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By Christine Benz | 05-09-2012 09:00 AM

2 Strategies for Maximizing Social Security

'Restricted application' and 'file and suspend' are two techniques spouses can employ to ensure they get the most out of their Social Security benefits, says Michael Kitces of Pinnacle Advisory Group.

Christine Benz: Hi, I am Christine Benz for Morningstar.com. The timing for a retiree's receipt of Social Security benefits can have a big impact on his or her lifetime benefit, and that's particularly true for married couples.

Joining me to discuss some research in this area is Michael Kitces. He is a partner and director of research at Pinnacle Advisory Group. Michael, thank you so much for coming in.

Michael Kitces: Thanks, my pleasure. Happy to be here today.

Benz: So Michael, this is a hot topic among our readers. They really would like guidance on how to maximize their lifetime Social Security benefits, but this gets complicated, when you've got married couples maybe who have a big age gap between them or a big income/earnings gap between them. Let's discuss some general rules of thumb. If you're part of a married couple and you're trying to figure out the timing of the receipt of these benefits, what are some pieces of guidance that you can give people?

Kitces: Absolutely. The starting point around these decisions, obviously, at the most basic level, it's essentially, "Do I take [Social Security] now, or do I delay it?" And in the individual context, that's relatively straightforward. If I delay, there are certain payments I won't get now in exchange for getting higher payments in the future. The higher payments in the future make up the money I didn’t get early on, and we can kind of do the math. There is a break-even period. If you live this long, you'll make up the payments. If you live longer you come out ahead. If you don't make it that long, you came out a little bit behind.

With married couples, it gets more complex because of the crossover the benefits decisions can have on each other, and so when we look at rules like for a widow, you get the higher of your benefit or your deceased spouse's benefit. Well, now when we're looking while everyone is still alive, at what that first spouse should do, decisions to delay one person's benefit affects not just that individual, but potentially also the survivor benefit of the other person after the fact.

Now what that generally leads us to, at least in terms of a rule of thumb, is it makes the delayed decision an especially good deal for particularly the higher earner because now in essence the delayed decision really means our break-even is the longer of my lifetime for having delayed or my spouse's lifetime if my spouse outlives me. It's a lot easier to get to those break-even points when we have two life expectancies instead of one in order to get there.

Sort of the starting-point emerging rule of thumb is we delay the higher earner's benefits as long as possible, even if that person themselves is unhealthy because we can still get to the required time horizon for the surviving spouse. And then if we're delaying the higher earner's benefits, now we start looking at anything that we can do to try to get some money out of the system during basically our 60s, because the maximum delay age is 70. What can we do to get money out of our benefits during our 60s until we get to that age 70 point where the higher earner turns on the higher benefit?

Benz: Well, let's discuss a strategy or two around that idea. Say that you have decided to wait until age 70 for that higher earner; what is a way to bring out some benefit up until that point.

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