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How to Show Couples the Hazards of Claiming Social Security Early

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What You Need to Know

  • Since the elimination of file-and-suspend, a split Social Security claiming strategy is risky and doesn't pay off for most couples.
  • Claiming at 62 is inadvisable unless it's necessary, Marcia Mantell says.
  • Advisors need to understand Social Security claiming on several levels to find the best scenario for their clients.

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.

However, Diane had already decided to claim her benefits at age 62, in part due to Sam’s dire health. She’s docked 30% for the pre-FRA claim, and her benefit drops to $2,100 per month. When Sam dies, she is able to replace her benefit with his $3,564 survivor benefit because she has reached her FRA.

If both had claimed at FRA, their monthly household amount would be $6,300. Sam’s death, however, would eliminate her $3,000 payment, and she only would collect Sam’s higher $3,300 as a survivor.

Scenario #2: Again, both spouses have an FRA of 67. Sam’s PIA is $3,300, but Diane’s is $1,500.

Sam is waiting to claim his benefit until he is 70, but then dies at 70. His PIA increased by 24% to $4,092. However, Diane, believing Sam would die before 70, claimed her benefits at age 62 and collected, with that 30% penalty, $1,050.

Although her benefit had been $1,050, with Sam’s death, she’s able to claim survivor benefits of $4,092 because she’s over her FRA. Yet if he didn’t die, she would continue to collect the $1,050 until he died.

Scenario #3: Again, Sam and Diane have an FRA of 67. Sam’s PIA is $3,300 and Diane’s is $3,000. Sam is planning to wait until 70 to claim his benefits. Diane claims hers at 62, believing Sam’s health will cut his life short. As a result, her PIA with a 30% penalty is $2,100.

But Sam lives on! His PIA at 70 is $4,092. However, Diane’s is $2,100 until he dies, let’s say at age 80. Instead, if both had claimed their benefits at FRA, they would have had a household payment of $6,300 a month.

By her claiming early, even if he waited till 70 to claim his, their household payment is $6,192. But when he dies at 80, she would only get his survivor benefit of $4,092, a drop of 34% from the household amount.

Mantell notes that these multiple scenarios mean that “every advisor needs to get in the game. Social Security is so specialized that advisors need to understand it. They can’t ignore the fact that with a couple, one of them will die, so they need to run through the various scenarios.”

Pictured: Marcia Mantell


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