Are spousal benefits always a factor?

Dear Rusty: Both my wife and I have worked our entire lives. When we retire, will we both be entitled to full benefit amount each, or will there always be a spousal factor in there? Also, how are those benefits calculated – based on your highest salaries throughout your career, or your ending salaries when you retire? Signed: Looking Ahead

Dear Looking: Prior to retiring from work is a smart time to investigate how Social Security will fit into your golden years. To answer your second question first, each person’s personal SS retirement benefit is based on the highest earning 35 years over their entire lifetime, with earlier years adjusted for inflation. The person’s Average Indexed Monthly Earnings – essentially the person’s lifetime average inflation-adjusted monthly earnings amount – is first determined. Using AIME, the person’s Primary Insurance Amount is calculated using a special benefit formula which will yield a PIA of about 40 percent or less of the person’s AIME. The PIA is the amount received if benefits start in the month full retirement age or “FRA” is attained (as you can see, Social Security likes acronyms).

Since you and your wife were both born after 1959, FRA for both of you is 67. The age when you claim benefits, relative to your FRA, determines how much you’ll get. Claim before FRA and your benefit is reduced; claim after your FRA and your SS retirement benefit will be more (up to age 70 when maximum is reached); claim at your FRA and your benefit will equal your PIA – the full (100 percent) amount you’ve earned from a lifetime of working.

Spouse benefits only come into play if the PIA for one of you is less than 50 percent of the other’s PIA. In that case, the spouse with the lower PIA gets a “spousal boost” to their own SS retirement benefit when claimed. The amount of the “spousal boost” will be the difference between the lower PIA and half of the higher PIA, but the amount of the “spousal boost” (as well as the person’s own SS retirement amount) will be reduced if benefits are claimed before full retirement age. Any time SS benefits are claimed before full retirement age, those benefits are permanently reduced.

If one spouse is entitled to a “spousal boost” from the other, the spousal amount will reach maximum at the recipient’s full retirement age. Thus, if the lower earning partner’s highest benefit will be as a spouse, then that spouse should not wait beyond their FRA to claim. If, instead, the lower earning partner’s own SS benefit at age 70 is more than their spousal amount, waiting longer than FRA to claim could be prudent, depending on life expectancy.

So, as you can see, deciding when to claim Social Security benefits should consider many things, including financial need, work status if claiming before FRA, marital status, and life expectancy. But it is your lifetime earnings which determines your SS retirement benefit amount, and it is how your FRA entitlements compare to each other that determines whether spousal benefits will be paid.