New rules about how you can claim Social Security benefits will take effect on April 30 as a result of the Bipartisan Budget Act of 2015. The changes are intended to close perceived loopholes in the system that gave rise to popular strategies for maximizing benefits that potentially were worth thousands of dollars in additional income each year. Importantly for some soon-to-be retirees, taking advantage of one commonly used option—the file-and-suspend strategy—requires action soon.
The vast majority of Americans claim Social Security benefits upon or before reaching their full retirement age (age 66 for those born between 1943 and 1954). For every year that you delay taking benefits between your full retirement age and age 70 (whether by delaying making a claim or filing for benefits then suspending them), your benefit amount increases by 8%. This is referred to as accruing a delayed retirement benefit and it is the cornerstone of many Social Security benefit maximization strategies, including those outlined below. The availability of the highlighted strategies is changing, but they may still offer some benefit to those who are near retirement age.
Consider this if you:
- Were born on or before April 30, 1950
- Can afford to delay full benefits until you reach age 70
- Have one or more dependents eligible for benefits on your record
- Have a normal life expectancy (if your full retirement age is 66, the break-even point after which it appears to be beneficial to delay benefits until age 70 is approximately age 83)
The Strategy: In the file-and-suspend strategy, the primary breadwinner files for Social Security, opening the door for a dependent spouse to claim a spousal benefit.1 The primary filer then immediately suspends benefits until age 70 while the dependent spouse continues to receive benefits. This strategy has allowed couples to collect a partial benefit while the primary breadwinner accrues delayed retirement benefits, potentially boosting the couple’s ultimate Social Security payout.
The Change: Under the new rules, the dependent spouse will no longer be able to receive the dependent spouse benefit after the primary breadwinner suspends his or her benefits. Instead, the dependent spouse will only be able to collect when the primary breadwinner is receiving benefits. Those born on or before April 30, 1950, can still adopt this strategy provided they file for benefits by April 29, 2016.
Hypothetical Illustration2: Linda and Mark, both age 66, married 35 years ago. Mark’s full retirement age benefit is $2,600 per month ($31,200 per year). Linda, who did not work outside the home, is eligible for a spousal benefit equal to 50% of Mark’s benefit, for a total of $1,300 per month ($15,600 per year). Under the old rules, Mark could file but immediately suspend his benefit to accrue delayed retirement credits while Linda filed for her spousal benefit. Mark’s benefit would increase by 8% for each year during suspension, culminating in an estimated benefit at age 70 of $3,537 per month ($42,444 per year). Under the new rules, Linda will not receive spousal benefits if Mark suspends his benefits.
Consider this if you:
- Are married and were born on or before January 1, 1954
- Are both eligible for your own Social Security retirement benefits
The Strategy: A spouse files a “restricted application” at full retirement age by claiming a spousal benefit while his or her own retirement benefit accrues delayed retirement credits. At age 70, the spouse claims his or her own accrued retirement benefit in place of the spousal benefit.
The Change: After April 30, 2016, a spouse filing for benefits who did not turn 62 on or before January 1, 2016, is deemed to file for both individual and spousal benefits and will receive whichever is the higher benefit. Those born on or before January 1, 1954, can continue to employ this strategy.
Hypothetical Illustration: Jane and Ian have been married for several decades and both worked outside the home. Jane turned 62 in 2015. Jane’s full retirement age benefit is $1,800 per month ($21,600 per year). Ian is also eligible for his own retirement benefit. Under the old rules, upon turning 66 in 2019, Jane could apply for a spousal benefit on Ian’s record (provided he is already receiving his own benefits) while allowing her own retirement benefit to accrue delayed retirement credits. Upon reaching age 70, she could claim her accrued retirement benefit, now estimated at $2,448 per month ($29,376 per year). Under the new rules, upon filing for spousal benefits, Jane will be deemed to have filed for both individual and spousal benefits and will receive whichever is the higher benefit. Her own retirement benefits will not accrue delayed retirement credits.
Lump-Sum Retroactive Benefits
Consider this if you:
- Were born on or before April 30, 1950
- Have already filed and suspended your benefit or plan to file and suspend by April 29, 2016
- Experience a future change in your financial or health circumstances
The Strategy: Under the old rules, an individual who had filed and suspended to receive a higher benefit at age 70 could later request a reinstatement of benefits and receive a lump-sum payment of all suspended payments since the file-and-suspend date.3
The Change: Under the new rules, individuals who file and suspend will no longer have the option to receive a future lump-sum payout of the suspended payments. Those born on or before April 30, 1950, can still retain the option to receive a future lump-sum payout of suspended payments provided they file and suspend by April 29, 2016.4
Hypothetical Illustration: David files for his Social Security retirement benefit at his full retirement age of 66 and immediately suspends his benefit in order to accrue delayed retirement credits, with the intention of taking his highest available benefit at age 70. At age 68, however, David suffers a health event that leads him to reevaluate his life expectancy. Under the old rules, he could request a reinstatement of benefits and receive all the delayed payments since the original file-and-suspend date in a lump-sum payment. His payments would then revert back to the full retirement age amount. Under the new rules, David would begin receiving monthly payments (at a higher accrued rate), but would not receive a lump-sum payment.
Given the many factors and assumptions that go into maximizing Social Security benefits, there’s no one-size-fits-all approach to making claims. Before filing and suspending, for example, it’s important to weigh the benefits of other strategies, such as the restricted application, if it’s available. Even those born after the dates mentioned above have many options available to them—particularly married couples. It is important to carefully consider retirement benefit amounts and life expectancies to determine what strategies make the most sense for your situation and to educate yourself before committing to any given approach. A financial advisor can help you map out the range of scenarios that may be possible through various Social Security filing strategies.
1 This new rule also applies to minor and disabled adult children.
2 Assumes full retirement age is 66. Full retirement age is between 65 and 67 depending on the year of birth. Age 66 is the full retirement age for those born between 1943 and 1954.
3 Individuals who merely delayed filing for benefits, without filing and suspending, could also receive a lump-sum payment, but it would be limited to six months’ retroactive payments. 4The IRS may retroactively eliminate this option at a future date for those who file and suspend by April 29, 2016.
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