There is yet another financial planning deadline looming on the horizon. Congress was nice this time as this newest deadline occurs when the snow melts by April 30, 2016. Nonetheless, time seems to move at an accelerated pace and May will be here before you know it. For that very reason, planning around the latest rule changes regarding Social Security is something to act upon well before then.
To begin, Social Security presents complexities that are not fully recognized by most people. Many retirees consider Social Security a benefit that is simply started at a particular age. Most commonly, surprisingly, people apply at the earliest eligible age of 62. In fact, almost half file for benefits at the earliest moment possible and, as a result, accept a permanent 30% reduction in benefits for life.
On the other hand, some people plan extensively to maximize their Social Security benefits. The latest law changes – hot off the presses – significantly affect their well-laid plans. These people should bone up now on the changes as Congress has set a clock that’s ticking down.
For background, the most classic Social Security maximization strategy is one used by dual-income couples. The strategy goes something like this, assuming a same-age couple.
The higher earning spouse – let’s say it’s the husband, in this case – files for benefits at age 66 and then immediately suspends his Social Security benefit. This move is called, file-and-suspend. During his benefit suspension period, his eventual benefit will grow 8% larger for each year he waits to collect – until he hits age 70.
Now, because he formally filed for benefits, his wife is entitled to receive her spousal benefit equal to 50% of his benefit amount, even if he’s chosen to not collect his benefit. All spouses are entitled to receive this 50% benefit. In this example, she is not filing to receive the benefit she’s earned through her own lifetime of work. Instead, she’s only choosing to receive her likely smaller spousal benefit. This move is called, filing a restricted application.
The trick is, while she’s collecting her smaller spousal benefit, her own eventually larger benefit – the benefit that’s based on her work record – will continue to grow 8% per year, until she too reaches age 70. For dual-earning couples, this strategy works to maximize their Social Security benefits.
And, here’s the punchline, this strategy – for those who haven’t already put it in place – will end on April 30, 2016, unless they act by then.
Of course, the myriad of Social Security claiming strategies are nearly endless and deserve individualized analysis. In future columns, I will address additional situations affected by the recent law changes. Change is clearly a rule and Social Security’s new rules are no exception.
Jason P. Tank, CFA will hold a free public educational workshop on this topic on December 9th at 6:30pm at the Thirlby Room at the Traverse Area District Library.
