Even after the “file-and-suspend” Social Security claiming option sunsets on April 29, many Americans age 62 or older still will have a lot to cheer about.
The Bipartisan Budget Act of 2015 eliminated two key Social Security claiming strategies. The first one, known as file and suspend, allows someone 66 or older to file for Social Security in order to trigger benefits for a spouse or minor dependent child while suspending his or her own benefit until it is worth more later. The file and suspend option disappears at the end of this month.
But the phase-out period for the other strategy, known as filing a “restricted application” for spousal benefits, will continue for many years to come. This second strategy benefits married couples and eligible divorced spouses who were married at least 10 years. It allows someone who is 66 or older to claim only spousal benefits — worth half of their mate's or ex-mate's full retirement age amount — for up to four years while their own retirement benefit continues to grow by 8% per year up to age 70.
However, to take advantage of the restricted application strategy, one must have been at least 62 by the end of 2015 (including those who turned 62 on Jan. 1, 2016). When they turn 66, they can file a restricted claim for spousal benefits, assuming their spouse is actually receiving Social Security benefits or was old enough to file and suspend benefits by the April 29, 2016, deadline.
In the case of divorced spouses, one ex-spouse can claim spousal benefits on the other ex-spouse's earnings record at 66 — even if the other spouse has not yet claimed Social Security — as long as the former spouse is at least 62 years old and the couple has been divorced at least two years.
The last of the eligible retirees will turn 66 on Jan. 1, 2020, and will be able to collect spousal benefits for four years before switching to their own maximum retirement benefits at age 70. That creates an eight-year planning window for select claimants.
“For those still lucky enough to use the restricted application strategy, the effect of the elimination of file and suspend is overstated,” said Jeffrey Miller, co-founder of Social Security Choices, a firm that provides customized Social Security claiming strategies for consumers and financial professionals. Mr. Miller and his co-founder Bill Dowd ran 1,300 simulations of customer data and have concluded that for many couples, the loss of file and suspend would have little or no effect on their lifetime Social Security benefits.
The optimal strategy for 82% of the firm's married clients with a normal life expectancy (82 for the man; 86 for the woman) is to have one spouse claim retirement benefits and have the other one file a restricted application for spousal benefits. “For them, the loss of the file and suspend strategy was not even an issue,” Mr. Miller said.
For the other 18% who did benefit from file and suspend, the projected median loss was only $3,000 over their lifetimes, he said. Losses would be somewhat larger for couples who live longer than average, but still relatively small, he said.
As I always tell my readers and audiences, it is usually wise to have at least one member of a couple delay benefits until 70 to maximize not just retirement benefits but the survivor benefit for the remaining spouse. When one spouse dies, the highest benefit continues as a survivor benefit and the smaller benefit goes away.
“A restricted application reduces the cost of delaying because the spouse is receiving the spousal benefits while waiting to claim his or her on benefits,” Mr. Miller explained.
But it does not usually pay to have both spouses delay until 70, which is what usually happens when one spouse files and suspends and the other spouse claims only spousal benefits. Although this combination strategy would increase their monthly benefits while both spouses are alive, the smaller of the two benefits would stop upon the death of the first spouse.
Other experts agree that Social Security planning will continue to be important even after the demise of file and suspend.
Married couples may have up to eight years to plan and execute their claiming strategies, and complex rules will still determine benefits for divorced spouses, widows, parents with minor children and public employees.
(Questions about new Social Security rules? Find the answers in my new ebook.)
Mary Beth Franklin is a certified financial planner.