Apparently, my recent blog about how married couples can coordinate their Social Security claiming strategies to maximize their lifetime benefits served as a floodgate. And now that the gate is open, questions about Social Security benefits keep pouring in.
Here's a good one from an adviser in Charlotte, N.C.: Can someone who collects reduced retirement benefits early, say at 62, suspend his benefits later and still earn delayed retirement credits? The answer is yes.
This may be an appropriate strategy if you have a client who collected benefits early, just because he could, and now regrets his decision. Let's say he was entitled to $2,000 per month at age 66, but he collected at 62, reducing his monthly benefit by 25% to $1,500.
Most retirees no longer have the option of repaying the benefits that they have already received and restarting their benefits at a higher amount. The rules affecting this so-called “do-over” strategy changed in December 2010. Now, you have a once-in-a-lifetime chance to change your mind and repay your benefits, but it must be within the first 12 months of claiming them.
However, you can still voluntarily suspend your Social Security benefits at any time. And you can still earn delayed retirement credits, which are worth 8% for every year you do not collect benefits between your full retirement age and age 70.
So in this above example, your client collected $1,500 per month in reduced retirement benefits between ages 62 and 66. At 66, he voluntarily suspends his benefits and resumes collecting them at age 70. At that point, his benefit would be worth $1,980 per month—132% of his previous amount-- creating a larger base benefit for future annual cost-of-living adjustments and a bigger survivor benefit for his wife if he dies first.
Remember, delayed retirement credits only affect the worker's benefit, not spousal benefits. So if his wife is collecting spousal benefits on his record, her monthly amount will not increase once he resumes collecting a larger amount at age 70.
But survivor benefits are worth 100% of what he received during his lifetime, including the delayed retirement credits. So if he dies first, his wife will collect a larger survivor benefit as a result of his decision to temporarily suspend benefits and collect a larger amount later.
Some advisers think it may be a wise strategy for the main breadwinner to collect reduced benefits early at age 62 and then to voluntarily suspend them between ages 66 and 70 to build them up again. The flaw with that argument is if the husband dies during that early collection period, the surviving spouse could be stuck with a smaller benefit for the rest of her life. Some say life insurance would protect against that possibility, but I'm not sure the added premium is worth the gamble.
What do you think? I'd like to hear your opinion.