When it comes to maximizing Social Security benefits, married couples have the most flexibility. But the rules about how and when to claim those benefits are very confusing, as evidenced by the numerous questions that have been clogging my inbox.
Financial advisers and their clients and intrigued by the idea that one spouse may be able to claim a reduced retirement benefit early while the other spouse delays claiming benefits until they are worth more later, maximizing their joint lifetime benefits.
In between the extremes of collecting reduced benefits at the earliest age of 62 and maximum benefits at 70, there's room for a little magic in between.
But to engage in the more sophisticated strategies, such as filing a restricted claim for spousal benefits only or filing and suspending benefits, at least one spouse must wait until his or her normal retirement age of 66 to take action. That's why, when I'm traveling around the country addressing financial adviser conferences or speaking to consumer audiences, I like to call 66 “the magic age”.
I have been amazed and gratified by the growing interest in this topic. And apparently I'm not alone. As one adviser from Denver recently wrote, “In 35 years of practice, the issue of Social Security claiming strategies has only come up about a half-a-dozen times. But in the past month, it's come up three times.”
The adviser said he recently met two potential new clients, a couple of medical doctors married to one another, both 65 years old. He asked: “Can they each apply for benefits on the other spouse (so they are both collecting half of each other's benefit now) and then at age 70 switch to their deferred individual benefits that would have been growing at 8% per year?”
I replied: No and yes.
No, they can't both claim spousal benefits. One spouse must take action to trigger benefits in order for the other spouse to claim them. But yes, there is a strategy that allows one of them to claim some Social Security benefits at 66 and for both of them to claim the maximum amount at 70.
Here's how it works. At 66, one spouse should file and suspend, triggering spousal benefits for the other and delaying his/her own retirement benefit until 70. Then, the other spouse, at 66, should file a restricted claim for spousal benefits only and delay collecting retirement benefits until 70. The couple will end up collecting one spousal benefit at 66 and two maximum retirement benefits at age 70.
Let me give you an example of how the numbers work. Say both spouses are entitled to $2,000 per month at their normal retirement age of 66. When the husband turns 66, he can file and suspend his retirement benefit, triggering a $1,000-per-month spousal benefit for his wife. At 66, the wife can file a restricted claim for spousal benefits only, collecting the $1,000-per-month spousal benefit rather than her full $2,000 retirement benefit.
Because they have both deferred their own retirement benefits, each will continue to accrue delayed retirement credits worth 8% per year between their normal retirement age of 66 and age 70. In this case, each of the $2,000-per-month retirement benefits at normal retirement age will increase to $2,640 per month by age 70. At that point, they each would switch to collect their enhanced benefits
In the above example, their combined Social Security benefits would total $5,280 per month at age 70. That's more than $63,000 per year in guaranteed income for life and their larger base amount would translate into larger cost-of-living adjustments in the future.
In another case, an adviser from San Diego, said he is working with a couple where the husband, age 64, is fully retired, and the wife, 57, is still working. He wrote: “Is it possible for the husband to receive spousal benefits—half of his wife's benefit amount—now and allow his own benefit to continue to grow until age 70?
I replied: No. If the husband claims Social Security benefits now--- before he reaches his normal retirement age of 66-- he cannot segregate his benefit. He must collect the largest benefit to which he is entitled, which would be his own. But more importantly, because the wife is only 57 years old, she is not yet eligible for Social Security benefits. Consequently, there are no spousal benefits available for the husband to collect.
Remember my mantra: 66 is the magic age!