Editor’s Note: This article was updated on April 4, 2016, to reflect the Social Security Administration (SSA)’s most recent updates to the rules governing these filing strategies.
This article was co-authored by Karl Schwartz, principal and senior financial advisor at Hewins Financial Advisors.
Over the past 15 years, a few Social Security filing tactics have gained momentum among married couples reaching retirement age. These strategies are a source of conversation for many clients and were also the focus of Hewins Financial Advisors’ first OneBite™ Webinar, which took place in October 2015. As a firm, Hewins recognizes the importance of Social Security for all working families and is proactively educating its client base about the changing landscape of the program.
The Bipartisan Budget Act of 2015 — signed into law by President Obama on November 2, 2015 — changed two of the most popular Social Security filing strategies for married couples: “file-and-suspend” and “restricted application”.
Since the signing of the bill, the Social Security Administration (SSA) has provided clarification on several details that were not specifically defined in the initial legislation. Here is an overview of the main changes you need to know, as well as recent updates to the rules (as of April 2016):
Benefits and Key Changes
1. Worker’s Benefit: This benefit is based on your own earnings history. You can start receiving the worker’s benefit as early as age 62, but if you wait until age 70, the benefit can grow by approximately eight percent each year that you postpone collecting benefits.
Key Changes: None!
2. Spousal Benefit: This benefit is based on your spouse’s earnings history. You can start receiving the spousal benefit as early as age 62, assuming that your spouse has already filed for their benefits. The benefit can be as much as 50 percent of the benefit your spouse would receive at full retirement age (FRA) — so long as you start collecting at your FRA — and as little as 32.5 percent if you start collecting at age 62.
Key Changes: You cannot claim unless your spouse has filed for and is receiving their own retirement benefit.
3. Deemed Filing Rule: This rule applies to a married individual that has reached age 62, at which time they may be entitled to either their worker’s benefit or a spousal benefit.
If the individual files for benefits before their FRA, they are deemed to have filed for all available benefits, which allows them to receive the larger of the two benefits. If the individual files at their FRA or later, they have the option to file a restricted application.
Key Changes: Now, the individual is deemed to have filed for all available benefits, regardless of the age at which they file for benefits.
4. Restricted Application: This provision allows a married individual who has reached their FRA to claim their spousal benefit only which enables them to maximize their worker’s benefit, allowing it to grow up to eight percent each year until age 70.
Once the individual reaches age 70, they can file for their now-maximized worker’s benefit and discontinue their spousal benefit.
Key Changes: This is only available to filers who turned 62 on or before January 1, 2016. Unfortunately, filers who turned 62 on or after January 2, 2016, will no longer be able to take advantage of this strategy.
5. File-and-Suspend: The file-and-suspend strategy allows one spouse to file for Social Security benefits at their FRA, but then immediately suspend the actual payment of the benefits as far out as age 70. One of the key elements of this strategy is that it addresses one of the qualifying factors to allow a spouse to collect a spousal benefit based on their earnings record.
Key Changes: To take advantage of this strategy, you must be 66 and file and suspend your benefits on or before April 29, 2016. The SSA has announced that it will not process any suspension requests submitted on or after April 30, 2016. However, if you file and suspend before April 30, but your request isn’t processed until April 30 or later, the SSA will still honor your claim — thus, you may still be able to take advantage of the strategy (so long as you’re of eligible filing age).
Further Clarification on Other Important Topics
Retroactive Benefits: Additionally, as part of the file-and-suspend strategy, an individual has the opportunity to file for retroactive benefits (in the form of a lump sum), all the way back to the date they first filed and suspended their benefits.
Clarification: This provision is still available, but only to those individuals who reach their FRA and file and suspend their benefits on or before April 29, 2016.
Spousal Benefits for Divorcees: Divorced filers are likely eligible for a spousal benefit based on their ex-spouse’s earnings record if their marriage lasted 10 years or longer, they are currently unmarried and they are age 62 or older.
Clarification: The Act’s original language made it seem as if a divorcee would have their benefits suspended if their ex-spouse decided to suspend his or her benefit on or after April 30, 2016. The SSA clarified this matter by stating that a divorced spouse can still collect his or her spousal benefit even if their ex-spouse suspends his or her own benefit on or after April 30.
As always, we are committed to being an independent, objective source of advice, while supplying you with the information we believe you need to make smart, financial decisions. We encourage you to reach out to your advisor if you have any questions.
Do you want to learn more about the rule changes and how they may affect your retirement plans? Contact one of our advisors