The passage of the Bipartisan Budget Bill of 2015 effectively ended the popular couples Social Security claiming strategy of file and suspend with a restricted application. This was a bit sudden and somewhat unexpected and threw those in world of retirement planning for a bit of a loop, potentially costing retirees in the neighborhood of $60,000 of retirement income.
File and Suspend to End: The Impact
This popular couples claiming strategy will be gone six months after the budget bill becomes law. April 29, 2016, is the filing deadline.
Under this strategy one spouse upon reaching their full retirement age (FRA) would file for their benefit and then suspend it. They would accrue additional credits to the tune of 8% per year out to age 70 at which time they would resume taking their benefit.
Once the other spouse reached their FRA they would then file a restricted application for benefits in order to receive a spousal benefit based upon the other spouse’s earnings record. Their own benefit would continue to accrue out until age 70 at which time they would switch to their own benefit if it was higher than the spousal benefit or continue to take the spousal benefit if it was larger. (For more, see: Social Security File and Suspend Claiming Strategy is Ending: Now What?)
Couples who have already gone this route are grandfathered in and no changes are needed. Eligible couples can execute this strategy until the end of the six month period and they will be fine as well.
With this strategy gone what Social Security claiming strategies are available to couples as they enter retirement? Those approaching retirement and the financial advisors who work with these clients need to rethink not only Social Security but also their overall retirement planning. Here are a few thoughts:
Especially for the spouse with the higher primary insurance amount (PIA), it will generally still make sense to delay filing for benefits until age 70 or at least as long as possible. For each year past their FRA until age 70 their benefit increases by 8% annually.
This impacts the base for any future cost of living increases and also serves to increase the survivor benefit that their spouse would receive if applicable.
For those who have never been married it also generally makes sense to delay claiming benefits as long as possible.
As for the spouse with the lower benefit level, it may or may not be more beneficial to wait to claim their benefit. Each situation is different and the right answer will vary on a case by case basis.
Impact on Divorcees
Under the current rules divorcees who may not have a strong earnings record on their own (and who were married for at least ten years and haven’t remarried) could file a restricted application to receive spousal benefits based upon their ex’s earnings records and continue to accrue delayed credits until age 70 to let their own benefit amount grow. They will lose this opportunity under the new deemed filing rules, with the exception of those who were born before Jan. 2, 1954 who can still do this once they reach their full retirement age. (For more, see: How Divorce Affects Social Security Benefits.)
Financial advisors knowledgeable in Social Security and claiming strategies can add value to their clients, especially in this time of transition, by reviewing their client’s situations and ensuring that they contact any clients who may be able to take advantage of this strategy during the next six months. It is important to make sure they don’t miss out on this opportunity. (For more insight, see: Social Security Depletion: Is the Fear Justified?)
Congress and the President seemed to want to target the wealthy retirees who they felt were getting an unintended windfall from this claiming strategy. In reality, many financial advisors seem to feel that those who will be hurt by these new rules will be middle income retirees with nest eggs between $100,000 and $1 million. The loss of the extra income for the four years from having one spouse draw a spousal benefit will cause pain to a lot of middle income folks.
Planning in This New Environment
Those within, say, 10 years of retirement who may have been counting on using the file and suspend with a restricted application strategy are now out of luck and will need to rethink their plans.
Delaying filing for benefits as long as possible will remain a solid strategy for most retirees. The reduction from your FRA to age 62 when most are first eligible to your full retirement age is significant. If you can delay even further from your FRA to age 70 the difference is 8% annually for each of those four years for those born in 1943 or later.
For those nearing retirement who have the ability to do so, some sort of phased retirement might be beneficial financially. This trend is becoming more prevalent among a growing number of employers who don’t want to lose the knowledge and experience of older workers. Phased retirements are not standardized and will vary by organization in terms of compensation and benefits compared with your former full-time position. The extra years of compensation might be enough to offset the loss of the extra $10,000 - $15,000 per year that couples might have realized from having one spouse do a restricted application for spousal benefits at their FRA. (For more, see: File and Suspend: Still An Option, But Act Fast.)
It is even more vital that those approaching retirement maximize their retirement savings opportunities while still working and financial advisors will surely be emphasizing this to their clients.
This might include funding a health savings account if they have one available to save for retiree medical costs while covering out-of-pocket medical expenses incurred during their working years from other sources.
Contributing the maximum to retirement plans such as a 401(k) becomes even more important during these peak earning years for many pre-retirees.
For those in a position to do so, such as high earning professionals and business owners who are self-employed, starting a cash balance pension plan can help ramp up retirement savings in the last years prior to retirement. (For more, see: Planning for Healthcare Costs in Retirement.)
Social Security Planning Will Evolve
This budget bill and the associated rule changes caught a lot of people by surprise. Those who advise clients and other financial advisors as to Social Security claiming strategies will surely come up with new strategies to make the best of these rule changes. Additionally the sites with credible Social Security calculators will be updated soon to reflect the impact of these changes.
The Bottom Line
The recent passage of the Bipartisan Budget Act of 2015 changed the landscape for couples in terms of Social Security claiming strategies by eliminating the popular file and suspend/restricted application tactic. Retirees, near-retirees and their financial advisors will need to rethink their strategies going forward. (For more, see: Why Boomer Retirements Will Be Vastly Different Than What They Planned For.)