Social Security provides valuable spousal and survivor benefits for married couples who take advantage of the special benefits just for them. A spouse of a retiree is entitled to a benefit equal to 50% of the worker’s benefit (with a reduction for benefits starting before “full retirement age,” which is age 66 for those born between 1943 and 1954). A survivor of a retiree is entitled to a benefit equal to 100% of the retiree’s benefit (with adjustments for early or late retirement). Decisions as to when to start receipt of Social Security should take these potential benefits into account.
Let’s assume that both Chaim and his wife Chani are age 66, and both have been working for a full career and are entitled to their own Social Security benefits. What should they do? One option (Strategy 1) would be for each to collect his/her own benefit, beginning at the age of each one’s choosing, without consideration of the other. By doing this, however, they miss out on the valuable spousal benefit, and the whole is merely equal to the sum of the parts. Their total benefit while both are alive will be the same as if they had not been married.
A better plan would be to look out for each other, and use a strategy that more fully utilizes the spousal and survivor benefits that Social Security provides. For example:
• Strategy 2–Chaim files for his benefit and immediately “suspends” it. This allows Chani to receive 50% of Chaim’s benefit as a spousal benefit (by making a “restricted application” for spousal benefits only) until age 70. In the meantime, each of their individual benefits will increase by 32% until age 70 (the increase is 8% per year for retirements after full retirement age, until age 70). At age 70, Chani switches to her own benefit, and Chaim starts collecting his own. If Chaim’s benefit is larger than Chani’s and he dies first, Chani will then get Chaim’s larger benefit after his death for the remainder of her lifetime.
• Strategy 3–Chaim files for his benefit at age 66, and Chani applies for spousal benefits at the same time (using a “restricted application”). Then, at age 70, Chani applies for her own benefit, which has increased by 32% at this point.
Of course, either of these strategies may be used in reverse–just switch the names of Chaim and Chani. This gives at least four strategies for this particular couple, each of which is likely to produce a better result (i.e., more lifetime income) than Strategy 1, where each applies for his/her own benefit. The particular strategy that works best will vary by couple, depending on their relative ages, benefits, and health considerations. It is important for each couple to consider all the various options and strategies, in order to produce the optimal result.
The main strategies available to married couples for maximizing their Social Security payouts are:
• Suspending a benefit–After full retirement age, a person is permitted to apply for his benefit and then suspend it. The most common reason for this is to permit the spouse to collect spousal benefits before the retiree starts his own benefit. Also, if someone already started collecting his or her own benefit at an earlier age and now regrets that decision, they may suspend the benefit, allow it to increase with the usual 8% per year adjustments between age 66 and 70, and then reinstate the benefit at a higher level.
• Restricted application–Generally speaking, when a married individual applies for a spousal benefit while also entitled to his/her own benefit, the Social Security Administration will compute the greater of the spousal benefit (i.e., 50% of the spouse’s entitlement, with the usual adjustments) or his/her own benefit. Even if the spousal benefit is larger, it will be deemed as if the spouse retired also, and his own benefit will not grow any more for the age adjustments. This can be avoided after full retirement age by filing a restricted application, whereby the individual specifies that the application is for the spousal benefit only, and not his or her own benefit.
• Claim some benefit now, more later–This usually operates in conjunction with one or both of the other strategies, and allows a person to apply for one benefit, and then for another a few years later. For example, in Strategy 2 above, Chani is using a restricted application together with Chaim’s suspending his benefit in order to get the spousal benefit at age 66, and then her own larger benefit at age 70.
Most married people nearing retirement age are not familiar with these strategies and make ill-informed decisions, leaving thousands of Social Security dollars on the table over their retirement years. If you are near retirement age, be aware of the importance of these decisions on your financial future, and adopt a carefully thought out plan. The best strategy will differ for each couple based on their own circumstances, such as ages, health, and relative benefits. Because of this complexity and the large amount of money involved, most people should seek professional help from an expert who will prepare year-by-year benefit illustrations under several options, and fully explain the choices available to them. Fees are well worth it. Make sure that in your marriage, the whole is better than the sum of the parts, not only in life but in your Social Security also.
Michael Karlin is a Fellow of the Society of Actuaries and an Enrolled Actuary, with 35 years of experience as a pension consultant to large organizations. He now assists individuals in maximizing their pension and social security lifetime payouts. Call 201-836-6408 or 201-741-7774, or email [email protected].
By Michael Karlin
