Mary Beth Franklin: Age difference creates Social Security quandry

Most Social Security claiming examples assume that the two spouses are the same age or that the husband is slightly older. In most of those cases, it makes sense for the higher-earning spouse, usually the husband, to delay claiming benefits as long as possible up to age 70 to lock in the maximum retirement benefit for himself and the largest possible survivor benefit for his wife.

For many married couples, the main Social Security claiming goal should be to maximize benefits for the surviving spouse, particularly if there is no traditional pension or annuity to guarantee retirement income once the first spouse dies.

Social Security survivor benefits are equal to 100% of what the deceased worker received or was entitled to receive at time of his or her death—including any delayed retirement credits worth 8% per year for each year benefits are postponed between normal retirement age and age 70.

But depending on the couple’s ages and income differences, there is often room for some creative claiming strategies in between to generate some Social Security income now and more later.

In the typical example, the lower-earning spouse, usually the wife, may want to claim reduced benefit as early as age 62 to bring some money into the household now, assuming she is no longer working or if so, her earnings are less than the $15,120 earnings limit for 2013. Earnings restrictions disappear once you reach full retirement age.

Even though her retirement benefits would be permanently reduced because she collected them four years early, in many cases she could step up to a larger spousal benefit once her husband claims his benefit. (But it would be less than half of his full retirement age benefit because she collected her own benefit early).

And although she collected reduced retirement benefits early, her survivor benefit would not be reduced as long as she is at least normal retirement age when she begins collecting them.

But deciding which Social Security claiming strategies to recommend to a married couple when the wife is the older, lower-earning spouse can be a real challenge.

Rich, an adviser from Nashville, sent me the following example. The husband, age 60, expects benefit of about $2,500 per month at his full retirement age of 66. The wife, who is 64, expects a monthly benefit of about $1,500 per month at her full retirement age. The couple would like to maximize their Social Security benefits and would be willing to wait until age 70 if necessary to collect. What’s the best strategy?

In this case, if the wife waits until age 70 to claim benefits, they will be worth maximum amount: 132% of what they would have been at her normal retirement age of 66. So at 70, she will collect about $1,980 per month or nearly $24,000 per year compared to the $18,000 per year she could collect at her full retirement age of 66.

When she turns 70s, her husband would have reached his full retirement age of 66. At that point, he could file a restricted claim for spousal benefits only and collect half of her full retirement age benefit (not half of her higher benefit she collected at age 70).

That would give him a benefit of about $750 per month or $9,000 per year. Meanwhile, his benefit would continue to grow by 8% per year up to age 70. At that point he would switch to his own benefit, which would be worth about $3,300 per month—about a third more than his full retirement age benefit of $2,500 per month.

Together, Rich’s clients would collect more than $63,000 per year in combined Social Security benefits when she was 74 and he was 70. The amounts would actually be larger due to annual cost of living adjustments that would increase their benefits in the interim and continue to grow in the future.

The real challenge of deciding on claiming strategies when the older spouse is that the lower earner is that the couple may miss out on the chance of exercising some creative claiming strategies available to couples where the age difference is flipped.

In the above example, the wife could not step up to a bigger spousal benefit once her husband claimed his benefit because her own benefit at 70, including delayed retirement credits, would be worth more than half of his basic benefit at his full retirement age. So she would never collect a spousal benefit.

Had the situation been reversed, with the older spouse having the larger lifetime earnings, the younger spouse could have claimed a reduced benefit early on her own record, possibly stepped up to a larger benefit once her husband claimed his and still been assured of the largest possible survivor benefit.

I’ll be answering Social Security questions live during the annual Morningstar Individual Investor Conference in Chicago on Saturday March 23 starting at 2:30 p.m. CT. You can listen for free but you must register at morningstar.com/Conference/agenda.