How Boomers Can Maximize Their Social Security Benefits

I receive more questions about Social Security than any other topic I cover. Part of the reason is simply demographics: more members of the large baby boom generation are hitting the age when they become eligible for benefits. The other factor is gender-related: compared to previous generations, a higher percentage of baby boomer women have college degrees and were paid substantially more than any time in American history.

In my opinion, the most significant impact boomers have had on American society- especially from an economic perspective- is the two-career marriage. And now, many more women are approaching retirement with Social Security benefits that are equal to or higher than those earned by their husbands.

Boosting Your Joint Benefit

Successful, educated boomer couples want to know how they can coordinate the way each party claims Social Security in order to maximize the total amount of income they receive. In a nutshell, the key is to wait until you are “full retirement age” (FRA), which is currently 66 to have more options on how to take the benefits.

Consider a typical boomer couple where both spouses worked and have earned the right to receive Social Security. In this case, each one is potentially eligible for two types of benefits- one based on her/his own work history and a benefit based on the work history of the spouse.

Now, here’s the crucial thing to understand: If you file to begin receiving Social Security before you are of FRA, you do not get to select which benefit you want to receive. Social Security will do that for you, and the agency will choose the one that initially pays the higher amount. You are stuck with this.

File “Early”, Get Less

Take the case of a couple named Mary, age 64, and George, 66.(1) Both have held good-paying jobs over their careers. In two years, Mary will be FRA and eligible for a Social Security check of $1,800 per month based upon her earnings record. At that time, assuming George has already filed for Social Security, she would also be eligible for a 50% spousal benefit of $1,250 pr month based on her husband’s lifetime earnings. (No matter what your age, you are not eligible for a spousal benefit unless your spouse has filed.)

The problem is, if Mary files for Social Security before reaching age 66, both benefits will be reduced. For instance, at age 64, the benefit based on her own earnings record would be $1,561 per month. Her spousal benefit would be cut to $1,042.(2)

Mary might want to take her reduced spousal benefit for two years, thinking she can switch to a larger benefit based on her own record at age 66, but this is not possible. Instead, because she is under FRA, Social Security will assign her the benefit that pays the higher amount, i.e. the (reduced) benefit based upon her work history. This is permanent.

Typical Scenario

Mary (age 64) benefit: $1,561 per month

George (age 66) benefit: $2,500 per month

Total Social Security income as a couple: $4,061 per month

Benefit when George is 72 and Mary is 70: $4,849 per month

FRA-LA-LA

If Mary waits until age 66 to file for Social Security she has more flexibility. At FRA, if you are eligible for more than one type of benefit, not only can you choose which one you want to receive, you also have the ability to switch to the other one a few years later and potentially receive a significantly larger check.

This is possible because for each year beyond FRA that you postpone receiving your monthly benefit the government pays you a bonus called the “Delayed Retirement Credit” (DRC). It guarantees that your Social Security income will go up by 8% annually. Delaying the start of your monthly benefit checks until age 70 increases the amount you will receive by at least 32%!

If Mary and George’s primary goal is to get the biggest combined benefit they can, then they would both want to take advantage of this.

The Couple Combo

To maximize the combined income they will receive as a couple, Mary and George would combine two claiming options that are only available if both are at least full retirement age: “File and Suspend” and “File to Restrict.”

The first entails one member of a couple filing for benefits and immediately telling Social Security to “suspend” (not send) his/her checks. (You actually write “suspend benefit” on your application.)  To get the biggest bang for your buck, the individual with the highest benefit should do this.

Step One

In our example, George would not file for Social Security until Mary reaches age 66. By this time he will be 68 and his benefit will have increased to $2,652 thanks to two years of Delayed Retirement Credits.

However, since he wants his benefit to keep growing thanks to DRCs, he needs avoid receiving any money. Thus, George will “file and suspend.” According to Social Security spokesperson Dorothy Clark, “that way, the wife can receive a spouse’s benefit and he can continue to earn delayed retirement credits until age 70.”  In other words, by virtue of the fact that George has technically filed for Social Security- even though he is not getting any checks- Mary is entitled to a spousal benefit.

Because Mary “has reached full retirement age, and is eligible for a spouse’s benefit and a retirement benefit [based on her own work history], she has a choice,” says Clark. Mary can opt for either 100% of her own benefit or the maximum spousal benefit equal to half of what George was entitled to at age 66: $2,500 x 50% = $1,250.

Even though this is less money than her own full retirement benefit, Mary will take the spousal amount for now. She indicates this on her Social Security application by specifying that she wishes to “restrict” her benefit to the amount she is entitled to as a spouse. (Although spousal benefits go up due to annual Cost of Living (COLA) increases, they do not earn Delayed Retirement Credits. Thus, it makes no sense to start receiving them later than age 66.)

Couple Combo, Step 1

Mary (age 66) spousal benefit: $1,250 per month

George (age 68) file-and-suspend benefit: $0 per month

Total Social Security income as a couple: $1,250

Patience Pays

Two years later, a few months before George turns 70, he notifies Social Security that he wishes to begin receiving his monthly retirement checks in his birthday month. Four years of DRCs at 8% per year, plus annual cost of living increases of 3% have boosted his monthly benefit to $3,713- almost 50% more than he would have received at age 66.  Over the past two years, Mary’s spousal benefit has also increased thanks to COLAs (only).

Couple Combo, Step 2

Mary (age 68) spousal benefit: $1,327 per month

George (age 70) own benefit: $3,713 per month

Total Social Security income as a couple: $5,040 per month

The Age 70 Switch

Two years later, as she is approaching 70, Mary notifies Social Security that she wants to drop her spousal benefit and switch to the retirement benefit she earned on her own work record. By delaying this four years past FRA, Mary’s benefit is also almost 50% higher: $2,764, thanks to four years of DRCs and annual COLAs of 3%. Over the past two years, George’s benefit has increased thanks to COLAs (only).

Couple Combo Scenario

Mary (age 70) own benefit: $2,764 per month

George (age 72) benefit: $3,939 per month

Total Social Security income as a couple: $6,613 per month

At these ages, compared to the Typical Scenario, Mary and George’s joint Social Security income using the Couple Combo is 36% higher. By being patient and smart about how they took and timed their benefits, Mary and George have substantially increased their Social Security income.

Moreover, since future cost-of-living increases will be applied to a larger benefit amount, despite the fact that they accepted less income for several years, it will not take long for Mary and George to make this up.

Money Isn’t Everything

The strategy outlined above isn’t appropriate for every couple. You have to run the numbers specific to your own situation.

In addition, you should consider how you are going to generate the income you need if you delay the onset of Social Security. Will one or both of you continue working? Do you have other resources you can tap, such as an IRA or 401(k)? If necessary, are you willing to scale back your lifestyle for a couple of years in order to reap the pay-off of both earning the annual 8% Delayed Retirement Credit? Health and longevity issues also need to be factored into your decision. Talk it over.

1. We assume that George and Mary were born from 1943-1954.
2. Go to http://www.socialsecurity.gov/retire2/agereduction.htm to find out how much your own or your spousal benefit is reduced based upon the year you were born and the age that you file.