Should you claim early? Should you delay until age 70? And what about your spouse?
By changing when and how you claim Social Security, you might end up collecting tens of thousands more over your lifetime. The difference could be $100,000 or more for a high-earning couple that chooses the best claiming strategy.
Social Security gives you an 8 percent increase in future benefits for life, plus cost of living allowance (COLA), for every year you delay after the early claiming date of age 62. Does this mean everyone should delay? Not necessarily.
No claiming strategy is best for everyone. Whether people are telling you it’s always better to claim early, late, or somewhere in between, what works best for one person may not work for someone else.
Break-even calculators can steer you wrong. Most don’t take into account Social Security’s COLA. They don’t accurately account for life expectancy. Most importantly, break-even analysis for individuals does not take into account the fact that one member or the other of a couple has a decent probability of living into his or her 90s. And the survivor receives 100 percent of the highest benefit of the couple, no matter which one dies first. Combined life expectancy is where delaying one benefit can pay off big.
How to Get More
Here are two claiming strategies that can be particularly useful for married couples. While I may be using "his" and "her," Social Security is gender neutral, including for gay couples.
File and Suspend
If you’re a couple with one zero- to low-earning spouse and one high earner, consider doing file and suspend.
The higher-earning spouse files for his benefit at full retirement age in order to entitle his spouse to take a spousal benefit now. But he "suspends" his own benefit to age 70 in order to gain delayed retirement credits. Spousal benefit is one-half the other spouse’s benefit. This allows the low-earning spouse to collect benefits for several years that she would not have collected if she’d also waited. Whichever spouse lives longer will have a higher benefit for life because benefits were suspended to age 70.
Claim Now, Claim More
If both members of the couple have a decent earnings record, try the claim-now-claim-more-later strategy. A couple in my family made a good example of this strategy. Her age 66 benefit was about $1,600 and his was $2,560. They were both planning to wait until age 70 to claim in order to maximize their benefit. But it turns out that waiting wasn’t the best. One of them claiming early was.
Here’s what they did: She filed for her own benefit at age 64. By claiming early, it was reduced to about $1,400 a month. I told the husband to file for his benefit using these words: "I want to restrict my benefit to my spousal benefit only, and earn delayed retirement credits on my own benefit." His spousal benefit is 50 percent of her benefit, or about $700 a month. Meanwhile, his own benefit grows 8 percent a year.
They’re receiving about $25,000 a year more over the next four years than the zero they would have collected by both of them waiting until 70—a cool $100,000—and will receive the higher age 70 benefit on the husband.
Once he is 70, his benefit will have risen 32 percent to about $3,380 (plus COLAs), and he will switch from spousal to his own delayed benefit. The odds are that his younger wife will outlive him. Although her own benefit was reduced a bit by claiming early, her survivor’s benefit will not be reduced. If he dies first, she will receive his full delayed benefit of $3,380 as long as she lives.
The "Viagra Benefit"
The "Viagra benefit" jokingly refers to the fact that if a parent or guardian (including a grandparent) is on Social Security, his or her under-18 children can each receive up to 50 percent of his benefit.
Just for Divorcé(e)s
Divorcé(e)s can claim on an ex-spouse’s record as long as the marriage lasted 10-plus years and you have not re-married before age 60. Even if your own benefit is higher than 50 percent of your ex’s while she/he is alive, there may be a benefit to switching to survivor’s benefit if your ex dies, because you’d jump to 100 percent of his/her benefit, which may be greater than your own.
Some General Rules of Thumb
With a couple, let the higher benefit go to age 70 if possible.
If you are tempted to claim Social Security early while you are still working because you’re not earning enough, think again! If your Social Security is not enough to live on by itself, and you can’t make enough to live on now, what on earth makes you think you’ll be better able to earn more money when you’re 82 or 92 than at 62?
If you claimed Social Security and now regret that you did (perhaps you’ve found a job in the meantime), you maybe able to suspend your benefits (stop receiving them) and restart them later at a higher lifetime monthly payment—you can received delayed retirement credits up to age 70. The credits will be based on the lower benefit as of when you claimed, but 8% annual increases are nothing to sneeze at. You can go back to the full delayed amount if you change your mind within a year. You can withdraw your application if you do so within a year and receive all you would have received if you hadn’t applied, if you also repay the money you received.
Advice for the Self-Employed
Self-employed people who do not pay self-employment tax are cheating themselves. You may think you’re saving money by not paying self-employment tax. After all, it adds up to over 15%. But if you don’t pay into Social Security, you can’t collect! And our calculations have shown that, in most cases, contributing to SS would give a far higher rate of return in future lifetime income than any prudent investment. Many people are unaware that as a self-employed person, you could contribute as much as $50,000 a year into a Solo 401k (and still contribute to a Roth IRA, depending on your income.) The reduced income tax from deductions via those 401k contributions more than makes up for what you pay in self-employment tax. Besides, if you don’t pay, you may be breaking the law.
Don’t try these:
- You can’t file for a spousal benefit unless your spouse has filed for his or her own.
- You can’t both file for spousal benefits on each other’s records.
- You can’t file and suspend before age 66 (or claim now-claim more later)
- Don’t delay past age 70! We’ve met a few people who didn’t claim SS at age 70 because they were still working and didn’t need the income. But there’s no increased benefit for delaying past age 70. If you don’t claim by age 70, the income is lost forever (except for 6 months of potential back payments.)
- If you file before age 66, SS will withhold $1 of benefit for every $2 you make over $15k of earned income in a job. Investment income does not count for this earnings test. There is no earnings test after age 66.
Claiming strategies can be complex and circumstances vary. I typically run two to four scenarios on my customized calculators, so that people can decide based on numbers, not just ideas.
Joan Masover is a registered principal of Financial West Group, member FINRA/SIPC. Securities and advisory services are offered through Financial West Group, member FINRA/SIPC. FWG and Investment Insights are unaffiliated entities.