A Social Security Strategy That Pays Off Big for Couples

When a door closes, a window opens, they say.

One door that closed this year was a (perfectly legal) option that allowed married couples to boost their lifetime benefits from Social Security. That option, called “file and suspend,” was eliminated by Congress earlier this year in an effort to close loopholes in the program.

The open window

Congress did, however, leave a window open, at least for eligible couples, to squeeze all they can from Social Security. That option, called “restricted application,” allows one spouse’s benefits to grow while the couple draw some Social Security payments but not as much as they’ll eventually be entitled to. The goal: super-sized monthly payments after the waiting is over.

The money gained is well worth the effort, says Russ Settle, founding partner of Social Security Choices, which sells $40 custom analyses for couples that show them the financial consequences of claiming their benefits at a range of ages.

Settle says his clients often are surprised to learn that an option for super-sizing their benefits still exists for couples. Those who can use it stand to gain up to tens of thousands more dollars in lifetime benefits from Social Security than they’d receive otherwise.

How it works

Restricted application lets a couple take maximum advantage of the fact that Social Security benefits grow while they are left untouched. Details vary, depending on your ages and the size of your Social Security accounts. Here’s a hypothetical example:

One spouse collects. One spouse — let’s call her “Michelle” — starts collecting benefits at age 62, the youngest age possible for claiming Social Security.

The other claims a “spousal benefit.” Michelle’s husband — we’ll call him Tim — age 66, files a claim for “spousal benefits” (described in detail by Social Security here and here). Unlike an individual worker’s benefit, based on your earnings, spousal benefits are based on your spouse’s earnings. Spousal benefit amounts can be up to half of your husband’s or wife’s benefit, depending on your ages when you make the claim.

The catch. Although you can make a claim for spousal benefits as early as 62, the restricted application option requires the person claiming spousal benefits to have reached “full retirement age.” Tim’s full retirement age is 66, so he’s good to go. (Full retirement age is the age at which when you can get all the Social Security benefits you are entitled to. Claim earlier and your monthly benefit checks are discounted. Learn your full retirement age in this Social Security article.)

The game plan. The plan is to accept a smaller payoff from Social Security now by letting one spouse’s benefits grow, locking in a much larger total monthly benefit later. The restricted application option uses a two-part strategy.

Smaller benefits today, more money tomorrow

Part 1: Today. Tim was the bigger wage earner, and his Social Security benefits are greater. By claiming spousal benefits based on Michelle’s smaller wage record, the couple let Tim’s Social Security account keep growing (read “Take the carrot,” below, to learn how that works). Meantime, Michelle and Tim get to enjoy some Social Security payments — from Michelle’s claim at age 62 plus the spousal benefit for Tim. These payments are smaller than if they had both claimed their entire allowable benefits right now. But they’ll get a much-bigger payoff in a few years.

Tim and Michelle’s approach — claiming benefits first on the account of the spouse who earned less — may not always be the best tactic. “It depends on age differences, benefit levels and other objectives,” Settle says. That’s why a service like Settle’s may be useful to evaluate the options.

The Wall Street Journal tested five services that help pre-retirees choose how and when to claim benefits, including two free online calculators, T.Rowe Price’s FuturePath and AARP’s Social Security Benefits Calculator. You also can see what you can learn by looking up your own numbers: For estimates of each spouse’s future benefits, sign up for free MySocialSecurity accounts.

Part 2: Later. When Tim turns 70, or when they decide they’ve waited long enough, Tim files for benefits based on his own earnings. Michelle, then, can apply for a spousal benefit based on Tim’s bigger account.

A $48,000 bonus

Settle offers the following example to illustrate how a restricted application could earn a hypothetical couple $48,000 in additional benefits. This time the spouse with the smaller Social Security benefit claims the spousal benefit:

Suppose a husband was four years older than the wife. They both want to claim retirement at 70 (being unaware of the restricted application option). His full retirement age benefit (FRA) is $2,000 and her FRA benefit is $1,000. So, under this plan he would get $2,640 at age 70 while she gets $1,320. Now, if she uses the restricted application option, she can claim a spousal benefit of $1,000 starting at age 66, letting her retirement benefit grow. So, between age 66 and 70, she picks up a total of $48,000 of basically free money. Then at 70 she starts retirement benefits of $1,320, as in the preceding example.

Take the carrot

Social Security offers both a stick and a carrot to encourage people to wait:

• The stick: Your payments are discounted if you take them before your full retirement age. As CNBC explains:

Those with a full retirement age of 66, for example, would receive a 25 percent reduction in benefits if they start receiving benefits at age 62. If they wait until age 63, they lose 20 percent, and age 64 roughly 13 percent.

• The carrot: Wait until after full retirement age and your benefits become super-sized, growing at 8 percent a year for every year you do not claim until your 70th birthday, at which point you could collect your maximum possible benefit. If your FRA is 66, you’d get 32 percent (8 percent times four years) bigger monthly payments than if you’d taken them starting at 66. (You can enjoy the 8 percent annual bonus after full retirement age and stop at any time you wish. After 70 there’s no more incentive to wait.) “The same retiree who collects $1,000 by waiting until their full retirement age at age 66 will collect $1,320 by delaying until age 70,” CNBC says.

Are you eligible?

A couple qualify for a restricted application if:

• One spouse was born on or before January 1954. Although Congress recently changed the rules on restricted applications, people born before this date are grandfathered in.
• You are married. Since you need to draw on a spouse’s benefits, a restricted application is not an option for singles.
• You are divorced. If you were married at least 10 years you can file a restricted application and claim spousal benefits based on an ex-spouse’s earnings record. Your former spouse will not be notified of your claim and does not need to be receiving Social Security.
• One spouse is at full retirement age. The person claiming spousal benefits has to be at least full retirement age.
• You are not a widow or widower. Widowed spouses have an alternative option (described at the Social Security Administration) for claiming claim survivor benefits, regardless when they were born. Remarrying after age 60 does not affect a widow or widower’s eligibility to these benefits.

How to maximize your Social Security

As this story illustrates, in many instances an informed decision about when to claim which Social Security benefits can boost benefits by tens of thousands of dollars over your lifetime, especially for couples.

Various companies will prepare a customized analysis revealing exactly when to claim Social Security benefits to receive the maximum lifetime payout. Kiplinger offers one for $49.95. Social Security Choices sells its product for $39.95 but, in partnership with Money Talks News, offers a $10 reduction. All you have to do is use the coupon code “moneytalks”.​ Learn more here, then check out “16 Ways to Get Bigger Checks From Social Security.”

What’s your plan for retiring and collecting benefits? Share with us in comments below or on our Facebook page.