You’ve may have heard by now that the 2015 Budget Act eliminated many of the advanced Social Security claiming strategies. What you may not have heard is that some people can still use these strategies. But there is a deadline!
For the next four years, there will be much confusion and misinformation on how and when Social Security filing strategies are still applicable. One key strategy, file and suspend, will mostly go away in 6 months. Another one of the big strategies will remain available for four more years, if you meet the age-based cutoff.
So what’s still available and what’s not? Who can still use these strategies?
There were two strategies that got the ax. The “file and suspend” strategy, and the “restricted application” strategy. Although each strategy is going away, they each have a different deadline.
File and Suspend
Under the “file and suspend” strategy, one spouse files for Social Security benefits and then immediately suspends those benefits. By doing so, this spouse preserves his or her ability to receive delayed-retirement credits while also letting the other spouse claim a spousal benefit.
How does this work? Let’s walk through an example.
Charles and Wanda were both 66 years old and ready to retire. Charles’ full-retirement-age benefit was $2,200 and Wanda’s was $1,000.
As we discussed their Social Security options, I mentioned to Charles that he could get delayed-retirement credits of 8% per year until age 70. He was captivated. All he had to do was wait four years to draw benefits and his would increase by at least $704 per month.
Once Charles filed for Social Security, Wanda was entitled to a spousal benefit of $1,100 per month, considerably more than the $1,000 available under her own work record. But for her to receive that extra $100 per month, Charles would have to file first.
Enter the “file and suspend” strategy. With it, Charles could file and immediately suspend his benefits. by doing this he would earn the delayed-retirement credits and Wanda could receive for the full spousal benefit of $1,100.
How This Strategy Is Changing
This strategy is still available if you attain full retirement age and request your suspension by April 28th, 2016. For the rest of us, it will have limited usefulness.
Restricting the scope of an application was one of the greatest tools in the Social Security planning toolbox.
Under the “restricted application” strategy, an individual could restrict his/her application to only spousal benefits. By doing so, an individual would receive a spousal benefit up until their age 70. Then they would switch back to their own benefit which could be as much as 32% higher. This was a “have your cake and eat it too” strategy.
Let’s continue the example of Charles and Wanda to illustrate this in action.
Charles has suspended his benefit and is watching it grow with delayed retirement credits. Wanda was getting ready to file for her benefit and get the extra spousal benefit when she heard about restricting her application to spousal benefits only.
This allowed her to collect the full spousal benefit of $1,100 and earn delayed retirement credits on her own work record benefit. At age 70, she could switch back to her own benefit which should be around $1,320.
How this Strategy Is Changing
It’s not that this strategy is just changing, it’s going away all together. The one group of individuals who can still use this strategy are those who turn 62 prior to January 2nd, 2016. For everyone else, it’s simply not available.
Effectively, we now have three sets of rules. One for those who are turning 66 before April 28, 2016. Another for those who are attaining age 62 before January 2nd, 2016. And the final set is for those who do not meet any of the age-based deadlines to use one of these strategies.
Since most couples have an age difference, these changes will be especially challenging for the next four years. In many cases, one spouse will likely have an option that the other spouse will not.
One thing’s for sure, these strategies have the ability to drastically increase your retirement income. Make sure you are properly utilizing them before the deadline arrives.