A Social Security benefit is a terrible thing to waste

As I travel around the country teaching financial advisers and their clients about smarter ways to claim Social Security benefits, my "magic age" strategies often trigger surprise and gratitude among my audiences who are astonished to learn about various ways they can maximize their benefits.

But sometimes, there is no clever claiming strategy available to boost lifetime benefits given the difference in ages between two spouses or the relative amount of their Social Security benefits. And that leads to frustration and disappointment.

Case in point: A financial adviser, who asked to remain anonymous, wrote to me recently asking for guidance about how to optimize Social Security benefits for her clients. The husband, who turned 66 in April, has not yet claimed his Social Security benefit, which is worth $2,560 per month at his full retirement age. His wife will turn 66 two years from now in July 2017.

The adviser said she planned to recommend that the husband file and suspend his Social Security benefit when the wife turned 66. That would allow the wife to collect a spousal benefit of $1,280 per month — half of her husband's full retirement age amount — rather than her own smaller retirement benefit of $800 per month. In this case, her benefit actually would be comprised of her own retirement benefit of $800 per month plus an additional amount to bring the combined total up to the spousal benefit amount.

I told the adviser that is an excellent strategy. Retirement benefits increase by 8% per year for every year you postpone collecting them beyond full retirement age up to age 70. And by ensuring that the husband delays collecting his retirement benefit until age 70 when it would be worth the maximum amount, it also locks in the largest possible survivor benefit after the death of one spouse.

But even though the husband would be 68 when he filed and suspended his benefit, at which point he would have automatically earned two years' worth of delayed retirement credits totaling 16%, the wife's spousal benefit would still be based on just half of his full retirement age amount, not half of a larger benefit. Spousal benefits do no accrue delayed retirement credits.

However, if the husband died first, his wife's survivor benefit would be worth 100% of his retirement benefit — including four years' worth of delayed retirement credits. In this case, the husband's benefit would increase by 32% at age 70 (8% x four years) to $3,379 per month plus annual cost-of-living adjustments thereafter. If he died first and the wife collected a survivor benefit, her own smaller benefit would disappear.

If the wife died first, then the husband would continue collecting his larger benefit, but the wife's smaller benefit would stop when she died.

Next, the adviser suggested a strategy that she thought would boost the couple's benefits even further.

"When the husband turns 68 and the wife is 66, can't he file a restricted claim for spousal benefits, allowing him to collect half of her benefit amount — $400 per month — until he turns 70?" she asked.

Sorry, that won't work. "Everyone is entitled to one Social Security claiming election," I replied. "If the husband files and suspends at 66 or later to trigger a spousal benefit for his wife, he cannot also file a restricted claim for spousal benefits," I explained. "It is one choice per person."

The adviser was incredulous. "So her Social Security benefit based on her own work record is a waste?" she asked. "In other words, their combined benefit is the same as if she never worked at all?"

That's correct. When one spouse's retirement benefit based on her own earnings record is smaller than a spousal benefit, it may seem that her benefit is wasted. But it all depends on the facts and circumstances of the couple's individual benefits and their relative ages.

If, for example, the lower-earning spouse were older than her higher-earning husband, then she could collect hear own smaller Social Security retirement benefit first until her husband either claimed his benefit or filed and suspended his benefit at his full retirement age, triggering a higher benefit for her.

But for some people who have worked only sporadically throughout their lives and have accumulated less than the minimum of 40 credits or 10 years of work needed to be eligible to collect Social Security benefits on their own earnings record, it may not be worth it to work longer to qualify for a retirement benefit that will never be higher than their benefit as a spouse.

Questions about new Social Security rules? Find the answers in Mary Beth Franklin’s 2022 ebook at MaximizingSocialSecurityBenefits.com.