Social Security Strategy for Couples and Divorcees
As couples approach retirement, thoughts turn to financial resources. Social Security claiming strategies become very important, and they can be complicated. Most individuals think in terms of maximizing their own Social Security benefit without coordinating with their spouse’s claim strategy. This is a mistake. Married couples can often obtain a better result if they work together. Even divorced individuals can leverage benefits based on a former spouse if they were married at least 10 years. This article will review some highlights of the restricted application for spousal benefits.
Social Security Income Basics
First, let’s talk about the basics of Social Security retirement income. Individuals born between 1943 and 1954 reach full retirement age (FRA) at 66. At this point, they become eligible to collect their primary insurance amount (PIA). For each year they defer the collection of their PIA, they earn an 8% delayed retirement credit (DRC). Thus, if one waits until age 70, he or she can collect about 32% more every month than if they started collecting at 66.
For most couples, social security claiming strategies hinge on the expected value of collecting early versus collecting later. There are several factors that weigh in: The time value of money (interest rates), life expectancy, and near-term cash flow needs. (For related reading, see: Tips on Delaying Social Security Benefits.)
Today’s low interest rates and longer life expectancies often argue for late collection of social security benefits. This is especially true for the mass affluent who tend to be healthier and do not require early cash flow infusions from Social Security. If one didn’t consider the spouse, waiting to age 70 is typically the better decision in today’s environment.
Restricted Social Security Applications
There may be another option for married and divorced individuals. Those who reach age 66 may file a restricted social security application provided their spouse is already collecting benefits. This restricted application is a petition to claim benefits based not on the individual’s earnings record but on that of his current or former spouse. It’s one-half of that spouse’s monthly benefit. (For related reading, see: Social Security "Start, Stop, Start" Strategy Explained.)
The economic advantage of the restricted social security application is that the applicant continues to accrue DRCs towards the social security benefit based on his own work history. In effect, the applicant gets a little now and a lot more later.
Here’s a relatively simple example of a couple with the same age and work histories. They each reach full retirement age in June 2017.
Mary files for social security benefits and begins collecting $2,400 per month in June 2017. John files a restricted application and begins collecting $1200 that same month. Together, they receive $3,600 per month for the next four years.
In June 2021, John switches to his own benefit, augmented by DRCs. He now upgrades to $3,170 while Mary continues to collect $2,400 per month. When the first spouse dies, the survivor will collect the larger of these two amounts. (For related reading, see: How Do Social Security Benefits for Widows or Widowers Work?)
This kind of coordinated claiming strategy can add value to the cash flow stream delivered by Social Security. Of course, there are complicating factors. Spouses obviously have different ages, health and projected benefits. No one path always dominates the others.
It would be helpful to have a tool that allows folks to compare different claiming strategies. Social Security Solutions allows users to input their personal information and view the value of different strategies side-by-side. Users can vary life expectancies and discount rates to gauge the robustness of each option. It’s worth a look.
In the last few years, Congress has been busy closing profitable loopholes in Social Security claiming strategies. File and suspend was shut down last year. The restricted social security application is only available to filers born before 1954. It should therefore remain open for new retirees through 2019. It may even add value if only one spouse was born before 1954. Note that the eligibility for the restricted application is looser for widows and widowers.
You’ll want to verify your options at your local Social Security office. If possible, get your expectations confirmed in writing.
