When I was in junior high school, I decided I would learn to play chess. It was sort of a fad sweeping the eighth grade. I thought the best way to learn the game was to play with another classmate who already knew the game. I figured chess couldn’t be much more complicated than checkers. After all, they were played on the same board. I knew the basic pieces and how they moved. It looked like fun. The other kid slaughtered me. It was checkmate in fewer than 10 moves every time we played – that is, until I bought a little 50-cent book entitled Chess for Beginners at the local news stand and learned that there was something called “strategy” that was involved in this game. Once I understood the rules and strategy, I rocked! Well, that may be overstating it a bit. At least I didn’t get killed so much.
When it comes to collecting Social Security, there are certain strategies, all perfectly legal and ethical, and even approved by the Social Security Administration, that, when employed, can result in a maximization of benefits to the tune of thousands. Making the proper “moves” at the proper time can help Social Security recipients, couples especially, get the most out of the system while they are still alive and maximize income for survivors after death. Some of these strategies can be a little complicated. What follows are a few examples as to how they work.
“File and Suspend”
One strategy, perfectly legal and acceptable to the government but one not known commonly, is called “file and suspend” or “claim and suspend,” depending on which financial advisor language you speak. The concept comes out of the Center for Retirement Research at Boston College. Here’s the way it works:
At FRA (full retirement age), a higher-earning spouse applies for his Social Security benefit and asks that it be suspended.
- The lower-earning spouse files for spousal benefit.
- The higher-earning spouse claims benefits at age 70.
Consider the case of Bob and Barbara:
- Bob and Barbara are both age 66
- Bob’s Primary Insurance Amount (PIA) is $2,000; Barbara’s PIA is $800 (less than her spousal benefit of $1,000)
- If Bob waits until age 70 to apply, his benefit will increase to $2,640. However, Barbara may not claim her spousal benefit until Bob files for benefits
- Bob “files and suspends” at 66. This entitles Barbara to her spousal benefit, while Bob’s benefit continues to earn delayed credits.
- A word of caution: “File and suspend” may not be done before full retirement age.
Something to remember: In order for a low-earning spouse to receive a spousal benefit, the high-earning spouse must have filed for benefits. But often the high-earning spouse wants to delay his benefit to age 70 in order to maximize income to the couple while both are alive, and income to the surviving spouse after one spouse dies. So as soon as the high-earning spouse turns full retirement age, he files for his benefit and then immediately suspends it. This allows his wife to start her spousal benefit while his benefit earns 8% annual delayed credits, plus COLAs.
Please note that this does not work if Bob is under full retirement age. It is only after full retirement age that a person may voluntarily suspend their benefit in order to earn delayed credits. The lower-earning spouse may, of course, apply for her spousal benefit at any time after the age of 62. If she applies before full retirement age, she will receive a lower amount. In order to receive the full 50% of her husband’s PIA, she must apply at full retirement age.
Claim Now, Claim More Later
Here’s another strategy that has come out of the Center for Retirement Research at Boston College. It’s called “claim now, claim more later,” and it has been blessed by the Social Security Administration, even if all the local Social Security personnel are not quite up to speed on it. At full retirement age, the higher earning spouse may apply for his or her spousal benefit only. The other spouse must be receiving benefits on her record. Then, at age 70, the higher earning spouse switches to his or her own higher benefit.
Here’s an example: Mike and Mary are both age 66
- Mike’s Primary Insurance Amount (PIA) is $2,000
- Mary’s PIA is $800
- Mary files for her benefit at age 66
- Mike files for his spousal benefit at the same time and begins collecting $400 (half of Mary’s PIA)
- When Mike turns 70, he switches to his own higher benefit.
- Result: Mike receives an additional $400 per month from age 66-70
Here are a few cautions you will want to take note of regarding the “claim now, claim more later” strategy.
- Higher-earning spouses may not do this before FRA
- Only one spouse may do this (both spouses can’t be receiving spousal benefits at the same time)
- Spousal planning analysis can determine which of the various spousal strategies will work best for your unique situation
It is important to follow the rules carefully, or this strategy could backfire. First, you cannot do it before full retirement age. If Mike walks into his Social Security office before he turns 66, they will compare his own benefit to his spousal benefit and give him the higher of the two. He will be given his own benefit, and it will be reduced for early claiming. It is only after full retirement age that he can “restrict” his application to his spousal benefit. And that’s the language he should use. Social Security personnel are accustomed to giving people the highest benefit they are entitled to, but if he restricts his application to his spousal benefit, his own higher benefit will not be part of the application. That way, it can continue to earn delayed credits until he turns 70.
Another important note is that both spouses cannot do this. The explanation is complicated, but suffice it to say that if one spouse is claiming spousal benefits, the other spouse must be receiving benefits on his or her own record. And finally, spousal strategies may vary depending on the ages and PIAs of the respective spouses. At our office, we use a special Spousal Planning Calculator that will help us analyze the possible strategies for each individual situation so we can devise a plan that will be custom fitted to each individual’s circumstances.