I’m 63 and still working. My wife, 64.5 years old and retired, spent most of her working life at home raising our children. She is eligible for Social Security at a current rate of $675 and $845 if she waits until FRA. I plan to continue working for another two to three years. My Social Security at age 65 is $2,785 and $3,295 at FRA. Should she rely on and invest her Social Security now, and switch to spousal benefits when I retire? Or should she wait until I retire and receive the full 50% spousal benefit?
– Two Air Force vets
I suggest waiting in most cases, but that doesn’t mean it’s always the best approach. Depending on your situation, risk tolerance, and goals, your wife may now want to file for Social Security. However, there may also be a mixed third option depending on when you apply, which I think you should consider. I’ll explain the tradeoffs and reasons why you might choose one option or the other, so you and your wife can decide which route is best for you.
If you have questions about your retirement planning or need help with another area of ​​your finances, consider reaching out to a financial advisor.
Reduction of early filing
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As you indicated, your wife will receive a reduced benefit if she files for Social Security before she reaches full retirement age (FRA). This applies to both her own benefit and her partner’s benefit. However, these discounts are different, so let’s start by clarifying how early filing affects both types of benefits:
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Primary benefits are reduced by 5/9 of 1% per month for up to 36 months and then by 5/12 of 1% for each additional month
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Partner benefits are reduced by 25/36 of 1% per month for a maximum of 36 years and then by 5/12 of 1% for each additional month
Based on your wife’s current age, I assume she was born in 1960. As a result, she will reach FRA at age 67. So if she is exactly 30 months late for her FRA:
Keep in mind that she won’t be able to claim her spousal benefits until you file for Social Security. But because her partner benefit will be higher than her own primary benefit, she would ultimately switch later, at which point this reduction would apply. (And if you need extra help deciding when to claim Social Security or how to plan spousal benefits, contact a financial advisor.)
Submit and invest now
If your wife files for benefits now and invests the money, this is approximately what she could have when she turns 67, based on the following returns:
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2% = $20,781
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4% = $21,331
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6% = $21,898
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8% = $22,484
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10% = $23,089
However, if she waits until age 67 to file for Social Security benefits, she will receive $845 per month — $170 more than what she would receive if she started now. But if she starts collecting Social Security now and invests those payments, she could have more than $23,000 in savings by age 67.
So how do you compare the two options? You can start by thinking about it in terms of a withdrawal rate. How much would you need in savings to generate an extra €170 per month?
Using the 4% rule as a guide, your wife will need $51,000 to afford a monthly withdrawal of $170. Clearly, none of the above assumptions about investment returns come close to that.
(Calculating potential investment returns can be complicated, but financial advisors often have the tools and expertise to perform complex calculations to help you make important decisions.)
Submit early vs. wait
However, there are still a number of scenarios in which your wife may still decide to file for benefits early, including:
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She has a short life expectancy due to a medical condition or family history
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You definitely need the money now
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You already have enough guaranteed income, such as military pensions, pensions or annuities, and you want more immediate cash flow
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You are very aggressive investors and prefer the chance of higher returns, even if it means taking on more risk
On the other hand, waiting until FRA may be more appropriate if:
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You and your wife are risk-averse or financially conservative and prefer security
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She expects to reach at least an average age
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You do not have sufficient guaranteed income
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You don’t need the money now
Which benefit to choose?
At this time, the only benefit your wife can receive is her own benefit. She cannot claim her spousal benefits until you file, which you clearly understand.
However, submitting an application now results in a sharp reduction in benefits. Unless other considerations weigh heavily on your mind, this may not be the best choice. So she can wait until you apply for and claim the full spousal benefit, worth €1,647.50 (50% of your full pension benefit).
But this is where a mixed third option comes into play. Let’s break down the relevant details:
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Her spousal benefit is based on 50% of your FRA benefit, regardless of when You file
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She will receive the full 50% as long as she files a tax return its own FRA
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If she files early, her spousal benefit will be reduced, as explained above. The spousal benefit does not provide any deferred filing credits, so there is no benefit to her in waiting past her FRA
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She’s a few years older than you
The third option is for your wife to file for her own benefit once she reaches her FRA and then switch to her spousal benefit after you file. If she does this, she will not receive a discount.
However, when you file a tax return is another point of discussion. You indicate that you plan to apply when you retire in a few years. You may want to evaluate the benefit of waiting until age 70 to take advantage of deferred retirement credits. This will likely maximize Social Security benefits for the two of you, making it an option I would strongly consider.
(And if you have any questions about Social Security and retirement income planning, contact a financial advisor and see how they can help.)
In short
Filing early to invest the money likely won’t provide the same level of income as waiting to maximize your Social Security benefits, and it’s riskier. If financial security in retirement is your goal, I would seriously consider having your wife file a claim with her FRA and delay your own benefits.
Social Security Planning Tips
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Depending on your total income, up to 85% of your Social Security benefits may be taxable. Advanced tax planning strategies, such as adjusting withdrawals from retirement accounts or Roth conversions, can help you manage your taxable income in retirement and reduce the tax burden on Social Security benefits.
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A financial advisor with expertise in retirement planning can help you plan for Social Security benefits and integrate them with your other sources of income. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and provides marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.
Brandon Renfro, CFP®, is a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question that you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not an employee of SmartAsset and is not a participant in SmartAsset AMP. He received compensation for this article. Some reader-submitted questions have been edited for clarity or brevity.
Photo credit: ©iStock.com/LaylaBird, ©iStock.com/JLco – Julia Amaral
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