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Dan Timberlake: Social Security claiming strategies can boost nest egg

Dan Timberlake
Dan Timberlake

For previous generations, claiming Social Security benefits was relatively simple. Once they decided on a retirement age, they called the Social Security Administration and applied for benefits.

As life expectancy has increased and interest rates on fixed-income investments have dropped to historic lows, baby boomers are looking for alternative strategies to maximize their retirement nest eggs. A number of clever Social Security claiming strategies have become increasingly common. Understanding some of your alternatives —and knowing how to discuss them with your local Social Security representative — can give you a head start on determining which, if any, may work for you.

There are three potential options for calculating the Social Security income to which you are entitled:

Your individual benefit based on your own earnings history.

Your spousal benefit, which is generally 50 percent of your spouse’s individual benefit.

Your survivor benefit, which is the larger of the two benefits a couple had been entitled to before one died.

For never-married people, the claiming strategy is simple, as the spousal and survivor benefit options are not available. Usually, the only strategizing needed is to guess how long you will live. If your full retirement age — the FRA — is 66, Social Security has set the payout rate for each claiming age so that if you die at about 80, any claiming age will result in about the same total lifetime amount. If you die before age 80, claiming earlier will have resulted in greater lifetime benefits. If you die later, claiming later will have resulted in greater lifetime benefits.

For couples, there are three concepts to consider:

1. File and suspend.

Just because you file for Social Security, you don’t have to begin receiving your individual benefit, and it can still grow. So why would you file if you don’t want your benefit? Because one spouse must have filed for the other spouse to begin collecting a spousal benefit.

The file-and-suspend option resolves the dilemma faced by the couple who want to start generating some Social Security income but don’t want to stop the growth of the higher earner’s individual benefit. Once the higher-earning spouse has reached full retirement age, he or she can file for benefits, then immediately suspend them. As long as the other spouse is at least 62, that spouse can then claim a spousal benefit.

Whenever a spousal benefit is claimed before either spouse has reached full retirement age, it will be smaller than it would have been had both spouses reached their FRA. However, unlike the individual benefit, your spousal benefit will not continue to increase after you and your spouse have reached full retirement age. It maxes out once you’ve both reached your FRA.

2. Claim now, claim more later.

Just because you’ve claimed your spousal benefit doesn’t mean you can’t keep growing your individual benefit and claim it later. If, at your FRA, you have an individual benefit that, let’s say, is the same as your spousal benefit, you may want to temporarily claim your spousal benefit and let your individual benefit keep growing. By temporarily accepting the spousal benefit when you reach full retirement age, you enable the individual benefit to continue growing at roughly 8 percent per year up to age 70. Assuming your FRA was age 66, that’s four years, or a 32 percent increase in the individual benefit.

To reiterate, implementing this strategy requires that a worker has reached full retirement age when first filing for spousal benefits.

3. Combination strategy.

This strategy focuses on maximizing the lifetime benefits shared by a working couple using all three benefits — individual, spousal and survivor.

A key assumption with this strategy is that the lower earner’s individual benefit at age 70 will exceed the spousal benefit to which the lower earner is entitled. Both workers must have reached their full retirement age. The higher earner files and immediately suspends his or her individual benefit. He or she delays taking any benefit for as long as possible. Waiting until age 70 would simultaneously max out his or her individual benefit and the couple’s survivor benefit.

Upon reaching full retirement age, the lower earner files a restricted claim for spousal benefits, providing the couple some immediate income while continuing to grow the lower earner’s individual benefit. At age 70, the lower earner switches to his or her individual benefit, which will be higher than the spousal benefit already in place, thanks to the application of delayed-retirement credits. At 70, the higher earner begins receiving his or her individual benefit. Whichever spouse dies first, the surviving spouse gets the higher earner’s individual benefit for the remainder of the surviving spouse’s life.