Walking Away From $100,000

Many people are still choosing a social security path that leaves big money on the table over the course of their lifetime. The amount can easily add up to well over $100,000.

In this post, I’ll highlight a couple of claiming strategies to illustrate what’s potentially at stake. While these strategies tend to benefit married couples the most, the principles also apply to single folks.

First, a bit of general background . . .

People born between 1943 to 1954 who’ve met social security’s requirements become (or already became) eligible for full benefits at age 66. This is called Full Retirement Age (FRA). Those born later have to wait a bit longer for FRA. Currently FRA is 67 for those born in 1960 or later.

Regular social security benefits can be collected as early as age 62 or as late as age 70. If your FRA is 66 but you draw at age 62, your benefits will be reduced to 75% of what you would otherwise have received. On the other hand, if you wait until age 70 you’ll receive 132% of the full benefit.

Think about that for a moment . . . wait for an additional four years and receive a 32% increased payout for the rest of your life. Where else can you get a guaranteed return like that?!

Subject to certain age and filing requirements, if you are married you can receive the higher of (1) your own social security benefit under your own earnings record or (2) half of your spouse’s social security benefit under their earnings record. Even divorcees may be eligible for a spousal benefit if they were married for 10+ years and are currently unmarried.

If your spouse dies and you’ve reached FRA, you can collect the larger of your social security benefit or your spouse’s benefit, but not both.

Okay, to the strategies . . .

File & Suspend

With this strategy, you file for your social security benefit at FRA and then immediately ask the social security administration to suspend payments.

Why in the world would you do that? Two reasons:

If you are married and half of your social security benefit is larger at FRA than your spouse’s full benefit, then your spouse will want to collect spousal benefits under your record instead of their own. However, your spouse cannot do so unless you first file for benefits under your earnings record. (Note that if your spouse is under FRA, the spousal benefit will be permanently reduced.)
Since you've suspended your own social security payments, you'll continue to earn "delayed credits" which will increase your benefit for as long as you wait to collect, until age 70.

Restricted Application

In a sense, the “Restricted Application” is simply the other side of the File & Suspend strategy. In other words, there’s no need for you to File & Suspend if your spouse isn’t going to then submit a Restricted Application for spousal benefits.

If you’re the filing spouse, the idea with this strategy is you’re putting the social security office on notice that you’re “restricting” your application to the (half) benefits available under your spouse’s earnings record. You have other benefits available to you (under your own record), but you’re making a restricted claim at this time.

Mike & Julie

Mike and Julie Johnson just happen to both be turning 61 in a couple of months. Of course, couples can have widely differing ages but let’s run with it to keep the illustration simple.

Mike’s full benefit at age 66 FRA is $2,400 per month. Julie spent much of her younger years caring for their children and didn’t have opportunity to earn as much. Her full benefit at age 66 FRA is $1,000 per month.

Half of Mike’s full benefit ($1,200) is larger than Julie’s full benefit ($1,000). If Mike files at FRA for his benefits and then suspends, that allows Julie to then file a Restricted Application for Mike’s higher spousal benefits (the $1,200). Mike can then wait to collect at age 70 when his own benefits will have grown to around $3,170 per month (current $).

With Julie filing a Restricted Application at age 66 for $1,200 (half of Mike’s full benefit), she can also continue to earn delayed credits under her own earnings record. At age 70, she can stop the spousal benefits under the Restricted Application and start collecting benefits under her own record, which would then be 32% higher at around $1,320 per month (current $).

What’s At Stake

So let’s run a couple of scenarios comparing lifetime benefits at the earliest possible eligibility vs. the optimum mix

Mike lives a bit over 81 years and Julie to almost 84 years

Earliest claim $582,000 (lifetime benefits)
Optimum claim 630,000
Left on the table $ 48,000

At age 65 and regular health, there’s a 40% probability that Mike will live to age 85 and a 31% probability that Julie will live to age 90. As a couple, there’s a 45% probability that one of them will still be living at age 90. [Source: 2011 Society of Actuaries Key Findings: Longevity]

A related consideration: since women tend to live longer than men, depending on your situation it can be important to choose a social security path—such as claiming at age 70—that maximizes the potential benefit for a surviving wife.

Mike lives to 85 and Julie to 90

Earliest claim $709,000
Optimum claim 832,000
Left on the table $123,000

[Calculations courtesy of www.socialsecuritytiming.com software. Amounts rounded. Assumptions include historical long term median inflation rate and conservative real rate of return for analysis purposes.]

This post merely scratches the surface of social security planning complexities. Social security employees are charged with providing information and answering general questions, not with helping you “play chess” in navigating the various strategies that yield the best outcome.

Once you make your social security choice, there is no “do-over” (after the first 12 months of collecting benefits). Given what’s at stake, be sure to seek competent advice to help you make the wisest choice.