I received an interesting question from a financial adviser in West Chester, Pa, yesterday about how to coordinate Social Security disability and retirement benefits.
Jeff asked me to recommend an optimum claiming strategy for his client, a married couple in which both spouses are 64 years old. One spouse has been collecting Social Security disability benefits since age 62. The other has not yet claimed benefits.
First, let me review some basic facts about Social Security disability benefits.
(What to watch: Mary Beth Franklin on how married couples can wring nearly $60K a year in income out of Social Security .)
Social Security pays disability benefits to people who cannot work because of a severe medical condition that limits their ability to do basic work activities such as walking, sitting or remembering, and the condition is expected to last at least one year or result in death. Special rules exist for people who are blind or have low vision. The definition of disability is strict and applies only to full-time, long-term disability, not partial disability or short-term disability covered by some private insurance programs.
To get Social Security disability benefits, you must meet two different earnings tests: a “recent work” test based on your age at the time you became disabled and a “duration of work” test to show that you worked long enough under the Social Security system to qualify for benefits. There is a five-month waiting period after the disability begins before benefits can be paid.
If approved for disability benefits, the amount will be based on average lifetime earnings. Unlike retirement benefits, which are reduced if you claim them before your full retirement age, disability benefits are not reduced regardless of age. At full retirement age, currently 66, disability benefits automatically convert to retirement benefits, but the amount remains the same.
Once you begin receiving benefits, certain family members may also qualify for benefits, including your spouse if he or she is age 62 or older or a spouse of any age if he or she is caring for a child of yours who is younger than age 16 or is disabled. (But earnings cap restrictions apply to anyone who receive benefits before full retirement age.) In addition, unmarried children younger than age 18 (or younger than 19 if still in high school) or unmarried children age 18 or older who was disabled before age 22 may also be entitled to benefits.
Now back to Jeff's question. He wondered how his clients could maximize their Social Security benefits. Specially, he asked if the spouse who is receiving disability benefits could suspend benefits at full retirement age, thereby earning delayed retirement credits worth 8% per year up to age 70.
Yes, the disabled spouse could suspend benefits at 66 for four years and collect the maximum benefit at age 70, but he or she would not be eligible to collect any other benefits in between.
A better strategy may be for the spouse who is on disability to continue receiving benefits and for the other spouse, at 66, to file a restricted claim for spousal benefits only. That would allow the healthy spouse to collect half of the disabled spouse's Social Security benefit and defer collecting his or her own retirement benefit until it is worth the maximum amount at age 70. The healthy spouse's benefit would be worth 132% of his or her primary insurance amount at full retirement age.
I don't know the details of Jeff's clients' situation. He may need to consult Social Security claiming software to see which strategy would result in the largest combined benefit for the couple. Remember, if you suspend benefits, you collect nothing during the suspension period, whereas if you file a restricted claim for spousal benefits, you collect half of your spouse's benefit while accruing delayed retirement credits on your own record.
