When clients want to file for Social Security benefits early, advisors need to be aware of this desire and work with them to determine the best claiming strategy. This is especially important for married couples, as a Social Security rule change effective in May 2016 eliminated the so-called "file and suspend" strategy, which many couples had used to maximize benefits.
Before the rule change, one spouse could file for Social Security retirement benefits at full retirement age, then suspend them until 70 so that the other could file early for their spousal benefit and let their own retirement benefit grow to age 70.
But those days are over for retirees born in 1954 or later, explained Larry Kotlikoff, professor of economics at Boston University, in a webinar, "Assessing the Split Social Security Strategy," held recently by the Financial Experts Network.
Lawmakers killed file-and-suspend in a bid to raise revenue, and there's no real replacement for it. In absence of that loophole, what if one spouse decides to claim at 62, while the higher-earning spouse lets their benefit grow until 70?
"This is a risky strategy and to advise it is a reckless thing to do," Kotlikoff said.
It's a strategy that pays off in one notable circumstance: when the high-earning spouse dies before 70. In that case, "the other will be able to collect a widow's benefit, which basically will equal the higher earner's age 70 benefit," he said.
This obviously is a gamble, because if the higher earner dies long after 70, the other spouse will continue to collect their lower benefits.
A Closer Look
To outline some of the potential issues with this strategy, we spoke with Marcia Mantell, founder and president of Mantell Retirement Consulting. Two points she highlighted: 1) the higher earning spouse must be claiming benefits in order for the lower-earning spouse to collect any spousal benefit, if eligible; and 2) a spouse must be full retirement age to receive their maximum spousal benefits (50% of the higher earner's primary insurance amount or PIA).
Further, she cautioned that "it never pays to claim at 62 unless you have to."
Scenario #1: Both spouses, let's say Sam and Diane, will reach full retirement age at 67. Sam's PIA at FRA is $3,300. Diane's is $3,000.
Sam was waiting to claim his benefits until 70, but he dies at 68. Therefore his PIA is increased by 8% (delayed retirement credits or DRCs, are 8% each year after FRA, up until age 70) and the benefit is increased to $3,564. However, he never got to claim any worker benefits while alive.
