Social Security Changes Made Simple
New Social Security rules will have a significant impact on when couples decide to start claiming their Social Security benefits. Financial planners and tax advisors were taken by surprise with the elimination of two popular strategies available for Social Security planning. The methods utilized for the past 15 years which are coming to an end include the “file and suspend” and “restricted” applications. However, there is still an opportunity for eligible couples to be grandfathered under the “file and suspend” rule if they apply by the April 29, 2016 deadline as described below.
Under the old Social Security rules, it was a metaphorical love fest where a full retirement age worker’s benefits were open to those who were allowed to take it even if the worker was not yet collecting their own benefit. Under the new rules, however, there’s a declaration of “If I’m not claiming my benefits, then no one else can claim on my benefits either.” The implications are heavy for those approaching retirement.
Let’s start with the basics. Provided someone works for at least 10 years and they pay into social security, when that person reaches full retirement age (“FRA”) he or she can start collecting benefits. The individual can collect benefits in a variety of ways: on their own work history, their spouse’s work history (assuming they were married for more than 10 years) or a combination of the two. A spousal benefit is half of the other spouse’s benefit. If both spouses worked, then they both have social security benefits available. The total benefit collected is the greater of their own retirement benefit or the spousal benefit. Essentially all benefits collected are a combination of a worker’s own benefit and their spousal benefit.
For simplicity sake, we will use Tim and Mary as our fictitious couple preparing for retirement. Tim, age 66, worked for fifty years and has attained Full Retirement Age. Although he can retire now, Tim wants to wait until he reaches age 70 so that he can get the annual 8% increase in benefits over the next four years. (The annual 8% increase is called “delayed retirement credits”.) Mary and Tim have been married for forty years and counting. Mary worked for 15 years and is also age 66, Full Retirement Age. Mary also wants to wait until age 70 to get the annual 8% increase on her benefits. Tim was the higher earner in the household and has a higher social security benefit.
A savvy advisor suggested Tim contact the Social Security Administration and apply to file and suspend his benefits at age 66. This allows Mary to start collecting her spousal benefit now (half of Tim’s monthly benefit calculated at his FRA) while his benefit will continue to grow by 8% per year until he decides to start collecting on his own benefit. (Side note: the other advantage of doing this is that should something change in their finances years down the road, Tim could go back to Social Security and collect all of the benefits he would have collected since the time he submitted the file and suspend application.) The new law would remove the ability for Mary to collect on Tim’s benefit when he is not collecting it himself. Remember, he opted to defer collection until he reaches age 70. However, the new law allows Mary to be grandfathered under the old file and suspend rules if Tim files his application by April 29, 2016. If someone already filed the file and suspend application, the new law will not change their benefits.
Restricted application is when the spouse with a lower benefit, in this example it is Mary, wants to collect a spousal benefit (half of Tim’s benefit) and let her own benefit continue to increase by 8% per year until she reaches age 70. Mary would be filing as a spouse first. This strategy too has been eliminated so a spouse opting to collect a spousal benefit will not enjoy her benefits increasing by the delayed retirement credit. Under the new law, only those who reach age 62 by the end of 2015 (born 1/1/1954 or earlier) can file a restricted application and collect only a spousal benefit once attaining FRA, allowing their own benefit to continue to grow. Lucky for Mary, she is 66 and will see her benefits grow.
Reach out to your Edelstein advisor today to help answer your questions and provide guidance on navigating these new Social Security rules.