Mary Beth Franklin: How to play the Social Security age game

Sometimes it makes sense for one spouse to claim benefits early.

My recent column about the value of waiting until the magic age of 66 to exercise creative Social Security claiming strategies triggered numerous comments and questions.

Sometimes, age differences between two spouses make it difficult to delay collecting Social Security benefits and to coordinate claiming strategies. In other cases, clients simply can’t afford to wait to collect benefits, even though delaying benefits means getting a bigger check later.

Here are two such cases from Investment News readers and my response.

One adviser asks what he should recommend when the wife, who is the lower-earning spouse, is three years older than the higher-earning husband. Both have sufficient Social Security credits to claim their own retirement benefits. Her normal retirement age for full benefits is 66. His is 66 and 6 months.

My response: The wife should probably file for her own Social Security retirement benefits when she turns 62 (assuming she is no longer earning or not earning more than the earnings cap at the time).

However, if she continues to work, she should wait until her normal retirement age of 66 to file so she doesn’t lose any of her benefits to the earnings cap. Currently, individuals who collect Social Security benefits before their normal retirement age and who continue to work lose $1 in benefits for every $2 over the earnings cap. For 2012, that cap is $14,640. Once you turn 66, the earnings cap restrictions disappear.

If she collects retirement benefits early at 62, they will be reduced by 25% compared to her normal retirement age. But it doesn’t really matter because for most married couples, where the husband is the bigger earner, the focus should be on maximizing survivor benefits. That means, the bigger his retirement benefit, the bigger his wife’s survivor benefit. That’s still a likely scenario even though he is three years younger than his wife.

Once the husband reaches his normal retirement age of 66 and 6 months, he has two choices. He can file for his own retirement benefits, and his wife will likely step up to a larger spousal benefit, but not as large as it would have been if she had waited until her normal retirement age of 66 to claim benefits.

Or, he could file a restricted claim for spousal benefits only and collect half of her full retirement benefit (even though her own benefit was reduced because she collected early.) Once he turns 70, he can switch to his maximum retirement benefit, which will be 24% more than if he collected at his normal retirement age of 66 and 6 months.

If he dies first, his wife will step up to a larger survivor benefit worth 100% of what he received during his life (or was entitled to at the time of his death if he had not yet started collecting benefits). And as long as she is at least 66 at the time, her survivor benefit will not be reduced even though her retirement benefits were reduced because she collected four years early.

Another adviser wrote that he is working with a married couple, both age 62, who want to retire early. He wants to know the best way for them to maximize their benefits while still generating some income now.

Although their circumstances are different than the first example, the solution is the same.

One spouse, preferably the lower-earning spouse, should collect reduced benefits early as a way of generating some extra income. When the second spouse, preferably the higher earner, reaches full retirement age, he can claim his full retirement benefit if they really need the money. But if they can afford to delay, he can restrict his claim to spousal benefits only when he turns 66, allowing him to collect half of his wife’s full benefit. Deferring his claim until age 70 will increase his benefit by 32%, locking in the maximum amount for him and the maximum survivor benefit for her if he dies first.