The most misunderstood Social Security rule

In one of my recent blogs, I discussed Social Security spousal benefits, explaining how spousal benefits can be worth up to half of the amount of a worker's benefit if collected at full retirement age. I also noted that because spousal benefits do not qualify for delayed retirement credits, it usually doesn't make sense to delay collecting spousal benefits beyond full retirement age because they won't grow any bigger. That blog triggered a flood of e-mails. Susan, a financial adviser from Overland Park, Kan., asked: “Is it possible for the wife to take spousal benefits at 62 and then switch over to her own benefits at 66?” No. If Susan's client claims benefits at 62, she must accept the largest benefit to which she is entitled at the time and she forfeits the right to engage in creative claiming strategies later. She can only restrict her claim to spousal benefits — which would allow her own retirement benefits to accrue delayed retirement credits — if she waits until her full retirement age of 66 to file her initial claim. Susan wasn't alone. Several other readers asked similar questions, uncovering a broad misunderstanding about a key Social Security claiming rule. Based on my own unscientific survey, I've dubbed it the most misunderstood rule of Social Security. Another adviser, Gordon from Los Angeles, said one of his clients told him she plans to claim her spousal benefit at 62, even though she realizes the amount will be reduced because she will collect four years early. Then, when she turns 70, she intends to switch to her own retirement benefit, which would have accrued four years' worth of delayed retirement credits, boosting her monthly benefit to 132% of the amount she was entitled to at her full retirement age of 66. Sorry. That's not happening either. If she claims benefits early at 62, that's it. She has made her decision to claim reduced benefits early. She doesn't get a second chance to claim more later. Social Security benefits are designed to be actuarially fair: you can either collect reduced benefit early so that you receive a smaller check for a longer period of time or you can defer claiming benefits until they are worth more later, but you will collect them for a shorter period of time. You can't do both. Susan added another wrinkle to her question. She noted that her client is 61 and in poor health. Her client's husband is 71 and has been retired for years. Because the client's primary insurance amount at full retirement age is worth more than half of her husband's amount, she will not collect any spousal benefits. Her retirement benefits will be based solely on her own earnings record. If she claims benefits early at 62, she would receive about $1,480 per month compared with about $2,000 per month if she waited until her full retirement age of 66 to collect. Susan asked if I had any other ideas about what her client should do. Yes, I replied. If the client is in poor health, she can file for disability benefits at the same time she claims early retirement benefits. She would receive her reduced retirement benefits automatically at age 62. And if her disability claim is ultimately approved, she would be paid an unreduced benefit retroactively, minus a five-month waiting period. Unlike retirement benefits, which are reduced if claimed early, disability benefits are based on average lifetime earnings at the time they are claimed, without a reduction for age. And, if approved for disability benefits, she could qualify for Medicare before age 65.