Editor's Note: Associate Editor Karen DeMasters writes the Social Security beat. Please send ideas to her at [email protected].
Spouses can use each other's earnings records to increase their Social Security benefits in ways that are sometimes overlooked, says J. Graydon Coghlan, president of CFG Wealth Management in San Diego.
Coghlan, whose firm has offices throughout California, works with many retirees and near-retirees to help them maximize their benefits and recreate as much of their paycheck as possible after retiring.
"There are a number of unusual strategies that can be used to boost Social Security benefits, including techniques know as 'claim now, claim later' and 'suspend claim for spousal benefit,' he says.
"Both spouses claiming their own benefits upon retirement is still the most common, but there are other ways to maximize benefits," he says.
Coghlan had one couple as clients where the husband was substantially older than the wife. The husband retired and began collecting benefits. At the same time, the wife returned to work, while collecting spousal benefits on the basis of her husband's earnings.
"Many of the scenarios depend on whether the couple wants to receive as much in benefits as possible as early as possible or whether the total amount of benefits received over a lifetime is more important and delaying collecting would achieve that," Coghlan says.
Although most people concentrate on their own benefits, "when you make decisions about Social Security retirement benefits, you may not be making those decisions in isolation," says the AARP resource book on Social Security by Jonathan Peterson, AARP executive communications director. "Our decisions may affect your spouse or former spouse."
One way of maximizing benefits, known as 'claim and suspend,' is used by couples who want to maximize their benefits over a lifetime. In this case, the couple needs to be able to wait to collect full benefits. The method often is advantageous when one partner earns substantially more than the other.
For the purposes of these discussions it will be assumed the husband is the main breadwinner and the wife has no work history or earns substantially less.
The wife, who earns less, can apply for spousal benefits at age 62 or older based on her husband's higher salary. The amount she would receive increases each year she waits between the time she is 62 and the time she reaches full retirement age, usually 66 years of age. The maximum spousal benefit is 50% of the partner's benefit. That amount is paid to the wife if she waits to file for spousal benefits until she reaches full retirement age. The amount is less if she applies sometime between 62 years of age and full retirement age, down to 35% of the husband's benefit if she begins collecting when she is 62.
In order for the wife to receive spousal benefits, the husband must be of retirement age and must have applied for benefits. But the husband can immediately suspend his benefits and not receive them.
Using this strategy the husband continues to work until age 70, at which time his benefits have reached the maximum amount and he begins collecting.
If the wife has some work history, her benefits also will continue to grow until she reaches 70. At that time she can determine if her benefits or the spousal benefits are higher.
If a person begins collecting Social Security before his full retirement age and continues to work, $1 in benefits is withheld for every $2 earned above $14,640. A much smaller deduction is taken during the year the person reaches full retirement age, for the months before his or her birthday. However, if additional earnings boost the amount a person should collect, an adjustment to the benefit is made, according to the Social Security Administration.
Also if a person earns enough to totally negate the Social Security benefit during any given month after he has started collecting, the person will get credit for the month of nonpayment and at full retirement age will collect the lost benefits, the Social Security Administration says.
There is a slight variation of the 'claim and suspend' strategy in which no suspension of benefits is required. Under this strategy, if both the husband and wife have earnings that are close to equal and they are both of retirement age, the husband, who is earning more, can claim spousal benefits and continue working to let his benefits continue to grow until he reaches age 70. The benefits would be larger because he waited. This would probably be used if the wife wanted to retire and collect her own benefits, while he collected the spousal benefits.
Another strategy can be used if a person starts collecting benefits at 62 or older and then decides to return to work and decides he or she does not want to collect any more. The claim can be retracted and a new claim can then be filed at a later age when the benefit will be larger. However, the amount received in benefits from the original claim will have to be repaid.
Advisors once saw this as a method of getting a no-interest loan to be spent or invested and repaid later. However, the Social Security Administration has now limited this option to the first year of collecting, according to the AARP Social Security resource book. If a person has collected for more than a year, he can no longer retract the claim.
"It all depends on which scenario proves to be most advantageous to the couples," Coghlan says, "and a financial advisor needs to know all of the different possibilities." (Learn more about CFG Wealth Management at www.cfgwmt.com.)