For many baby boomers hoping to maximize their Social Security benefits, the time is now. That’s because two key claiming strategies that help married couples access additional or enhanced Social Security benefits for retirement are being phased out.
The “file and suspend” strategy is set to expire on April 29, 2016, as a result of the Bipartisan Budget Act of 2015. The change in law won’t impact older Americans who already use this Social Security benefit provision, but will impact people approaching retirement age who were thinking of using it as a way to increase their benefits from Social Security.
Combined with the “restricted application strategy,” the file and suspend strategy lets one spouse who has reached Full Retirement Age (66 or older depending on the year of their birth) postpone benefits and earn delayed retirement credits of 8 percent annually while his or her spouse accesses spousal benefits without having to file for retirement benefits on their own record.
The change in law “happened fairly quickly and not everyone understands the applications,” said Natalie Colley, an analyst at Francis Financial and a member of the National Association of Personal Finance Advisors, in an interview.
Single people who meet the age requirements for “file and suspend” can also still file through April 29, but this provision has less of an impact on single people or people without dependents.
A person who filed and suspended on or before April 29 retains the right to change his or her mind. Between the suspension date and age 70 a person can receive a lump sum payment for the suspended benefits, forfeiting the 8 percent per year boost. Or they could simply start taking benefits and realize the increases provided by delayed retirement credits earned through the date their benefits start.
Workers who turned 62 by Jan. 1, 2016, can still use the “restricted application” filing strategy.
The “restricted application filing strategy,” allows a spouse to receive only Social Security spousal benefits starting at age 66, rather than their own retirement benefits. Upon reaching age 70, the spouse lifts the restriction and receives his or her own benefits, including the 8-percent delayed retirement credits.
The traditional combination approach for using the Social Security benefit filing strategies has been for one spouse to “file and suspend,” while the other spouse filed a “restricted application” for spousal benefits at full retirement age. At a spouse’s full retirement age (66 or 67 depending on their year of birth), his or her spousal benefits would be 50 percent of what the higher-earning spouse is entitled to receive at their full retirement age. Combining these strategies allowed both spouses to receive monthly benefits that included delayed retirement credits at age 70 while one received some benefits starting at age 66 or 67.
The new Social Security law modifies this practice. Someone who files and suspends after April 29, 2016, will have all benefits on their record suspended, including spousal benefits. The restricted application strategy will only be available to those who were 62 by Jan. 1, 2016, and whose spouse either filed and suspended by April 29, 2016, or is already receiving his- or her-own benefits. Now a spouse who does not qualify to use the restricted application strategy, must take the highest amount he or she qualifies for – either spousal benefits or retirement benefits. The lump sum payment of suspended benefits is off the table too. (Related: How to Replace Lost Social Security Income)
Social Security Benefits: The Difference
David Freitag, a financial planning consultant with MassMutual, said in an interview that many people are anxious that they will be missing out on benefits. Here’s a hypothetical example he provided that demonstrates the impact of the change in the law:
“Steve is 66 and eligible to file and suspend. Amy is 66. Both Steve and Amy have a Primary Insurance Amount of $2,500 at their full retirement age of 66. Steve is postponing his Social Security benefit until age 70 using a file and suspend strategy. Amy, Steve’s wife, was planning to file a restricted application at her full retirement age of 66 to receive spousal benefits and postpone her benefit until age 70. Assuming that they both live until age 93 and receive an annual 1.5 percent cost of living adjustment, under the old Social Security filing strategies, they would have received approximately $2,255,913 in cumulative benefits over their joint lifetimes. Under the new law, if Steve does not file and suspend by April 29, 2016, he will not qualify to file and suspend his application. Until he files for his benefits, Amy cannot file a restricted application. In that situation, the filing strategy that results in the most cumulative benefits over their lifetimes is for each of them to postpone their benefits until age 70. This strategy results in approximately $2,107,428 in cumulative benefits over their lifetimes, $148,485 less than they would have received under the older filing strategies.”
Retirement: Diversification is Key
The file and suspend and the restricted filing strategies were put into effect in 2000 as a way to add flexibility to taking benefits from the system. The 2015 Social Security Trustees Report projects that the Social Security Trust Fund could run out of money by 2034, resulting in a 21 percent reduction in benefits if no changes are made. Cutting these two provisions are part of the government’s strategy to combat some of these shortfalls. (Related: Social Security Changes—What and Why)
Social Security remains a big part of Americans’ retirement strategy. In 2015, more than 59 million Americans received $870 billion in Social Security benefits, including 90 percent of people older than 65, according to the Social Security Administration.
The new changes in the more than 80-year-old Social Security program highlight the need for Americans to have a diversified strategy for retirement, including investment vehicles such as savings, pensions, annuities, life insurance, a 401(k) and other personal savings.