Part 1: Married Couples

Every day, more Americans discover the Social Security safety net they rely on is filled with complex traps that can reduce their potential benefits by tens of thousands of dollars.

One of the complications: For married couples, Social Security rules and strategies can be very different from what they are for people who are single, widowed or divorced.

Here we explain ways to avoid some of the most common, confusing and potentially costly traps for married couples and we explore a quandary that affects all kinds of retirees—when to start collecting benefits. For part 2—which focuses on singles, widows and widowers—click here. (And see our earlier article “Divorced? You Could Be Entitled to Much More Social Security” at www.BottomLinePublications.com.)

TRAP 1: Many men think that they should start receiving benefits as soon as they are eligible because men have shorter life spans, on average, than women.

Monthly benefit checks increase in size for every month that you delay retirement from age 62 to 70. But many men assume that it’s sensible to start benefits as soon as they retire because longevity tables (and in some cases, family history and/or their own health) indicate that they’re unlikely to live far into their 80s. And Social Security calculators often suggest that delaying benefits is a money loser if you die before age 80.

While that logic can be sound for single men, it tends to be a mistake for husbands—particularly husbands who significantly outearned their wives during their careers and are older than their wives and/or have healthy wives from long-lived families.

Better strategy: Generally, higher-earning husbands should base decisions about whether to take benefits early on the longer of the two spouses’ projected life spans, which usually is the wife’s. That’s because after a man in this situation dies, his widow is entitled to a survivor benefit equal to the benefit that the husband had been receiving. (However, this survivor benefit would be reduced if the widow began receiving it prior to her so-called “standard” or “full” retirement age. That age varies according to what year you were born and may be slightly different for widows/widowers—see Trap 2.)

Once this survivor benefit is taken into account, many households would be better off if the husband delays starting his benefits as long as possible up to age 70—even if that means he doesn’t receive much from Social Security before he dies. (This also could apply to wives who significantly outearned younger husbands, but because women tend to have longer life spans, benefit calculators are less likely to suggest that women should claim their benefits early.)

Example: Mr. Jones, who is 66 (his standard retirement age), starts collecting $2,000 per month. If he lives 16 more years—a typical life span for a 66-year-old man—he will have received a total of $384,000* from Social Security. Waiting until age 70 to start benefits might reduce the total benefits he receives—his monthly checks would increase to $2,640, but the loss of four years’ worth of checks means that his take would be just over $380,000, which is nearly $4,000 less than if he had started collecting at age 66.

But if Mr. Jones is married, for instance to a healthy woman four years his junior, then delaying benefits until age 70 might pay off better. In that case, after Mr. Jones dies, Mrs. Jones continues to receive $2,640 per month in survivor benefits, rather than the $2,000 she would have received had Mr. Jones started his benefits at age 66. If she lives a typical woman’s life span—in this case, staying alive for seven years after her husband’s death—she would receive $53,760 extra from Social Security, offsetting her husband’s $4,000 loss many times over.

TRAP 2: Many people don’t realize that they might earn nothing extra by postponing spousal benefits past their standard retirement age.

After reaching standard retirement age, Social Security allows married people to choose between filing for their own retirement benefits (based on their own earnings history) and spousal benefits (based on their spouse’s earnings history). You even can switch from one of these options to the other along the way to allow the size of monthly checks under the postponed option to grow until you switch to that option. Using this strategy, you can maximize your lifetime benefits.

For instance, a woman might file for her own retirement benefits and then eventually switch to higher spousal benefits. But postponing the switch to spousal benefits beyond her standard retirement age will not continue to increase her spousal benefits.

This surprises many people because it is different from the rule that applies to Social Security benefits based on your own earnings history. Postponing the start of your own retirement benefits beyond your standard retirement age will increase your benefit checks by 7% to 8% per year until age 70.

(For a widow/widower, survivor benefits do not increase after she/he reaches standard retirement age.)

TRAP 3: If one spouse—for instance, the husband—files for benefits…and later the wife files before reaching her standard retirement age, the wife could lose the ability to eventually switch to the highest possible benefits.

That’s because the wife runs into a complication called the “deemed filing rule.” In this circumstance, when the wife tries to claim her own retirement benefits before reaching standard retirement age, she is deemed to be filing for her husband’s benefits as well—even though that isn’t what she meant to do. That means neither her own benefits nor the spousal benefits will grow—thwarting her plan to get the highest possible benefits by switching at a later date.

Example: Mr. Smith files for his own benefits at age 66—his standard retirement age—and starts collecting $2,100 a month. Mrs. Smith, 63, plans to apply for her own retirement benefits at the same time, collecting $720 a month. She figures that she will switch to spousal benefits of $1,050 per month (half of her husband’s $2,100 benefit) when she reaches her standard retirement age of 66, thus allowing the eventual monthly spousal benefit to be bigger than if she had filed for spousal benefits when she was 63. But, in reality, she triggered the deemed filing rule at age 63. At that point, she became eligible for $833 a month—the equivalent of spousal benefits, which in this case are higher than her own benefits—but the amount will not grow in subsequent years.

Better strategy: Assuming that she has many years left to live, Mrs. Smith would be better off waiting until her standard retirement age…starting to collect spousal benefits of $1,050 a month at that point…and then at age 70, switching to her own benefits, which will have grown to $1,188.

(Similarly, the deemed filing rule kicks in if one spouse—say, the husband—files for his own benefits and the wife then files for spousal benefits before reaching standard retirement age. As a result, when the wife switches to her own benefits at a later date, those benefits will not have grown.)

CAN YOU DO BETTER INVESTING YOUR BENEFITS?

Confident investors often start their benefits as soon as they turn age 62 and/or retire. This lowers their monthly benefit checks but ensures that those checks start arriving as soon as possible and can be invested.

However, today’s low interest rates mean that the strategy of claiming Social Security benefits as soon as possible and investing the checks is more likely to be a money loser in the long run.

Low interest rates make it very difficult to beat the upside offered by delaying Social Security benefits without also incurring significantly greater risk through such investments as stocks.

Here’s how the trade-off involved in delaying Social Security works: If we postpone the start of our Social Security benefits, the monthly checks that we eventually see will have increased by 7% to 8% per year, although, of course, we are without any checks in the interim.

But even when you factor in several years when you are getting no benefits, if you have a typical life span, you will end up with higher total benefits that translate to 3% to 4% in annual returns (7% for married couples) over the long run by delaying.

If those returns don’t impress you, consider that these are inflation-adjusted…government-backed…and guaranteed to last for the rest of your life, like an annuity.

Of course, postponing benefits doesn’t do you a lot of good if you need the money right away to help pay for your expenses or if you don’t trust the government to live up to its promise. But for most people, waiting can pay.

*Estimates of future Social Security income provided in this article do not include future inflation adjustments.