One of the least understood and most confusing aspects of Social Security benefits are the spousal benefits. Much attention is devoted to the best time for an individual to begin receiving retirement benefits, but how that choice can affect the benefits of a spouse receives much less attention.

In this visit we primarily are going to discuss spousal retirement benefits, but lets first briefly discuss the rules for survivor benefits.

A survivor receives the higher of his or her own earned benefit and the survivor benefit. A surviving spouse who already has reached full retirement age is entitled to a survivor benefit equal to what the deceased spouse was receiving. A surviving spouse who applies for survivor benefits before full retirement age will have the benefit reduced 0.42% for each month survivor is below the full retirement age. The age at which the survivor began collecting his or her own retirement benefits will not affect the amount of survivor benefits.

Strategy: The longer one delays one’s own retirement benefits, the higher the amount a spouse could receive in survivor benefits.

Spouses also are entitled to retirement benefits. A married person can receive retirement benefits based on either his or her own earnings record or on the spouse’s earnings, whichever is higher. The general rule is that a spouse receives the higher of his or her own earned benefits and half of the spouse’s earned retirement benefit. But the spousal retirement benefit is reduced if either spouse begins benefits before full retirement age. We’ll look at some examples shortly. To keep it simple, we’ll assume the wife is the lower-earning spouse.

For a spouse to receive retirement benefits, the other spouse first must be receiving retirement benefits. If the wife is ready to retire and wants to receive benefits before her husband, the wife’s benefits will not be based on the husband’s earned benefits. Theoretically the husband can begin receiving retirement benefits while continuing to work. If the husband is under full retirement age, however, the earnings limit will reduce the amount of those benefits and that in turn will reduce the amount received by the wife. If the salary of the husband is high enough, the benefits either spouse is eligible for will be zero.

The wife, however, can begin receiving benefits based on her own earnings record when the husband is not yet receiving benefits. After the husband begins receiving benefits the wife can receive benefits based on the husband’s earnings record. The benefits received by the wife at both times, however, will be reduced if the wife begins benefits before his or her full retirement age (FRA). Let’s look at some examples.

Rosie Profits wants to begin receiving benefits while her husband Max wants to delay benefits. Rosie is entitled to $500 monthly at full retirement age based on her own earnings. When Max reaches FRA he will be entitled to $1,800 monthly. Rosie can begin taking $500 now. When Max begins benefits at FRA, Rosie will receive an additional $400 to bring her total to $900 monthly—half of Max’s benefits. That assumes neither of them began receiving benefits until reaching FRA.

Suppose Rosie begins receiving her benefits before her FRA. She will receive a reduced benefit of let’s say $400 monthly. When Max retires at FRA, she still will receive the additional $400, bringing her monthly benefit to only $800. By beginning benefits before FRA she permanently reduces her monthly benefit, even after Max retires at FRA.

Now suppose Max begins benefits before Rosie reaches FRA, and Rosie already began receiving $400 monthly before her FRA. Rosie’s spousal benefit will be reduced again, based on a formula. She should receive less than the $800 monthly in the previous example. A calculator on the Social Security web site at www.socialsecurity.gov can compute the actual benefits for individual situations.

As you can see, the rules and scenarios can get complicated. Social Security’s web site calculators can help explore results under different scenarios. Others have studied the issue and concluded the best strategy for most couples. Under these studies lifetime payouts are maximized if the lower-earning spouse begins taking benefits early, say when first eligible at age 62. The higher-earning spouse should wait to at least age 68 before taking benefits and preferably to age 70.

Here’s a peculiar scenario the law apparently allows. Max and Rosie Profits are the same age. Rosie would be entitled to $1,000 monthly at her FRA; Max would receive $2,000 at his FRA. Rosie begins benefits at 62, receiving $750. Max wants to wait until age 70, but decides he needs some cash flow before then. At FRA, Max applies to receive one half Rosie’s benefits. He would receive $500 (half Rosie’s benefits at her FRA). At 70, Max can apply for benefits based on his earnings record, which would pay benefits over $2,000 monthly.

What if a spouse now believes he or she made the wrong choice and began benefits early? A retirement benefits recipient can change his or her mind by filing a Withdrawal of Claim with SSA. Along with the form, the benefits received to date have to be repaid. In the year prior benefits are repaid, the recipient will receive a Form 1099 from SSA with a negative number, and that amount might be either deductible on the tax return or taken as a credit for income taxes paid on the previous benefits. For details check IRS Publication 915 and the Social Security benefits handbook. Both are available on the agencies’ web sites.

The bottom line is that it usually pays for at least one spouse to wait before receiving benefits. Married couples should consider their benefits jointly to maximize the family income, the benefits paid to each, and future survivor benefits.

. About Bob Carlson

Bob Carlson is editor of the monthly newsletter, Retirement Watch. In it, he provides independent, objective research covering all the financial issues of retirement and retirement planning. Carlson also is Chairman of the Board of Trustees of the Fairfax County Employees’ Retirement System, which has over $2.8 billion in assets, and has served on the board since 1992. He was a member of the Board of Trustees of the Virginia Retirement System, which oversaw $42 billion in assets, from 2001-2005.

His latest book is Invest Like a Fox…Not Like a Hedgehog, published by John Wiley & Co. in 2007. His previous book was, The New Rules of Retirement, as published by John Wiley & Co. in the fall of 2004.

© 2003 – 2009 Retirement Watch, L.L.C.
All rights reserved.

By Mary Quist-Newins, State Farm Chair in Women and Financial Services
Professor of Women’s Studies, CLU®, ChFC®, CFP®
The American College

Even before our country’s current economic woes, one could reasonably argue that the vast majority of both American women and men needed trustworthy, competent and financial professionals to guide them. As markets have continued to unravel in recent months, that need has grown. Moreover, navigating the complexities of Social Security benefits and integrating them into a well-thought-out plan of action require significant expertise.

Here are just a few unsettling statistics for perspective:

• Thirty-one percent of the U.S. workforce had no savings set aside. (1)
• Forty percent of all Americans end up retiring earlier than planned. (2)
• The U.S. savings rate experienced a steady decline from 1970 when Americans saved roughly 9 percent of their after-tax income to 2005, when the savings rate actually drifted into the negative. (3)

Since women, on average, have less savings than men, we can only imagine a more ominous picture. The sad fact is that many women face a nightmare of poverty in retirement. The data that illustrate this phenomenon are as tragic as they are startling:

• Almost three-in-four Americans older than the age of 65 living in poverty are women. (4)
• The median income for women over age 65 is more than one-third lower than men in the same age group. (5)
• A full 80 percent of widows living in poverty were not poor when their husbands were alive. (6)
• By some estimates, without Social Security, the poverty rate for elderly females would increase from about 12 percent to more than 50 percent. (7)

Factors that increase a woman’s retirement risks and potentially compromise her Social Security benefits include:

• Family matters: On average, women take 12 years out of their working lives to care for children and/or parents. (7) Fewer years in the workforce results in fewer dollars set aside for the future and lower Social Security benefits.
• Lower earnings: The wage gap of about 20 cents on the dollar to the average earned by men translates to an even larger proportion of income that should be saved and smaller Social Security payments. (8)
• Greater longevity: This means that a woman’s retirement savings and her benefits need to stretch much further. To compensate for both higher life expectancy and a greater need for self sufficiency, some have calculated that women need to save as much as 2 percent more than men every year for 30 years. (9)
• Singlehood: Women are more than twice as likely to be alone in their later years as men (10). In 2004, according to the Social Security Administration, 61 percent of women older than age 65 living alone had an annual income under $15,000. Even adjusted for inflation, that income still falls below $20,000 per year. (5)
• Sources of income: For 25 percent of unmarried women, Social Security is their only source of income. (11)

As financial professionals, it is essential for us to take note of these issues when helping our female clients with their retirement plans. It is all the more important when we consider how vital Social Security is for most Americans. Almost two-thirds of all beneficiaries older than age 70 are female and for three-in-four women, benefits represent at least half of their retirement income. (12)

Beyond the current state of affairs for women, it is likely we will see an increasing, not declining, dependency on Social Security in light of the current economic climate, persistently low personal savings and other risk factors. As such, it falls to us to not only become experts on the intricacies of Social Security benefits, but also when it might be best for a woman and her spouse, if applicable, to claim them.

In a 2007 article from the Journal of Financial Planning, Alicia H. Munnell, director of the Center for Retirement Research at Boston College, suggested that it is generally advisable for single women to delay claiming as long as possible. For married couples, wives (who are most likely younger) should claim early and the husband should delay. (13) However, with these, as with any “rules of thumb,” making sweeping generalizations can be dangerous unless our clients are (pardon the pun) “all thumbs.”

Since Social Security is the mainstay for many women, it’s important for financial professionals to carefully analyze a range of benefits and alternative income (e.g., working and asset-based) options. And, it’s not just her benefits that matter. Analyzing various scenarios on both spouses determines the impact of taking benefits earlier or later. As many women outlive their husbands, projections also must take into account what she might be entitled to as a surviving spouse with her potentially higher life expectancy. The health history and longevity patterns of both the husband and wife are also essential to take into consideration.

Simply put: Relying solely on basic assumptions, rules of thumb, or even the annual statement of estimated Social Security benefits will fall far short of what most women will need in a well-developed retirement plan.

An excellent resource for both financial professionals and the public is the Social Security Web site at www.ssa.gov. The site is rich in information, including frequently asked questions and the most comprehensive resource of all — the Social Security handbook. The handbook provides exhaustive detail on all aspects of the program and will help you build the expertise that will aid many of your clients.

In addition, the Web site provides four calculators to estimate the impact of claiming benefits earlier or later. You can then plug those benefit amounts into planning software, along with assumptions on other income sources (e.g., pensions, asset yield and liquidation, employment, etc.), estimated expenses, longevity and inflation.

Becoming an expert in Social Security and how to optimize benefits in a woman’s retirement might literally save her from a life of poverty. Most of us came into this business to help others. Here is a real opportunity for us to do just that.

The benefit of your hard work in putting together a well-thought-out plan? Industry studies show that planning not only increases a woman’s confidence, but also increases the rates of implementation and cross-selling. This means not only greater retirement security for your female clients, but also more referrals, higher income and maybe even the satisfaction of knowing you made a real difference.

(1) Helman, R., Greenwald, Mo, VanDerhei, J. Copeland, C (2008). Retirement Confidence Survey: Americans Much More Worried About Retirement, Health Costs a Big Concern. Employee Benefit Research Institute.
(2) McDonnell, E.C. & Dulisse,R.A.,(2007) Retirement Planning for Women (7.1). In Hayes, L., Marketing Financial Services to Women. Bryn Mawr: The American College
(3) U.S. Bureau of Economic Analysis
(4) U.S. Census Bureau, Current Population Survey, Annual Social And Economic Supplement, 2006 (Washington, 2007)
(5) Society of Actuaries, Key Findings and Issues, The Impact of Retirement Risk on Women, 2005 Risks and Process of Retirement Survey
(6) U.S. Census Bureau, Marital Status of the Population 15 Years and Older (Washington, DC 2003)
(7) Hounsell, C. Women Face Unique Challenges When Planning for Retirement. WISER. March 2006.
(8) Bureau of Labor Statistics, 2007.
(9) Longer lives, less pay — women not saving enough. Washingtonpost.com. July 8, 2008.
(10) Women and Life Insurance, LIMRA Int’l, 2005
(11) Women and Retirement Security. National Economic Council Interagency Working Group on Social Security. www.ssa.gov. October, 1998.
(12) How does Social Security help women today? Wachovia. August 2004.
(13) Married and Single Women Face Different Choices When Claiming Social Security Benefits. Journal of Financial Planning. June 2007.