Mary Beth Franklin: With Social Security, no double dipping allowed

I often receive questions from financial advisers who are anxious to maximize their clients—on in some cases, their-own—retirement income through smart Social Security claiming decisions. Unfortunately, the strategies that some of them propose are based more on wishful thinking than fact.

A common suggestion is for both spouses to file and suspend, triggering benefits for the other spouse while both defer their own retirement benefits until they are worth the maximum amount at age 70.

Sorry. That doesn’t work. One spouse can file and suspend to trigger benefits for the other spouse, assuming they are both at least 66 years. But if both of them file and suspend their benefits—which isn’t allowed—it would amount to both spouses suspending their benefits, so neither could collect anything.

Another common error is to recommend that both spouses restrict their claim to spousal benefits only. Again, that’s not an option. Someone needs to be either collecting a retirement benefit, or to file and suspend their benefits, in order to activate a spousal benefit for the other spouse to collect.

Deborah Peterson, a financial adviser in Charlotte, NC, posed a similar question regarding her personal situation as a learning exercise for future client strategies.

Deborah is two years younger than her husband Dennis. He plans to collect Social Security benefits at his full retirement age of 66. Deborah, whose Social Security benefit is larger, says she is likely to wait until 70 to collect hers.

She asked if Dennis could take his full benefit for two years, and then switch to his spousal benefit for two years, suspending his own retirement benefit in order for it to accrue delayed retirement credits worth 8% per year up to age 70.

No. Once Dennis decides to claim his retirement benefit, restricting his claim to spousal benefits later is no longer an option.

In some cases, a spouse can step up to a higher benefit once the other spouse claims, but it won’t work in the Petersons’ case because his primary insurance amount (PIA) benefit of $1,800 per month at his full retirement age is more than half of her PIA of $2,200 per month. But if his benefit was much lower—say $600 per month—his benefit would increase by $500 per month to $1,100 once Deborah either claimed her benefit or filed and suspended her benefit at age 66.

But they have other options.

Dennis could collect his full retirement benefit of $1,800 per month at age 66. Two years later when Deborah turns 66, she could restrict her claim to spousal benefits only, collecting $900 per month (half of his PIA) for four years until she switches to her maximum benefit of $2,900 per month at age 70. That’s 32% more than her benefit at full retirement age thanks to four years of delayed retirement credits.

In the above scenario, Dennis would collect $21,600 in Social Security benefits for two years; Dennis and Deborah together would collect $32,400 per year for the next four years; and their combined Social Security benefit would grow to $56,400 per year when Deborah collects her maximum benefit of $2,900 per month when she turns 70. (These estimates ignore the intervening annual cost-of-living adjustment that would increase their benefits even further).

I haven’t run these numbers through any Social Security calculators yet, but on the surface I think my recommended scenario is superior to the Petersons waiting until Dennis is 68 and Deborah is 66 to exercise a combo strategy. That’s because the primary goal for most married couples should be to maximize the survivor benefit by making sure the larger earner—Deborah in this case—wait as long as possible to claim benefits.

Although a combo strategy would eventually result in a higher combined benefit once they both reached age 70, it would result in several years of little or no benefits without increasing the survivor benefit beyond the first strategy. But for comparison sake, let’s look at a combo strategy.

At 66, Deborah could file and suspend to trigger spousal benefits for Dennis. At the same time, Dennis, who would be 68 at the time, could file a restricted claim for spousal benefits only. In that scenario, Deborah would collect nothing until age 70 and Dennis would collect $1,100 per month (half of her PIA) for two years. They both would collect their maximum benefits—worth 132% of their PIA—when each turned 70.

In this combo scenario, the couple would collect nothing for the first two years of Dennis’ eligibility of Social Security benefits–a loss of $43,200 of potential income. Dennis would collect $13,200 per year in spousal benefits for the next two years while his own deferred retirement benefit continues to grow. Once Dennis turns 70, he would step up to his maximum benefit of $2,376 per month or $28,512 per year for two years. Then when Deborah turns 70 and collects her maximum benefit of $2,900 per month, their combined Social Security benefits would be worth more than $63,312 per year.