Whenever I meet with clients who plan to retire in the next few years, the topic of social security benefits always comes up – usually right away. “What’s the best way to maximize our social security benefits in retirement?” they ask.
This post addresses one of the most effective planning strategies married couples can use to get the most out of their social security dollar.
Jack and Carole
I recently met with a married couple that was planning to retire later this year. Having been born in 1949, both Jack and Carole have attained their Full Retirement Age (FRA) as defined by the Social Security Administration. This presented a wonderful opportunity to maximize their potential lifetime benefits while still allowing them to receive at least some income right away.
File and Suspend
Since Jack and Carole have both reached their FRA, age 66 for each of then, they can implement a strategy called “File and Suspend” in which one spouse files for benefits based on their work record (Jack, in this case) while the other spouse (Carole) claims a spousal benefit on the other spouse’s work record. Meanwhile, the social security benefit based on Carole’s earnings record continues to earn delayed retirement credits until she reaches age 70.
For this strategy to work, Jack must file for benefits based on his earnings record. Carole should have reached Full Retirement Age as well. Carole can claim a spousal benefit only if Jack is receiving benefits based on his earnings record. Carole may apply for a spousal benefit based on Jack’s earnings record now and switch to her own benefits later in life.
Once Carole’s benefits start, Jack can suspend his benefit and continue to earn delayed retirement credits on his own social security benefit until he is ready to begin receiving benefits on a more permanent basis – probably at age 70.
Leveraging Spousal Benefits
Using this strategy Carole is able to receive about $1,000 a month in social security benefits for 48 months between when she turned 66 and when she turns 70. When Carole turns 70 she will qualify for maximum social security benefits under her own work record. The current social security rules allow Carole to switch from her spousal benefit that she began receiving when she turned 66 and switch to her own benefit at age 70. Jack will turn age 70 the same year and can begin receiving his maximum benefit at that time as well.
Assuming Carol and Jack live past about age 78 or so, they will receive more social security dollars per month and more dollars over their lifetime. Of course, there is an obvious risk with this strategy. What happens if one of them dies before age 78? If you don’t expect to live past age 78, this strategy may not be for you.
Since none of us know how much time we have left on Earth, I usually recommend going with the odds. Odds are that a healthy 66 year old will likely live beyond age 78. The longer you live the better this strategy gets.
It’s Not for Everyone
“File and Suspend” works best when couples can afford to delay their social security benefits and expect to live longer than age 78. However, like most financial planning strategies, the “file and suspend” strategy isn’t for everyone.
Carefully consider all your options before making your final decision. For more information visit the Social Security Administration’s website or click here.