Restricted application for spousal benefits is still key for married couples.
The financial impact of eliminating the file and suspend Social Security claiming strategy slated to take effect this spring may might not be as severe as originally feared, according to one software company executive.
For married couples, the ability to coordinate their Social Security claiming strategies can boost their combined lifetime income by $100,000 or more, according to some estimates. But the stand-alone file-and-suspend strategy that allows one spouse who is at least 66 years old to file for Social Security and immediately suspend benefits in order to boost future retirement income is not the most valuable part of the claiming strategy equation.
Jeff Miller, co-founder of Social Security Choices, a software company that helps individuals and financial advisers calculate optimum Social Security claiming strategies, recently analyzed nearly 1,300 cases of couples who used his software.
“Assuming normal life expectancy, file and suspend was only optimal 18% of the time,” said Mr. Miller, an emeritus economics professor at the University of Delaware.
“In these cases, the median loss is only $3,000,” he said. “Very, very few people lose even $10,000 in cumulative benefits.”
For a 66-year-old couple, average life expectancy is 82 for a man and 86 for a woman. But if you assume one or both spouses will live longer than average, the file-and-suspend strategy becomes the optimum claiming strategy in 26% of the cases he analyzed. Even then, the scheduled elimination of the file-and-suspend strategy would result in an average loss of about $6,000 over both lifetimes, Mr. Miller found.
The real value of coordinating Social Security claiming strategies for married couples, and in some cases qualified divorced spouses, is the ability to claim spousal benefits at full retirement age and defer collecting one's own retirement benefit until it is worth the maximum amount at age 70, Mr. Miller said. A spousal benefit is worth 50% of a worker's full retirement age amount if collected at full retirement age or older.
Normally, if you are entitled to both a retirement benefit on your own work record and as a spouse, the Social Security Administration pays you the higher of the two benefits. But if you wait until 66 to claim Social Security, you have a choice; you can collect just spousal benefits for up to four years and switch to your own larger retirement benefit at 70.
Both claiming strategies — file-and-suspend and filing a restricted claim for spousal benefits — will be eliminated as a result of the Bipartisan Budget Act of 2015, but each is subject to a separate effective date.
The law creates a new set of rules for any requests to file and suspend that are submitted after April 30, 2016. One must be 66 or older to file and suspend.
Under existing rules, filing and suspending triggers auxiliary benefits for a spouse or a minor dependent child. People who file and suspend under existing rules also reserve the right to request a lump sum payout of suspended benefits at any time up to age 70 instead of claiming the 8% per year in delayed retirement credits.
But after April 30, 2016, no one will be able to collect benefits on a worker's record during the suspension. And the option to request a lump sum payout of suspended benefits will disappear.
Separately, there is a four-year phase-in to file a restricted claim for spousal benefits. Anyone who is 62 or older by the end of 2015 retains the right to claim only spousal benefits when they turn 66 and switch to their own larger retirement benefits at 70. Those who are younger than 62 at the end of this year will no longer have the choice of which benefit to claim. They automatically will be paid the higher benefit, whether on their own record or as a spouse.
The good news is financial advisers have up to four years to help certain married and divorced clients make the best Social Security claiming decision that can still have a significant impact on their lifetime benefits. But in order to claim spousal benefits under the new rules, the other spouse must already be collecting Social Security benefits or be old enough to have filed and suspended their benefits before the April 30, 2016 deadline.
The same four-year phase-in applies to divorced spouses who are 62 or older by the end of 2015. As long as they were married at least 10 years, have been divorced at least two years and are currently single, they can file a restricted claim for spousal benefits at 66 and switch to their own higher retirement benefit at 70.
Mary Beth Franklin is a certified financial planner.
