Lynn Brenner's Family Finance

An Even Smarter Social Security Strategy

In Monday's post, I wrote that a reader's Social Security strategy is a smart way to maximize a couple's retirement benefits.

Now Barry C. Picker, a Brooklyn New York CPA and financial planner, has alerted me to an even smarter plan.

Here's how my reader described his situation. We'll call his strategy Plan A:

We don't need Social Security until we're both 70 years old. My full retirement benefit (FRA) at age 66  is $2,500 per month. My wife's FRA Social Security  benefit is $2,000 per month. I'm two years older than she is. Our plan is that at age 68, I'll file and suspend. That will allow my wife, who will then be 66, to file for a spousal benefit of $1,250 -- 50% of my $2,500 full retirement benefit. At age 70, she'll switch to her own retirement benefit. And I'll start collecting my benefit when I turn 70.

On Monday, I explained why that's a good idea. Let's call this couple George and Martha. With Plan A, between Martha's 66 birthday and her 70 birthday, together they'd collect $139,200 in Social Security:

Year One: George files for his benefit but immediately suspends his application. Martha collects $1,250 a month in spousal benefit.

Year Two: Martha collects $1,250 a month in spousal benefit.

Year Three: Martha collects $1,250 a month. And George, now 70, starts to collect his own benefit. It's $3,300 a month -- 32% bigger than his original $2,500 benefit thanks to his four years of delay.

Year Four: Martha collects $1,250 a month, George collects $3,300 a month.

In year five, Martha will be 70 and switch to her own enhanced benefit -- $2,640. Going forward, George and Martha together will collect $5,940 a month.

(I've left out annual inflation adjustments, both for simplicity's sake and because we don't know what they'll be.)

Plan A is a good one: In four years, Martha has collected $60,000 as a spouse, and George $79,200 based on his own record. It adds up to $139,200.

But after reading my post, Picker suggested an alternative plan, which in a flash of inspiration I've called Plan B:

Let Martha file for her own $2,000 benefit when she turns 66. George who will then be 68, can file for a spousal benefit based on her record, postponing his application for his own benefit until he's 70.

With Plan B, Picker points out, the couple would collect an additional $60,000 in the first four years:

Year One: She collects her full $2,000 monthly benefit. He gets a $1,000 monthly spousal benefit.

Year Two: She collects $2,000 a month; he collects $1,000 a month.

Year Three: She collects $2,000 a month. He turns 70 and switches from the spousal benefit to his own enhanced $3,300 monthly benefit.

Year Four: She collects $2,000 a month. He collects $3,300 a month.

In four years, Martha will have received $96,000, and George will have received $24,000 as a spouse and $79,200 based on his own record. Grand total: $199,200.

To be sure, going forward their total monthly benefit will be only $5,300. (With Plan A, it would be $5,940.)

With Plan A, they collect $60,000 less in years one through four, but starting in year five their combined annual benefits will be $7,680 more.

With Plan B, they get an extra $60,000 in years one through four, but $7,680 less in combined annual benefits thereafter.

This is yet another example of why it really pays to weigh your options before you file for Social Security.

(In case you're wondering how long George and Martha would have to live before Plan A nets them more than Plan B, I don't have the answer. They should ask their financial adviser to crunch the numbers for them.)

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved

A Smart Social Security Strategy

Q: We don't need Social Security until we're both 70 years old. My full retirement benefit (FRA) at age 66  is $2,500 per month. My wife's FRA Social Security  benefit is $2,000 per month. I'm two years older than she is. Our plan is that at age 68, I'll file and suspend. That will allow my wife, who will then be 66, to file for a spousal benefit of $1,250 -- 50% of my $2,500 full retirement benefit.

At age 70, she'll switch to her own retirement benefit. And I'll start collecting my benefit when I turn 70.

Does this appear to work? Assuming that we live a long life, does this strategy maximize the total amount collected? Does the fact that my wife's FRA benefit is greater than her spousal benefit affect this plan? -- BA via email


A: Go to the head of the class. You've really paid attention to the Social Security rules!

Yes, assuming you live a long life this plan will maximize the amount of Social Security you collect. In fact, this is a good plan even if only one of you lives a long time because it maximizes the survivor's benefit no matter which of you collects it.

If you die first, your widow will receive 100% of your Social Security benefit, including any extra credits you gained from delaying your application until you were 70. And of course if you survive her, you'll continue collecting your larger benefit.

Or to put it another way, the bigger of the two Social Security benefits survives no matter which spouse dies first.

Your strategy would be a good one even if your wife's benefit on her own record were smaller than her spousal benefit.

As you clearly understand, your wife can't file for a spousal benefit until you have applied for Social Security. By filing and then immediately suspending your application, you enable her to start collecting as a spouse when you're 68, but still keep your own benefit growing for another two years. And since she'll be 66 when she files for her spousal benefit, she'll get the maximum: 50% of the amount you're entitled to collect at 66, plus any annual inflation adjustments since that date.

 Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved

If I Delay Social Security, Should My Spouse Delay Too?

Q: I'm 67 years old. I'm planning to wait until I'm 70 to apply for Social Security. (If I had taken my benefit at 66 -- my full retirement age -- I would have received $2,000 a month.)

My wife is 63, and her own full benefit at age 66 will be $800 a month.

It's unclear to us what would happen if she also waits until she's 70 to apply for Social Security. Is there any advantage to that? Would she then be eligible for a bigger spousal benefit -- i.e., half of the amount I receive at 70, instead of half of the amount I get at 66? --AP, via email

 

A:  Based on what you say, there's no reason for your wife to delay applying for Social Security after she turns 66.

The delayed credits you can earn by postponing your application for your own benefit until you're 70 don't also boost your spouse's benefit.

During your lifetime the biggest Social Security benefit your wife can collect based on your work record is 50% of the amount you're eligible to receive at your full retirement age -- i.e., 66.

She can collect that maximum spousal benefit only if she waits until she herself turns 66 to apply for it.

But if she survives you, the fact that you delayed applying for Social Security until you're 70 will boost her widow's benefit: She'll be entitled to 100% of the benefit you were eligible to receive when you died.

Let's look at the numbers.

Your full Social Security benefit was $2,000 a month, so her maximum spousal benefit will be $1,000, plus any annual inflation adjustments since the year in which you turned 66. Given the difference in your ages, there will have been four years of inflation adjustments by the time she's 66.

Of course, she will have an alternative choice available to her when she turns 66: She could choose to apply for her spousal benefit alone, and postpone collecting her own benefit until she turns 70. Then she could switch from her spousal benefit to her own benefit.

That would make sense if her own benefit at 70 is going to bigger than her spousal benefit. But given the numbers, that's not the case.

At 70, her own benefit will be 32% larger than at 66 -- i.e., her original $800 benefit will become $1,056 (plus four years of annual inflation adjustments). But her $1,000 spousal benefit will almost certainly be bigger. By then, it will have been boosted by eight years of annual inflation adjustments.

 Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

 (c) Lynn Brenner, All Rights Reserved