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.
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.