The Bipartisan Budget Act signed into law on November 2, 2015 effectively eliminated the File and Suspend and Restricted Application strategies for anyone younger than 66 and 62, respectively. These “unintended loopholes” were the product of three legislative changes that allowed for creativity, flexibility and pay raises for those who were well-informed. As of May 1, the party is over. So what’s the best way to adapt? Here are a few strategies.
Strategies That Apply to Everyone
The Do Over
According to the Social Security Administration, 74% of beneficiaries collect early. I assure you at least some of these folks will regret their decision. The good news is if that regret comes within a year, you can pay back the benefits you’ve received in a lump sum, and you will be treated as if you never took them at all.
In certain instances, it does make sense to turn on Social Security early. You may simply need supplemental income, or you may want to trigger benefits for a minor child. But it may not be a permanent need. If you decide for any reason that you no longer need that payment, you can suspend it. Your benefit will start to earn delayed retirement credits until you are 70.
Strategies That Apply to Married Couples If at Least One Spouse Is 62 or Older
This “loophole” is being phased out by the Bipartisan Budget Act of 2015. However, if you were born before January 1, 1954, you are still eligible to file for a restricted application when you reach full retirement age. This allows one spouse to collect a spousal benefit based on the other spouse’s earnings record while Spouse One’s benefit continues to grow until age 70. At 70, Spouse One will switch back to her increased benefit. In order to use this strategy, Spouse Two has to be collecting his benefit or have filed and suspended before May 1.
Strategies That Apply to Married Couples If Both Spouses Are Under 62
Higher Earner Delays, Lower Earner Gets a Raise
When married couples are planning for retirement, it is very important, if possible, for the higher-earning spouse to wait until age 70 to collect his or her benefit. Not only will the higher benefit increase by 8% every year between full retirement age and 70, but the benefit will also become the survivor benefit should that person die before his or her spouse. Depending on the gap in earned benefits and whether or not the lower earner is still working, it often makes sense for the lower earner to start collecting early. If the person is fully insured but not working, she or he can collect at 62. If the person is still working at 62, it probably makes sense to wait until she or he stops working or reaches full retirement age so that the earnings offset isn’t a factor.
Strategies for Widows and Widowers
Collect Now, Survivor Later
If a surviving spouse had a significantly lower earned benefit than the decedent, he or she should collect the benefit at age 62. Once the recipient hits full retirement age, he can switch over to the survivor benefit.
Survivor Now, Collect Later
If a couple had similar records, it makes sense for the survivor to take the survivor benefit as early as possible, at age 60. His own earned benefit will continue to grow until age 70. At 70, the person will switch over to her earned benefit.
Strategies to Claim on Your Ex-Spouse
The rules for divorced couples are very similar to those for married couples, so long as the marriage lasted at least 10 years. The restricted application strategy described earlier can be used by only one spouse in a married couple. If you’re teetering on the edge of divorce, this may get you there. If you are divorced, both you and your ex can claim a spousal benefit on each other while your own benefits grow in the background until you begin receiving them at age 70. It’s essentially the restricted application times two.
Every single one of these strategies has exceptions, and this is by no means a comprehensive list. Until the most recent legislation, there were 567 different ways to collect Social Security. You should work with your financial planner to develop a customized claiming strategy. Make sure that as you are putting together that strategy, the rest of your assets, liabilities, income and expenses are factored in. Social Security is an important piece of the puzzle but should never be considered in a silo.
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