Should my wife wait to claim spousal benefits or claim her benefit now?

I am 63 years old and still working. My wife, who is 64 1/2 years old and retired, has spent most of her working life raising our children at home. She qualifies for Social Security at a current rate of $675 and $845 if she waits until FRA. I plan to work for another two or three years. My Social Security at 65 is $2,785 and $3,295 at FRA. Should she start using her social security now and invest it, switching to spousal benefits when I retire? Or should I wait until I retire and take 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 want to file for Social Security now. However, there may be a third combo option depending on when you file that I think you should consider. I’ll explain the trade-offs 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 retirement planning or need help with another area of ​​your finances, consider contacting a financial advisor.

Early filing reduction

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As you pointed out, your wife will receive a reduced benefit if she files for Social Security before her full retirement age (FRA). This applies to both your own benefit and your spousal benefit. However, these discounts are different, so let’s start by clarifying how early filing impacts both types of benefits:

• 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

• Spousal benefits are reduced by 25/36 of 1% per month until age 36 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. Therefore, she will reach FRA at age 67. So if it is exactly 30 months from FRA:

Note that she cannot claim spousal benefits until you file for Social Security. But since her spousal benefit will be higher than her own primary benefit, she would end up transitioning later, at which point this reduction would apply. (And if you need extra help deciding when to claim Social Security or how to plan for spousal benefits, talk to a financial advisor.)

Deposit now and invest

If your wife claims benefits now and invests the money, here’s roughly what she could have when she turns 67, based on the following rates of return:

• 2% = $20,781

• 4% = $21,331

• 6% = $21,898

• 8% = $22,484

• 10% = $23,089

However, if he waits until age 67 to file for Social Security, he’ll get $845 a month — $170 more than he would if he starts now. Then again, if he starts collecting Social Security now and invests those payments, he 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 bounce rate. How much would you need in savings to generate another $170 per month?

Using the 4% rule as a guide, your wife would need $51,000 to support a monthly withdrawal of $170. Clearly, none of the ROI assumptions above 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.)

Early filing vs. waiting

However, there are still a number of scenarios where your wife may decide to file early for her benefits, including:

• Has a short life expectancy due to a medical condition or family history

• You absolutely need money now

• You already have enough guaranteed income, such as military retiree pay, pensions or annuities, and want more immediate cash flow

• You are very aggressive investors and prefer the chance of a higher return even if it means taking on more risk

Then again, waiting until FRA may be more appropriate if:

• You and your spouse are risk averse or financially conservative and prefer security

• They are expected to live at least to middle age

• You do not have an adequate guaranteed income

• You don’t need money now

Which benefit to choose?

Currently, the only benefit your wife can receive is hers. She won’t be able to claim spousal benefits until you file, which you clearly understand.

However, filing now results in a steep reduction in benefits. Unless other considerations weigh heavily on you, this may not be the best choice. So she could wait until you file and claim the full spousal benefit, which would be worth $1,647.50 (50% of your full retirement benefit).

But here comes a third combined option. Let’s present the relevant details:

• Her spousal benefit is based on 50% of your FRA benefit, regardless of when you file

• She gets 50% as long as she deposits at her own FRA

• If she files early, her spousal benefit is reduced, as explained above. The spousal benefit does not earn late filing credits, so there is no benefit for her to wait past the FRA.

• She is a few years older than you

The third option is for your wife to file for her own benefit once she reaches FRA and then switch to the spousal benefit after you file. If he does so, no discount will apply.

However, when you file is another point of discussion. Make it clear that you plan to file when you retire in a few years. You may want to consider the benefit of waiting until age 70 to take advantage of delayed retirement credits. This will likely maximize Social Security benefits for both of you, making it an option I would strongly consider.

(And if you have additional questions related to Social Security and retirement income planning, contact a financial advisor and see how I can help you.)

Conclusion

Depositing early to invest your money is not likely to provide the same level of income as waiting to maximize your Social Security benefits and is riskier. If financial security in retirement is your goal, I would seriously consider claiming your wife at FRA and delaying your benefit.

Social Security Planning Tips

• Up to 85% of your Social Security benefits may be taxable, depending on your total income. 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 of your Social Security benefits.

• A financial advisor with expertise in retirement planning can help you plan your Social Security benefits and integrate them with your other sources of income. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool matches you with up to three verified financial advisors serving your area, and you can have a free introductory call with your matched advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help reach your financial goals, get started now.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with prospects and offers marketing automation solutions so you can spend more time converting. Learn more about SmartAsset AMP.

Brandon Renfro, CFP®, is SmartAsset’s financial planning columnist and answers readers’ questions about personal finance and tax topics. Have a question you’d like answered? Email [email protected] and your question may be answered in a future column.

Please note that Brandon is not an employee of SmartAsset and is not a SmartAsset AMP participant. He was compensated for this article. Some questions submitted by readers are edited for clarity or brevity.

Photo credit: ©iStock.com/LaylaBird, ©iStock.com/JLco – Julia Amaral

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