My recent blog about coordinating Social Security benefits when one spouse is four years older than the other triggered some additional questions.
James Wood, a professor at the University of Louisiana-Monroe, posed two excellent questions, so I thought I would share my responses with other InvestmentNews readers.
He cited a recent blog post in which I wrote: "The wife could claim her reduced retirement benefits at 62, assuming she wasn't working or not earning too much beyond the earnings cap, and the husband, 66, could file a restricted claim for spousal benefits on his wife's earnings record."
My example assumed the wife's primary insurance amount at her full retirement age of 66 is $800 per month. The husband's PIA is $2,000.
In that online column, I wrote: "Although her benefits would be reduced to 75% of her full retirement age benefit ($600) because she claimed four years early, her husband would receive half of her full-retirement-age benefits ($800 x 50% = $400) and defer collecting his own benefit until 70."
Mr. Wood asked for some clarifications.
"When the wife draws early, is she penalized 25% forever even when she changes to half of her husband's benefit?" he asked in an e-mail.
Mr. Wood also asked: "Is she also penalized 25% after the husband dies and changes to her husband's benefit as a survivor?"
Both are great questions. Let's take them one at a time.
Yes, if the wife collects her retirement benefits early at 62, her retirement benefits will be permanently reduced. In the scenario that I outlined above, she would collect her own reduced retirement benefits until the husband claimed his benefits at 70.
At that point, she could step up to a larger spousal benefit if it was higher than her own, but her total retirement benefit would be worth less than half of the husband's PIA.
Remember, spousal benefits are based on 50% of the higher earner's full retirement age benefit if collected at full retirement age — less if collected earlier. But spouses aren't entitled to half the higher benefit he would collect at 70.
When he starts collecting benefits at 70, his benefit would include four years' worth of delayed retirement credits. So he will receive about $2,640 per month plus intervening annual cost-of-living adjustments.
Once he claims, it would trigger spousal benefits for his wife.
The math works like this: Subtract her PIA ($800) from half his PIA ($1,000) to determine the spousal differential ($200). Then add that amount to her reduced retirement benefit: $600 + $200 = $800.
That would be her new benefit amount, once he begins collecting.
Now to Mr. Wood's second question.
Although the wife's retirement benefits are reduced permanently because she claimed early, her survivor benefits won't be reduced as long as she is at least full retirement age at the time she begins collecting them. Remember: Retirement benefits and survivor benefits represent two different pots of money.
Let's say the husband dies at 72 when she is 68. She would step up to his full benefit — including the delayed retirement credits — as a survivor benefit, but her own retirement benefit would disappear at that point.
Mr. Wood was thankful for my clarification and noted that my regular use of hypothetical examples in my articles is a boon to understanding Social Security's often-perplexing rules.
And it isn't just a matter of academic discussion, he said.
It is personal.
"I am 64, and my wife is 60, and your work has helped me decide to wait until 70 to draw my benefit," Mr. Wood wrote. "My wife will draw hers at 62, and I will draw half of her PIA at the same time."
It is an excellent Social Security-claiming strategy and sounds like the professor learned a valuable lesson.