Two strategies used to claim Social Security benefits — file and suspend, and restricted application — are being eliminated. But you can still take advantage of the tactics if you meet age requirements and act by the deadline.
“It might not be the end of the world,” said Andrew Carrillo, a certified financial planner with Barnett Capital Advisors in Miami. “Before people get upset, they need to run the numbers with different scenarios.”
Here is a summary of the changes:
File and suspend
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Under existing law, at full retirement age (currently age 66), you can file for Social Security benefits and immediately suspend them. This triggers auxiliary benefits, allowing a spouse age 62 or older to collect spousal benefits, or a dependent minor to collect dependent benefits. Meanwhile, the primary wage earner's benefit continues to increase 8 percent per year until age 70.
“Say I've got a child who is 14. If I'm 66 and I file and suspend, I get nothing, mine keeps growing, but the child is entitled to a benefit that's worth half of my full retirement age amount,” said Mary Beth Franklin, a contributing editor with InvestmentNews.com and a certified financial planner. “If my benefit at age 66 is worth $2,000 a month, my child will get a check for $1,000 a month until he turns 18. That would be one reason to file and suspend.”
The more common reason is a married couple who wants to delay the primary wage earner’s benefit until age 70, without sacrificing the spousal benefit. It’s a strategy that can benefit a stay-at-home spouse who doesn't have her own Social Security earnings, Franklin said.
"I'm married and my wife is entitled to a spousal benefit, but she can't get one until I file," Franklin said. “I know as the primary wage earner I'm better off waiting until age 70 to collect, not only because I get the biggest retirement benefit possible, but it will also translate to the biggest survivor benefit possible, if I die first.”
If a single person files and suspends at 66, it acts like an insurance policy, Franklin said. “Under normal circumstances, the maximum retroactive Social Security benefit you can get in a lump sum is six months. But if you file and suspend at 66 — and two years later you change your mind and want to be paid all of your suspended benefits in a lump sum — you can do that,” she said.
Under the new rules, people 66 and older by May 1, 2016 have until April 30, 2016 to file and suspend and get spousal and/or dependent benefits. Starting May 1, you can still file and suspend, but the auxiliary benefits go away, and the ability to claim a lump sum goes away, Franklin said. Under the new law, spouses and dependent children will be able to collect benefits only if the primary wage earner also is collecting benefits. Anyone who has already filed and suspended benefits will not be affected.
Under current law, if the primary wage earner is claiming benefits or has filed and suspended, the spouse, at age 66 (full retirement age), could file for restricted application, meaning they would collect spousal benefits, while their own benefit continues to increase at 8 percent per year. At age 70, the spouse can then switch to collecting their own benefit, which has grown 32 percent (8 percent per year for four years.)
“This has been really useful for married couples, when both of them are working, because in most cases, when you file for Social Security benefits, Social Security will pay you the highest benefit to which you are entitled, either your own, or your spousal benefit,” Franklin said.
If you've been working your whole life, your own benefit is probably higher than your spousal benefit, which means your spousal benefit would completely go to waste, Franklin said.
“By waiting to age 66, and claiming spousal benefits only, I actually get to collect my spousal benefits for four years, while my own benefits keep growing, and I switch to my own at 70. That's what it means to file restricted claim,” Franklin said.
Under the new legislation, anyone who turns 62 by the end of 2015 is grandfathered under existing rules. And when they turn 66, they can claim spousal benefits if their spouse is already claiming benefits (or they were old enough to file and suspend by the April 30, 2016 deadline).
Divorced spouses who were married at least 10 years and are currently single can claim Social Security benefits on their ex, just as if they were still married. “So divorced spouses who are 62 or older by the end of 2015 also can take advantage of restricted application,” Franklin said.
Franklin, who is 61, is too young to meet the cutoff for restricted claim and her husband, 63, is too young to quality for file and suspend. "Like so many other baby boomers, we had factored this into our retirement income plan, and now we can't do any of those things,” she said. “If your birthday falls on the right side of the calendar, there are still things you can take advantage of. People who are younger need to start meeting with their financial planner and asking, ‘What's our Plan B?’ ”
Carrillo said prevailing wisdom is that the primary wage earner should delay taking Social Security as long as possible to increase the monthly benefit. But before people panic, they should analyze their individual situation, he said.
Run a comprehensive financial plan. Run the different scenarios, such as claiming at different ages, so you can see what strategy adds the most value. “Your goal is not to maximize Social Security. Your goal is to maximize your income over your lifetime,” Carrillo said. “It may be better to take Social Security early and let your investments continue to grow.”
The Social Security benefit will be less, but overall wealth will be higher, because investments will continue to compound and grow, he said.
“If you're going to retire at 66, and if you're not taking that Social Security income, you're taking it from somewhere else — from your assets, investments, IRA,” Carrillo said. “What is that costing you?”
Vielka T. Burey, a certified financial planner with Women’s Financial Advisory Group in Miami, said to remember there are three legs to creating a good retirement plan — Social Security, 40l(k) and a combination of pension, IRA and Roth IRA.
“Shoot for at least two types of retirement savings. I know not everybody has a lot of money to put away, but do what you can,” Burey said. “The person who will retire first is the one who contributes the most to their own plan. Social Security was never meant to be the sole source of financing your retirement. You should always create something separate from Social Security.”