How spouses can maximize their benefits as some popular claiming tactics are eliminated

By Anne Tergesen
Published on Nov 19, 2015 on The Wall Street Journal

Congress recently put an end to a pair of Social Security-claiming strategies that couples have used to add tens of thousands of dollars to their lifetime retirement incomes. Now, spouses who want to maximize their benefits will need to become familiar with the next-best claiming strategies.

For spouses who both have significant earnings, it will generally make sense for the higher earner to delay collecting benefits and the lower earner to collect early. For other couples in which one person has earned a lot more than the other, the changes may lead higher earners to file for Social Security earlier than they might have otherwise.

The tactics being eliminated—known as file-and-suspend and a restricted application for spousal benefits—have made it possible for both members of a couple who are 66 or older to delay claiming Social Security based on their own earnings records in order to increase those payments, while at the same time, one spouse pockets a spousal benefit.

But starting in about six months, people who file for benefits and then suspend them will also suspend Social Security payments for spouses and dependents that would be based on the same work record. Those who file and suspend before May will be grandfathered, which means their spouses will still have the option to claim a spousal benefit based on a suspended benefit.

Meanwhile, workers who are younger than 62 at the end of this year will lose the right in the future to file a restricted application to claim only a spousal benefit and then switch to their own benefit later. Instead, when they apply for a retirement benefit, they will receive either their own earned benefit or a spousal benefit—whichever is higher.

Those who are 62 or older at year-end retain the ability to file a restricted application at their full retirement age, as long as their spouse has suspended or is taking benefits. (Couples already using these strategies will be allowed to continue doing so.)

For couples barred under the new rules from using either of these strategies, claiming decisions may become less complicated. But because claims will also be less lucrative, it’s more important than ever to use a coordinated strategy to squeeze the maximum from spouses’ combined benefits, says Michael Kitces, director of financial planning at Pinnacle Advisory Group Inc. in Columbia, Md. He recommends consulting with an adviser or using one of a growing number of websites that provide claiming advice.

Here are basic guidelines for two types of couples:

Dual-Earner Couples

First, consider the options for a couple in which both spouses have work histories and the lower earner’s projected Social Security benefits are at least half that of the higher earner.

While there are some exceptions, in this scenario both spouses will generally collect Social Security retirement benefits based only on their own earnings. (A spousal benefit is typically a maximum of half of what a worker is entitled to at his or her full retirement age.)

While each spouse can start taking benefits any time between ages 62 and 70, it often pays for the higher earner to put off claiming as long as possible, preferably until age 70. Why? The longer you wait to claim, the higher your monthly payment.

Take for example a couple where the higher earner, the husband, is entitled to $1,800 a month at age 62. He would be eligible for $3,151 a month if he waits until age 70 to claim, according to Social Security Solutions, which sells Social Security claiming advice. Should he die first, his spouse would typically collect his benefit rather than her own, as it would be higher.

For a relatively high-earning couple who are the same age, one spouse has to live to 83 for the couple to come out ahead by delaying the higher earner’s benefits until 70, says Baylor University professor William Reichenstein, a principal at Social Security Solutions.

Because the probability of one member of a 65-year-old couple reaching 90 is about 60%, Mr. Kitces says using such a strategy “is the odds-on bet.”

In contrast, it generally makes sense for the lower earner—the wife in this example—to claim her benefit relatively early, at age 62 or 63.

Why? The odds are less than 50% that both spouses will live beyond 81, Mr. Kitces says. Given that the low earner’s Social Security retirement benefit will stop when the first spouse dies, those odds argue in favor of the low earner claiming early, he adds.

In this case, if the wife died first, the husband would simply continue to collect his own benefit. If the husband died first, the wife would get a survivor benefit based on his earnings rather than her earned benefit.

Health and family history should also be a consideration.

“With a married couple, the decision to delay benefits must be evaluated based on the life expectancies of both members of the couple,” says Mr. Kitces. “If both are in poor health, it won’t pay to delay much. And if both are likely to live well beyond 90, there can still be a value for both to delay to 70. But for most with average life expectancies, the most common strategy will be to delay the higher-earning spouse as long as possible but start the lower earning spouse’s benefits as early as possible.”

Couples With One Primary Earner

The math is different for couples in which only one spouse qualifies for an earned Social Security retirement benefit or where one spouse’s benefit is more than double the other’s.

For them, it is often best for the high earner to wait to claim—but only until the low earner reaches full retirement age, which is 66 for those born between 1943 and 1954.

To see why, consider Bob and Sally, who are both younger than 62 and whose respective monthly benefits at full retirement age are $2,685 and $500. Once Bob claims his benefit, Sally will become eligible for an $842 spousal supplement, which will bump her $500 benefit to $1,342, or half of Bob’s.

For Sally to get the most from Social Security, she will want to start her spousal supplement at 66. Why? Spousal benefits stop growing at 66, so Sally won’t receive the delayed retirement credits that increase a worker’s benefit by 6% to 8% for each year he or she puts off claiming between 66 and 70. (But if she starts claiming before 66, her benefits will be reduced.)

Under the new rules, Sally can’t receive her spousal supplement unless Bob claims his benefit. But if Bob takes his benefit before 70, he won’t receive the $3,544 maximum he’s eligible for at 70, which would force the couple to accept a lower survivor benefit.

What should they do? If Bob is four or more years older than Sally, the decision is easy, says Joe Elsasser, founder of Social Security Timing, a software program advisers use to identify optimal claiming strategies. Bob should file at 70 and get the maximum he is entitled to. And Sally should claim her own benefit at 62—she’ll actually receive less than the $500 because she’s claiming early—and pick up her spousal supplement when Bob starts his benefits at 70.

If Bob is less than four years older than Sally or is younger, the decision on when Bob should start his benefit becomes trickier. The couple will have to decide whether it is worth forfeiting some of Sally’s $842 spousal supplement—which sums to $10,104 a year—to secure a higher benefit for Bob.

“If both live long enough it may still pay to delay,” says Prof. Reichenstein.

Still, he expects many couples to decide against having the high earner delay all the way to age 70. With the changes in the rules, “the high earner is more likely to claim benefits earlier than he or she would have so that the low earner can add spousal benefits sooner,” Prof. Reichenstein says.

Contact us today for an examination of your portfolio – our “Financial Fresh Look”!

You can start your examination by filling out and submitting the Data Gathering form below.  The Expense Sheet is optional.