Recent Changes to Your Social Security Benefits

There has been a lot of confusion over the new Social Security claiming rules set forth in the Bipartisan Budget Act of 2015. Here is what you need to know.

File and Suspend

File and suspend is a strategy that allows one spouse to start receiving her spousal benefit before the other spouse is ready to take his own benefit. Let’s say Jack and Jill are both 66. Jill wants to start her spousal benefit now. But she is not entitled to a spousal benefit because Jack hasn’t filed. Jack wants to delay his benefit to age 70 in order to build maximum delayed credits. So Jack would file for his benefit and immediately suspend it. This would entitle Jill to her spousal benefit now and give her four more years of spousal benefits compared to waiting until Jack is 70, while Jack builds four years of delayed credits.

This strategy was created by a loophole in the original Social Security rules. Congress has recently voted to close that loophole and after April 30th of this year it will no longer be permissible to claim a spousal benefit based on the earnings record of a spouse who has suspended his benefit. So in our Jack and Jill example, because Jack is already Full retirement age (FRA) and still able to file and suspend by April 30, 2016, Jill can go ahead and file for her spousal benefit. They fall under the old rules. But if they were slightly younger-say Jack would not turn 66 until June 2016, he would not be able to file and suspend by the April 30 deadline. Either Jill would have to wait to claim her spousal benefit until Jack was ready to file for his benefit (at age 70), or Jack would have to forego delayed credits in order to start Jill’s spousal benefit now.

What does this mean to you? If you turn Full Retirement Age before April 30, you can still File and Suspend even if your younger spouse will not be eligible for their spousal benefit for several more years.  The only reason not to file and suspend is if the client is contributing to a health savings account.  If you have additional questions about this strategy and how it may apply to you, contact your Beacon Wealth advisor.

Restricted Application (or, Claim Now, Claim More Later)

In addition to file and suspend, the other major loophole being closed by the Bipartisan Budget Act of 2015 is the Restricted Application. This is the more egregious loophole, as it allows high-earning spouses to receive four years of spousal benefits while their own benefit builds delayed credits to age 70. This change includes a  four-year phase-in which provides an opportunity to take advantage of  the rules for four more years.  Over the next four years, clients who will be over 62 at the end of 2015 will still be able to file a restricted application for spousal benefits when they turn FRA.

Spousal strategies are a wonderful thing. They can give a married couple or divorced person more than $60,000 in spousal benefits over and above their own retirement benefit while their own benefit builds 8% annual delayed credits. Some income now, more income later. What more could you want?  With file-and-suspend no longer available after April 30, strategies that were once slam-dunks now require a calculator and an in-depth discussion of the tradeoffs. More specifically, clients will have to think seriously about their life expectancies.

With file and suspend out of the picture for many couples, it will become necessary to balance the desire for more income now against higher income later.  It’s important that your advisor understands your claiming options, crunches the numbers for each available option, and analyzes them in the context of your overall retirement income goals.

If you, or a friend or family member want to know more about how to maximize your Social Security benefit, please contact Beacon Wealth Consultants at info@beaconwealth.com or 540-345-3891.