In Part One of this two part series we discussed the following basics of Social Security: how it works, what is a spousal benefit, how does survivor’s benefit work and some things you should think about when considering whether to start receiving your social security benefit early.
In this post, I want to give you some strategies to help you maximize your benefits.
Social Security Strategies for Singles
Unless they have significant savings, or are unable to work because of health reasons, singles generally need to wait until full retirement age before drawing their benefits. Singles simply don’t have the advantage of a second income or a spousal benefit, and living as a single is nearly as expensive as a married couple. Whatever nest egg a single may have will be depleted quicker if they start their benefits earlier, both because they are drawing on it for a longer period of time and because they will need more of that nest egg by virtue of starting Social Security at a lower benefit level. Waiting is especially important for women. Why? Because of their longer life expectancies, they will more often live past the “break even point" (around age 78) when the larger delayed benefit will equal the total of the reduced benefits received by starting early.
Social Security Strategies for Married Couples
For clarity’s sake (and because it is this way in most families), I will refer to the higher earner as the man and the lower earner as the woman throughout the rest of this article.
Because (remember from Part One) the spousal benefit and the survivor’s benefit are based on the benefit of the top earner, married couples need to strategize their start dates in order to get maximum benefits. If the husband delays until full retirement age, he is putting his wife in position to draw his full benefit as a survivor benefit. If he waits until age 70, he is adding another 32% to the survivor benefit. And of course the larger his benefit, the larger her spousal benefit (maximum is 50% of his pension) will be.
Should Spousal Benefit Always be Delayed Till Full Retirement Age?
No. The ages of the spouses should be considered. For example, if the husband is 70 and the wife is 62, she should consider starting her spousal benefit at the reduced rate. Why? Because the husband is likely to die earlier and, at that time, her survivor’s benefit (based on HIS pension) would kick in. This is the same benefit she will receive whether she starts at age 62 or not, so she is better off bringing the extra money into the household now instead of waiting.
How Voluntary Suspension Can Help
Suppose the husband is full retirement age and wants to wait until age 70 before starting his benefits. Will the wife, who cannot draw the spousal benefit unless her husband has started his pension, need to wait until he is 70? Not if the couple takes advantage of voluntary suspension.
Here is how it works: The husband files for his benefit and the wife files for the spousal benefit (which will be less than 50% if she is under full retirement age). The husband then immediately requests a voluntary suspension of his pension. The wife will be able to collect her spousal benefit while the husband’s future benefit will grow by 8% annually. I like this strategy because the couple is bringing in “bonus" household income while the husband is patiently maxing out both his future pension and his wife’s future survivor benefit.
How the Top Earner Can Claim a Spousal Benefit While Waiting
Suppose the husband wants to wait until age 70 to start his pension but his wife also qualifies for benefits based on her own work record. Think through this one with me: she could start her benefit and he could sign up for the spousal benefit while waiting until age 70 to start his own. At that point he switches to his own higher benefit. As in previous examples, this will increase the survivor’s benefit, but will do so while bringing extra income into the household. And the wife could also switch to a spousal benefit based on what the husband’s benefit would have been at age 66. This is very similar to having your cake and eating it too.
The Second Chance Option
What if you claimed your benefits earlier than full retirement age and then later decide that you should have waited? The Social Security Administration has a plan just for you: you can repay all benefits, free of interest and then reapply for a bigger benefit later. You will need to also return any spousal benefits you have received.
Is this for you? One obvious advantage is that you (and your spouse if she receives a spousal benefit) will receive higher monthly pensions for the rest of your lives. Also, by bumping up the pension amount you have also increased the survivor’s benefit. Of course your health is a major consideration, but if poor health is not an issue, this option starts becoming quite attractive.
Of course the payment must come from a source that will not significantly affect your life. For example, you would not want to deplete your emergency fund, but if you were drawing interest from a nest egg while leaving the principle untouched, using this nest egg could be a consideration.
You would probably want your estate planner to help you crunch these numbers, but this do-over is certainly an option to consider.
Although Social Security can be complicated, you should be certain that you understand the basics so you can make intelligent decisions on what is right for your household. This is your pension that you have paid into all of your working life. Make sure you maximize your benefits.