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How To Switch From Spousal Benefit To Own

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 12 minute read

Retirement benefits are available to citizens of the United States who have paid Social Security taxes for at least 40 quarters. If you paid taxes and were a member for a certain number of years, you will receive a certain sum. Spouses are eligible for half of the worker’s Social Security payout.

In addition to receiving a benefit based on their own earnings, many persons are also eligible to receive a spousal benefit based on their spouse’s earnings. Although, you can only receive one benefit at a time.

If Tom receives $2,000 per month in benefits, his wife Mary would be entitled to $1,000 per month in benefits or 50% of Tom’s benefit. Once both spouses reach retirement age, they will be eligible to receive a $3,000 lump sum. 

Mary can take either her own benefits, which she has earned through her own effort or half of Tom’s benefits, which she will receive automatically. The ability to move from a spousal benefit to a personal benefit, or vice versa, is a once-in-a-lifetime chance to significantly increase Social Security income.

When planning for retirement, the following choices accessible to Social Security beneficiaries make the right to receive spousal benefits even more significant. The overall amount of money you receive over the course of your life and how much you receive each month can be greatly improved by making smart choices.

Deferred or Early Monthly Benefits

Age of Normal Retirement

In accordance with Social Security rules, “normal retirement age” refers to the age at which you or your spouse are eligible to begin collecting normal retirement benefits as set by federal law. If you were born in 1960 or later, that means you’re just 67 years old.

Early Retirement

At age 62, both the primary beneficiary and his or her spouse are eligible to receive a portion of Social Security’s reduced retirement payments. For every month that passes before you reach your usual retirement age, however, your monthly benefit amount will decrease.

The following are some real-life scenarios that show how choosing an early retirement distribution might significantly impact your benefits:

  • Retirement age of 67, benefit took at 62. Mary would receive a $1,000 monthly pension after she reached the standard retirement age of 67. Taking her benefit at age 62 would result in a $700 reduction. There would be a $200 monthly deduction from her benefit for the first 36 months. A further $100 would be taken out of her benefit for each of the next 24 months. If she started collecting benefits five years early, she would lose $300 per month, bringing her net income down to $700 from $1,000.
  • Benefits can be claimed at age 64, even though the typical retirement age is 67. Mary would receive a $1,000 monthly pension after she reached the standard retirement age of 67. Her benefit, if she chose to accept it three years early at age 64, would be reduced by $200, from $800 to $604.
  • The average retirement age in the United States is 67, however, you can start collecting at age 66. Mary would receive a $1,000 monthly pension after she reached the standard retirement age of 67. If she chose to begin receiving her benefits at age 66, she would see a $76.60 reduction, bringing the total amount she would get down to $933.30.

Once the benefit amount has been set, it will not vary except for inflation adjustments in subsequent installments. Choosing to receive your benefits early can be expensive because of the steep reductions that are typically imposed.

Age of Deferred Retirement

With proper financial planning, you and your spouse may be able to delay Social Security benefits past the typical retirement dates. Up until age 70, your benefit will increase by 8% per year. If Mary is entitled to $1,000 at age 67, she will receive $1,240, a 24% increase, if she waits until age 70.

If you were born in 1960 or later, you should know that there is no financial benefit to deferring benefits beyond age 69. The increase in the monthly benefit cannot exceed 24%.

Option to “File and Suspend”

People can apply for and then suspend their own Social Security payments if they desire to provide for their spouse while deferring their own benefits. If Tom were to file for his benefit at age 66, for instance, Mary would become eligible for a spousal benefit. 

If Tom delays receiving his benefit until he turns 70, he will receive the larger deferred amount. Mary might start getting her spousal benefit right away while postponing her own retirement payment. 

To maximize the amount received, it is essential to have the option to “flip” from spouse benefits to one’s own.

Suspend and File Considerations

It is crucial to consider the file and suspend option in the following cases:

  • Tom hasn’t retired yet, so he’ll have to pay more in taxes on his Social Security benefits if he starts collecting them now. After Tom reaches the standard retirement age, he will no longer have to worry about having a portion of his pension clawed back owing to earnings.
  • Mary will receive a higher amount of Social Security than the spousal benefit she receives from Tom because she is entitled to her own payment. She can now earn 8% annual interest on her own benefit through the spousal benefit until she transfers it to her own account.
  • Tom might start receiving his retirement benefits at any moment after his normal retirement age if he and his wife experience financial hardship during the suspension period. Or, he can ask for a lump sum equal to the amount of money he would have received each month had he started receiving benefits at his full retirement age instead of delaying them. He should be aware of his potential income tax liability and the potential for higher Medicare premiums if he opts for the latter.

If you want to adopt the file and suspend tactic, you had better be in good condition and have a reasonable life expectancy. If you delay payments, you are betting that you will have enough cash on hand to break even in the long run.

Alternative “Restricted Application”

If you are a beneficiary of Social Security and your spouse is also a beneficiary, you may file for benefits but receive only the spousal benefit. 

In other words, if Bill and Jane retire at age 67, they can count on receiving Social Security benefits for the rest of their lives—which, according to the SSA, is 16.1 and 18.6 years, respectively. They anticipate receiving a monthly payout of $2,000 based on their lifetime earnings.

What Bill and Jane can do is one of three things:

  • The Benefit Age for Both Spouses Is 67. Bill and Jane each receive $2,000 each, for a total of $4,000 per month for the marriage. There is a potential profit of $772,800 for the pair if they both survive an extra 16 years.
  • Both Allow Benefit Deferral Until Age 70. If Bill and Jane wait until they are 70 to start collecting their benefits, they will each earn $2,480, for a grand total of $4,960. Earnings for the pair add up to $839,232 if Bill makes it until age 84. For the first four years of deferred payments to be made up, Bill will need to live until at least age 83.
  • Combine and contrast. The first spouse collects their usual benefit at age 67, while the second collect a spousal benefit. By using the restricted application, Bill is able to apply for his spouse’s benefit of $1,000 per month while delaying his own benefits until he reaches age 70. Jane applies for her full benefit of $2,000. At age 70, he will be able to begin collecting his own individual benefit, which will be $2,480 per month (due to the deferred benefit). Now, Bill and Jane can live well on a monthly salary of $4,480. With Bill’s current health and a projected 83 years of life, the couple may count on receiving $806,880 in total benefits.

These choices can be difficult and vary widely from pair to couple based on their individual situations. You should talk to a financial planner if you have any doubts about deciding which method of distribution to use.

The Benefit for Widow or Widower

If the deceased spouse was nearing retirement age, the surviving spouse may get up to 100% of the deceased spouse’s pension. 

Here are some real-world applications of benefit calculation:

  • If Tom receives $2,000 per month and Mary has chosen to receive half of Tom’s Social Security payment, she will receive $1,000 per month. Mary would be entitled to a $2,000 survivor benefit but would lose her $1,000 spousal benefit upon Tom’s passing.
  • John and Betty receive $2,000 and $2,000, respectively, per month from their respective sources of income, for a total of $4,000. Considering that her Social Security wages are equivalent to John’s, Betty will not be eligible for a widow’s benefit upon his passing. That $2,000 a month would keep coming to her.
  • Their total income is $3,200, with Carol bringing home $2,000 and Joe $1,200. In the event of Carol’s passing, Joe would get $2,000 in the form of a spousal death benefit.

In the event that the deceased spouse received a lower benefit amount due to an early election, the surviving spouse’s benefit amount will also be lowered. Similarly, the widow or widower benefit would increase if the departed spouse had chosen to delay receiving payments until after the typical retirement age.

Considerations for Selecting Spousal Benefits

Social Security benefit calculations can get tricky when both partners have different work histories and retirement ages. You should think about the following before making any decisions on your retirement.

The State of Each Partner’s Health

After a person dies, they will continue to receive Social Security payments until the end of the next month. One or both spouses’ poor health should weigh in on your decision as to when to start receiving benefits. 

For instance, a high-earning spouse who is also in bad health may choose to delay receiving benefits past the standard retirement age in order to maximize the widow or widower benefit. On the other hand, it may be wise to start collecting benefits early so that you can spend more time with your loved one.

Other Assets and Income for Retirement

A considerable yearly market return of 8% can be earned by deferring Social Security benefits. In a database maintained by the Federal Reserve Bank of St. Louis, we find that the S&P 500 returned an annualized 11.50% between 1928 and 2013. 

The market’s volatility, however, has varied from a loss of 36.55% to a gain of 32.15% over the past decade. An annual rate of return of 8 percent may seem like a safe and desirable choice to some investors.

Each Earner’s Anticipated Social Security Payments

If one partner has earned significantly more than their partner, the benefits may reflect that. A monthly reward of $1,800, for instance, may be due to Tony, who spent his working life in the accounting field. 

His $2,400 benefit may be doubled if his wife, Pam, worked as a pediatrician. This distinction makes it possible for most couples to tailor the management of their benefits to meet their specific requirements, such as maximizing income in the now or in the future.

When it comes time for Tony and Pam to begin receiving their retirement benefits, they can choose between a number of different alternatives, including:

  • Tony might apply for his benefits and receive $1,800 every month. Pam might apply to have her own payments put on hold so that she could receive $900 in spousal benefits from Tony’s account. She could put off receiving her benefits for three years until she turned 70, at which point she could transfer them to her own account and start receiving $2,976 per month. Their lifetime earnings would amount to $4,776. If one spouse were to pass away, the survivor’s benefit would drop to $2,976.
  • If Pam applied for her benefits in her own name, she would be eligible to receive $2,400 monthly. Tony has the option of taking a $1,200 spousal benefit now or delaying his own benefits for three years, up until he is 70. Tony, at age 70, would be eligible to receive $2,232 a month in his own account. Their lifetime earnings would amount to $4,632. If one spouse were to pass away, the payout would reset to $2,400.
  • It’s possible that future benefit amounts and expected life spans will have an initial role in determining which spouse would collect the spousal benefit. The average female can expect to live about two and a half years longer than the average male after reaching the age of 67. Widow or widower benefits may be affected by your calculations.

General Guidelines for Social Security Benefits Election

Social Security benefit eligibility should be carefully evaluated before being started. A couple can receive hundreds of thousands of dollars in benefits, so making the wrong choice could be very costly. It is suggested that you see a professional financial planner.

An engaged couple should think about the following before filing for benefits:

  1. If at all possible, you should not take early retirement. If you can wait until you reach the usual retirement age, you will receive a larger payout, therefore you should do so unless you have an extreme financial need now. Naturally, accepting early distributions is financially smart if a person is in poor health and unlikely to live to their typical retirement age. Keep in mind, however, that claiming benefits early will also diminish the surviving spouse’s monthly widow or widower payout.
  2. Benefits should be delayed till age 70. Even if you’re ready to accept large investment risks in today’s turbulent markets, it can be tough to earn a deferred guaranteed return of 8%. In spite of the fact that deferring benefits can be a wise choice from a monetary standpoint, you should be prepared to make up for the lost income through gainful employment or other means.
  3. A beneficiary should always file and suspend if their spouse does not work. Most of the time, it is not a good idea for a nonworking spouse to defer receiving spousal benefits. If a primary benefit owner was initially entitled to $1,000 per month and payment was delayed, he or she would ultimately receive $1,240.
  4. Simultaneously, the spouse’s benefit would go up from $500 to $620. Delaying payments for three years would cost $18,000, taking an additional 12 and a half years simply to reach “break even.” Instead, the spouse should use the file and suspend to start receiving benefits immediately.
  5. People with higher incomes should put that away and use the spouse’s benefit instead. Higher-income couples who choose the spousal benefit have the option of letting their accounts grow and switching to them when they reach age 70. While this strategy may cut the couple’s income during the deferral years, it will set them up for a far larger advantage in the years to come.

You should claim either the Spousal Benefit or your partner’s Eligible Benefit, whichever is higher. The higher benefit amount is guaranteed to remain in effect for the duration of the widow(er) benefit.

Results & Possibilities for a Typical Retiring Couple

Both Matt and Sylvia are 67 years old, which is the typical retirement age in their fields. While Sylvia, who works for a local charity, is entitled to $1,500 per month, former executive Matt is entitled to $2,300. The two of you are both healthy and will likely outlive your respective life expectancies.

The options they have for dispersal are as follows:

  • They’ve both decided to put off receiving their benefits until they are 70. Before reaching age 70, neither partner is eligible to receive Social Security benefits. Benefits at that point would total $4,712; this would include both Sylvia’s delayed benefit of $1,860 and Matt’s deferred benefit of $2,852. If one spouse passes away, the surviving spouse would receive a benefit of $2,852.
  • At 67, they each start receiving benefits individually. Sylvia will receive $1,500 in benefits, which is more than her spouse, who will receive $1,150. Their monthly take-home is $3,800 as a couple. In the event of the death of one spouse, the payment would revert to $2,300, which is the full amount of Matt’s benefit.
  • While Sylvia uses her Spousal Benefit, Matt takes his full benefit. At age 67, Matt will begin receiving $2,300 per month, while Sylvia will postpone her own account and receive $1,150 per month as a spousal benefit after filing a restricted application. The pair now has a monthly budget of $3,450. When Sylvia becomes 70, she no longer receives the spouse’s benefit and instead receives her own benefit of $1,860. The deferred payment is $3,450 for the first three years and $4,160 per year thereafter for as long as either spouse is living. In the event of the death of one spouse, the survivor’s benefit amount would decrease to $2,300.
  • Matt uses his Spousal Benefit to help support Sylvia, who is taking her full benefit. Sylvia, now 67, receives $1,500 each month, and Matt, now receiving a spousal benefit, will receive $750. The deferred income for the couple is $2,250 each year. When Matt becomes 70, he will no longer receive the spousal benefit and would instead receive $4,352 per month for himself and his wife. If one spouse passes away, the surviving spouse would receive a benefit of $2,852.

Bottom Line

The Social Security Administration said that in August 2014, more than 40 million Americans received retirement benefits, costing an average of $52 billion every month. One-third of all U.S. seniors rely nearly entirely on their Social Security payments as their sole source of income. 

These benefits unquestionably improve the safety and convenience of senior citizens in the United States. The rewards for understanding the system, planning ahead, and making the most of your privileges can be substantial. Get in touch with your neighborhood Social Security office to learn about your protections and consult a licensed financial counselor to evaluate your choices.

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