These strategies will help you make the most of your benefits.
There is no perfect time to apply for Social Security. You can claim early and take a smaller monthly payment for a longer period of time. Or you can claim later, collecting a larger benefit that is based on a shorter life expectancy. Your decision depends on many things beyond your need for the money: whether you’re married, your spouse’s earnings compared with yours, how much you have saved and your health.
Your goal is to maximize your Social Security benefits, but not all beneficiaries understand how to make the most of this guaranteed source of inflation-adjusted income. Over the years, Kiplinger’s Retirement Report has written about little-known strategies to stretch government benefits. Those stories have been among our biggest source of reader inquiries, so we’re returning to the topic.
Before we review the strategies, you need to know some Social Security basics. If you were born between 1943 and 1954, you can claim your full benefit, called the primary insurance amount, at age 66. The earliest you can claim Social Security is 62. But your benefit will be permanently reduced by a certain percentage for each month you claim before your 66th birthday. For instance, if you claim at age 62, you’ll get 75% of your full benefit. If you claim at 64 and 9 months, you’ll receive 90%. For each year you delay claiming benefits between 66 and 70, your benefit will increase by 8%. Hold off all four years, and you earn a 32% bonus, plus all accumulated cost-of-living adjustments.
A lower-earning spouse can claim a benefit based on his or her work record at age 62. Or the spouse can claim a “spousal” benefit, as long as the higher-earning spouse has started collecting benefits. If the lower earner is at full retirement age, he or she can collect a benefit that’s 50% of the higher earner’s primary insurance amount.
However, if the lower earner collects a spousal benefit before reaching full retirement age, the benefit will be reduced by a set percentage. For instance, if the spouse claims at 64 and 3 months, the spousal benefit will be 42.7% of the higher earner’s benefit. And if the lower-earning spouse collects his or own benefit early and then “steps up” to the spousal benefit later, that spousal benefit will also be reduced.
Now let’s turn to the strategies. At the risk of inviting accusations of sexism, we will refer to the lower-earning spouse as the wife. That’s the way it usually is, and she tends to live longer than the husband, too.
First, if you’re single. It usually makes sense to wait until full retirement age to start claiming benefits, unless you expect to die early or need the money sooner. This is especially true for women, who are more likely to reach the “break-even age,” when the total value of full benefits equals what you would have received by claiming reduced benefits earlier.
Unless you have significant savings, it generally pays for singles to claim at 66, says Henry Hebeler, creator of the Web site AnalyzeNow.com. Many singles will not have enough savings to support a delay until age 70, Hebeler says. But a single person who collects at 62 is more likely to run out of money at an earlier age than someone with the same amount of savings who waits until 66, he says. “It usually works out that a single person should take benefits at full retirement age,” he says.
You can use a free program on Hebeler’s site to make your own calculations. Plug in your savings, tax bracket, annual spending and assumptions on investment growth. You can see how long your money will last based on when you start taking your benefits.
Married men should delay. Married couples can maximize total benefits by coordinating their start dates. The top goal is to increase the benefit for the surviving spouse, who gets 100% of the higher-earning spouse’s benefit when he dies. If the higher-earning husband delays until 70, his survivor will get an extra 32% plus cost-of-living adjustments.
There are two ways that the surviving spouse would get less than 100% of her husband’s primary insurance amount. If he collects Social Security before age 66, his benefit — and his wife’s survivor benefit — will be lower. Also, the survivor benefit will be reduced if the husband dies and the wife collects the survivor benefit before turning 66. If she waits until her full retirement age, she’ll get 100% of the survivor benefit. The size of her survivor benefit, however, will not be affected if she collects her own benefit or a spousal benefit early.
For many couples, a husband should claim at 70 while the lower-earning wife should start collecting at 62, according to a study by Boston College’s Center for Retirement Research. Because the husband is likely to die earlier, the study says, he will increase the value of the survivor benefit by delaying. As for the wife, even though her benefit will be reduced by 25%, the authors figured that her reduced benefit is only temporary. After her husband dies, she will step up to the higher survivor benefit. In the meantime, the household is bringing in extra income.
Found money. Let’s say you’re at full retirement age. You’d like to delay collecting benefits until 70. If your wife is 62 or older, she could collect benefits based on her own work record, but she’d get more money with a spousal benefit. One problem: She can’t apply for the spousal benefit until you file for your own benefit.
Here’s what you do. You file for your own benefit, and your wife applies for the spousal benefit (which will be less than 50% of your benefit if she applies before her full retirement age). You immediately request a voluntary suspension for your own benefits. Your wife would then get spousal checks, and you can earn a bigger benefit when you reapply later.
James Mahaney, vice-president of Prudential Financial, recalls one couple who didn’t realize they could “file and suspend.” The husband didn’t want to collect until 70. “They were leaving money on the table,” he says. Once they learned of this strategy, the wife applied for a monthly spousal benefit of $1,000 — a nice pot of “found money” over four years. If the husband dies first, she’ll collect a higher survivor benefit.
Claim a spousal benefit. Like the man above, you’re at full retirement age and you want to delay until 70. But you can still get benefits now — a spousal benefit. If your lower-earning spouse is at least 62, she could claim her own benefit. You can then apply for a spousal benefit. At 70, you switch to your own higher benefit. This strategy offers you and your spouse several advantages: Your wife’s survivor benefit will be higher if you die first, and you’ll be bringing extra income into the household until you reach 70. At that point, your wife can switch to a spousal benefit based on what you would have received at 66.
Raymond Lekowski, 67, of Fort Lauderdale, Fla., had planned to wait until 70 to claim benefits. But when he read in Kiplinger’s Retirement Report about claiming a spousal benefit, he decided to go for it.
His wife, Carol, a retired nurse, started collecting her own benefit just short of full retirement age. Her monthly benefit is about $1,000. Raymond, a retired executive for a communications company, gets a spousal benefit of about $500. If Raymond had claimed at 66, he would have collected more than $1,925 a month. By waiting until 70, his benefit will be 32% higher, plus inflation adjustments. “By not taking the benefit, it’s like investing the money and seeing it grow,” Raymond says. And if he dies first, Carol will be left with the bigger survivor benefit.
Note that the higher-earning spouse cannot use this tactic — known as “restricting an application” to spousal benefits — if he’s younger than full retirement age.
The retirement do-over. If you claimed your benefits early, perhaps at age 62, you may decide that taking a permanent cut was a mistake. Believe it or not, you can repay the benefits, free of interest, and reapply for a bigger benefit later. Your wife must return any accumulated spousal benefits as well. Dan Cowles, a retired systems analyst for IBM and Wachovia, decided a do-over was a smart move. He had claimed his benefits at age 62. But he says: “I had regrets as the years went by. I was in good health, and my mother lived until she was 94.”
Last year at age 67, Cowles, who lives with his wife, Sharon, 65, in Cumming, Ga., decided to repay his benefits. After mailing in a Request for Withdrawal of Application (SSA Form 521), the government told him that the tab was about $84,000. He took the cash from a money-market fund paying 3% interest. Because each year of delay boosts a benefit by more than twice that rate (not including the COLA), he figured he was getting a nice return on his investment.
At the time he repaid his benefits, he was receiving $1,580 a month. He reapplied soon after and now receives $2,196 a month — $616 more. By repaying $84,000 in past benefits, Dan “bought” an additional $616 a month in inflation-adjusted income. That’s less than what it would cost to buy an inflation-protected immediate annuity with a 100% survivor benefit from a low-cost annuity provider.
If Dan dies first, Sharon would receive his full benefit. Dan’s higher benefit also means that Sharon’s spousal benefit will be bigger. And he will be able to recoup the income taxes he paid on the benefits he gave back. Cowles says that he’s owed a credit of about $8,200, reducing his repayment cost even further. (Check IRS Publication 915 for instructions.)
One word of caution: Although this do-over strategy works well if you were already collecting benefits, it’s riskier to plan to collect reduced benefits now with the intention of repaying them later. You might not live long enough to take advantage of the repayment strategy. In that case, your spouse would be left with a reduced survivor benefit.
Remember, Medicare premiums are deducted from Social Security checks. When you withdraw an application, you must pay back all the benefits, including the benefits that paid your Medicare premiums. But if you don’t intend to reapply for Social Security for several years, be clear that you are withdrawing from Social Security but not Medicare. You will pay your Medicare premium separately.