outlive you
You might think that claiming Social Security as early as possible makes sense if you have health issues or aren’t likely to live a long life. But if you’re married, there’s another key factor you can’t afford to overlook: survivor benefits.
If you’re the higher earner in your household, your spouse will be eligible for survivor benefits if they outlive you. At that point, they’ll be eligible for the benefit you received while you were alive.
If you shrink your monthly benefits by filing for Social Security early, you’ll also shrink your spouse’s survivor benefits. That could put your spouse in a very difficult financial position if you don’t have a lot of household savings. Plus, you could end up with less total Social Security income on a household basis.
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The math you need to understand
Let’s say you pass away at 72, at which point your spouse is only 65, and they then live until 95.
Going back to our example, claiming Social Security at 62 would put $168,000 in your pocket in total. It would put $504,000 in your spouse’s pocket in total, since your spouse would get $1,400 a month for 30 years, not accounting for cost-of-living adjustments. The sum of those two numbers is $672,000.
Now, let’s say you file at 67 and get $120,000 in Social Security in your lifetime. Your spouse would be looking at $2,000 a month for 30 years, or $720,000 in total. In this situation, you’d have $840,000 of Social Security income in total on a household basis.
Bottom line
Social Security will probably end up being a big part of your retirement plan. If you’re married, it’s very important to review your Social Security filing strategy carefully, especially if you’re the higher earner and are likely to pass away first.
Many retirees who are married don’t realize how their filing choices could impact their spouses’ finances for better or worse. Doing the math before claiming benefits could help you avoid a potentially huge mistake.
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