Social Security 6: The 70-66 Strategy

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Every retiree has significant choices to make regarding Social Security benefit options. One way to analyze the possible scenarios is by calculating the joint lifetime benefits for couples. This method suggests the higher wage earner should often delay filing to receive a maximum benefit at age 70.

If a higher earning husband opts to delay his retirement, the next decision involves when a lower earning wife should file. Let’s consider the case of James and Betty Butterworth again. We have already established that if James is healthy, he should delay his filing. He should only consider the file-and-suspend option if his family history and/or personal health implies a premature death. Betty’s short working life means she is only entitled to a small benefit of her own. Thus she will receive a spousal benefit from the point that her husband files, preferably at age 70, for the rest of his life.

You might assume Betty should file as soon as possible because she most likely will inherit James’s increased benefit. But this decision may overlook the 25% penalty carried over from Betty’s reduced personal benefit to her spousal benefit. Current retirees who file at age 62 have their monthly Social Security check reduced by 25%. If Betty files at 62 for her own reduced benefit, this 25% cut will apply to her spousal benefits. So instead of receiving half of James’s increased benefit (e.g., $1,533 = half of $3,066) when he files at age 70, she will only get $1,149 monthly. If she waits until age 66 to file on her own record, her spousal benefit will not be reduced. The 25% cut does not carry over to survivor benefits. So in any case Betty will assume James’s full $3,066 monthly benefit when he dies.

To avoid this reduction on both the personal and spousal benefit, Betty should file at age 66. This 70-66 strategy is a smart and very common way to maximize Social Security income for healthy couples. Waiting until age 66 means that Betty will receive her the full spousal benefit when James files. The 70-66 strategy can increase a couple’s income 14% over filing early and 22% over both filing at full retirement age.

There’s no incentive for a lower earning wife to delay her filing beyond age 66. Because a spouse can inherit no more than 100% of a benefit, filing at age 66 maximizes both spousal and survivor benefits. Thus no benefit accrues if both James and Betty wait until age 70 to file. He should file at 70 and she should file at 66.

If the wife is the high wage earner, her incentives are quite different. Unless she is much older than her husband, she will most likely outlive her spouse. But even in this case the wife should still consider delaying her own filing to secure maximum benefits for herself.

Interestingly, a higher earning married woman’s Social Security income maximization incentives resemble those for a single person. Single people and higher earning wives should only consider their own life expectancy when making filing decisions. If healthy, they should delay filing. Filing early only makes sense for people who have reasons to doubt their longevity. Informed decision making should take all these calculations into account.

Delaying your filing means you could likely have a reduced income during these gap years. You may want to use that time to convert some of your pre-tax investments to a Roth IRA.

Converting some of the money in a traditional IRA to a Roth IRA requires paying ordinary income tax rates on the amount in question. If you can orchestrate some years in which your income is as low as possible by delaying Social Security benefits, you can minimize the tax required when the money comes out of your IRA.

To maximize your family’s Social Security benefits, you must integrate Social Security legislation with your personal situation: your ages, earning histories and your best guess at life expectancy. Careful tax planning to anticipate future earnings and the potential for Roth IRA conversions should be part of your plan.

Finally, if you are eligible for Social Security disability or have been divorced, the rules become even more complex. Don’t make these decisions quickly or carelessly. How you handle your choices about Social Security benefits can be worth more than a quarter of a million dollars.

Photo by Ray Hennessy on Unsplash

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.

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Matthew Illian was a Wealth Manager at Marotta Wealth Management from 2007 to 2016. He specialized in small business consulting, college planning, and retirement plans.