It's not just when clients begin taking Social Security benefits, but how. (Illustration: Taylor Callery)

For advisors with clients approaching retirement age, it is important to keep in mind that in addition to selecting the year in which they want to start taking benefits, there are several options currently available for choosing how to structure their Social Security benefits.

As most of us know, early retirement benefits begin at age 62 and equal between 70% and 75% of your client’s full retirement benefit, depending on his or her year of birth. Full retirement benefits begin at age 66 or 67, depending on birth year. Finally, delaying retirement benefits past full retirement adds 8% per year to the full retirement amount (called delayed retirement credits) until age 70. Thus, the benefit at age 70 is 132% of the full retirement benefit and will not rise any higher.

There are a number of additional considerations in determining how to maximize clients’ benefits over their lifetime. Note, as explained below, in budget legislation effective Nov. 2, 2015, Congress limited the availability of some of these strategies.

Let’s start with a married couple, Bob and Liz.

Restricted Applications

If both Bob and Liz have reached full retirement age, Bob can apply for benefits and Liz can claim spousal benefits only, which equal 50% of Bob’s benefits. Liz can defer claiming her own benefits until age 70, allowing her benefits to grow by 8% per year. This is referred to as a restricted application for Liz.

Let’s assume each spouse’s full retirement benefit is $2,000 per month or $24,000 per year. If Bob files for full retirement benefits and Liz applies for spousal benefits, as a couple they will receive $36,000 per year (plus COLA adjustments) instead of the full $48,000 per year had both applied for full benefits — a loss of $48,000 over four years. When Liz reaches age 70 and switches to her own benefits, the couple will receive $55,680 per year while both are living, for an increase of $7,680 per year. It will take 6.25 years to make up for the lost benefits, and after that it’s all gain.

Under the new budget legislation, restricted applications are limited to people who were 62 and older in 2015 — the opportunity remains available even if you have to wait as long as four years to actually implement the technique. If you are younger than 62, you will not be able to use this strategy. For you, filing for spousal benefits will be deemed by Social Security to also trigger your own retirement benefit, and you will receive the greater of the two benefits.

The new rules do not apply to Social Security survivor benefits. Widows and widowers will still be able to optimize the timing of when to start both Social Security survivor benefits and Social Security retirement benefits — they may claim survivor benefits and still defer their own retirement benefits, if that will result in the optimal benefit amount.

File and Suspend for Couples

If Bob and Liz’s cash flow needs are otherwise covered, Bob can file at full retirement age but suspend benefits, and Liz can still apply for spousal benefits. Then, both spouses can defer payment until age 70 while enjoying the spousal benefits between age 66 and 70. This technique is referred to as file and suspend. In this instance, Bob and Liz would forgo $144,000 of benefits over four years in exchange for an increase of $15,360 per year ($48,000 to $63,360). The crossover point is 9.37 years; after that the extra $15,360 per year is all gain.

File and suspend as a planning tool for married couples has a limited life expectancy, however. As of now, it will only be available to those who are at least 66, or who will turn 66 and file and suspend benefits by April 29. After that date, if you are a new filer, you will no longer have the option to receive benefits on anyone else’s work record while their benefits are suspended and, likewise, no one else (including dependent children) will be able to receive benefits on your work record while your benefits are suspended.

Other Suspension Strategies

Early claimers can choose to suspend benefits once they reach full retirement age and will earn delayed retirement credits of 8% per year until age 70. This mitigates the 25% reduction resulting from the claim of benefits at age 62.

For example, say John is out of work at age 62 and needs to increase his cash flow so he files for Social Security. His $2,000 per month benefit will be reduced by 25% ($1,500 per month or $18,000 per year). If his financial picture improves, John can suspend at age 66 and receive no benefits until he resumes at age 70, at which time his benefits will be 132% of $18,000 ($23,760 per year). He will have forgone $72,000 of benefits but will receive $5,760 extra per year starting at age 70. The crossover point is 12.5 years. If he lives past age 82.5, it’s all gain.

Similarly, say John is in a second marriage and has adopted his wife’s minor children. John can elect to take his benefits at age 62 to trigger dependent child benefits equal to 50% of his full retirement benefit amount (even though he has not yet reached full retirement). If the children come of age during the next four years, John can suspend his benefits at age 66 and resume them at age 70 with the increased benefit amount.

The end of the “hedge your bet” technique. In the past, if you reached full retirement age but planned to wait until age 70 to start collecting the maximum benefit, you could file and suspend rather than simply delaying. It did not change the calculation of your delayed retirement credits, but it gave you the opportunity to hedge your bet. You could change your mind and make a claim for a reinstatement of your suspended benefits at, say, age 68 because of a change in your health status, and you would receive a lump-sum payment of two years’ worth of benefits (while giving up your delayed retirement credits). Under the new law, you will not be able to retroactively unsuspend benefits and be eligible for a lump-sum payment.

Start/Stop. If you change your mind after you apply for benefits, you may withdraw your application, return all the benefits paid with no interest added and reapply at a later time when your benefit amount is higher. You may do this only once. Formerly, you could withdraw and repay at any time — a nice, interest-free loan from the government — but now you may only withdraw within the first year after filing for benefits.

Divorce. If you are divorced and were married for at least 10 years, both you and your ex-spouse can collect spousal benefits on each other’s work histories. You and your ex must be age 62 or over. If your ex is 62 or older but has not applied for Social Security, you must be divorced for two years in order to collect spousal benefits. If you were born on Jan. 1, 1954, or earlier, you can claim ex-spousal benefits at your full retirement age, and delay receiving your own benefits until you reach age 70. The new restricted application rules apply to divorced spouses, so you must have reached age 62 by the end of 2015 to be eligible to file a restricted application later.

It is not yet clear how the file-and-suspend rules will apply to ex-spouses. An unintended consequence of the rule change may be that if the primary worker spouse voluntarily (perhaps spitefully?) suspends benefits, the dependent ex-spouse will also lose access to benefits during the suspension.

Working in retirement. What if your clients take benefits at age 62 but continue to work? Their benefits will be reduced by $1 for every $2 they earn over the annual limit (in 2016, the limit is $15,720). The benefit reduction is not spread over the year. Payments are withheld altogether for the applicable number of months.

The year your working clients reach full retirement age, their benefits will be reduced $1 for every $3 they earn over $41,880 prior to their birthday. At full retirement age, their benefits will no longer be reduced no matter how much they earn. In fact, their benefit amount will be recomputed upward to account for the benefits withheld due to their excess earnings.

Other Resources

These are just a few of many options to consider before applying for Social Security. If you are confused, you are not alone — the Social Security Handbook has 2,728 separate rules governing benefits, which are subject to change at any time, as they did in November.

The ultimate decision on when to file for benefits will depend on many things — whether your clients are still working at age 66, their health and life expectancy, investments, family situation and cash flow, among others. Here are a few websites that can help you analyze the optimum strategy for taking benefits:

— Read “Fixing Social Security: Be Careful What You Wish For” on ThinkAdvisor.