An important discussion I have with my clients is the merits of possibly delaying Social Security benefits until age 70. Under optimal conditions this could mean many more thousands of dollars for your retirement over your lifetime.
One strategy popular with spouses was to delay full Social Security and claim the spousal benefit. This allowed the spouse to claim half of what the other spouse would have received at their full retirement age. This also allowed time for her or his benefit to grow by 8% over four to five years.
Spousal Benefit Change and Concession
This was seen by politicians as gaming the system, so they changed the rules and phased out the spousal benefit. But they allowed some concessions. If you turned 62 prior to January 2, 2016, there is still a nifty strategy.
- When you turn 66 and are eligible for full retirement benefits from Social Security, you have the option of suspending your benefit until you turn 70.
- Social Security guarantees an annual 8% benefit increase for every year you wait. That 32% increase can be significant over time.
Under this scenario: Once you suspend your benefit until you reach 70, you are eligible for 50% of what your spouse would have received when he or she reaches their full retirement age.
For example, let’s say the husband’s benefit at age 66 was $1,500 per month. Now a couple years later, the wife is eligible for her benefit. Her full amount would be $2,000 per month. She suspends that benefit in favor of $750 as the spousal benefit. In four years, her benefit would then be valued at $2,640 per month.
Why take the lower spousal amount now? The reason is because over her lifetime it could be worth thousands more than she would have received by claiming her own benefit sooner.
New Ruling on File and Suspend Strategy
The above scenario is precisely why President Obama wanted this loophole closed. Too rich of a benefit. Unfortunately, President Obama was successful and anyone who turned 62 after January 2, 2016, can no longer use the spousal benefit strategy. (For related reading, see: Seniors See the End of Social Security File and Suspend as a Benefit Cut.)
However, they can still defer their benefit until age 70, gaining the generous 8% per year increase.
By delaying your benefits until later you are putting more pressure on your portfolio in the first few years of retirement. However, as the increased Social Security benefit comes into the picture the amount of reliance on your portfolio should diminish and may leave you with more money later in life.
Summary of Changes
In short, the changes to Social Security claiming strategies are summed up in the following bullet points:
- Folks who had already implemented a file and suspend strategy, will be grandfathered and allowed to continue with their claiming strategy.
- Clients who qualify had until April 30, 2016, to implement the file and suspend strategy if they attained full retirement age by the end of the six-month window. After this period, any request to suspend benefits will stop all payments of benefits on a worker’s record, including spousal and other family benefits.
Decisions you make about Social Security are probably the most important and critical financial decisions you will ever make. Let a professional help you through the maze.
There are many factors that need to be considered before delaying full Social Security income. One needs to consider health, financial standard of living requirements, taxes, insurance, the size of your portfolio, etc. A well-trained financial advisor will take the time to calculate your options and review the best course of action. (For related reading, see: Is Delaying Social Security Until 70 Always a Good Idea?)
The information provided is solely for informational purposes and is not meant to be, and should not be construed as advice or use for investment or Financial Planning purposes. It is recommended that before making any decisions regarding Financial Planning or Investment Advice that you seek the counsel of a Trained & Certified Fee Only Professional.