Calculating Spousal Social Security Benefit In A Unique Situation

A reader from Texas looks for clarity on how to calculate a Social Security spousal offset given their situation.

"My wife is about five years younger than me. What would be the optimal Social Security claiming strategy for us: If we start my wife's small retirement benefit (PIA $724) at 62, then have her switch to the spousal benefit at 65 when I claim my retirement benefit (PIA $3376) at 70? Or if we both start claiming when I'm 70, with my wife claiming her own and the spousal when she's 65? You have discussed 'spousal offset,' but I am not sure how it is calculated. If she claims her benefit at 62, how much will that reduce the spousal offset when she switches to it at 65? Most web calculators do not answer this question."

I appreciate that you shared numbers because it will allow me to walk you – and other readers -- through the exact mechanics of how this works with a pretty typical scenario.

You asked what the optimal scenario for you would be. That's something that I cannot identify directly because of unknown variables that would impact the best approach. The most critical variable is how long each of you will live. Lifespans that end up shorter than average – or shorter than you expected – would favor one approach, whereas longevity might favor another. The day I know your optimal approach is the day you pass away; I can then tell you how you should have done your Social Security claiming. But obviously, that's not going to be particularly helpful.

Instead, we usually guide people to use Social Security as a tool that helps solve the problem that concerns them the most, which is often their longevity risk in retirement. We tend to look at scenarios such as, "What if we live a really long time? What's the best way for us to harvest Social Security?" While that's our approach, you might see Social Security as a tool to solve something else. The point is that there isn't just one optimal approach.

You haven't shared your and your wife's Full Retirement Ages (FRAs) or your current ages, just the 5-year age difference. Most people looking into Social Security tend to be around age 64, which today would be the age of someone born in 1960. Since anyone born in 1960 or after has an FRA of 67, I will assume your FRAs are both 67 for simplicity's sake, although I'm not sure that's your case.

As you explained, you have a much more significant Social Security benefit than your wife, stated as your Primary Insurance Amount (PIA), which is the amount you would be paid as a benefit if you were to claim at your FRA. We can assume, for calculation purposes, that the $3376 is your PIA at age 67. You cite your wife's PIA as $724, presumably also available at age 67.

Let's look at your hypotheticals. What if your wife claims at 62? Well, that's five years before her FRA. The rule for one's own benefit is that if you claim earlier than your FRA, Social Security will reduce your benefit by 20% prorated over the first three years you're claiming early and then 5% for each year after that. That's how we get to the often-cited 30% reduction for someone claiming at age 62 rather than at 67. So, if your wife were to claim at 62, her PIA of $724 is reduced by 30% to $507. So that's her benefit.

Half of your $3376 retirement benefit is $1688. Since that's bigger than her benefit, it unlocks a spousal benefit for her when you claim yours. Let's pretend your wife claims her own benefit at her FRA. She would get her $724, plus what's called a spousal offset of $964, to bump her up to the total of $1688, or half of your PIA. That's the most she can collect as a spousal benefit. There's nothing she can do to increase it. But there is something she can do to decrease it: she can claim either her own benefit, the spousal benefit, or both earlier than her FRA.

So, let's walk through the scenario of your wife claiming at 62. She would collect $507 monthly until you turn on her access to the spousal benefit by claiming your own benefit. You're contemplating claiming at 70, which puts her at 65 when she hasn't yet reached her FRA. So, her spousal offset (the $964) gets reduced -- but this time, not by five years because she claimed just two years early, at 65 and not at 62.

So, two separate reductions are happening here: a 30% reduction to her benefit plus a separate reduction for two years of early claiming on the spousal benefit. The reduction factor for spousal benefits differs from one's own benefit: It's 25% instead of 20%, prorated over the first three years. So if she claims at 65 instead of 67, she's experiencing two of those three years of reduction or 16.67%. As a result, the spousal offset of $964 becomes $803.

All this while she's collecting her $507, and then she gets her $803, for a total of $1310 a month. That's what she would get forever by following that claiming strategy. (To simplify the calculation, we do not include Cost-of-Living Adjustments, or COLAs, which go on top of the chosen approach.) In today's terms, the $1310 becomes the most she'll ever receive. She'll never reach the maximum of $1688 unless she claims both benefits at FRA or later.

Some may think, "Well, I'm not claiming my spousal; I can wait. I'm only claiming my own." That's true. That's why Social Security applies separate reduction factors to each portion. It allows people the flexibility – and the fair calculation – to collect their own for a while, even though it's reduced, and later turn on the spousal.

Now, when you claim your retirement at age 70, Social Security will generally automatically turn on your wife's since she will have already claimed. If she hadn't claimed yet, when you claim at 70, she could intentionally not file at all until she reaches 67 to get the most money available.

Why would you want to consider this?

If you're concerned about generating the most income while you're both alive, getting her to wait until her FRA to claim will help accomplish that. But, when one of you passes away, her benefit will disappear. So it's not that her waiting helps both of you individually. It helps the couple only. But if you're worried about joint longevity and if generating the most income is your priority in the long haul, waiting to 67 is the way to do it – not claiming either benefit early. Remember, if she claims her own earlier than that, there's no way you'll get her back to the $1688. It will be reduced permanently, even if she waits to claim the spousal until later.

Just to complete the explanation, the reason for two separate components to the calculation is that when you file for benefits, you are deemed to be filing for your own retirement benefit first. After that, they will top you up with a spousal benefit, considering it two separate parts. It's just how they choose to account for things. It isn't two separate pools of money; the money comes from the same source. Instead, there are two separate calculations available to you. You can spend some time with only your benefit, then bolt on the spousal benefit. However, when you do that, it doesn't undo any early claiming you did for your own benefit. Early claiming here causes permanent harm.

Let's look at one more aspect. Where that 'permanent' harm doesn't last is with the survivor benefit. Survivor benefits are paid from a separate pool of money. The fact that someone claims their own benefit early, before FRA, will not undermine their ability to collect all of an unreduced survivor benefit later, as long as they collect it after their FRA.

Some people are worried about that, too. If your wife collects at 62 and you pass away later, will she have harmed her survivor benefit? No, as long as she doesn't switch that survivor benefit on until at least her FRA. That survivor benefit, which is 100% of what you collected or could have collected if you hadn't started, is available to her even though she may have claimed her own or her spousal benefit early. Survivorship acts like a reset button. Social Security takes a fresh look with new dates and claiming ages.

I know this explanation is a little long and convoluted. However, this question comes up often because of the confusion over how the components come together. Hopefully, walking you step-by-step will give you some ideas.

For example, here's the calculation in the scenario where your wife waits until age 65 (when you turn on your retirement benefit) to claim her own benefit plus the spousal benefit. When we apply the two independent reduction factors -- two years early for her own benefit and two years for the spousal offset – she will receive a total of $1430 per month. That's better than the $1310 if she claimed at 62 and then added the spousal later, but still not quite the $1688 she could get by not claiming either until 67.

Hopefully, the explanation helps you weigh your options.