How to Make the Best Deal in Town Even Better!

RBIInvestPIctIn this world there are many mysteries to ponder, and governmental bureaucracies like the Social Security Administration (SSA) rank high on the list. Few things are as mind-boggling and impossible to fully unravel. As daunting as it may appear however, simply grasping a few basic “claiming“strategies might help you maximize your SSA benefits for life.

Perhaps you’ve wondered, when should I file for benefits? At age 62, 66, or 70? Well, in short, there are no absolute answers because it ultimately depends upon something unknown to us — how long we will live. But we do know SSA retirement benefits are based on our earnings, and on actuarially derived individual “life-expectancy” tables. Theoretically, if you live to your normal life-expectancy age, you would not be better off to claim early at age 62, full retirement age (66-67), or delay until age 70. The benefits you would receive either way would be equivalent. So, for an individual of average health, “when to file” or “how to maximize benefits” is a difficult question to answer. On the other hand, for married couples, it is not as difficult. Married couples have a “joint life-expectancy” which is generally longer. For this reason, unless poor health is an issue, it often makes sense to delay benefits for married couples. And couples who are close in age may have some additional opportunities to maximize their joint benefits as well.

Delay. First of all, if you have not saved sufficiently for retirement, and need more monthly income, don’t file early. To maximize your “joint-life” benefits, and take advantage of optimizing strategies, you must wait until age 70 to claim retirement benefits. Every year that you delay, you gain an “actuarial advantage” and increase your benefit by approximately 8%. Since wives statistically outlive their husbands by approximately 7 years, and receive their husbands’ benefit as a widow (unless their own is greater), this could significantly increase your spouse’s monthly income later in life. And for as long as she lives. Sadly, according to a recent AARP survey, 51.7% of Social Security retirement benefits paid out in 2010 were awarded to 62 year-olds participants receiving benefits as early as possible. I’m sure some had no choice; they needed income. But many will live to regret that decision. Claiming at age 62 diminishes benefits for life. So, unless you are in poor health, or need money to survive, delay taking benefits until age 70. And if possible, take advantage of “optimizing strategies.” Here are a few little known “claiming” strategies many married couples can employ to receive some partial income between age 66 and 70.

Restricted Application. First, consider a “restricted application.” If you are married, at full retirement age, and plan to delay taking your benefits until age 70, and your spouse has already filed for benefits, you may be entitled to half of your spouse’s benefits while you are delaying your own. For example, consider Luther and Katherine, both 66 years old. Luther wisely wants to delay filing for his benefits to accrue increased benefits for Katherine for life. Katherine, however, has already filed for her earned benefits and receives $1,250/month. Luther may be entitled to “spousal benefits” even while he’s delaying his own benefits to accrue a higher benefit for Katherine. Luther may file an application for spousal benefits ONLY. By restricting his application to spousal benefits only, his own personal benefits will continue to accrue at 8% per year, while receiving “half” of Katherine’s full retirement benefits, or $625/month. Together, Luther and Katherine can receive $1,875/month while waiting for Luther’s benefits to increase. Clearly this strategy makes it easier to afford to delay Luther’s benefits. Then at age 70, he will switch over to begin to receive benefits based on his own earnings plus his “delayed credits.”

File and Suspend. In the “restricted application” example above, Katherine filed for her own benefits permanently capping them at $1,250/month. But, what if Katherine and Luther are both in great health and Katherine wanted to maximize her own benefits as well? Would they have to give up SSA income from age 66-70? No. Another way to receive some Social Security income while delaying benefits might be to “file” for benefits, and then immediately “suspend” them. By simply filing for benefits, Luther would open the door for Katherine to begin to receive spousal benefits. And by suspending benefits, Luther would continue to earn delayed credits at 8%/year until age 70. For example, imagine that Luther’s SSA benefits are estimated to be $2,000 and $2,600 per month at age 66 and 70 respectively, and Katherine’s SSA benefits are estimated to be $1,250 and $1,600. Instead of filing for her own benefits at age 66, Katherine could delay her benefits and file a restricted application for “spousal” benefits and receive $1,000/month (50% of Luther’s full retirement age (66) benefits). Then, at age 70, she could switch over to benefits based on her own earnings record and begin receiving $1,600/month. Together, Luther and Katherine would then receive $4,200/month. ($2,600+$1,600=$4,200) after age 70 (until the Lord calls one of them home).

Optimizing strategies are highly dependent upon your specific situation. But the first step is to obtain an estimate of your SSA benefits. After that, give RBI a call, and we will help you navigate the waters of the SSA.

— Dave Anderegg, Financial Planning Advisor