The Social Security spousal benefit rule that had existed for decades allowed beneficiaries to alternate between their own benefits and those of their spouses to maximize their payments.
Unfortunately, for those turning 70 on January 1, 2024, that rule is no longer in effect. The Bipartisan Budget Act of 2015 effectively closed this opportunity for individuals born after January 1, 1954. This significant change requires married individuals to rethink their strategies for claiming Social Security benefits.
If you are in this situation, here are three critical things you should consider for your Social Security spousal benefits moving forward:
Review Benefits
The first step toward maximizing your Social Security spousal benefits is to review your estimated benefits and plan ahead. Social Security calculates benefits based on your work history and the timing of your claim. The lower earner in a couple is always entitled to the larger of their benefits or spousal benefits.
To plan effectively, married couples should create an online Social Security account to review their projected benefits at various claiming ages. Tools available through the Social Security Administration’s website can help you and your spouse evaluate different scenarios to find the optimal time to claim your benefits. As Matthew Allen, CEO of Social Security Advisors, recommends, it’s essential for couples to create a Social Security plan as soon as possible to avoid missing out on benefits.
Claim Timing
One of the most significant decisions when it comes to Social Security is when to claim your benefits. While you can start as early as age 62, doing so will result in a permanent reduction in your benefits. The full retirement age (FRA) for most people is now 67, and waiting until this age to claim benefits will allow you to receive 100% of what you are entitled to.
However, claiming at 62 results in a permanent 30% reduction. For instance, if your full retirement benefit at 67 would be $2,000 per month, claiming early at 62 would reduce that to $1,400 per month. This reduction in the primary beneficiary’s payout also affects the spousal benefit, as the spouse will receive 50% of the primary earner’s benefit. If your spouse claims benefits early, this will lock in a lower monthly payout for both of you.
Delay Considerations
While delaying benefits can increase your monthly payment, waiting until age 70 might not always be the best strategy for spousal benefits. If a spouse delays benefits, their monthly payment will increase due to delayed retirement credits. However, spouses are only eligible to receive up to 50% of the primary beneficiary’s full retirement benefit—not the enhanced benefit they would receive by waiting until 70.
This means that the spousal benefit caps out at 50% of the primary beneficiary’s FRA benefit. If your spouse’s full retirement benefit is $2,000, you could only receive a maximum of $1,000 as a spousal benefit. Whether your spouse delays their benefit until 70, your spousal benefit does not increase beyond this amount.
Tax-Friendly States
Another aspect to consider when managing Social Security benefits is the impact of state taxes. Depending on where you retire, Social Security benefits might be taxed. Moving to a state that doesn’t tax Social Security could significantly impact your retirement income. Let’s take a look at some tax-friendly states for retirees:
| State | Sales Tax Rate | Social Security Tax | Property Tax Rate | Income Tax (65+) |
|---|---|---|---|---|
| Delaware | 0% | None | 0.61% | 2.2% to 6.6% |
| New Hampshire | 0% | None | 1.93% | 4% (dividends & interest) |
| Wyoming | 5.36% | None | 0.56% | None |
Delaware, New Hampshire, and Wyoming are ideal states for retirees who want to minimize tax burdens. These states do not tax Social Security benefits and have relatively low property taxes, although Wyoming’s sales tax rate is higher than the others.
In summary, recent changes to Social Security rules have significantly impacted spousal benefits. While it may no longer be possible to maximize payments by alternating benefits, careful planning, delaying claims only when appropriate, and considering where you live for tax purposes can help optimize your retirement strategy.
FAQs
What happens if I claim benefits before full retirement age?
You’ll face a permanent reduction of up to 30%.
Can I still receive spousal benefits after the 2016 law change?
Yes, but you can’t maximize them by alternating between your and your spouse’s benefits.
Does delaying benefits until 70 boost my spousal benefit?
No, the spousal benefit caps at 50% of your spouse’s full retirement age benefit.
How can I review my Social Security benefits?
Create an online account with the Social Security Administration.
Which states are tax-friendly for retirees?
Delaware, New Hampshire, and Wyoming are great choices.
