Getting Your Financial Ducks In A Row

As reviewed in the article The Family Maximum Benefit (Retirement), there is a maximum amount that can be paid on a particular Social Security record.  As you’re planning for your family’s benefits, it is important to know what is involved in establishing the maximum benefit, as well as what can be impacted by the maximum limit.

What’s Not Included

Maybe it would be easiest to point out a few things that don’t go into the calculation for the Family Maximum limit:

• Ex-spouse spousal benefits are not included
• Ex-spouse survivor benefits are not included
• Any delayed retirement credits on the primary beneficiary’s record are not included
• Any PIA amount of a dually-entitled spouse (spousal benefits in excess of the recipient’s PIA are included)

So – with those items excluded, that leaves us with the question of what IS included:

What Is Included

Included in calculating the Family Maximum benefit limit would be everything else that wasn’t specifically excluded, based upon the primary recipient’s record:

• Primary beneficiary’s benefit, up to the Primary Insurance Amount
• Spousal Benefits for a current spouse (not an ex), but only the amount above the PIA of the recipient
• Survivor Benefits for the spouse who was married to the primary beneficiary at the date of death
• Child’s benefits
• Spouse benefits for a spouse caring for young children under age 16
• Other beneficiary benefits, including aged parents, other dependents, etc.

What Can Be Impacted by FMB

Once the Family Maximum Benefit amount is calculated, certain benefits can be reduced as a result (if the maximum is breached).  First of all, it’s important to note that those benefits mentioned in the “What’s Not Included” section above are not subject to reduction by the FMB.  In addition, the primary beneficiary’s retirement or disability benefit would also not be reduced by a limit imposed by FMB.

All of the other, secondary benefits, such as survivor benefits by the last-current spouse, spousal benefits, child’s benefits, and other beneficiary benefits can be reduced.  Each benefit is reduced pro-rata depending on the FMB figure that has been developed.

Example of FMB calculation

So let’s work through an example: John, age 70, just filed for his retirement benefit, in the amount of $3,000.  His Primary Insurance Amount (PIA) is $2,273.

John was married twice previously, to Jane first (age 62) and then to Sally (age 63), and each of those marriages lasted more than ten years.  He married his current wife, Celeste (age 30), three years ago and they have newborn triplets.

The family maximum benefit is calculated as follows (2012 figures, the year John reached age 62):

1) 150% of the first $980 = $1,470

2) 272% of the next $435 = $1,183

3) 134% of the next $430 = $576

4) 175% of the remaining PIA ($428) = $749

5) adding these up ($1,470 + $1,183 + $576 + $749) = $3,978 <= this is the FMB limit for John’s record

Now, we know that Jane’s spousal benefit and Sally’s spousal benefit are not included in the FMB.  Additionally, John’s Delayed Retirement Credit ($727) is also not included.  The following benefits are included in determining if the FMB has been reached:

• John’s PIA of $2,273
• Celeste’s benefit for caring for the children of $1,136 (half of John’s)
• Each child’s benefit of $1,136 (x3 = $3,408) (also half)

For a total of $6,817, which is $2,839 more than the FMB.  Since John’s PIA amount cannot be reduced, Celeste’s and the childrens’ benefits will be reduced at a rate of 63% less than their original amounts – to $426 for each of the benefits.  (That calculation was done by taking the full FMB, subtracting John’s PIA, and then splitting up the remaining amount pro rata among the other beneficiaries.)

Now, if Celeste was at or older than her FRA, the computation would be adjusted based on Celeste’s benefit based on her own record. With the example above, let’s say Celeste is 66 (her FRA) and she has a PIA of $1,000 based on her own lifetime earnings. This is because Celeste is dually-entitled – first to her own benefit of $1,000, and second to a spousal excess benefit of $136. The first $1,000 of benefits that Celeste can receive are not counted toward the family maximum benefit. In fact, her “excess” spousal benefit amount of $136 is subtracted from the total of family maximum benefits (right after John’s PIA), and the remainder is split among the 3 children.

• Original FMB – $3,978
• Minus John’s PIA – $3,978 – $2,273 = $1,705
• Minus Celeste’s excess Spousal Benefit – $1,705 – $136 = $1,579
• Divided among the 3 children – $1,579 ÷ 3 = $523

So each child receives $523, Celeste receives $1,136, and John gets his DRC-enhanced benefit of $3,000.