Although I spent most of last week in an intensive Dalton Review course for my upcoming certified financial planner exam next month, readers continued to fill up my inbox with Social Security questions.
During my absence, I received several similar questions about optimum claiming strategies for married couples when the spouses' ages are four years apart.
It is a very common scenario and presents challenges for financial advisers who want to use either a file-and-suspend or a restrictive claiming strategy to maximize their clients' Social Security benefits.
Sam Lindenberg, an independent adviser with Team Financial Managers, sent me an example of a 66-year-old husband with a full-retirement-age benefit of $2,000 per month and a 62-year-old wife with a full-retirement-age benefit of $800 per month.
"At these ages, can either of these claiming strategies work?" Mr. Lindenberg asked.
In that scenario, a file-and-suspend claiming strategy probably doesn't make sense.
At full retirement age — currently 66 — one spouse can elect to file and suspend for the purpose of triggering spousal benefits for the other spouse, who must be at least 62. The first spouse can then defer collecting his or her own benefit until it is worth more later.
In the interim, the benefit would earn delayed retirement credits worth 8% per year up to the maximum amount at 70. At that point, that spouse could collect his or her Social Security benefit, which would be worth 132% of the full-retirement-age benefit, including any intervening cost-of-living adjustments.
Although the husband could file and suspend at 66 to trigger spousal benefits for his wife, she would be only 62. That means she would be eligible for just 35% of his primary-insurance amount — $700 per month — rather than half his PIA if she had waited until her full retirement age to claim.
And because she also would be entitled to benefits on her own earnings record, Social Security would pay her retirement benefits first and top off any difference to bring her up to the appropriate spousal-benefit amount.
Specifically, she would receive $600 per month on her own earnings record ($800 x 75%). Then she would receive an additional $100 in spousal benefits — for a total monthly benefit of $700 — equal to 35% of her husband's full retirement age benefit ($2,000 x 35% = $700).
She would also be subject to earnings cap restrictions if she continued to work while collecting Social Security benefits before her full retirement age.
But there may be another option.
The wife could claim her reduced retirement benefits at 62, assuming she weren't working or not earning too much beyond the earnings cap, and the husband, 66, could file a restricted claim for spousal benefits on his wife's earnings record.
Although her benefits would be reduced to 75% of her full retirement age benefits ($600) because she claimed four years early, he would receive half her full-retirement-age benefits ($800 x 50% = $400) and defer collecting his own benefit up until 70.
However, if her benefits were reduced due to earnings cap restrictions, it would affect his spousal benefits, too.
Another adviser, John Herron of SagePoint Financial Inc., asked if one of his clients could collect spousal benefits now at 62 on her retired husband's benefit and switch to her own retirement benefit when she turns 66.
No, that won't work.
Anytime an individual collects before the full retirement age, he or she must accept the largest benefit to which the person is entitled. Individuals can restrict their claim to spousal benefits only if they wait until 66 to claim.
If she claimed early, her benefit would be permanently reduced, and she would forfeit her right to higher benefits later.
However, there may be another option for this couple, too.
The husband, who started collecting reduced retirement benefits early, could voluntarily suspend his retirement benefit at 66 and earn delayed-retirement benefits worth 8% per year between now and 70.
But because he already made his election decision to collect benefits early, he can't now restrict his claim to spousal benefits only. That claiming decision ship has sailed.
But if the couple could afford to suspend his benefit for four years, his benefits would be worth about 99% of his full-retirement-age benefit when he resumed collecting at 70.
The math works like this: ($2,000 x 75% = $1,500 x 1.32% = $1,980.) His benefit would actually be a little larger due to annual cost-of-living adjustments during the intervening four years that would be applied to his new benefit.
I don't recommend claiming reduced retirement benefits early with the intention of voluntarily suspending them later as a claiming strategy, but it can be a good way to reverse an early claiming decision that an investor later regrets.
