Entering The Widow Gap

Claiming Social Security At 62

A dual dilemma for dependent wives

by Marcia Mantell, RMA®

Ms. Mantell is the founder and president of Mantell Retirement Consulting, Inc., a retirement business development, marketing & communications, and education company supporting the financial services industry, advisors, and their clients.  She’s the author of “What’s the Deal with Retirement Planning for Women,” “What’s the Deal with Social Security for Women,” “Cookin’ Up Your Retirement Plan,” and blogs at BoomerRetirementBriefs.com.

In an interesting conversation with a high earner husband, he questioned why he should wait to claim Social Security until his Full Retirement Age (FRA) or later. He just turned 60 and was taking an early retirement package from his employer. His plan was to claim Social Security at 62 when his exit package ran out. He wanted additional income from Social Security to start right away. After all, he had earned it.

When pressed about the impact his early claim would have on his wife, he seemed miffed. Why did he need to think about his wife when this was his benefit? What was so special about how and when he decided to claim Social Security?

Husbands Can Be Genuinely Confused About Spousal Benefits

This case illustrates how many married couples have no idea how one spouse’s Social Security claim will have a direct impact on the other spouse. Especially when a dependent spouse is involved. He was genuinely confused why he might need to think differently about his Social Security benefit.

As a young retiree, he was focused on investment portfolio sustainability. Social Security was not part of that analysis, and he was now trying to figure out the ropes.

In honor of Women’s History Month this March and International Women’s Day on March 8th, let’s unpack the Social Security situation for dependent wives and cover:

  • How spousal benefits work.
  • His claiming decision is a 40-year financial decision.
  • Why setting up a widow gap can be detrimental.

How Spousal Benefits Work

Like all Social Security  benefits, spousal benefits are calculated. Only dependent spouses get these benefits: a spouse whose Primary Insurance Amount (PIA) is $0 or less than half of the other spouse’s PIA. An independent spouse is one whose own PIA is greater than 50% of the other’s PIA.

Using traditional “husband” and “wife” labels to follow along with this case, a dependent wife is entitled to half of her husband’s PIA when she reaches her own FRA.

If she has earned 40 credits, she will receive her own benefit. But if her benefit is less than 50% of his, she’ll also receive a “spousal top up” so her maximum benefit equals half of her husband’s PIA.

Example:

  • His PIA = $3,200 per month. Her own PIA = $1,000 per month.
  • Her calculated spousal benefit = $1,600.
  • At her FRA, she receives her own $1,000 plus a $600 spousal top-up. Her maximum benefit is half of his PIA.

If the higher earning husband claims before or after his FRA, the spousal benefit is still calculated on his PIA. However, if she claims before her FRA, both her own benefit and the spousal top up will be reduced—by as much as 35%.

Spousal benefits on the dependent spouse bring important income into a retiree’s household. They add to the guaranteed income stream and prevent spending more from the portfolio than necessary, likely prolonging it’s value.

The Importance Of A Husband’s Claim

The higher-earner’s claiming decision carries disproportionate weight for the couple. As many financial advisors know and advise, the higher earner should generally consider waiting until 70 before claiming. Particularly if they are still working and do not need to tap their portfolio.

Claiming at 62 puts into motion a dual dilemma, especially when there is a dependent spouse:

  • Claiming at 62 results in the lowest monthly benefits while both spouses are alive. Less from Social Security means drawing more from the portfolio.
  • Claiming at 62 leaves the survivor with much lower guaranteed monthly income than they could have had. This creates a widow gap.
The widow gap is created when the higher-earning husband claims much earlier than ideal. The focus when someone claims at 62 is on the near-term. But the long-term is the more important factor...

The widow gap is created when the higher-earning husband claims much earlier than ideal. The focus when someone claims at 62 is on the near-term. But the long-term is the more important factor.

Waiting for the maximum payment at 70 yields a much higher monthly income than claiming at 62—about 118% more monthly income when including cost-of-living adjustments plus delayed retirement credits.

His Claiming Decision Is A 40-Year Financial Decision

Longevity is at the heart of making the best Social Security claiming decisions. In today’s world of modern medicine, longevity is the key risk all women need to plan for. It’s the odds of living well beyond life expectancy.

Most dependent, married women who are healthy at 65 should plan to live to their late 90s. In this case, because the dependent wife is four years younger than her husband, they need to plan for her 40-year retirement.

As the higher earner, he controls the claim. His claim locks in and lays the financial foundation for her income in her oldest years.

Example:

  • The incremental monthly income by waiting until age 70 versus claiming at 62 is approximately $2,300.
  • In the first year, that’s an additional $28,000 from Social Security.
  • If the annual COLA is 2.6% (the long-term average since 1990), ten years later, incremental Social Security income is now $35,000.
  • At year 20, additional income from his higher Social Security claim is over $45,000.

And, she still has a planning horizon of 20 years!

All in, waiting until 70 to claim instead of 62 could result in almost $2 million more from Social Security over 40 years just on his benefit.

Setting Up A Widow Gap Can Be Detrimental

As she is four years younger, the odds of her outliving him are even higher. She could be on her own for many years as the surviving spouse. She loses her own, lower benefit, but steps into his shoes to receive the monthly payment he had been receiving. The higher the amount he was receiving, the more income she would have to support herself.

If he ultimately decides to claim at 62, he’s locked his surviving wife into the least amount of monthly income possible from Social Security. Most clients are disappointed benefits aren’t as high as they thought they would be. Inflicting a permanent penalty is not an ideal strategy.

The difference in monthly income can be substantial. She could have been receiving $4,200 per month before COLAs. But instead, if he claimed at 62, she’s stuck with only $1,970. Her own benefit stops at his death, further reducing household income. This is the “widow gap.”

The Goal: More Monthly Income for Oldest Years

Foregoing an extra $2,300 per month throughout retirement is a significant financial decision. Regardless of how good investment returns are on the portfolio, the consequence of higher pressure on the portfolio drives up withdrawal rates.

While both are alive, they will likely spend a larger share of personal assets. Especially concerning is if he gets sick or needs additional care in his last years. The portfolio will take an additional hit for his care.

At the point she becomes the surviving spouse, more monthly Social Security income and a larger portfolio are better. The couple needs to plan that she may need to spend significantly more for health-related care and assisted living when she’s living alone. The best plans account for the realities of aging without depending on family, friends, or state services.

In her oldest age, a dependent wife will have significantly less rather than significantly more if her husband claimed at 62. That cuts off options for comfort and care that she may need. And likely reduces the legacy they both hoped to leave behind.

But What If He Becomes the Surviving Spouse?

When considering longevity, actuarily women live longer than men. Younger spouses as in this case, tend to outlive the older spouse. But that is not always the case. In the conversation with the higher-earner husband, he wanted to know what happens if he is the survivor? Wouldn’t he lose out on her spousal benefit coming into the household?

Yes, he would. But then, if he claimed at 70, he would have secured for himself the same protection and benefits for his oldest years. Less would have come out of the portfolio to cover living expenses while they were both alive, and he would be set up in a more comfortable financial situation for his old age.

In the end, when there is a dependent spouse to cover, claiming at 62 is almost always financially harmful. Planning for a secure retirement means having more income and more assets available for the spouse who will be on her own late in life and wishes to remain independent.