The Quiet Social Security Trap That Catches Married Couples Off Guard

Some Social Security rules are pretty well known. For example, most people know you're eligible to start benefits at 62, and that retirees get periodic cost-of-living adjustments. But other rules are much more complicated, and far too many retirees simply don't understand them. This is especially true for married couples.

Unfortunately, not knowing the rules often costs real money — often thousands of dollars per year. This lack of Social Security savvy often makes the difference between a stress-free retirement and one filled with financial mistakes.

Married couples must consider retirement, spousal, and survivor benefits

Married couples often get into trouble when it comes to Social Security because they don't understand all the benefits they could get as a couple or how those benefits interact. Here are the available benefits:

• Retirement benefits: These are claimed on your own work record and are available starting at 62. Benefits increase for each month you wait to claim until age 70.
• Spousal benefits: The spouse whose work history is used is the "primary earner." Spousal benefits equal up to 50% of the primary earner's standard benefit, but only become available once the primary earner starts their own retirement benefits. Spousal benefits are available at 62. A claim before full retirement age shrinks them, but a claim after FRA won't increase them.
• Survivor benefits: These are available starting at 60 (or younger with a qualifying child), but an early claim shrinks them. You may claim them if your spouse passes away. If your spouse claimed benefits before dying, your benefit is based on the amount they were receiving. If they haven't claimed, it's based on the amount they were entitled to receive at death, including any delayed retirement credits earned.

This huge claiming order trap could cost you thousands

The above rules should make clear that one spouse's claiming decision has a huge impact on the other's benefits. Unfortunately, there's a common trap couples fall into. That trap: The higher earner claims first.

Once this happens:

• The lower earner becomes eligible for spousal benefits: Under deemed filing rules, when they file for benefits, they're not allowed to restrict their application to their retirement benefit alone. They'll automatically collect the higher of their spousal or retirement benefits.
  
• The higher earner's benefits are locked in: There's no further opportunity to increase them by earning delayed retirement credits. And if the higher earner claims before their full retirement age, they'll have permanently shrunk their benefits because of their early claim.
  
• Survivor benefits are locked in: Since survivor benefits are based on the benefit that the higher earner is receiving, there's no further opportunity to increase them either.

This single decision has a far-reaching impact. It could cost a couple of thousand and put the lower earner at greater risk of financial hardship if the higher earner dies first.

The restricted application strategy

Couples used to have more flexibility in how they claimed Social Security because eligible spouses could file a restricted application. A restricted application allowed one spouse to claim only spousal benefits while delaying their own retirement benefit.

This means they could claim their spousal benefits and let their retirement checks grow through delayed retirement credits. For example:

• One spouse could claim retirement benefits.
• The other spouse could then file a restricted application and collect a spousal benefit.
• The one receiving spousal benefits could delay claiming their own retirement benefit until age 70.
• At 70, they could switch to their own retirement benefit to get a bigger check.

This strategy could increase lifetime Social Security income and potentially survivor benefits.

Unfortunately, Congress largely eliminated this strategy in the Bipartisan Budget Act of 2015. Today, only people born on or before January 1, 1954, are eligible to file a restricted application.

What strategy should spouses try today?

With the restricted application strategy eliminated, what should spouses do to avoid falling into a common Social Security trap?

The right strategy depends on each person's individual situation. However, often the best option is for the lower earner to claim their own retirement benefit, while the higher earner waits until 70.

This brings some Social Security income into the household. It probably won't be enough to live on, so the couple needs supplementary savings. But it still can help to have a guaranteed income source. The higher earner then delays their own claim as long as possible, ideally until 70.

With this approach, the lower earner can switch to spousal benefits later if they're worth more than their own retirement check (which was shrunk by the early filing penalties). The early claim doesn't matter because of the switch to spousal benefits. The higher benefit is maximized, and survivor benefits are as large as possible.

Bottom line

If this all seems confusing, that's because it is. The important thing is to make sure you fully understand the rules for Social Security when you make your retirement plan. If you aren't sure about the best approach, work with a financial advisor.

You should also make sure you are saving for retirement, both because Social Security won't be able to support you by itself and because having supplementary income makes it possible to choose when to file Social Security based on a strategy aimed at optimizing lifetime benefits, rather than because you need the cash today.