What you may not know about managing you and your spouse’s Social Security benefits may cost you hundreds of thousands of dollars over your lifetime. There are two key strategies. Of the roughly 58 million current Social Security recipients, per the SSA.gov website, only 27% are aware of these strategies, which can optimize lifetime benefits for retirees, spouses and survivors.
The two strategies are a “restricted application” and “voluntary suspension” or “file and suspend”. These techniques can be combined in several creative ways, which involve the election of a limited benefit initially, and a larger benefit later.
For a single family, it is not unusual to be able to receive an additional $20,000 to $40,000 more in annual benefits from applying these strategies. In fact, a Boston College study has suggested that failure to use them currently represents more than $10 billion of unclaimed benefits.
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Before diving into an example of the two strategies, it’s important to note that if you file for benefits prior to your full retirement age, your benefits could be reduced by as much as 25%. If you wait to file at age 70 your benefits would increase 32% from your primary insurance amount or PIA at full retirement age, which is 66 for those born between 1943-1954. The fact is, only 3% of those eligible to claim social security wait until age 70 to do so.
The two aforementioned strategies can only be implemented when one spouse has reached full retirement age. At full retirement age (66 for most) you have the option to restrict your application to exclude retirement benefits. If the retirement benefit is excluded, it will continue to build delayed retirement “credits” of 8% per year to age 70 if you were born in 1943 or later.
For example, Steve, who was born in 1950 and has earned more than his wife, Mary, over their respective working lives, and is therefore considered to be the “higher-earning spouse”, decides he wants to wait until age 70 to begin collecting Social Security. By restricting his application to only spousal benefits available under Mary's record, he could claim half of her PIA (assuming that she filed for benefits), while still allowing his own benefit to build Delayed Retirement Credits. It's important to note that Mary's benefit is not negatively impacted by Steve's claim of half of her PIA.
At age 70, he would then switch to his own benefit, which would have grown by 32% of his PIA because of delayed credits. Alternatively, Mary, the “lower-earning spouse”, could restrict her application to only her spousal benefit (assuming Steve filed for benefits) while continuing to claim delayed credits on her earnings record. The restricted application can be used to increase lifetime income as well as survivor's benefits.
The second technique is a voluntary suspension. Spousal benefits are not available until the higher-earning spouse has filed for his or her own benefits. A higher-earning spouse can file for benefits, then immediately suspend the benefit, and continue to earn delayed credits of 8% annually.
If we continue to use Steve and Mary as an example of this strategy, Steve (the higher earner) could file and suspend in order to make Mary (the lower-earning spouse) eligible for spousal benefits under his earnings record. Again, her claim on half of his benefits would not affect his Social Security.
It is important to note that each technique is available to the higher-earning spouse (the “primary” earner) or to the lower-earning spouse (the “secondary” earner). Also, the techniques can be combined. For example, the higher earner could file and suspend to make a spousal benefit available to the secondary earner, who could then file a restricted application for just spousal benefits. This would allow both spouses to earn Delayed Retirement Credits on their own earnings records while one of them is still able to collect some benefit now.
The complexities of Social Security are dizzying. There are some 2,700 rules and 729 options that married couples need to evaluate in order to choose the optimum age combination and election strategy for maximum payoff.
Prudent Social Security planning should be about how to get the greatest benefit for you and your spouse over your entire lifetime, not about how to get the highest payment for yourself today. Social Security employees have been trained to help you identify the highest benefit you can get today, not necessarily over your lifetime, and likely not over the joint lives of you and your spouse. Therefore, you are unlikely to hear about these techniques from Social Security.
Social Security is not intended as a substitute for private savings, pension plans and insurance protection. It is, rather, intended as the foundation upon which these other forms of protection be soundly built. Social Security is completely unique as a retirement asset, and there’s no other asset in the private sector that possesses the following four characteristics: it’s adjusted annually for inflation, it is tax-advantaged, it will pay you for as long as you live and it’s backed by a government promise.
When you consider the current environment, with increased life expectancies, disappearing pensions, an economy in turmoil, historically low interest rates and the possibility of higher inflation and income taxes, the fear of outliving your assets is completely justified.
Social Security planning should be the foundation of everyone’s retirement income plan.
Woodring is founding partner of San Francisco Bay area Cypress Partners, a fee-only wealth consulting practice that provides personalized, comprehensive services that help retirees and busy professionals to enjoy life free of financial concern.
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