Inside Money: Social Security strategies

If you’re ready to retire —or if you’re close — one of the biggest financial decisions you’ll ever make is when to collect Social Security benefits.

About 95 percent of Americans will collect Social Security benefits before they reach full retirement age (FRA), according to a survey by Boston College’s Center for Retirement Research.

If you collect early, you collect less.

“This is a classic example of the old proverb in thinking that a bird in the hand is worth two in the bush, but is potentially a flawed strategy for many retirees,” says Jeffrey Boyer, a certified financial planner with RegentAtlantic Capital in Morristown.

Here’s how you can be smart about your benefits.

The benefit of delaying

Social Security benefits are derived from your primary insurance amount (PIA), which is the monthly benefit for which you are eligible at your FRA, says James Marchesi, a certified financial planner with Mill Ridge Wealth Management in Chester.

Generally, age 62 is the earliest you can initiate Social Security benefits, but if you collect before your FRA, you will permanently reduce your benefit. If you delay collecting, your nut would increase as much as 8 percent a year, each year until age 70.

A study by the Society of Actuaries’ Committee on Life Insurance Research found that for a 65-year-old couple today, there is a 50 percent chance that both will live to age 80. There’s a 60 percent chance that one of the two spouses will reach 90. The person who delays the collection of benefits will earn more over time, every time.

You and your spouse

Married couples should consider the “file and suspend” strategy.

MikeandMaryBoyer offers the example of Mary and Mike. Mike was the higher earner. Neither spouse would collect early at age 62, but at Mike’s FRA of 66, he’d file and immediately suspend benefits. This allows Mary the option to begin collecting spousal benefits off of Mike’s record.

Mary’s spousal benefit at age 66 would be 50 percent of Mike’s PIA, or $1,100. She could file a “restricted application,” which gives her the choice of collecting under her own earnings record, or collecting spousal benefits based on Mike’s record.

While she collected her spousal benefit, her own benefit would grow by 8 percent a year until age 70, at which time both Mary and Mike would each file for benefits on their own record at much higher dollar amounts. The overall benefits are significant.

If Mary and Mike both collected at age 62, they’d have total benefits of $1.23 million by age 85. If Mike filed at 66 and then used the “file and suspend strategy,” and they both collected at age 70, they’d have a total benefit of $1.66 million by age 85.

While every couple should consider this strategy, it may not work for everyone.

“If spouses earned similar amounts over the years, the 50 percent spousal benefit might not translate to more money and it may make sense for each to draw their individual benefits,” Marchesi says. “Also, file and suspend only makes sense if you have other sources of income to cover all expenses while you are delaying a portion of your Social Security benefits.”

File and suspend for singles

Even if you don’t have a spouse, file and suspend benefits you.

If you file and suspend at FRA, you remain entitled to “benefits held in suspension,” Boyer says. That means you have the option to collect those past benefits as a lump sum.

“This lump-sum option can become useful if you are suddenly in a pinch and need funds, or it could allow you to get as much as possible from the Social Security system in the case of a terminal illness,” he says.

Keep in mind that if you request the lump-sum option, your future monthly benefit checks will be calculated as if you had started your benefits when you originally decided to file and suspend — and will be permanently lowered.