How Marital Status Affects Retirement Benefits

US News

Married couples are eligible for a variety of retirement benefits that single people are not. A recent Government Accountability Office report examined how declining marriage rates affect how prepared couples and singles are for retirement. Here's a look at how your marital status affects the retirement benefits you are eligible for:

Social Security. Married individuals have Social Security claiming options that single people don't, and they can use various strategies to maximize their benefit as a couple. Spouses are eligible to receive Social Security payments worth as much as 50 percent of the retired worker's benefit (if it's more than they would get based on their own work record), and surviving spouses are entitled to up to 100 percent of the higher earner's benefit. Married individuals can also claim spousal payments and benefits based on their own work record at different times in their lives. For example, a wife claiming Social Security payments based on her own work record might switch to survivor's payments based on her husband's work record when he passes away if his payment is higher than the one she is getting. "Couples have an advantage in that they can play the game a little bit and try some strategies," says Samantha Macchia, a certified financial planner for Summit Financial Strategies in Columbus, Ohio. "The widow's benefit is going to be based on whatever his final benefit is, so by waiting until age 70, if something does happen to him, she will get that higher benefit." Divorced spouses can get these payments too if the marriage lasted at least 10 years. In contrast, single people or divorced individuals whose marriage did not last a decade can only claim benefits based on their own work record.

[See: 12 Ways to Increase Your Social Security Payments.]

However, fewer people are collecting spousal payments because women are increasingly earning enough to get higher Social Security payments than they could claim as a spouse. The proportion of women over age 62 claiming spousal payments declined from 62 percent in 1960 to 9 percent in 2011. However, the proportion of women over 62 receiving survivor's benefits based exclusively on their spouse's work record declined more slowly, from 23 to 16 percent over the same period. "In addition to the effect of rising labor-force participation, the decline in women's receipt of spousal benefits is partly due to the decline in marriage," according to the GAO report. "Specifically, the proportion of women who are not eligible to receive Social Security spousal benefits because they were either never married, or divorced after less than 10 years of marriage -- the length of time required for eligibility for Social Security divorced spouse benefits -- has increased over the last two decades." Less than 1 percent of men received Social Security spousal benefits in 2012.

Traditional pension. Traditional pensions generally provide a steady stream of payments over the lifetime of the retiree and are also required to provide payments to a surviving spouse. However, more than a third of married households with pensions opted not to receive a spousal survivor benefit, often to get higher monthly payments, the GAO found. A worker who wishes to opt out of the spousal coverage needs written consent from the spouse. Some pension plans also give workers the option to take lump-sum cash payments instead of lifetime payments, which allows them greater freedom to spend or invest the money, but also results in the loss of the security of guaranteed monthly payments in old age.

401(k)s. Dual-earner couples who both have 401(k)s at work can defer income tax on twice as much cash as single people. Couples who are only able to save a limited amount can decide whose 401(k) has the better employer contributions and focus their savings efforts there. But getting matches from both employers is even better. Between 1992 and 2010, married women's contributions to retirement accounts increased from 20 percent to 38 percent, on average, according to a GAO analysis of Federal Reserve data. And among dual-earner households ages 55 to 64 with 401(k)s or similar types of accounts, wives contributed an average of 44 percent of the household's deposits in retirement accounts.

[See: 10 Trendy 401(k) Plan Perks.]

Spouses are generally the default beneficiary of a 401(k) account balance upon the death of the account owner, and spouses typically need to sign off on any alternative beneficiary. "Spouses have rights to pension plans and 401(k) plans," says Jeffrey Massey, a certified financial planner for Massey & Associates in Lincoln, R.I. "With an IRA account, the wife does not become the default primary beneficiary, and you can declare anyone as your primary beneficiary without her having to waive her rights." However, spouses have no protection against inappropriate investments, the account balance being spent too quickly or the money being withdrawn during a job change or rolled into an IRA, which does not require the spouse to be the beneficiary. "In a worst-case scenario, the spouse who participates in the defined contribution plan could withdraw all the assets and spend them in ways that do not provide for the couple's retirement security," according to the GAO report. "While the increases in dual-earner couples and women's coverage under defined contribution plans have the potential to mitigate these concerns by providing alternative sources of retirement income, spouses with lower or no earnings may remain vulnerable."

IRAs. Married couples have different income limits than individuals when it comes to their ability to make tax-deductible IRA contributions if they also have retirement accounts at work. The tax deduction for traditional IRA contributions is phased out for married couples with a modified adjusted gross income between $96,000 and $116,000, compared to between $60,000 and $70,000 for individuals. An investor who doesn't have a workplace retirement account but is married to someone who does can claim the tax deduction until the couple's income is between $181,000 and $191,000 in 2014. The AGI phaseout range for Roth IRAs is $181,000 to $191,000 for married couples and $114,000 to $129,000 for singles.

[See: What Everyone Should Know About IRAs.]

Spouses who inherit an IRA are able to treat it as their own and roll it into their own retirement account, an option other beneficiaries don't have. "If it's your spouse, you have a choice of either rolling it over as your own IRA or keeping it as a separate IRA and taking required minimum distributions based upon when your deceased spouse would have turned 70 1/2," says Bernie Strout, a certified financial planner for Gitterman & Associates Wealth Management in Iselin, N.J. Putting the money in their own account allows spouses to continue to defer taxes on it until they withdraw the money. However, IRA account owners are not required to name their spouse the beneficiary of the account and are free to make withdrawals from the account without spousal consent.



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