What used to be a knee-jerk reaction to file for Social Security benefits at age 62 has evolved into a complex planning opportunity.
By now most advisors have at least heard of the "file and suspend" strategy for couples to maximize their Social Security benefits. If only all the good folks working in Social Security's offices were familiar with it, this couple would have had a much easier time. Throw in a federal pension and what used to be an easy decision can become very complex.
When John and Susan became clients of our firm, we told them early on about the Social Security claiming strategy for couples, commonly called "file and suspend," to delay claiming Social Security in order to collect the higher benefit available at age 70. For every year benefits are delayed from the Full Retirement Age (FRA) to age 70, the benefit increases by 8% plus any cost of living increases. For older folks whose FRA is age 65, this represents a potential 40% increase in benefits by delaying for the full five years until age 70. For John and Susan, it represents a 32% increase from their FRA of 66 to age 70.
Both of them qualify for Social Security on their own earning records, and both of them reach their FRA of 66 this year. Susan's benefit is larger than John's since his first career was in civil service where he did not contribute to Social Security. He does receive a healthy civil service pension. Many couples erroneously believe that the most effective claiming strategy is for them both to delay benefits until they each reach age 70. However, this option may leave money on the table unnecessarily.
Claiming a Spousal Benefit
There is a lot of confusion out there as to how spousal retirement benefits actually work. In order for a wife to claim a spousal retirement benefit on her husband's record, he would have to have filed for his benefit. If so, then her benefit would be half of his Primary Insurance Amount, which is the full, unreduced benefit at his FRA. (Note that it is not half of the benefit he is actually receiving. If he is older and receiving a larger benefit because he delayed claiming benefits past his FRA, her benefit is still calculated on his PIA, not his actual benefit.)
If she has reached her own FRA, then she receives her full half share. There is no increase in her half share for delaying past her FRA. If she has reached age 62, but not her FRA, then she will receive her half share of her spouse's benefit (reduced for claiming before FRA) or her own benefit (also reduced), whichever is greater. The implication here is that if you are going to claim a spousal benefit, there is no advantage to waiting beyond your FRA.
What often gets lost in the details is a wife's ability to claim a spousal benefit on her husband's record at her FRA, while delaying her own benefit, then switch from the spousal benefit to her own, increased benefit anytime before age 70. There is no advantage to waiting past her age 70 to switch, since her benefit will not increase any more other than for cost of living adjustments. The key point to remember is that she must have reached her own FRA in order to choose the spousal benefit versus being forced to take the larger of her own or the spousal benefit.
The benefit of this is that the wife (or husband, it works for either spouse) can collect spousal benefits for four years while also earning delayed credits by waiting to claim her own benefit until age 70.
Now, how do you avoid the mandate that the husband must have filed for his benefit in order for his wife to collect a spousal benefit?