How to maximize Social Security benefits if Congress targets file-and-suspend strategy

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Larry Kotlikoff’s Social Security original 34 “secrets”, his additional secrets, his Social Security “mistakes” and his Social Security gotchas have prompted so many of you to write in that we now feature “Ask Larry” every Monday. Find a complete list of his columns here. We are determined to continue it until the queries stop or we run through the particular problems of all 78 million Baby Boomers, whichever comes first. Let us know your Social Security questions. Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version.

Question: First I want to thank you for your earlier advice on the “file and suspend” strategy for my spouse and me. Just today, a friend alerted me to an article in Investment News that suggests that President Barack Obama is asking to remove this Social Security claiming strategy in his budget proposal. Have you seen this article and could you comment on whether a pre-retiree and his spouse (both age 63) should reconsider the file-and-suspend strategy at age 66? Thanks again for your insight.

Larry Kotlikoff: Yes, I’ve seen this column about the possible repeal of the file-and-suspend option. I don’t know the likelihood of passage. It seems the two parties can’t agree on anything. But it’s clear it will affect only high-income households, although I don’t know how they would define income here, let alone high income. I also doubt they would do anything that hurts people very close to full retirement age. That would be extremely unfair.

Perhaps the best thing I can do in response to your question is to indicate how your optimal strategy would change if this provision were immediately implemented. I’ll assume here that your wife is the higher earner.

In this case, one option, I’ll call it option A, is for your wife to wait until 70 to take her highest possible retirement benefit. But if they change the law, you won’t be able to apply for a spousal benefit until your wife files for her retirement benefit, i.e., when you are age 70. So you’d also need to wait until age 70 to apply for your spousal as well as retirement benefit. Under this plan, you both wait until age 70 to file for both retirement and spousal benefits. Both of you can’t receive an excess spousal benefit (see next answer for a more complete description of the excess benefit), and it may be that neither of you receives an excess spousal benefit if you had similar earnings or even just had decent-sized earnings.

Under option B, your wife would apply for her retirement benefit at full retirement age. This would permit you to collect just a spousal benefit starting at age 66 and give you four years of spousal benefits at the price of your wife not being able to take advantage of the delayed retirement credit. Under this option, you’d apply for your own retirement benefit, inclusive of delayed retirement credits, at age 70.

Option C is for you to take your retirement benefit early and let your wife collect a spousal benefit while waiting until 70 to collect her largest possible retirement benefit.

Which of three options would be best depends on how long each of you might live and your respective covered work records.

Question: My husband and I are both 60 and will turn 61 in May and June this year. He is currently collecting a pension and works full-time. I want to collect my Social Security when I am 62. I want my husband to finally retire and collect his Social Security as well. Financially, we will be okay given the amount of income we will bring in. My husband will have larger Social Security benefits than I will. What do you suggest is our best option for claiming our benefits?

Larry Kotlikoff: ​If you and your husband both take your retirement benefits at 62, you will almost surely end up collecting just your reduced retirement benefits. In other words, you’ll be deemed to be applying for your spousal benefit, but what you’ll get as a spousal benefit is your reduced excess spousal benefit. The excess spousal benefit is the difference between half of your husband’s full retirement benefit and 100 percent of your own full retirement benefit. If this difference is negative, the excess spousal benefit is set to zero. It’s likely to be zero if you earned anywhere close to what your husband earned. So your proposed strategy won’t likely get you a spousal benefit. If you do go this route, you can suspend your benefit at full retirement age and restart it at age 70 at a 32 percent higher level relative to the suspended level.


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But the way to maximize your lifetime benefits is for one of you to file for retirement benefits at full retirement age and then suspend it. The other spouse should then file just for a spousal benefit. At 70, you’d both go for your retirement benefits.

Question: My wife and I are each 64. She, with a permanent green card, has never worked in the U.S. (or earned U.S. dollars). Until she is 65, she will continue to receive her normal income. Her benefits from her home country begin on her 65th birthday. I want to wait until I am 70 to collect my Social Security benefit. As I have never been to a Social Security Administration facility, what is the correct procedure for me to follow (from you, rather than someone from the SSA)?

Additionally, is my spouse eligible for a spousal benefit — even though she will be receiving her retirement income in a foreign currency?

Larry Kotlikoff: Your wife can collect a spousal benefit and, were you to pass away, a widow’s benefit. Her receipt of a pension from her own country won’t affect either benefit. You should file for your retirement benefit at 66 and suspend it. She should file for her spousal benefit when she reaches 66. You should restart your retirement benefit at 70. This will maximize your lifetime benefits unless your maximum ages of life are relatively short. In that case, you’ll need to use software that lets you enter your maximum ages of life into the calculations.

Question: I started benefits at 62. When my wife files for benefits at full retirement age, will she get half of what I get now or what I would have gotten at full retirement?

Larry Kotlikoff: She will get half, not of your actual benefit, but of your full retirement benefit.

Rich: I am a 56-year-old male, divorced and filing for disability due to a work accident in 2012. My question is, can I file for a spousal benefit? We were married 29 3/4 years and my wife was easily the higher earner.

Larry Kotlikoff: You can file for a spousal benefit at 62, but it may well be zero because it will be calculated as your reduced excess spousal benefit, which, in your case, will be half of your ex’s full retirement benefit less 100 percent of your own.

Doing this will preclude you from withdrawing your retirement benefit when you reach full retirement age and from applying just for a spousal benefit, which you’d receive in full with no reduction. Please see this earlier column about how the disabled can maximize benefits.

Question: Can a person be working full time, making about $40,000 per year and still start receiving Social Security benefits at age 62? I know there will be a reduction in the monthly benefit from what it would be if one was not working. In other words, not receiving the 80 percent (not waiting until full retirement at age 66 in order to receive the full 100 percent) of the benefit due to working full time according to the Social Security Administration’s Q&As.

Larry Kotlikoff: A current 62-year-old earning $40,000 would lose 50 cents on the dollar in benefits for every dollar earned, about $15,480. So you could lose the bulk of your retirement benefit. This loss in benefits would be restored to you at full retirement age via the adjustment of the reduction factor or AFR, which would permanently increase your retirement benefit based on the months of benefits you lost due to the earnings test.

However, if you are, at full retirement age, also entitled to a higher benefit on the account of a deceased spouse or a deceased ex-spouse, that benefit will be cut dollar for dollar with the ARF-increase in your retirement benefit at full retirement age. In this case, you’ll never really recoup any of the benefits you lost via the earnings test. Your retirement benefit will go up, but your excess survivor benefit will fall by the same amount, leaving your total payment unchanged.