Coordinating Social Security Spousal Benefits – An Illustrated Example

We’ve talked about the concept of Spousal Social Security benefits in other articles, but there still may be some confusion about the best way to coordinate these benefits to the maximum potential.  This article will follow a typical couple through the process using a couple of different tracks, so that you can see the potential outcomes of various options.

Our Example Couple

Our couple for the purpose of these examples is named Lester and Selma, both age 60.  The couple’s future potential monthly benefits are reported as follows:

Note: These figures are made up out of thin air, and may or may not represent realistic figures.  The figures merely give us an example to work with.  We’ve also purposely set the couple to equal ages in order to simplify the calculations.

First Option: Both File Early (age 62)

Lester and Selma are bothered by the fact that they’ve had OASDI withholding from their paychecks over their entire working lives, so they decided that as soon as possible, they’re going to start taking their hard-earned Social Security benefit.  Let’s look at the resulting amounts that this couple will receive over their lifetimes, assuming they both live to age 95:

Seems like a pretty decent result, don’t you think?  But as we know, things don’t always go the way we expect.  Let’s see what the outcome is if Lester were to die at age 72:

The increased accumulated amount that Selma has received over her lifetime is due to the fact that she began receiving 100% of Lester’s benefit as a surviving spousal benefit upon his death.

Now let’s shake this up a bit and see what other outcomes we can see.

Option 2: Both File at FRA (age 67)

Having thought things over, Lester and Selma change their minds and decide to delay receiving their benefit until age 67, Full Retirement Age.  Here’s what happens if they both live to age 95:

And again, since the likelihood of Selma’s outliving Lester is significant, we look at the outcome if Lester passes away at age 72:

This is where it starts to get interesting… if you’ll notice, under this option, when they both live to age 95, they are receiving a significant amount more by taking the Full Retirement Age amounts – a total of $1,376,961 versus $1,108,800 when filing early.  This is a difference of $268,161 more.

But the real difference plays out when Lester predeceases Selma.  When taking the early payment option, Selma would receive a total of $599,172 over her lifetime, while if they both delay receiving benefits to age 67, she’ll receive $779,184, or $180,012 more in lifetime benefits.  When you add in Lester’s benefit over his lifetime to age 72, the Full Retirement Age option pays out $927,324 combined, versus $801,612 under the early option, for a difference of $125,712 more in total lifetime benefits for the couple.

So we have one thing that we’ve learned now:  Truth #1 – it pays off in the long run to delay receiving benefits to a later age.

Option 3: Both File at Maximum (Age 70)

Very quickly, here are the results when both delay filing for retirement benefits to the maximum age of 70:

And then here’s the outcome if Lester dies at age 72:

As you probably expected, the totals for both life outcomes is better yet with the option of waiting to age 70 to file.  If both Lester and Selma live to age 95, they’ll collect a total of $1,538,700 in benefits.  The benefit is also greater if Lester dies at age 72, as illustrated above.

Truth #1 from above still holds true.  But we’ve not necessarily learning anything else, beyond the fact that Truth #1 becomes more true the more you delay – up to age 70 (no benefit to delaying beyond that age).

So, that’s it, right?  It’s best to wait until age 70 to begin taking your Social Security retirement benefits – cut and dried.  Hold on there, pardner… let’s have another look at the numbers, and the provisions of the system.

Option 4: Selma files early (age 62), Lester files at maximum (age 70)

Here’s the outcomes:

And if Lester dies at age 72:

This one takes a little bit to digest what happened… but if you add the numbers together, you’ll quickly see that if Selma files at age 62 and both live to age 95, it’s still better in the long run to delay receiving benefits for Selma.  (For brevity, we’ve only included the Third Option to compare with, since it had the best outcome from the first three.)

But when you look at the possibility of Lester’s dying at age 72, something different happens:  the couple’s lifetime benefits are greater if Selma starts taking her benefit early and Lester delays to FRA.  This is due to the fact that Selma is receiving her benefit for 8 years (even though it’s significantly reduced) earlier than the Option 3 choice – and then when Lester dies she begins taking her Surviving Spouse option at Lester’s FRA amount.  When you calculate the lifetime benefit received, Selma and Lester would receive significantly more – $84,624 in total – when Selma files at age 62, Lester at FRA of 70, if Lester dies at age 72.

This illustrates how, if the higher-earning spouse dies soon after taking his benefit if he has delayed receiving the benefit to the maximum amount, while the lower earning spouse takes her benefit early.  This doesn’t tell us a lot, and it doesn’t conclusively give us another Truth, so let’s make another change.

Option 5:  Same as Option 4, but Lester dies at age 80

So, is the outcome we found in Option 4 only good if Lester dies relatively early?  What happens if he lives a while longer, say to age 80?  Here’s what happens:

The answer is that the delayed benefit by the higher earning spouse is such a significant factor, at whatever age the higher earning spouse dies, this option provides the greatest benefit.  In fact, if the higher earning spouse lives to age 87 or beyond, this alternative is even better than if both spouses delay to age 70 and live to age 95 (Option 3).

This gives us Truth #2 – if the spouse with the higher benefit dies before the spouse with the lower benefit, it makes sense for the lower-benefit spouse to file early. It doesn’t need to be a focus, but the same would be true if the lower benefit spouse predeceases the other, higher benefit spouse.

Some Final Notes

To keep from confusing matters too much, we didn’t illustrate the spousal living benefit in these examples… perhaps we’ll do that at another time, as there can be some real eye-opening benefits.  What I mean by this is, as long as we’ve got one spouse receiving benefits and one spouse delaying to the maximum age, at FRA the spouse that’s delaying can begin taking a spousal benefit equal to 50% of the other spouse’s benefit.  This would be more gravy on top of the benefits we illustrated above.

Also, in our examples we did not factor in Cost-of-Living-Adjustments – again, to keep things as simple to understand as possible.

There can be other alternatives to look at that are significant – especially if there is a significant difference in the ages of the two spouses.  Again, this may be fodder for a future post.

If you have a specific situation that you’d like some calculations on, leave me a comment or use one of our other methods of communication to tell me what you’re looking for.

And lastly, it’s possible that I’ve fouled up some of the numbers in my tables by a bit, but the truths are still the same, even if my numbers are funky.  “It happens”, to quote Forrest Gump.

Photo by juhansonin

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 Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 25 years of experience in the industry. Read more from this author