For many retirees, Social Security retirement benefits are their only source of fixed income. As retirement approaches, people start thinking about when they should apply for these benefits. Full retirement benefits are available at normal retirement age, anywhere from age 65 to 67, depending on when the applicant was born. According to information from the Social Security Administration (SSA), a person can apply as early as age 62 and receive about 25% less than the full retirement benefit, or he or she can delay receiving benefits until age 70 and get an amount greater than the full retirement benefit.
If you're approaching the age where you'd like to start receiving your benefits, realize that many of these strategies have been curtailed or are changing. Read on to learn which continue to help you make your money grow – and which strategies changed with the 2015 budget bill.
Social Security retirement benefits are available to retired workers, their spouses as spousal benefits, and to spouses and children in the form of survivor benefits. These benefits are based on a retiree's Social Security earnings record and age at the time the benefit amount is established.
If you're looking to tap into your Social Security benefits, there are some little-known strategies available that may help you decide when you or your spouse should apply. There are pros and cons to each opportunity and what may work for you may not work for your neighbor. However, one of these options may enhance the Social Security retirement benefits for you and your family. (For the basics, read Introduction To Social Security and Ten Common Questions About Social Security.)
1. The Two-Claim Approach: If You're Old Enough
A strategy that may benefit two working spouses involves one spouse claiming spousal benefits at normal retirement age while continuing to work and accumulating higher retirement benefit credits for his or her own account. Often, one spouse may decide to retire at normal retirement age while the other spouse continues working past normal retirement age.
In this case, it may make sense for the retired spouse to claim full retirement benefits, while the working spouse files a "restricted application" for spousal benefits but continues to work. The advantage of this plan is that the working spouse gets spousal benefits equal to one-half of the retired spouse's full retirement benefit (provided the working spouse is at normal retirement age), while the working spouse's future benefit continues to increase until age 70.
On Nov. 2, 2015, President Obama signed a budget bill that included a provision that will end this strategy for anyone who is not age 62 by Dec. 31, 2015. Younger Americans will not be allowed to file for spousal benefits and then wait till past normal retirement age to file for their own benefits. Here's why this could be a financial loss.
For recipients born between 1943 and 1954, delaying benefits past age 66 (normal retirement age) adds 8% per year. In four years, at age 70, the benefit is about 132% of the full retirement benefit. For this strategy to work, each spouse must have reached his or her respective normal retirement age before claiming benefits. When the working spouse reaches age 70, he or she can claim increased benefits in lieu of spousal benefits.
Example: The Two-Claim Approach Let's say that a husband and wife are about the same age, both born in 1943. The husband retires at normal retirement age (66) and files for Social Security monthly retirement benefits of about $2,196. The wife then files for spousal benefits and receives almost $1,100 per month (almost $3,300 per month combined). She continues to work until age 70, and then claims monthly benefits of about $2,898 (increased by delayed retirement credits). By comparison, the wife could have claimed her full retirement benefits at age 66 ($2,196). However, by claiming only her spousal benefits ($1,100), she is able to claim a larger benefit ($2,898) at age 70.
Does this strategy make financial sense? It may if you plan on living at least to your full life expectancy. Based on the hypothetical numbers from the example, both spouses would have to live about 81 years for the total accumulated benefits received using the spousal option to exceed the accumulated benefits of both claiming benefits at normal retirement age.
2. Claim Early-Claim Late
The budget bill also affected another strategy that could be applied if one spouse wants to retire early and collect permanently reduced benefits while the other spouse continues working. What if the retired spouse is older than the working spouse? Here's where the working spouse is about to lose the chance of taking advantage of the age difference and earn delayed retirement credits on his or her own full retirement benefit.
Example – Claim Early-Claim Late Strategy Let's say Denny, who is four years older than his wife, Clara, retires at age 62 and makes a claim for reduced benefits, while Clara continues to work. At her normal retirement age, Clara used to be able to file a "restricted application" for spousal benefits, which would have equaled 50% of the retirement benefit that her husband would have received based on his age at the time she made her claim, or in this case, his full retirement benefit. In this way, even though Denny was collecting a reduced benefit, Clara could get half of her husband's full retirement benefit. At age 70 she could forgo the spousal benefit and receive her full retirement benefit, enhanced by delayed retirement credits.
Now, due to the 2015 budget bill and something called "deemed filing," the wife in this example can no longer file the restricted application. If she files at normal retirement age, she will be deemed to have filed to collect her full retirement benefit (since it's larger than the spousal benefit) and will no longer be eligible to file for increased benefits at 70.
If she wants those increased benefits, she will need to wait until 70 and receive no spousal benefits in the meantime. If Clara expects to live well past average retirement, the increased benefits she'll receive after age 70 can significantly add to her retirement income, but the couple has lost the extra interim cash.
3. Suspend Claim for Spousal Benefit: A Benefit That's Ending
Similar to the claim early-claim late approach, one spouse may want to work past normal retirement age and allow his or her retirement benefit to grow with delayed retirement credits. Under current law, there is still a way for a non-working spouse with little or no retirement benefits available to apply for spousal benefits without waiting until the working spouse retires late. This approach is called "file and suspend." The Nov. 2, 2015, budget bill included a provision that ended this option as of May 1, 2016.
Here's how it worked: To be eligible for maximum spousal benefits (50% of the working spouse's benefit) both spouses must be at normal retirement age, and the working spouse also must have filed a claim for benefits. After both spouses file their respective claims for benefits, the working spouse can suspend his or her claim. This permits the non-working spouse to receive full spousal benefits while the working spouse defers his or her own benefits, increasing their future value.
Again, anytime a retiree defers full retirement benefits for enhanced benefits based on delayed retirement credits, he or she must live long enough to recoup the difference. For details see File and Suspend: Still An Option, But Act Fast.
4. The "Do-Over" Payback Option: Available for One Year – Not Many
There's a fourth strategy that people who don't realize it's mostly obsolete may still be telling you about. In December 2010, Social Security put a stringent 12-month limit on a strategy variously called "withdraw and reapply" and "do-over and pay back." Under certain circumstances, retirees could receive early retirement benefits at age 62, repay the amount received at a later date and then reapply for a larger monthly benefit.
This strategy amounted to receiving a zero-interest loan from the government. According to the SSA, a benefit recipient could rescind his or her claim, pay back all benefits received (without interest), and then reapply for benefits based on his/her current age.
The 12-month limit pretty much eliminates the financial benefits of this strategy, though it still gives Social Security recipients a short time to reconsider their decision to take benefits and the chance to decide to wait until they will receive more. This might be especially helpful to those filing before normal retirement age and then finding that they can manage without the payments for a few more years, thus getting a higher benefit. But it's no longer the big money-maker it was in the past.
Here's what's entailed: If a recipient has a change of heart about filing for Social Security within 12 months, he or she will have to repay what may be a significant sum of money. The recipient will have had the opportunity to invest the benefit payments and retain or use the earnings – but this isn't the kind of benefit it was when someone had use of these funds for years and a big bump-up in monthly benefits upon reapplication.
Notably, after repaying what was received, the individual can either claim a tax refund or credit for any taxes paid on the benefits received. (To learn more about tax returns and credits, see The Saver's Tax Credit: An Added Incentive to Fund Your Plan and our Income Tax special feature.)
One other element to consider: During the period when the person is without Social Security payments, he or she will have to pay for Medicare Part B Premiums out of pocket as Social Security will not make payments until the person begins to receive benefits again. Finally, it may take a while for the SSA to begin making payments after someone reapplies, so he or she may have to go a few months without a benefit check.
The Bottom Line
Social Security retirement benefits can be an important part of any retirement income plan. Knowing the different options available can provide you with a greater chance of maximizing your benefits. Deciding which choices work best for you requires careful consideration. Weigh the benefits against the potential disadvantages in light of your particular circumstances and the changed law.