Social Security for Couples: Should One of You File Early?
June 20, 2012
My husband is almost 62 and working part time. I’m 54, have always been the primary breadwinner, and plan to work at least another decade. He’s thinking of taking Social Security soon, but I think he should wait until later so that he gets a bigger benefit. What’s your opinion?
Interestingly, you and your husband both have a point. While you're correct that if he takes Social Security before what the IRS designates as normal retirement age (66 for those born between 1943 and 1954), his benefits will be permanently reduced by approximately 25 percent. The upside is that, although his checks would be smaller, he'd collect them for a longer period of time.
However, as a married couple, and especially with your age and income differences, there are a few other things to consider. In fact, having your husband take benefits early could actually work in your favor.
On the plus side: the 62/70 combination
This is a strategy that can work when the lower-earning spouse takes Social Security early and the higher-earning spouse waits until age 70 to file for benefits. In your case, your husband could take his benefits at 62, augmenting his earnings, while you continue to work full time. Then when you reach full retirement age, you'd have a choice. You could, of course, take your full benefits at that time. But you also have a couple of other options.
Rather than taking your own benefits, you could claim a spousal benefit, which is 50 percent of what your husband receives. That would put some extra money in your pocket while you let your own benefits accrue until you reach age 70. Or—and this is another interesting strategy for couples when one spouse's benefits are significantly higher that the other's—you could file for full benefits and immediately suspend them. This would allow your husband to file for the spousal benefit based on your work record, potentially getting more than what he receives on his own, while you wait until 70 to collect.
With either of the last two choices, your own benefits would continue to accrue by 8 percent per year for each year you wait to collect beyond your normal retirement age. Wait until 70 and that's a 32 percent increase. In the meantime, there would be more money in your collective pocket through the spousal benefit scenario that works best for the two of you.
On the minus side: deductions and taxes
When Uncle Sam gives, he also takes away in the form of taxes. In your situation, you have two tax considerations to factor into your equation.
First, if your husband files for benefits at 62 and continues to work, initially $1 will be deducted for every $2 he makes above the annual limit, currently $14,640. In the year he reaches his full retirement age it gets a bit better. A dollar is deducted for every $3 earned above a higher limit, currently $38,880. However, he will get the money back in the form of a recalculated benefit when he turns 66, so he doesn't need to worry too much about how much he earns before then. And once he reaches full retirement age, there's no earnings deduction.
Second, Social Security benefits may be taxable, depending on your modified adjusted gross income (MAGI). For married filing jointly, you could pay income taxes on up to 85 percent of benefits you receive if your MAGI is over $44,000. Since it sounds like your career is in full swing, it's likely that your husband's benefits will be taxed.
The longevity factor
You've probably heard of the breakeven point. This is the age you have to reach to basically collect the same amount of money whether you take your benefits early or late. For instance, a top wage earner today taking benefits at 62 would have to live to around 76 to break even. Today's average life expectancy is about 78. If your husband is healthy, the odds of breaking even are pretty much in his favor.
However, keep in mind that life expectancy statistics are even better for married couples. So, assuming you both live longer than the average life expectancy, would it be wiser for your husband to wait and collect a bigger benefit in his later years?
The best thing is probably to go to SSA.gov and use their calculators to estimate your husband's benefits at age 62 and 66. You can also estimate your own. There's nothing like real numbers to help you come to an agreement!
The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.
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