Maximizing Social Security

It’s a little hard to believe, but I read more and more in the popular press about maximizing Social Security benefits.  One of the best-selling books this year is called ‘Get What’s Yours: The Secrets to Maxing Out Your Social Security’ by Laurence Kotlikoff. 


I tried to read it earlier this year and admit that even I found it was pretty dry, and I think it’s fairly obvious that I’ve got a high pain threshold when it comes to highly technical investment related books. 


It seems to me that it’s popular with Boomers who are at decision time, while readers my age know that the program will either look a lot different when our time comes or will be gone.


One of the popular strategies the book outlines is called ‘File and Suspend.’  The basic idea is pretty much as it sounds: when you reach full retirement age, file for Social Security payments and then suspend them until you’re 70 and enjoy the benefits of higher payments down the road.


If you were born after 1943, your Social Security benefits will increase eight percent per year by waiting.  While I’m an optimist about future stock returns, increasing your inflation-adjusted annual cash flow by eight percent per year with no additional risk is hard to beat.


So far, this isn’t very different than just delaying your payments, but the key element is actually filing so that your spouse can apply for a spousal benefit immediately.  A spouse can’t claim for spousal benefits until you file yourself.


Let’s imagine a couple named Alexander and Rosa, who are both 66.  Rosa had a bigger income than Alexander over the course of her career and is entitled to $2,000 per month in Social Security payments at her full retirement age today.  If she holds off until 70, that payment will increase to $2,640, not including cost-of-living (COLA) adjustments.


By Rosa filing today instead of simply waiting to file at age 70, Rosa automatically activates Alexander’s spousal benefit.  He can collect benefits based on his own work history or receive half of Rosa’s payment – whichever is more.  


Keep in mind that Alexander is at his full retirement age, so taking the spousal benefit allows his own retirement benefit to grow.  The couple receives $1,000 a month (half of Rosa’s benefit) while they let their benefits grow at eight percent per year.


Obviously, this only works if you have investments to live off of while you wait (unless you can make ends meet at $12,000 per year) or if you plan to work until you’re 70.  It also works better for healthier folks who are likely to live longer, although in some cases, you only need one person to live longer for a payoff to occur.


Also, only one member of the couple can file and suspend so that the spouse collect half of the primary benefit.


Of course, as with any government program, there are a million details, caveats and exceptions that apply, which is compounded by the fact that everyone’s situation is different.  


Thankfully, we have software that analyzes the Social Security options so everyone can optimize and maximize based on their own personal circumstances.