Social Security calculates how much you and your spouse can receive in retirement benefits using a complex calculation that considers the number of years each of you worked, your historical inflation-adjusted earnings over your career, and the age at which the two of you begin collecting benefits. Every couple's specific Social Security benefit will be different. However, it may be helpful for retirement planning to know that the average retired couple is collecting $2,340 per month in 2018, according to the Social Security Administration.
Here's what you should know about Social Security's benefit calculation, spousal benefits, and how you and your spouse can collect as much in benefits in retirement as possible.
How Social Security works
Unlike traditional retirement savings accounts, including 401(k) plans and IRAs, contributions to Social Security in the form of payroll taxes on your income aren't set aside for your use in the future. Instead, you and your spouse's payroll taxes are used to pay benefits to existing retirees.
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Currently, workers and their employer (or if self-employed, you entirely) pay a 12.4% payroll tax on your income up to a specific amount that changes every year based on inflation. In 2018, payroll taxes apply to earnings of up to $128,400.
A financial safety net, Social Security is designed to replace about 40% of the average retiree's pre-retirement income. However, because of how Social Security is calculated, it will replace a higher proportion of a lower wage earner's pre-retirement income than it will a higher wage earner's pre-retirement income.
How much do married couples get?
As I mentioned, the payroll taxes you and your spouse pay every year aren't invested in an account for the two of you. Instead, your future benefits are determined by a formula based on you and your spouse's work history.
Specifically, the Social Security Administration adjusts your historical earnings for inflation, and then it calculates your average monthly income over your 35 highest-income earning years. Then, it adjusts your average monthly indexed earnings lower using "bend points." This calculation is done separately for you and your spouse to determine how much each of you is entitled to individually at full retirement age.
Full retirement age varies between age 66 to 67 for people born after 1954. For instance, if you were born in or after 1960, your full retirement age is age 67. If you retire earlier than full retirement age, then the amount you and your spouse can collect in benefits is lowered. Alternatively, if you claim benefits later than full retirement age, then your benefits can increase up to age 70, except in the case of spousal benefits.
Spousal benefits apply in situations where a spouse's own work record results in a benefit that's smaller than one-half of the other spouse's full retirement age benefit. For example, if one spouse didn't work or they earned substantially less on average per month than the other spouse, then they could qualify for spousal benefits.
Let's say one spouse has a full retirement age benefit of $2,000 and the other spouse has a full retirement age benefit of $0. In this scenario, the spouse with a $0 benefit would be entitled to up to $1,000 monthly in spousal benefits.
Now, let's assume one spouse's benefit is $2,000 and the other spouse's benefit is $750. In that scenario, the spouse with the lower benefit amount would collect $750 per month on their own record, plus $250 per month in spousal benefits, for a grand total of $1,000 in benefits at full retirement age.
On average, after considering the puts and takes that go into determining how much people can receive in benefits, the typical couple is collecting a combined $2,340 per month, or $28,080 per year, in 2018, which is up 2% from 2017.
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Details you ought to know
The average amount married couples are receiving in Social Security benefits in 2018 is a pre-tax figure. If you work and collect benefits, you could pay taxes on up to 85% of your benefits, depending on your income. If you're younger than full retirement age, continuing to work could also cause you to fail Social Security's earnings test, resulting in Social Security holding back some of your benefits until you reach your full retirement age.
If you claim at age 62, then your benefits will be up to 30% lower than they'd be at full retirement age, depending on your birth year and the exact number of months you claim early. The reduction applies even if you're a spouse who qualifies for spousal benefits. For example, a spouse born in 1960 who claims benefits two years before reaching full retirement age can only receive 41.67% of their higher-earning spouse's full retirement benefit, unless they're caring for a qualifying child. For convenience, you can use this Social Security calculator to see how claiming at different ages might impact your spousal benefits.
It's also important to know that if your birthday is on or after Jan. 2, 1954, you can't receive only one benefit. In the past, the higher earner could file at full retirement age and then suspend benefits, effectively allowing their benefit to grow while their spouse collects spousal benefits. That's no longer allowed. If you claim, both of you will have to receive your benefits.
Additionally, if you qualify for spousal benefits and you're considering delaying when you claim Social Security to get the biggest benefit, you should know that delayed retirement credits awarded to those who hold off will only increase the benefit to the higher-earning spouse because spousal benefits can't exceed 50% of the other spouse's full retirement age amount. Nevertheless, delaying can still provide you and your spouse with the biggest payment possible.
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