One of the most important decisions to make in retirement is specifically when and how to take social security. There are over 80 different strategies that can be taken, and each strategy has its own set of confusing characteristics. What’s more, in many cases your SS decision is irrevocable – thus, like life, you only get one chance to make such decision.
The good news is, Congress is eliminating some of the more advanced strategies, and thus are reducing some of the complexity in the system. The bad news? There is limited time for some retirees to make use of such strategies that can equate to thousands of dollars over your lifetime. In this article, my hope is to explain to you some of the more popular advanced strategies, and hopefully forewarn some of you close to retirement so that you can properly plan.
Q: In summary, how is the law affecting social security?
A: Congress has significantly impaired certain social security strategies through the recently passed Bipartisan Budget Act of 2015. The law is affecting two key social security strategies that are employed by many Americans each year – the “file and suspend” and “restricted application – claim now, claim more later” strategies. Each are explained in great detail below, but just a quick summary as to how they work. “File and suspend” allows an individual to file for social security benefits and delay their receipt of such benefits, allowing their own benefit to grow, which in turn allows their spouse to take a spousal benefit equaling 50% (or a portion thereof) of the filer’s social security benefits. “Restricted application” allows for one spouse to “restrict” the filing of their SS benefits to only a spousal benefit, thus allowing their OWN social security benefit to grow and then subsequently switching over to their own benefit in the future (generally at age 70).
The law will effectively end both the file and suspend strategy and restricted application “claim now, claim more later” strategies based on the dates noted below.
First off, I would note that any of you who are already utilizing either strategy currently – either “file and suspend” or “restricted application” – will be grandfathered in to allow for you to continue to utilize such strategies without any affect. Thus, if you (or your loved ones) are currently utilizing such strategies, you can breathe easy.
However, for those that would like to utilize such strategies, you may not be able to do so or have a limited window to begin doing so. In the case of “file and suspend,” you have until end of day on April 29th, 2016 to file and suspend, otherwise you will lose the ability to do so. Note that you very well may not be able to take advantage of this strategy if you are younger, specifically if the earner who desires to file and suspend has not attained their full/normal retirement age by the date noted above.
Only this strategy requires a proactive step to take in the near future. In the case of “restricted application,” those who turn age 62 by the end of calendar year 2015 (in essence, those born on January 1st, 1954 or earlier) are grandfathered in under the rules and will still have time to make use of this strategy, either now or in the future. If you are younger than this age, you will not be able to take advantage of this strategy any longer. Below is a more granular explanation of some key pieces of the social security system and the accompanying advanced strategies.
Q: First, a basic question - what is full/normal retirement age? What occurs if I take it earlier or later?
A: This is the age whereby you can receive your full social security benefit in retirement - “full” or “normal” are used synonymously. This age varies according to the year in which you were born according to a table provided by the IRS (which can be found at https://www.ssa.gov/planners/retire/retirechart.html). As you can see, for most pre-retirees and recent retirees this age is between ages 66 and 67. If you file for social security benefits prior to attaining such age, you are going to give up a portion of your full retirement age benefit – this accounts for a 25% reduction (on average 6.25% per year) between the ages 62 and your full retirement age. The crossover point where it makes sense to wait is sooner than you think – for most people this is in the upper 70s where it makes sense to wait until at least full retirement age. On the flipside, you can also delay receiving your benefits between normal retirement age and the maximum age at which you need to start taking social security (age 70) – this will result in an extra 8% per year or 32% cumulatively. The crossover point where it makes sense to wait until age 70 is in your early 80s. Of course, there may be other reasons to NOT wait – you need the money to live on, you get sick, tax implications, etc. However, in most cases, it may make sense to wait until at least your normal retirement age, not only due to the increase in benefits BUT also the effects of some of the strategies you can employ (at least, for now).
Q: How does the “file and suspend” strategy work?
A: “File and suspend” best works as follows: the higher SS wage earning spouse files for SS at their normal retirement age and “suspends” their benefit, meaning they delay the receipt for their SS benefit, allowing such benefit to continue to grow (an extra 8% per year or 32% cumulatively by age 70). The lower SS wage earning spouse (who has at least attained the age of 62) can then take a “spousal benefit,” or a portion up to 50% of the other spouse’s social security benefit. This strategy has the triple benefit of a) allowing the higher wage earner’s social security benefit to grow while b) also providing the lower wage earning spouse to receive some social security benefits immediately without having to wait until the higher earner actually begins drawing SS and c) allows for a higher survivor benefit (since once the higher benefit spouse passes the lower income spouse stops receiving their own SS benefit or spousal benefit and gets their spouse’s higher benefit). This strategy in a vacuum makes the most sense for those married couples who have a very large disparity in income or for those instances where one spouse works and the other does not.
Note a few key pieces of this strategy – the spouse who desires to file and suspend must at LEAST be at their normal retirement age – he/she cannot file and suspend without at least attaining such age. Also, the lower wage earning spouse must at least be age 62 to take a spousal benefit – if there is a large age disparity, this strategy may not be possible. Also, understand that the MAXIMUM amount for the spousal benefit is 50% - the closer to age 62 the spouse seeking the spousal benefit is, the less spousal benefit they will receive. Moreover, note that if you are the spouse claiming a spousal benefit and you have yet to reach full retirement age yourself, you will be locked in at this benefit for life UNLESS you have the ability to restrict your application (explained below if you yourself have reached full retirement age). Thus, it is critical for you to make sure you understand the optimal result for you and your family and have your options reviewed.
Q: How does the “restricted application – claim now, claim more later” strategy work?
A: In general, the law says that an application for one kind of reduced Social Security benefit is automatically an application for every other Social Security benefit you might be due. That is why you generally cannot file for reduced spousal benefits (at age 62, for example) and later switch to full benefits on your own record. HOWEVER, if you have reached full retirement age, this rule does not automatically apply, so long as you file something called a “restricted application.” This strategy allows you to restrict your filing of benefits to one specific type without affecting your other benefits. In terms of strategy, it may be beneficial for you to restrict your application to a spousal benefit, which will allow your own benefit to continue to grow. This strategy typically works in tandem with “file and suspend” but can in some cases work alone, especially if one spouse has already filed and is receiving social security. In this case, the other spouse (who again must have attained full retirement age) can file a restricted application for spousal benefits, thus delaying their own social security benefit and also begin receiving spousal benefits now. Such higher earning spouse will immediately receive 50% of the lower wage earning spouse’s then current SS benefit and at the same time allow his/her own social security benefit to continue to grow (8% per year or 32% by age 70).
Again, note that in order for this strategy to work, the spouse desiring to file a restricted application must at least have attained normal retirement age. Finally, as will be explained below, there is a combination strategy that utilizes both “file and suspend” and “restricted application.”
Q: Can I utilize a combo strategy of employing both a “file and suspend” and “restricted application?”
A: Absolutely. This is one of the most lucrative strategies if it can be employed properly. This strategy works best where there are two high or similar wage earning spouses who have both reached their normal retirement age, and both are close in age to one another. This can be employed as follows: one spouse (the highest wage earner of the two) first files and suspends his/her benefit, thus allowing for the benefit to grow. The other spouse then files a restricted application for spousal benefits, thus receiving half of the other spouse’s full retirement age benefits, and allows for his/her own benefit to grow. When they both reach age 70, they then take their own maximum benefit. This allows one of the two spouses to take a spousal benefit while also allowing both of their own benefits to grow!
Q: How is the new law ending such strategies?
A: Under the new rules in Section 831 of the Bipartisan Budget Act of 2015, when one party suspends their benefits, he/she will suspend not only their own benefits, but any/all benefits payable to other individuals based on his/her earnings record. Thus, such party’s spouse will not be able to file for spousal benefits immediately if the other spouse has suspended their SS benefits, since such spouse will need to wait until the suspender begins taking his/her own benefit.
Under the same section 831, when one party files for benefits, they are deemed to file for both individual and spousal benefits. And under the standard rules for Social Security benefits, anytime someone applies for multiple benefits they simply receive whichever provides the biggest benefit check (i.e., the larger benefit simply overwrites the smaller one). In other words, there will no longer be such thing as applying for just one benefit and switching to the other later (the restricted application claim now claim more later strategy). Instead, for better or worse, either all benefits start earlier, or all are delayed later.
Michael Kitce, a financial planner with a terrific blog entitled the Nerd’s EyeView, had a very handy chart which explains eligibility based on age for each strategy:
Q: Does my status matter as a filer?
A: Yes it does - your status as a social security filer will first determine whether or not you can utilize these strategies and in what capacity; for instance, if you are a single individual, you cannot file a restricted application for spousal benefits, since you do not have a spouse! However, as a single individual, you CAN potentially “file and suspend” your own benefit at your full retirement age (why conduct this strategy and simply just wait until you desire to file? You may potentially be able to retroactively claim all benefits going back to the day of original suspension, if say you were to get terminally ill etc.). The chart above really explains this quite well, and can be a nice reference guide for you.
Second, as noted above, your age matters as to whether you can make use of these strategies prior to the deadlines. For married couples, the “filer” in the file and suspend strategy must be their full retirement age
Q: When does the “file and suspend” strategy work best?
A: For a single individual, the filer must be full retirement age by the end of the day on April 29th 2016. If you are single, will reach full retirement age by this date AND you want to delay when you want to receive social security to get the annual increases, it may make sense to file and suspend by the date above. If you are not going to be full retirement age by this date, you will not be able to take advantage of this strategy.
For married individuals, if you are the filer who will be suspending their benefit so your spouse can begin taking spousal benefits, you must have reached full retirement age by April 29th, 2016 AND filed/suspended to execute the strategy. If the filer/suspender has not reached their full retirement age by this date, you will not be able to make use of this strategy. Also, and this is important, just because the filer/suspender has reached their full retirement age, this does not mean you automatically can have your spouse take a spousal benefit – they must ALSO be of age to begin taking social security (at least age 62) AND it must make financial sense to do so. There are a myriad of different scenarios where the potential to execute this strategy may not make sense.
For instance, let’s assume a couple, Bob and Jane. Bob is 66 and just attained his normal retirement age and Jane just turned 62, and we are in present day. Bob was the breadwinner, and Jane never worked, thus Jane only has the spousal benefit at her disposal (50% of Bob’s full retirement age benefit). Technically, Bob can file and suspend, and Jane has the ability to take a spousal benefit. HOWEVER, if Jane takes the spousal benefit now, her spousal benefit is going to be reduced since she is not yet at normal retirement age – it can be significantly less than 50% of Bob’s benefit that she is now locked into for life! The closer Jane is to her normal retirement age, the more sense this strategy may make. If they are both normal retirement age, then Jane can get the full spousal benefit while allowing Bob’s own benefit to grow! However, even this strategy depends greatly on individual circumstances – if both Bob and Jane were in great need of income, it may very well not make sense for them to delay Bob’s benefit.
Q: When does the “restricted application” strategy work best?
A: I am going to only focus on married couples in this example, again with Bob and Jane. Let’s again assume that Bob is normal retirement age, and Jane is age 62 in present day. Let’s also add in a few additional wrinkles – 1) Bob cannot wait to take social security and files and actually RECEIVES his social security, and 2) Bob and Jane’s benefits at normal retirement age would be roughly the same. Let’s assume that Jane does not need her full benefit and now wants to file a restricted application and simply take a spousal benefit, thus allowing her own benefit to continue to grow so she can switch over to such benefit at her full retirement age – she thinks she is set since she has met the new age requirement of being age 62 by the end of the year according to the new law. Unfortunately, she cannot do so – if she files a restricted application prior to her normal retirement age, she will be deemed to have filed the higher of her spousal benefit and her OWN benefit. Since her own benefit is higher than the spousal benefit, she will now have to take her own benefit, which now will be reduced since she did not wait to take it at her normal retirement age – she is now worse off!
HOWEVER, now let’s assume the same set of circumstances, but she is age 64 and her husband is still normal retirement age. Let’s also assume that she again does not need her full benefit and wants to file a restricted application and take a spousal benefit but this time she does not want to switch over to her own benefit until age 70. She should not file now due to the above deemed filing rule, but she CAN do so at her normal retirement age in a few years at her normal retirement age. This is due to the fact that the rules change once she hits her normal retirement age - at that time, she can file a restricted application, take a spousal benefit (based on 50% of her husband’s benefit at his normal retirement age) until age 70, allowing her own benefit to grow. At age 70, she can then switch over to her own benefit!
You may be wondering why she can do this, since we said the restricted application rule was going away. Since she is 62 by the end of this calendar year (2015), she qualifies for the restricted application – she just needs to wait a few years to get to normal retirement age to execute this strategy. If she was not age 62 by the end of 2015, she will NEVER be able to take a restricted application.
Q: When does the “file and suspend” and “restricted application” tandem strategy work best?
A: Now we are going to pull it all together. Again, let’s assume Bob and Jane, and that again their SS benefits are approximately the same at their full retirement age. First, if Bob is not normal retirement age by the end of day on April 29th, 2016, this is a nonstarter – he cannot file and suspend. But let’s assume he IS normal retirement age today, and Jane is one year away from normal retirement age. Bob thus can file and suspend, meeting the above date. Jane, according to the last scenario, cannot file a restricted application (even though she is over age 62), as she will meet the deemed filing rules which will force her to take her own benefit, again reduced since she took it prior to her full retirement age.
However, if she waits a year and is now at her normal retirement age, she can NOW file a restricted application, take a spousal benefit, thus allowing her own benefit to grow, and then switch over to her own benefit at age 70. When Bob is age 70 as well, he can begin taking his benefit which has now grown. Again, whether it makes sense to conduct this advantaged strategy really depends on your personal situation, but a nice rule of thumb is as follows: if both members of the couple are now normal retirement age (or are close in age and the filer will be normal retirement age by April 29th of 2016), have similar full retirement benefits AND are not in need of their social security benefits, this strategy may be perfect for them.
Q: Boy, is this confusing. Are there any other strategies I should know about to make my head spin further?
A: There are a myriad of differing strategies – there are further some strategies for single individuals which we barely touched on and there is also the question of divorced clients and how their social security benefits are affected. Thus, as I have stated, it is best to really understand how your social security benefits are going to be affected by the new rule changes, and the only way to do so is for a professional to take a look at it for you.
Karen DeRose and Anthony DeRose are registered representatives of Lincoln Financial Advisors.
Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. DeRose Financial Planning Group is not an affiliate of Lincoln Financial Advisors.
*Licensed but not practicing on behalf of Lincoln Financial Advisors.