Over the years, from time to time I wrote about maximizing Social Security retirement benefits. Those pieces didn’t receive much of a reaction. More recently, Social Security strategies draw a lot of attention, presumably because of the large number of people now at or approaching traditional retirement age.
There are recurring questions and issues that arise when discussing Social Security strategies. Those who’ve read my articles over the years know that married couples have the most options but that the options can be confusing. You can find the advice in the articles on the Cash Watch section of the Archive on the members’ web site, and in my report, Secrets to Boosting Social Security Benefits, available through the Bob’s Library tab on the web site.
I’ve found that a few rules and principles are the sources of most of the confusion. Let’s isolate them, and then show how they can work together. Here are the key facts you need to know.
? For one spouse to receive a spousal benefit the other spouse, the one on whose earnings record the spousal benefit is based, either must be receiving retirement benefits or have claimed and suspended benefits. A spouse is allowed the higher of either his or her own earned benefits or 50% of the other spouse’s normal retirement benefit. Alternatively, a married person who wants to delay his or her earned benefits until they are higher can generate some income by claiming only spousal benefits for now.
To achieve either of these results, the other spouse must either begin receiving his or her own benefits or file to claim them and then suspend payment of them.
? Only one spouse at a time in a couple can receive a spousal benefit.
The key here is that both spouses can’t claim and suspend their own benefits and then each claim only spousal benefits. Social Security’s rules also are clear that only one spouse can file for and suspend benefits. In addition, if both spouses are full retirement age or older, only one spouse can elect to receive only spousal benefits while delaying his or her own earned benefit.
? Related to that, benefits can be claimed and then suspended only by someone who is full retirement age or older (66 for most of those contemplating these strategies today). Benefits can be claimed as early as 62 but can’t suspended before full retirement age.
Also, filing a restricted claim for only spousal benefits is available only to someone who is full retirement age or older. Someone who applies to start benefits before full retirement age automatically will be paid the higher of his or her earned benefits and half the other spouse’s full retirement age benefits. In addition, the benefits will be reduced for starting before full retirement age.
? Here’s a little kicker. Suppose you applied for benefits early, when your spouse hadn’t reached full retirement age or filed for benefits. After both you and your spouse reach full retirement age and your spouse files to claim benefits, you can decide to suspend your benefits and file to claim for only a spousal benefit. You won’t receive 50% of your spouse’s benefit because you started your benefits early. Your spousal benefit will be reduced. But your own benefits will receive delayed credits for the time they’re suspended.
? Some benefits aren’t increased by delaying them past full retirement age. Spousal benefits and widow/widower benefits don’t receive delayed retirement credits, so there’s no advantage to delaying them beyond full retirement age.
? Delaying or claiming and suspending benefits can affect Medicare. Most of us need to sign up for Medicare at age 65 to avoid paying higher premiums for life (see our September 2013 visit). Those receiving Social Security at age 65 automatically are enrolled in Medicare Part B, and Medicare premiums are automatically deducted from Social Security benefits unless you choose otherwise. If you’re 65 and suspended or haven’t claimed your Social Security benefits, then you have to arrange to pay Medicare Part B premiums directly.
Also, increases in Medicare Part B premiums have a ceiling when premiums are deducted from Social Security retirement benefits. The Part B premiums can’t increase more than the retirement benefits. (This cap applies only to the standard Medicare premium, not to the surtax imposed on higher income beneficiaries.) But if you pay the Part B premiums separately, there’s no cap on the premium increases. That lack of a cap increases your Medicare premiums for life. Because once you start receiving retirement benefits, future premium increases will be capped going forward but don’t erase past increases.
? After one spouse dies, the surviving spouse receives the higher or his or her earned benefit and the benefit the other spouse was receiving. The lower payment received by the couple, whichever it was, will end.
Let’s look at an example of how Max and Rosie Profits can use these rules. They’re both age 66, and Max was the higher-earning spouse. Max files for retirement benefits and immediately files to suspend them. Rosie then files a restricted claim for spousal benefits only, so she begins receiving half of Max’s full retirement age benefit.
They continue this way until age 70. Then, Max lifts the suspension on his benefits and begins receiving his maximum benefit. Rosie also switches from spousal benefits to her full benefit, which is the higher of her earned benefit and half of Max’s benefit. The result is beginning at age 70 each is receiving 132% of his or her full retirement age benefit. This strategy also locks in the maximum survivor benefit for whichever spouse survives.
The cost of this is Max delayed all the benefits he could have received beginning at age 66, and Rosie probably was receiving less than her maximum potential benefit from 66 through 70. They have to live long enough for the higher benefits at age 70 to make up for the years they delayed benefits.
This is only an example. The strategy might not be the best for you. In some cases it makes sense for the lower-earning spouse to claim benefits as early as age 62. The best strategy for a couple depends on the relative ages of the spouses and their relative lifetime earnings. Fortunately, you don’t have to make these decisions alone.
The Center for Retirement Research at Boston University issues periodic studies and reports on Social Security strategies and makes them available free on its web site at www.crr.bc.edu.
There also are calculators available on the Web. Of course, use the calculator at the Social Security web site. T. Rowe Price and AARP also have free calculators, each with limits and advantages. More robust calculators are available for small fees at MaximizeMySocialSecur-ity.com, SocialSecuritySolutions.com, and SocialSecurity-Choices.com. (Ignore the hyphens.)
You also might want to work with a financial planner who has developed an expertise in this area and uses these or 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 to search for the optimum strategy.
RW April 2014.