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Kotlikoff: 10 Ways to Maximize Social Security Benefits Under New Law

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Nearly 1.5 million baby boomers have till April 29 to decide whether to file and suspend their Social Security benefits, or to 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 grandfathered period until the bill is enacted on April 29 where file and suspend is still in effect — which means a good chunk of boomers (those who will turn 66 by 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.

“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 age 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.

Kotlikoff laid out some “secrets” to maximize a client’s Social Security benefits under the new rules.

Who Can Suspend, Who Can Collect

Secret 1: File and Suspend Still Works for Some

If a client is married, he or she may still be able to use the file and suspend strategy.

“There are millions of people who 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 2: Older Divorcees Can Still Collect

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 or her 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 3: When to Apply for Spousal Benefits

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.

Secret 4: Birthday Penalty

A client can still suspend their retirement benefit no matter their birthdate. There’s a catch, though, if the client isn’t 66 by or on April 29.

“Even if you’re too young to reach 66 by the end of April, you can still suspend your retirement benefit regardless of what your birthdate is, it’s just that you can’t provide or receive any benefits to relatives on [your] work record,” Kotlikoff said.

Secret 5: Who’s Out of Luck

Anyone who can’t suspend by or on April 29 (i.e., anyone who is not at full retirement age) also can’t collect excess benefits while their retirement benefit is suspended, or have benefits awarded to another person.

Secret 6: The Benefits of Reconciliation

The new rules make getting divorced and remarrying much more profitable for certain couples.

“This is an interesting secret,” Kotlikoff said.

Kotlikoff gave an example of two 63-year-old spouses, who don’t fall into the grandfathered period under the new law.

According to Kotlikoff, they can collect two full spousal benefits starting at 66 if they get divorced before age 64 (because they have to be divorced at least two years in order to collect on this benefit).

“If we’re talking about a high-earning couple, there might be something like $100,000 here in terms of their getting divorced,” he said. If “they got divorced and lived together and got remarried at age 70, they could pick up an extra $100,000. I don’t know if any of your clients would want to do that, but just letting you know that that’s fully legal to do that.”

Few Changes for Some

Secret 7: Little Effect on Single People

If clients are single or divorced short of 10 years, nothing has changed for them except the ability to reclaim their suspended benefits if they haven’t suspended by or on April 29.

“Basically single or divorced from short marriages, they’re not really affected by this change in law at all,” Kotlikoff said.

Secret 8: No Changes for Widows

If clients are widowed, the new law seems to have no impact on their benefit collection options.

“If you’re widowed, the optimal thing to do seems to be to take your retirement benefit first and your widow’s benefit second,” Kotlikoff explains. “Or take your widow’s benefit first and take your retirement benefit at 70. Take your widow’s benefit essentially at age 60. And that hasn’t changed.”

With widow’s benefits, there’s no deeming, so clients can take their widow’s benefit first and are not forced to take their retirement benefit at the same time or vice versa.

Secret 9: Lower Benefits, Little Change for Disabled People

The disabled weren’t hurt as badly under the new law because they previously weren’t able to collect full spousal benefits while letting their own retirement benefit grow.

“The disabled were not able to get a full spousal benefit to begin with, so they weren’t really much affected by this new law,” Kotlikoff explained, “although there are some aspects of the new law that do affect them. If they do suspend their retirement benefit at full retirement age, they won’t be able to get what’s called an excess spousal benefit during that period.”

Secret 10: Be Patient

The best strategy for most clients remains unchanged. That strategy, Kotlikoff said, “is to be patient” and to “wait to collect as long as your benefits are still growing.”

— Read “Social Security Changes: What Advisors Need to Know” on ThinkAdvisor.