Getting the Most Out of Social Security

It has become a cliché to say that the work-life balance of average Americans has changed substantially and that many couples plan to work well beyond what has been traditionally defined as the "retirement years."

It's important to remember that the decision to work longer can come even after a few years of retirement, and can affect married couples in a variety of ways. Certain individuals may initially choose to retire, only to re-enter the workforce for a variety of reasons—ranging from boredom to necessity—a few years later, and continue to work for an indeterminate period of time. Some married couples may have one spouse choose to continue to have a career well into the traditional retirement years, while the other spouse may elect to stay away from the working world permanently.

It is important for retirees and pre-retirees who want to do smart financial planning for the future to think about how to best maximize Social Security for such scenarios, which are not only increasingly possible, but probable for many.

The first step is to begin thinking of Social Security payments as an asset. Consider Social Security a guaranteed annuity that all legally employed citizens own, which will ultimately provide one of the most secure income streams possible in your investment portfolio.

Given this context, what are some possible strategies to maximize Social Security income returns for individuals and married couples who fall under the above circumstances?

The "Social Security Do-Over."
This strategy is geared toward individuals who have started to take Social Security benefits early, but wind up working again.

Individuals who began collecting Social Security benefits early—at the age of 62—and choose to re-enter the workforce at some point afterward can stop receiving current payments until or after age 70. What's the upside? When this individual truly retires again, either at or after age 70, Social Security benefits will have increased proportionately based on his or her earnings.

What are the key caveats? First, a "do-over strategy" will require the individual to pay back all of his or her Social Security income previously received. Those considering this strategy must be certain that they have the savings set aside to pay it back as well as very detailed tax records on the amount of tax already paid to the IRS on those received benefits. If taxes have been paid, a tax credit or deduction may be available.

Equally important: If both spouses decide to take advantage of this strategy, they should be in good health and have longevity on their side. One of the largest downside risks of this strategy is if both spouses pass away shortly after paying back their benefits, the money that they initially paid back to Uncle Sam is lost as far as heirs are concerned. However, if just one spouse pays back the benefits and dies shortly after, the surviving spouse can still collect the spousal benefits.

This strategy is easier to execute on than you might think. Anyone older than 62 and younger than 70 who is already receiving benefits can start by filing a "Request for Withdrawal of Application."

The "File and Suspend" approach.
The second possible strategy is geared only toward couples in which one spouse is the breadwinner, and who have sufficient assets or sources of income so that only one set of Social Security benefits is needed.

This is how it works: A husband who has worked until Social Security qualifying age files for benefits while the wife who has stopped working well before the qualifying age files for spousal benefits. The husband then requests from the Social Security Administration a suspension of benefits while the wife continues to receive her payments. The husband's benefits—which would be more significant in this hypothetical instance, given his "breadwinner" status—continue to grow until he decides when to start receiving benefits again. Over the long term, this can create an even greater income stream when a couple is further along the distribution stage of their retirement financial plan.

Restricting benefits.
The third potential strategy addresses married couples in which one spouse is retired and the other is still gainfully employed, and consists of restricting benefits to a spouse.

Here's how it works: Let's say a wife stopped working and is collecting Social Security benefits calculated from her time in the workforce, but her spouse still has a career and hasn't begun collecting Social Security. As long as he is at full retirement age, currently age 66, he can begin to receive spousal benefits, and then when he retires, he can suspend them and collect his own full benefit.

This means that he would get half his wife's Social Security income each month while still allowing his own benefits to accrue. Then, at age 70, he would apply to stop receiving the Social Security spousal benefit and file for his own. The bottom line: This becomes free money that most Americans simply don't know about.

Obviously, it is very important to work with an accountant or Certified Financial Planner when making such decisions because many moving parts need to be carefully considered.

Clearly, retirement means different things to today's generations than it did in the past. What all retirees and pre-retirees need to think about are the various tools at their disposal that can maximize their financial planning over the long run. Actively viewing Social Security as one of these tools can be a critical step in the right direction.

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