Nearly 1.5 million baby boomers have the next five months to decide whether to file and suspend their Social Security benefits or suspend if they have already filed, according to Boston University Professor Laurence Kotlikoff.
This is due to the budget bill that was signed into law in early November that shut down the popular “file and suspend” Social Security benefit claiming strategy.
There is a phase-in or grandfathered period between now and six months after the bill is enacted (April 29, 2016) where file and suspend is still in effect – which means a good chunk of boomers (those that will turn 66 by this April) need to act quickly.
The new law eliminates auxiliary benefits given or received for those whose retirement benefits are in suspension – unless suspended by or on April 29, 2016.
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“The new law is a little tricky to understand,” Kotlikoff said during a webinar hosted by the Financial Experts Network. “It’s eliminating auxiliary benefits, like spousal benefits or widow’s benefits or child benefits, including disabled child benefits, for people who put their retirement benefit in suspension.”
The new law also extends “deeming” from full retirement age through 70 for those who turn 62 after Jan. 1, 2016 – instead of only applying before full retirement age.
This means that a person can no longer file for spousal benefits at full retirement age while allowing their own retirement benefit to continue growing. Instead, someone claiming a benefit before full retirement age must file for all benefits for which they may be eligible.
The new law also eliminates the option to recover, in a lump sum, suspended benefits for those who don’t suspend by or on April 29, 2016.
Kotlikoff laid out some “secrets” to maximize a client’s Social Security benefits under the new rules:
Secret #1: The best strategy for most clients remains unchanged.
That strategy, Kotlikoff says, “is to be patient” and to “wait to collect as long as your benefits are still growing.”
Secret #2: If a client is married, he or she may still be able to use the file and suspend strategy.
“There’s millions of people that can still take advantage of this file and suspend strategy,” Kotlikoff said.
There are two conditions that have to be satisfied, he said. One spouse must have been born before May 2, 1950, and the other spouse must have been born before Jan. 2, 1954.
“One person has to be pretty close to 66 or over 66 to file and suspend,” Kotlikoff said. “And the other person has to be over 62 by the end of this year in order to not be deemed to be also filing for retirement benefits by the time they reach full retirement age and be able to just take their spousal benefit.”
Secret #3: Clients divorced after a marriage of at least 10 years may still be able to collect a full spousal benefit.
Divorced clients who were born before Jan. 2, 1954, with an ex-spouse at least 62 years old can file and suspend if the divorce occurred two or more years ago or the ex has filed for his retirement benefit, Kotlikoff said.
“The basic message is, anybody who’s 62 by the end of this year who’s divorced will likely be able to collect a full spousal benefit – these other conditions again have to be met,” Kotlikoff said.
Secret #4: For a married couple that isn’t exempt from the new law because both spouses are too young, and if the elder spouse is a very low earner compared to the younger spouse, Kotlikoff suggests it may be best for the younger spouse to file somewhat before 70 to activate their spousal benefit.