Advanced Social Security Strategies for Couples

Social Security benefits are a key source of retirement income. While many people approaching retirement say they don’t plan to rely on Social Security, a majority of those already retired say it is an important percentage of their income.

Too many people leave money on the table by not maximizing their Social Security retirement benefits. You have options for taking the benefits, and the choices you make can add up to tens of thousands of dollars over your lifetime. Your choices also dramatically affect the benefits available to your spouse and any minor children.

Married couples have the most options and can take actions that dramatically increase lifetime cash flow from Social Security. These strategies are a little tricky, and I receive a lot of questions from readers about the details. Let’s review the key strategies and some important points about them.

There are two important strategies available to married couples who are eligible for Social Security retirement benefits. They’re known as file-and-suspend and filing a restricted claim.

To understand these strategies, you have to understand that each married spouse has two potential sources of benefits. You can receive your own earned benefits that are based on your earnings history. Or you can receive 50% of the full retirement age benefits your spouse earned. You don’t receive both. Generally you receive the higher of the two, but sometimes you can change that and might benefit from that change.

Here’s an important point. You can receive spousal benefits only when your spouse has already filed to receive his or her earned retirement benefits.

Let’s say we have a traditional couple, Max and Rosie Profits, in which the wife has much lower lifetime earnings than the husband. The spouses are the same age and recently reached 66, the full retirement age for them. Max plans to continue working and in any event wants to delay receiving his retirement benefits until they are maximized at age 70. But they want some money coming in for Rosie without her having to work. Since her earned retirement benefits are low, they don’t see much advantage to her filing to claim benefits on her own earnings record.

File-and-suspend is a good strategy for them. Max files to receive his own retirement benefits, and then immediately files to suspend them. By suspending his benefits, Max continues to earn credits for delaying receipt of his benefits and will receive the higher payout when he rescinds the suspension at age 70. In the meantime, Rosie can file to receive the higher of her own benefits and 50% of Max’s earned benefits.

Now, let’s change the facts. Assume that Max and Rosie Profits both had careers and each have healthy earnings histories. Let’s say that again Max has higher lifetime earnings and wants to continue working or at least delay his benefits until their maximum level at age 70. Rosie’s ready to collect some retirement benefits.

In this case, Rosie files for her own retirement benefits. Under our scenario, Rosie’s earned benefits are likely to be higher than the alternative of half of Max’s benefits. So it doesn’t matter to her if Max has filed for benefits. Once Rosie begins to receive her retirement benefits, Max can file what’s known as a restricted claim for spousal benefits only. He tells Social Security that he doesn’t want to receive his own benefits at this point but wants to receive half of Rosie’s earned benefit.

The result is both spouses now are receiving some cash flow from Social Security. Max’s earned benefit continues to accrue, because he isn’t receiving it yet. He can wait until age 70 and receive the highest possible benefit at that time.

One question that frequently arises is whether both spouses can do the restricted claim in the last example, allowing their separate earned benefits to accrue to the maximum at age 70. The answer is no. For a spouse to file a restricted claim for spousal benefits, the other spouse must have filed for his or her own benefits. So, at least one spouse must have filed for his or her own retirement benefits for the other to be able to file a restricted claim. (In fact, you can’t receive spousal benefits, whether under a restricted claim or seeking the higher or her own benefit and the spousal benefit, until the other spouse has filed for benefits. That’s why in the first scenario, Max filed for and then suspended his benefits.)

The next question is why don’t both spouses file for their own benefits, suspend them, and then file restricted claims for spousal benefits. The answer simply is that Social Security rules don’t allow that. You can’t file for your own benefits, suspend them, and then at the same time file for spousal benefits only.

That’s why in the first scenario Max had to file and suspend his benefits for Rosie to receive a spousal benefit. If Max hadn’t done that, Rosie would receive only her earned benefit at that point. Later, after Max filed to receive his own benefits, Rosie could switch to the higher of her benefit or 50% of Max’s benefit.

Here’s a third strategy to consider that also can be effective for two-earner couples when the lower-earning spouse’s earned benefit is greater than 50% of the other spouse’s benefit.

Under this scenario Max does a file-and-suspend at 66, filing to receive his own benefits and then immediately suspending his benefits. Rosie then files a restricted claim, receiving only 50% of Max’s benefit. Max does nothing else.

The first effect is that Rosie is receiving a reduced benefit, and Max isn’t receiving anything until age 70. But each spouse’s earned benefit is rising, because they are delaying the benefits. At age 70, each spouse receives the maximum benefit. Max rescinds his suspension and begins his earned retirement benefits. Rosie then applies for the higher of her own earned benefit and 50% of the spousal benefit. The downside to this strategy is only Rosie is receiving benefits at first. Max receives no cash flow from Social Security until 70.

Remember the normal retirement age for people retiring now is 66. You can receive either your own benefit or a spousal benefit beginning at 62, but if you start either before age 66 the benefit is reduced and that reduction carries through for the rest of your life. The exception is if you begin receiving only a spousal benefit under a restricted claim. That benefit still will be reduced if you began it before age 66, but the reduction won’t carry through when you later switch to your own earned benefit.

Here’s a little trick you might not realize. Suppose one spouse begins receive his or her own benefits at 62. The other waits until turning 66 and files a restricted claim for spousal benefits. While the first spouse will receive a reduced benefit for beginning benefits before age 66, the second spouse won’t. The spousal benefit will be 50% of the normal retirement benefits (known to Social Security as the primary insurance amount) that the first spouse would have received by waiting to 66. So, in fact, the second spouse will receive something like 64% of what the first spouse began receiving at 62.

There are times when it makes sense for a spouse to claim benefits before age 66, especially when there are age differences between the spouses. For example, the Center for Retirement Research has said that it can make sense for a lower-earning spouse to begin receiving a spousal benefit under the first strategy or even her own earned benefit at age 62 while the higher-earning spouse waits until age 70 to receive his benefits.

The best strategy depends on the relative ages and earnings histories of the spouses. There are tools available on the Web to help. Of course, use the calculator at the Social Security web site. T. Rowe Price and AARP also have free calculators, each with its limits and advantages.

More robust calculators are available for small fees at MaximizeMySocialSecurity.com, SocialSecuritySolutions.com, and SocialSecur-ityChoices.com. (Ignore the hyphen.)

You also might want to work with a financial planner who has developed an expertise in this area and uses these are more robust professional calculators. Because the difference can be tens of thousands of dollars in lifetime, inflation-adjusted benefits, it can be worth the effort and resources.

RW October 2013.