Want to Maximize Your Social Security Benefits? The Door Is About to Close on Two Strategies for Most People
January 6, 2016
Want to Maximize Your Social Security Benefits? The Door Is About to Close on Two Strategies for Most People With all the concern about the future of the viability of Social Security, it should come as no surprise that President Obama signed into law last month a bipartisan federal budget bill that starts to chip away at the retirement benefits the system pays out for two-income households.
Specifically, depending on your age, the provisions make big changes in popular strategies that married couples have been taking advantage of to increase their lifetime benefits by tens to hundreds of thousands of dollars. The “file and suspend” and “restricted application” options are being eliminated early next year for most Americans. But since the doors won’t close until the end of April, now is the time to do some careful financial planning if you’re still eligible.
Before we explain the changes, it’s important to have a little background on how the system works.
Social Security Basics
• Everybody who has worked at least 10 years is entitled to Social Security retirement benefits. How much you get is determined, basically, by a formula based on how much you made while you worked.
• You get 100% of what Social Security intends to pay you every year at your “full retirement age.” That used to be age 65 for everybody, but now it depends on when you were born. The chart below spells that out:
Year Your Were Born Your Full Retirement Age
1943-1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 or later 67
• You can start receiving benefits under your own employment record as early as age 62, but your benefits will be between 25% and 30% less than if you wait until your full retirement age. If you wait to claim, past your full retirement age, your annual payouts increase by about 8% (plus any cost of living adjustments granted) each year you wait, and could be as much as 30% more than if you started claiming at your full retirement age. To put a fine point on it: by waiting to collect until you’re 70, your annual payout could be 30% or more of what you would have received if you started collecting at your full retirement age.
• If you’re married and both you and your spouse worked long enough to be eligible for your own retirement benefits, you have a choice: you can claim benefits according to your own work history, or according to your spouse’s. These so-called “spousal benefits” are equal to 50% of your partner’s full retirement age benefit, so it only makes sense to claim them if they’re more than you would receive on your own when you claim.
The Affected Strategies: File and Suspend
As you can see, deciding what kind of benefits to claim – your own or spousal – and when can have a big effect on how much you get as a married couple from Uncle Sam when you retire. But there are two more strategies that married couples could use to get even more, and these are the ones the budget law is ending shortly.
The first is called the “file and suspend” option. Under this approach, when you reach your full retirement age you file for benefits but suspend receiving them for up to four years. In this way, you preserve the credits that enable your eventual payouts to grow. The real benefit, however, is to enable your spouse to receive benefits based on your work record, instead of his or her own. This, of course, only makes sense if your spouse gets more from your account than their own, but for couples in which one partner made considerably more than the other, the advantage can be large.
Under the new law, however, this strategy expires as of April 30, 2016, so those who will have reached full retirement age between now and then need to act fast. But if you’re already taking advantage of this option, you can relax: you and your spouse are grandfathered for life.
Changes to Restricted Applications
The second change affects making a restricted application. By choosing this option, you start receiving monthly retirement benefits, but under your spouse’s record instead of your own. The advantage is that you retain the right to switch to benefits based on your own record, benefits that grow by at least 8% a year until age 70. Better yet, if begin receiving spousal benefits, you can still work and earn a paycheck, with no reduction in those benefits once you reach your full retirement age.
Just like the file and suspend option, this strategy goes away as of April 30, but not if you have reached age 62 by the end of this year. If you haven’t, you’ll no longer have the option of deciding between spousal or your own benefits: the Social Security Administration will automatically pay you the larger benefit.
There is a lot at stake if you and your spouse are on the bubble here. If you are, be sure to make an appointment to discuss what’s best for you.