Tricks and Traps in Social Security Benefits

People continue to miss significant opportunities to maximize their Social Security retirement benefits. The problem is especially acute among married couples who don’t consider the long-term effects or don’t know the interaction between personal retirement benefits, spousal benefits, and survivor benefits. It’s a once-in-a-lifetime decision, but the benefits or drawbacks of the decision will last your lifetime and beyond.

For a single person, delaying SS benefits generally is a winner. Your benefits increase by 8% for each year you delay through age 70. These days, it’s tough to find a return like that elsewhere. Plus, SS benefits are indexed for inflation and lifetime guaranteed.

Married couples have more options and considerations. It’s worth the time to consider the choices and make the best one. You’ll accrue the benefits every month for the rest of your life, and even beyond when your spouse survives you.

A spouse can receive retirement benefits based on either his or her own working record or 50% of the normal benefits earned by the other spouse, whichever is higher. The latter are known as spousal benefits. But the benefits will be reduced if this spouse claims benefits before normal retirement age (age 66 for people retiring today). In addition, you can claim spousal benefits only if your spouse already has filed for his or her retirement benefits.

Survivor benefits are 100% of what the deceased spouse was receiving at his or her death. An advantage of survivor benefits is that they aren’t reduced when the surviving spouse began receiving retirement benefits before his or her normal retirement age. So a spouse can begin benefits at age 62 without affecting survivor benefits. (A surviving spouse receives the higher of his or her earned benefits or the survivors’ benefits, but not both.)

Those are the basic rules. Let’s look at some nuances and strategies you should consider to maximize the family benefits. To keep it simple, I’ll assume the wife’s earned benefit is less than the husband’s and that they’re both the same age.

Collect now, collect more later. Let’s say the wife begins receiving her retirement benefits at age 62. She would have been entitled to $1,600 per month at age 66 but receives 25% less, or $1,200 monthly, at age 62. The husband plans to wait until age 70 to begin receiving his benefits to maximize the benefits and also maximize his wife’s survivor benefits.

The husband has another option. After reaching full retirement age (age 66 for people retiring now) he can file a restricted claim. That is, he files only to claim the spousal benefits of 50% of his wife’s benefit. He would receive half of what his wife would have received at her full retirement age. That’s $800 (half of $1,600) per month.

Then, at age 70 he can file to claim his own retirement benefits. He won’t be treated as having filed for retirement benefits early and will receive the full bonus for waiting until age 70.

Claim and suspend. Remember a spouse qualifies to receive the spousal benefit of half the other spouse’s earned benefits only if the other spouse already has filed to receive retirement benefits. In this case, the husband wants to wait until age 70 to begin his benefits, but there’s a way he can receive the advantage of waiting until age 70 and still allow his wife to claim a spousal benefit of 50% of his earned benefit. He can claim and suspend. That means at age 66 or later he can file for his SS retirement benefits, and then he can immediately file to suspend his payments. His wife still can receive her spousal benefit based on his earned benefits. When he reaches age 70, he ends the suspension and begins receiving benefits based on his current age.

There are special rules for those many of those receiving federal and state pensions, but for most people these are the rules and strategies.

I think most people should have a couple of goals for their SS benefits. When you’re married, a major goal should be to maximize the survivor benefits available to the lower-earning spouse. Survivor benefits are a form of life insurance that pays an inflation-adjusted annuity. That means the higher-earning spouse should delay beginning benefits until age 70.

Another goal should be to maximize lifetime cash flow. For unmarried people, that means delaying the receipt of SS benefits as long as possible, preferably to age 70. Even if that means spending from your nest egg first, it’s usually a good idea. That’s because each year you wait to begin SS benefits increases the benefits by 8%, and those benefits are indexed for inflation and guaranteed for life.

For married couples, the higher-earning spouse can maximize his lifetime benefits and his spouse’s survivor benefits by delaying retirement benefits until age 70. At the same time he can increase the family’s cash flow by either filing to receive a spousal benefit based on his wife’s earned benefits or claiming and suspending his benefits so his wife can receive 50% of his earned benefit.

Divorced persons have some special considerations. You can receive retirement benefits based on your ex-spouse’s earnings record when the two of you were married for at least 10 years; you’re at least 62 years old and unmarried; and is entitled to a benefit based on your own record but those benefits would be less than those as a divorced spouse. When you have been divorced at least two years, you can apply for divorced spouse benefits even when the other ex-spouse hasn’t applied for retirement benefits. The receipt of benefits by a divorced spouse doesn’t affect the amounts paid to the other spouse and any current spouse. So, three people can receive benefits at the same time based on one earnings record. A divorced spouse’s benefit is 50% of the other spouse’s full retirement benefit if the divorced spouse doesn’t apply for benefits until reaching his or her full retirement age.

When your former spouse passes away, you might be eligible for divorced spouse survivor benefits.

You can find more details about these and other aspects of Social Security retirement benefits in my report Secrets to Boosting Social Security Benefits, available through the Bob’s Library tab on the web site and in my book, Personal Finance for Seniors for Dummies (with Eric Tyson). Also, the Social Security web site has details on these rules and offers some free calculators you can use to see results for different options. Making the right choice for Social Security benefits can generate more cash than all the investment decisions you’re likely to make over the next couple of decades. 

RW May 2012.